M/s Foodworld Supermarkets Ltd., Bangalore V. Dy. DIT, Bangalore

ITA 1356/BANG/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95355 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 1 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 15-09-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 23-09-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Transfer pricing; Double taxation relief; Permanent establishment
• Section: 201(1); 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SHRI VIJAYPAL RAO, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER ITA NOS.13 56 & 1357/BANG/2013 (ASST. YEAR 2008-0 9) M/S FOOD WORLD SUPERMARKETS LTD., NO.740, ESHWARI INDUSTRIAL ESTATE, GATE NO.2, HULIMAVU, BANNERGATTA ROAD, BANGALORE-560 076. . APPELLANT VS. THE DY. DIRECTOR OF INCOME-TAX, (INTERNATIONAL TAXATION) CIRCLE-I(1), BANGALORE. . RESPONDENT APPELLANT BY : SHRI PADAM CHAND KHINCHA, CA RESPONDENT BY : SHRI SARAVANAN B, JCIT DATE OF HEARING : 15-09-2015 DATE OF PRONOUNCEMENT : 28-10-2015 O R D E R PER SHRI VIJAYPAL RAO, JUDICIAL MEMBER THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 22/7/2013 OF CIT(A) ARISING FROM THE ORDER PA SSED U/S 201(1) AND 201(1A) OF THE ACT FOR THE ASST. YEAR 2008-09. ITA NOS.1356 & 1 357/B/13 2 2. THE ASSESSEE HAS RAISED THE COMMON GROUNDS FOR T HESE TWO APPEALS WHICH READ AS UNDER: 1.1 THE ORDER PASSED BY THE LEARNED CIT(A) IV, BANGALORE TO THE EXTENT PREJUDICIAL TO THE APPELLAN T IS BAD IN LAW AND LIABLE TO BE QUASHED. 2.1 THE LEARNED CIT(A) IV, BANGALORE HAS ERRED IN CONCLUDING THAT REIMUBURSEMENT OF SALARY COSTS OF SECONDED PERSONNEL MADE TO M/S DIARY FARM CO. LTD., HONGKONG, AMOUNTING TO HK $25,82,922/- IS IN THE NA TURE OF FEES FOR TECHNICAL SERVICES U/S 9(1)(VII) OF T HE INCOME- TAX ACT, 1961 AND CONSEQUENTLY LIABLE FOR DEDUCTION OF TAX AT SOURCE U/S 195 OF THE INCOME-TAX ACT, 1961 (ACT) . 2.2 THE LEARNED CIT(A) IV, BLORE HAS ERRED IN TREATING THE APPELLANT AS ASSESSEE IN DEFAULT U/S 201 OF THE ACT FOR NOT DEDUCTING TAX AT SOURCE IN RESPECT OF THE IMPUGNED PAYMENTS. ON FACTS AND IN THE CIRCUMSTANC ES OF THE CASE AND LAW APPLICABLE, THE IMPUGNED PAYMEN TS WERE NOT LIABLE FOR TDS U/S 195 AND CONSEQUENTLY, T HE APPELLANT CANNOT BE REGARDED AS ASSESSEE IN DEFAUL T U/S 201. ITA NOS.1356 & 1 357/B/13 3 3.1 IN THE VIEW OF THE ABOVE AND OTHER GROUNDS TO BE ADDUCED AT THE TIME OF HEARING THE APPELLANT PRAYS THAT: (I) THE ORDER PASSED U/S 201(1) BEING BAD IN LAW B E QUASHED. OR IN THE ALTERNATIVE; A) THE APPELLANT BE HELD AS NOT LIABLE TO DEDUCT TAX A T SOURCE U/S 195 AND THEREBY NOT TO BE DEEMED AS ASSESSEE IN DEFAULT U/S 201(1); B) THE