Reimbursement of salary cost of high level managerial personal can be treated as FTS
Case Law Citation:- M/s Food world Supermarkets Ltd. vs. Deputy Director of Income Tax (ITAT Bangalore), ITA Nos.1356 & 1357/Bang/2013 Assessment year: 2008-09, Date of Decision – 28th October 2015.
Brief Facts and Question of Law:
Brief Facts of the Assessee:
The assessee is an Indian company engaged in the business of ownership and operation of supermarket chain in India. The assessee entered into an agreement of secondment of few employees with a Hong Kong based company M/s Diary Farm Company Ltd., (herewith “DFCL”). As per the said agreement, DFCL deputed its 5 employees to India, to whom the salary was paid by DFCL which was reimbursed to DFCL by the Assessee. DFCL, withheld tax on the said salary under section 192 of the Income Tax Act, 1961 (herewith “the Act”). The assessee reimbursed a sum of HC 25,82,922/- to DFCL towards the salary paid to the assigned personnel. The reimbursement was made without deduction of tax at source. The DDIT held that remittance made by the assessee constitute fee for technical services u/s 9(1)(vii) of the Act and an order u/s 201(1) and 201(1A) was passed treating the assessee as ‘Assessee in default” for not withholding tax at source at 10% u/s 195.
Held by CIT (A):
The CIT(A) after examination of the terms and conditions of the seconded agreement arrived at the conclusion that the seconded employees did not have a master servant relationship with assessee. They had provided managerial and consultancy services to the assessee within the meaning of explanation 2 to section 9(1)(vii) of the Act. The CIT(A) upheld the decision of the DDIT and held that tax has to be withheld at the rate of 10% u/s 195 of the Act.
Question of Law:
Whether, payment made towards reimbursement of salary of seconded employees can be treated as Fees for Technical services u/s 9(1)(vii) of the Act.
Contention of the Revenue:
The Revenue contented that as per the terms of the seconded agreement, the assessee did not have any control over deputed personnel. Also the employees were on the payroll of the DFCL and, therefore, there was no relation of master and employees between the assessee and these secondees. DFCL was the actual employer hence the services rendered by this employees were actually rendered on behalf of DFCL. The Revenue relied upon the judgement Hon’ble Delhi High Court in the case of Centrica India Pvt. Ltd. Vs. CIT 364 ITR 336 held by the Hon’ble High Court that the secondees are imparting technical expertise to all regular employees of the assessee. Further nomenclature used in the agreement relating to the payment as reimbursement cannot be a determinative factor.
Contention of the Assessee:
The Assessee contended that the remittance to DFCL is nothing but reimbursement of remuneration paid to the employees under secondment agreement and said salary was chargeable to tax in India. Therefore, the assessee was under the liability to deduct tax at source u/s 192 of the Act which was discharged by the assessee. The Assessee relied upon the judgement passed in the case of IDS Software Solution Vs. ITO (Supra) as well as the decision in the case of Abbey Business Services (India) Pvt. Ltd., 53 SOT 401 wherein it was held that the payment towards reimbursement of salary could not be treated as fees for technical services u/s 9(1)(vii) of the Act.
The Assessee also held that even if the payment are treated as FTS, the secondees would constitute a service Permanent Establishment (PE) and, therefore, only the net of the expenditure would be chargeable to tax as per the provision of section 44D of the Act. Hence there would be no tax liability because the net amount will be Nil after deducting the expenditure which is in the shape of salary of these secondees.
Held by the Income Tax Appellate Tribunal (“ITAT”):
The ITAT observed that the 5 seconded employees were not ordinary employees or workers but they were deputed at the high level managerial/executive positions which showed that they were deputed because of expertise and managerial skills in the field. The secondees were under the legal obligation as well as employment of DFCL and assigned to the assessee only for a short period of time. Hence, the ITAT held that the seconded employees were providing services in the nature of professional/managerial nature.
As the FTS is taxable in India, such income is assessed as per Double Taxation Avoidance Agreement (herewith “DTAA”) or domestic Income Tax provisions whichever is beneficial to the assessee. Presently there is no DTAA between India and Hong Kong, hence, the income is required to be assessed as per the domestic provisions. As per the domestic tax provisions, FTS or royalty is taxable at gross basis irrespective of profit element in the income. Hence, the gross payment under section 44D becomes chargeable to tax. However as per the exception to this rule, when the non-resident is having fixed place of business or PE in India and the amount is earned through the PE, then the expenditure incurred in the relation to the PE for earning said amount is allowable as per the provisions of section 44DA of the Act.
The concept of PE was introduced in 1961 Act as part of the statutory provisions of transfer pricing by the Finance Act of 2001. However, vide Finance Act, 2002, an inclusive definition of PE was inserted in the Act vide sec. 92F(iiia) which states that the PE shall include a fixed place of business through which the business of the MNE is wholly or partly carried on. Hence, for the sake of proper examination, the matter is remitted to the record of the AO for adjudication of the plea raised by the assessee that the secondment of the employees constitute a service PE and accordingly provisions of sec. 44DA would be applicable or not.