REIMBURSEMENT MADE TO THE FOREIGN COMPANY (DFCL ), BENEFIT OF PROFIT ELEMENT, BE NOT CONSIDERED AS FEE S FOR TECHNICAL SERVICES OR INCOME CHARGEABLE TO TAX IN I NDIA; 3. THE ASSESSEE IS AN INDIAN COMPANY ENGAGED IN THE BUSINESS OF OWNERSHIP AND OPERATION OF SUPERMARKET CHAIN IN IN DIA. THE ASSESSEE ENTERED INTO AN AGREEMENT DATED 6/6/2007 WITH M/S D IARY FARM COMPANY LTD., (IN SHORT DFCL). DFCL IS A COMPANY B ASED IN HONG KONG AND ENGAGED IN THE IDENTICAL BUSINESS ACTIVITY THAT OF ASSESSEE. UNDER THE SAID AGREEMENT DATED 6/6/2007, DFCL AGREE D TO ASSIGN ITS EMPLOYEES TO THE ASSESSEE AND CONSEQUENTLY 5 EMPLOY EES/EXPATRIATES WERE DEPUTED BY DFCL TO THE ASSESSEE. ITA NOS.1356 & 1 357/B/13 4 4. THE ASSESSEE AGREED TO ENGAGE THESE EMPLOYEES T O ASSIST ITS BUSINESS OPERATION. IT WAS ALSO AGREED BETWEEN THE PARTIES THAT DFCL WOULD PAY SALARY TO THE ASSIGNED PERSONNEL AND THE ASSESSEE WOULD REIMBURSE SUCH AMOUNT TO DFCL. ACCORDINGLY, SALARY TO ASSIGNED PERSONNEL WERE PAID BY DFCL WHICH WAS SUBJECTED TO TDS U/S 192 OF THE INCOME-TAX ACT. THE ASSESSEE REIMBURSED A SUM OF HC 2582922/- TO DFCL TOWARDS THE SALARY PAID TO THE ASSIGNED PER SONNEL. THE REIMBURSEMENT WAS MADE WITHOUT DEDUCTION OF TAX AT SOURCE. THE LEARNED DDIT BANGALORE(INTERNATIONAL TAXATION) INI TIATED PROCEEDINGS U/S 201 OF THE ACT FOR NOT WITHHOLDING TAX AT SOURC E IN RESPECT OF REIMBURSEMENT MADE TO DFCL. AN ORDER U/S 201(1) AND 201(1A) HAS BEEN PASSED BY THE DDIT (INTERNATIONAL TAXATION) ON 31/7/2008, WHEREBY IT WAS HELD THAT REMITTANCE MADE BY THE ASS ESSEE CONSTITUTE FEE FOR TECHNICAL SERVICES U/S 9(1)(VII) OF THE ACT . THEREFORE, THE SAME IS CHARGEABLE TO TAX ON GROSS BASIS. THE DDIT (INT ERNATIONAL TAXATION) WAS OF THE VIEW THAT THE ASSESSEE WAS LIA BLE TO DEDUCT TAX U/S 195 @ 10%. ACCORDINGLY, HE TREATED THE ASSESSE E AS AN ASSESSEE IN DEFAULT U/S 201(1) OF THE ACT FOR NOT WITHHOLDI NG TAX AT SOURCE. THE AO ALSO DETERMINED THE INTEREST U/S 201(1A) OF THE ACT. THE ASSESSEE CHALLENGED THE ACTION OF THE AO BEFORE THE CIT(A) AND CONTENDED THAT THE AMOUNT IN QUESTION IS NOT FTS BU T MERELY ITA NOS.1356 & 1 357/B/13 5 REIMBURSEMENT OF SALARIES OF THE SECONDED EMPLOYEES . THE ASSESSEE RELIED UPON THE DECISION OF THE SPL. BENCH IN THE C ASE OF MAHENDRA AND MAHENDRA, 314 ITR (AT) (SB) 263) AS WELL AS THE DECISION OF THIS TRIBUNAL IN THE CASE OF IDS SOFTWARE SOLUTION SOFTW ARE INDIA PVT. LTD., 122 TTJ WHICH WAS ALSO FOLLOWED IN THE CASE OF M/S ABBEY BUSINESS SERVICES (INDIA) PVT. LTD. THE CIT(A) DI D NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND AFTER EXAMINATION OF THE TERMS AND CONDITIONS OF THE SECONDED AGREEMENT ARRIVED AT THE CONCLUSION THAT THE SECONDED EMPLOYEES DID NOT HAVE AN MASTER SERVA NT RELATIONSHIP WITH ASSESSEE. THEY HAVE PROVIDED MANAGERIAL AND CO NSULTANCY SERVICES TO THE ASSESSEE WITHIN THE MEANING OF EXPL ANATION 2 TO SEC. 9(1)9VII) OF THE ACT. THE CIT(A) UPHELD THE DECISI ON OF THE DDIT (INTERNATIONAL TAXATION). 5. BEFORE US, THE LEARNED AR OF THE ASSESSEE HAS RE FERRED TO VARIOUS CLAUSES OF SECONDED AGREEMENT AND SUBMITTED THAT THE REMITTANCE TO DFCL IS NOTHING BUT REIMBURSEMENT OF REMUNERATION PAID TO THE EMPLOYEES UNDER SECONDED AGREEMENT AND SAID SALARY WAS CHARGEABLE TO TAX IN INDIA. THEREFORE, THE ASSESSE E WAS UNDER THE LIABILITY TO DEDUCT TAX AT SOURCE U/S 192 OF THE A CT WHICH WAS DISCHARGED BY THE ASSESSEE. HE HAS REFERRED THE DE TAILS OF THE PAYMENT ITA NOS.1356 & 1 357/B/13 6 AND SUBMITTED THAT THE AMOUNT REPRESENTS ONLY REIMB URSEMENT OF SALARY OF FIVE EMPLOYEES DEPUTED WITH ASSESSEE AS P ER THE SECONDMENT AGREEMENT. THE LEARNED AR HAVE BEEN REFERRED DEBIT NOTE ISSUED BY THE DFCL AND SUBMITTED THAT THE AMOUNT OF NOTE BEIN G SALARY TO THE EMPLOYEE MATCHES WITH THE PAYMENT MADE BY THE ASSES SEE. THUS THE LEARNED AR HAS SUBMITTED THAT WHEN THE ASSESSEE HAS ALREADY DISCHARGED ITS LIABILITY BY DEDUCTING TAX AT SOURCE U/S 192 APPLICABLE ON SALARY THEN THE PAYMENT IN QUESTION CANNOT BE HE LD AS FTS. THE LEARNED AR HAS POINTED OUT THAT THE LEARNED CIT(A) HAS ISSUED A REMAND ORDER BUT THE IMPUGNED ORDER HAS BEEN PASSED WITHOUT ANY REMAND REPORT. IT IS, THEREFORE, SUBMITTED THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL 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 4 01 WHEREIN TRIBUNAL HAS FOLLOWED THE DECISION IN THE CASE OF I DS SOFTWARE SOLUTION AND REAFFIRMED THE VIEW THAT THE PAYMENT B EING REIMBURSEMENT OF SALARY CANNOT BE TREATED AS FTS. 6. ON THE OTHER HAND, THE LEARNED DR HAS SUBMITTED THAT AS PER THE TERMS OF THE SECONDED AGREEMENT, THE ASSESSEE DID N OT HAVE ANY CONTROL OVER DEPUTED PERSONNEL. FURTHER THESE EMPL OYEES WERE STILL ON ITA NOS.1356 & 1 357/B/13 7 THE PAY ROLE OF DFCL AND, THEREFORE, THERE WAS NO R ELATION OF MASTER AND EMPLOYEES BETWEEN THE ASSESSEE AND THESE SECOND EES. DFCL WAS THE ACTUAL EMPLOYER HENCE THE SERVICES RENDERED BY THIS EMPLOYEES WERE ACTUALLY RENDERED ON BEHALF OF DFCL. THUS, T HE LEARNED DR HAS SUBMITTED THAT THE REMITTANCE WAS NOT TOWARDS REIMB URSEMENT OF SALARY BUT FOR THE SERVICES RENDERED BY THE EXPATRI ATES ON BEHALF OF DFCL. THE AO AS WELL AS CIT(A) AFTER EXAMINATION O F EXPATRIATES QUALIFICATION OF THE SECONDEES HAVE COME TO THE CO NCLUSION THAT THEY HAVE BEEN INVOLVED IN MANAGEMENT AND CONSULTANCY SE RVICES AND THESE SERVICES ARE PROVIDED AS PER THE AGREEMENT AN D, THEREFORE, THE REMITTANCE MADE BY THE ASSESSEE ARE ACTUALLY FTS AN D NOT REIMBURSEMENT OF SALARY. HE HAS RELIED UPON THE JU DGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CENTRICA INDIA PVT. LTD. VS. CIT 364 ITR 336 AND SUBMITTED THAT IT HAS BEEN HELD BY THE HONBLE HIGH COURT THAT THE SECONDEES ARE IMPARTING TECHNICAL EX PERTISE TO ALL REGULAR EMPLOYEES OF THE ASSESSEE. FURTHER NOMENCL ATURE USED IN THE AGREEMENT RELATING TO THE PAYMENT AS REIMBURSEMENT CANNOT BE A DETERMINATIVE FACTOR. THE LEARNED DR FURTHER POINTE D OUT THAT THE SLP AGAINST THE SAID JUDGMENT OF HONBLE HIGH COURT HAS BEEN DISMISSED BY HONBLE SUPREME COURT REPORTED IN 227 TAXMAN 368 . ITA NOS.1356 & 1 357/B/13 8 7. IN REJOINDER, THE LEARNED AR OF THE ASSESSEE SUB MITTED THAT EVEN IF THE PAYMENT ARE TREATED AS FTS, THE SECONDEES WO ULD CONSTITUTE A SERVICE PERMANENT ESTABLISHMENT (PE) AND, THEREFOR E, ONLY THE NET OF THE EXPENDITURE WOULD BE CHARGEABLE TO TAX AS PER T HE PROVISION OF SEC. 44D OF THE ACT. IN SUPPORT OF HIS CONTENTION, HE H AS RELIED UPON THE JUDGMENT OF HONBLE SC IN THE CASE OF CIT VS. MORGA N STANLEY AND CO. INC., 292 ITR 416 AND SUBMITTED THAT WHILE INTE RPRETING THE DEFINITION OF PE AS PROVIDED U/S 92F(III) AS WELL A S CONSIDERING THE CBDT CIRCULAR 14 OF 2001 THE HONBLE SC HAS OBSERVE D THAT THE DEFINITION OF PE COVERS SERVICES PE, AGENCY PE, SOF TWARE PE, CONSTRUCTION PE ETC. THUS, THE LEARNED AR HAS SUBM ITTED THAT EVEN IN THE CASE OF THE PAYMENT IN QUESTION IS TREATED AS FTS THERE WOULD BE NO TAX LIABILITY BECAUSE THE NET AMOUNT WILL BE NI L AFTER DEDUCTING THE EXPENDITURE WHICH IS IN THE SHAPE OF SALARY OF THES E SECONDEES. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSION AS WELL AS RELEVANT MATERIAL ON RECORD. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF OWNERSHIP AND SUPERMARKET CHAIN IN INDIA. THE ASSE SSEE WAS IN NEED OF PERSONNEL TO ASSIST WITH ITS OPERATION IN INDIA . THE ASSESSEE EXPRESS ITS DESIRE TO DFCL A HONG KONG BASED COMPA NY ENGAGED IN ITA NOS.1356 & 1 357/B/13 9 THE SIMILAR LINE OF BUSINESS AND OPERATION TO ASSI GN CERTAIN PERSONNEL TO ASSIST. ACCORDINGLY, THE ASSESSEE AND DFCL ENTE RED INTO AN AGREEMENT DATED 30/6/2007. THE SAID AGREEMENT UNDO UBTEDLY IS A SECONDMENT AGREEMENT AND THE DFCL ASSIGNED 5 PERSONNEL/EMPLOYEES OF SECONDEES TO ASSESSEE. THE RELEVANT PART OF TERMS AND CONDITIONS OF THE AGREEMENT ARE REPRODUCE D AS UNDER: 1.2 IT IS CLARIFIED THAT DFCL WILL ONLY DEPUTE MANPOWER AS REQUIRED BY FOOD WORLD UNDER THIS AGREEMENT AND NOT BE RENDERING ANY SERVICE; TO FOO D WORLD. 1.3 DETAILS OF EXPATRIATE WITH NAME AND QUALIFICAT ION AS ON THE DATE OF THIS AGREEMENT ARE ENCLOSED IN AN NEXURE 1. ANY CHANGE IN THE LIST OF SUCH PERSONNEL WILL BE AG REED BETWEEN THE PARTIES TO THE AGREEMENT BY EXCHANGE OF LETTERS. 1.4 DFCL SHALL NOT BE RESPONSIBLE FOR OR ASSUME AND RISK FOR THE PERFORMANCE BY THE SECONDEES WHILE ON ASSIGNMENT TO FOOD WORLD. THE SECONDEES SHALL FUNC TION UNDER THE CONTROL, DIRECTION AND SUPERVISION OF FOO D WORLD AND IN ACCORDANCE WITH THE POLICIES, RULES AND GUID ELINES GENERALLY APPLICABLE TO FOODWORLDS EMPLOYEES DURIN G THE ASSIGNMENT PERIOD. EFCL WILL NOT HAVE CONTINUING OBLIGATION TOWARDS FOODWORLD WITH REGARD TO THE PERFORMANCE OF THE SECONDEES. THE OBLIGATION OF DF CL SHALL CEASE ON THE ACCEPTANCE BY THE RELEVANT SECON DEE OF AN EMPLOYMENT LETTER FROM FOODWORLD. ITA NOS.1356 & 1 357/B/13 10 X X X X X X 1.8 FOODWORLD SHALL BE RESPONSIBLE FOR COMPLYING WITH THE REQUIREMENTS OF WITHHOLDING TAX AND ASSOCI ATED REPORTING OBLIGATIONS UNDER THE INDIAN TAX LAWS, ON THE REMUNERATION AND ANY OTHER PAYMENTS OR BENEFITS PAI D TO THE SECONDEES. X X X X X X 6.1 THIS AGREEMENT SHALL BECOME BINDING UPON ITS SIGNATURE BY BOTH THE PARTIES, AND SHALL REMAIN IN FULL FORCE AND EFFECT UNLESS IT IS TERMINATED PURSUANT TO ARTI CLE 6.2 OR 6.3 BELOW. 6.2 EITHER PARTY SHALL, WITHOUT PREJUDICE TO ITS OTHER RIGHT IN LAW OR EQUITY AND WITHOUT ANY LIABIL ITY AND JUDICIAL INTERVENTION, BE ENTITLED TO TERMINATE THI S AGREEMENT FORTHWITH BY GIVING WRITTEN NOTICE TO SUCH EFFECT T O THE OTHER PARTY IN CASE THE OTHER PARTY: 6.3 THIS AGREEMENT MAY BE TERMINATED BY EITHER PARTY AT ANY TIME, BY PROVIDING NOT LESS THAN 90 DA YS WRITTEN NOTICE TO THE OTHER PARTY. 9. AS PER THE TERMS OF THE ABOVE AGREEMENT, 5 PERSO NNEL WERE DEPUTED WITH THE ASSESSEE. THE DETAILS OF THE SECON DEES ARE GIVEN AT PAGE 6 OF THE CIT(A) AS UNDER: ITA NOS.1356 & 1 357/B/13 11 NAME OF SECONDEES; DESIGNATION WORKED DURING 2007- 08 QUALIFICATION RETAIL EXPERIENCE NORMA YUM CHIEF EXECUTIVE OFFICER APR-07 MAR-08 MBA FROM NEWPORT UNIVERSITY (HONG KONG) 1999 BA FROM REGENTS OF AMERICAN WORLD UNIVERSITY, HONG KONG 1996 OVER 20 YEARS OF RETAIL EXPERIENCE IN HONG KING; HOLDING MERCHANDISING OPERATION AND GENERAL MANAGEMENT ROLES IN SENIOR POSITIONS. PRIOR TO SECONDMENT, THE FRESH FOOD DIRECTOR OF WELCOME, HON KOGN (AN ENTITY WITH ANNUAL SALES IN EXCESS OF US$ 1 BILLION), REPORTING TO CEO ERIC LAW HO FAI GENERAL MANAGER PROJECTS APR-07- MAR-08 A LEVELS : SHUE YA COLLEGE, HONG KNOG (1981) OVER 20 YEARS OF RETAIL EXPERIENCE IN HONG KONG, HOLDING A VARIETY OF MERCHANDISING AND OPERATIONAL MANAGEMENT POSITIONS. PRIOR TO SECONDMENT, FRESH OPERATIONS MANAGER FOR WELCOME, HONG KONG, REPORTING TO THE FRESH FOOD DIRECTOR. MARK MARSHAL CHIEF OPERATING OFFICER APR-07- MAR-08 26 YEARS OF RETAILS EXPERIENCE IN SOUTH AFRICA MAN YEE LINDA SHIU GROUP CATEGORY MANAGER APR-07- JAN-08 BSC IN FOOD AND NUTRITION, UNIVERSITY OF HONG KONG (2000) 6 YEARS OF RETAIL EXPERIENCE WITH WELCOME, HONG KONG IN FRESH FOOD AND MERCHANDISING MANAGEMENT POSITIONS. ALMEN AZE SING CHAN GROUP CATEGORY MANAGER APR-07- JAN-08 BACHELOR OF MASTER IN PHILOSOPHY : FOOD SCIENCE (2003) BSC IN 2 YEARS OF RETAIL EXPERIENCE WITH WELCOME, HONG KONG IN FRESH FOOD AND MERCHANDISING MANAGEMENT POSITIONS. ITA NOS.1356 & 1 357/B/13 12 FOOD AND NUTRITION SCIENCE, UNIVERSITY OF HONG KONG (2000) 10. AS IT IS CLEAR THAT ALL 5 SECONDEES ARE NOT ORD INARY EMPLOYEES OR WORKERS BUT THEY ARE DEPUTED THE HIGH LEVEL MANAGER IAL/EXECUTIVE POSITIONS WHICH SHOWS THAT THEY ARE DEPUTED BECAUSE OF EXPERTISE AND MANAGERIAL SKILLS IN THE FIELD. THIS FACT IS A LSO REFLECTED IN THE AGREEMENT. IT IS PERTINENT TO NOTE THAT THE SECOND MENT AGREEMENT IS BETWEEN THE ASSESSEE AND DFCL AND THESE SECONDEES A SSIGNED TO THE ASSESSEE ARE NOT PARTY TO THE AGREEMENT. FURTHER T HE SECONDEES ARE ASSIGNED BY DFCL AND THERE IS NO SEPARATE CONTRACT OF EMPLOYMENT BETWEEN THE ASSESSEE AND THE SECONDEES. THE SECOND EES ARE UNDER THE LEGAL OBLIGATION AS WELL AS EMPLOYMENT OF DFCL AND ASSIGNED TO THE ASSESSEE ONLY FOR A SHORT PERIOD OF TIME. IN THE A BSENCE OF ANY CONTRACT BETWEEN THE ASSESSEE AND THE SECONDEES, TH E PARTIES CANNOT ENFORCE ANY RIGHT OR OBLIGATION AGAINST EACH OTHER. THE SECONDEESS CAN CLAIM THEIR SALARY ONLY FROM THE PARENT COMPANY I.E DFCL AND NOT FROM THE ASSESSEE. THUS, THE EXPATRIATES WERE PER FORMING THEIR DUTIES FOR AND ON BEHALF OF THE DFCL. ONCE IT IS FOUND TH AT THE SECONDEES ITA NOS.1356 & 1 357/B/13 13 WERE RENDERING THE MARGINAL AND HIGHLY EXPERTISE SE RVICES TO THE ASSESSEE THE PAYMENT FOR SUCH SERVICES IS IN THE AM BIT OF FTS DEFINED IN EXPLANATION 2 TO SEC. 9(1)(VII) OF THE ACT, WHI CH READ AS UNDER:- EXPLANATION [2] FOR THE PURPOSES OF THIS CLAUSE, FEES FOR TECHNICAL SERVICES MEANS ANY CONSIDERATIO N (INCLUDING ANY LUMP SUM CONSIDERATION) FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONNEL) BUT DOES NOT INCLUDE CONSIDERATION FOR ANY CONSTRUCTION, ASSEMBL Y, MINING OR LIKE PROJECT UNDERTAKEN BY THE RECIPIENT OR CONSIDERATION WHICH WOULD BE INCOME OF THE RECIPIEN T CHARGEABLE UNDER THE HEAD SALARIES . 11. AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECI DED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CENTRICA ( SUPRA). THE HONBLE HIGH COURT WHILE DEALING WITH THE DEFINITIO N OF FTS UNDER ARTICLE 13(IV) OF INDO UK DTAA HAS HELD THAT THE S ERVICES OF THE PERSONNEL DEPUTED UNDER THE SECONDMENT AGREEMENT WE RE IN THE NATURE OF MANAGERIAL CONSULTANCY SERVICES TO THE ASSESSEE . IT IS PERTINENT TO NOTE THAT THE DEFINITION UNDER ARTICLE 13(4) OF THE INDO UK DTAA AS WELL AS THE DEFINITION UNDER EXPLANATION 2 TO SEC. 9(1)(VII) ARE ALMOST ITA NOS.1356 & 1 357/B/13 14 IDENTICAL EXCEPT THE WORD MANAGERIAL IS MISSING IN THE DEFINITION PROVIDED UNDER TAX TREATY. FOR READY REFERENCE WE QUOTE THE DEFINITION OF FTS UNDER ARTICLE 13(4) OF INDO-UK DTAA WHICH H AS BEEN REPRODUCED BY THE HONBLE HIGH COURT IN PARA 25 AS UNDER:- ARTICLE 13 ROYALTIES AND FEES FOR TECHNICAL SERV ICES- 4. THE DEFINITIONS OF FEES FOR TECHNICAL SERVICES IN PARAGRAPH 4 OF THIS ARTICLE SHALL NOT INCLUDE AMOUN TS PAID : (A) FOR SERVICES THAT ARE ANCILLARY AND SUBSIDIARY, AS WELL AS INEXTRICABLY AND ESSENTIALLY LINKED, TO THE SALE OF PROPERTY, OTHER THAN PROPERTY DESCRIBED IN PARAGRAP H 3(A) OF THIS ARTICLE. (B) FOR SERVICE THAT ARE ANCILLARY AND SUBSIDIARY TO TH E RENTAL OF SHIPS, AIRCRAFT, CONTAINERS OR OTHER EQUI PMENT USED IN CONNECTION WITH THE OPERATION OF SHIPS, OR AIRCRAFT IN INTERNATIONAL TRAFFIC; (C) FOR TEACHING IN OR BY EDUCATIONAL INSTITUTIONS; (D) FOR SERVICES FOR THE PRIVATE USE OF THE INDIVIDUAL OR INDIVIDUALS MAKING THE PAYMENT; OR (E) TO AN EMPLOYEE OF THE PERSON MAKING THE PAYMENTS OR TO ANY INDIVIDUAL OR PARTNERSHIP FOR PROFESSIONAL SERVICE AS DEFINED IN ARTICLE 15 (INDEPENDENT PERSO NAL SERVICES) OF THIS CONVENTION. X X X X X X ITA NOS.1356 & 1 357/B/13 15 12. THE HONBLE HIGH COURT WHILE DECIDING THE ISSUE HAS OBSERVED THAT THE ASSESSEE FILED THE PROVISION OF SERVICES O F OTHER PERSONNEL. THE TERM INCLUDING THE PROVISION OF SERVICES OF TEC HNICAL OR OTHER PERSONNEL; IS COMMON IN BOTH DEFINITION PROVIDED U NDER EXPLANATION 2 TO SEC. 9(1)(VII) OF THE ACT AS WELL AS IN THE AR TICLE 13(4) OF THE INDIA UK DTA. MOREOVER THE DEFINITION OF FTS UNDER SEC. 9(1)(VII) ART 13(IV) OF INDO UK DTA HAS SIMILAR EXCEPT ONE EXTRA WORD MARGINAL DEED TO THE DEFINITION UNDER INCOME-TAX ACT. THE HONBLE HIGH COURT WHILE DEALING WITH THE ISSUE AS HELD IN PARA 28 TO 31, 37, 38 AS UNDER: 28. CIOP RELIES ON THE CONCEPT OF ECONOMIC EMPLOYMENT AS OPPOSED TO LEGAL EMPLOYMENT AND SUBMITS THAT THE FORMAL JUR AL OR LEGAL RELATIONSHIP OF EMPLOYER AND EMPLOYEE AS BETWEEN TH E SECONDED EMPLOYEE AND THE OVERSEAS ENTITY IS OF NO SIGNIFICA NCE. IT IS ARGUED THAT FOR ALL PRACTICAL PURPOSES, CIOP IS THE REAL E MPLOYER, BECAUSE THE CONTENT OF THE WORK OR EMPLOYMENT, THE ENTIRE D IRECTION AND SUPERVISION OVER THE SECONDED EMPLOYEES WORK AND TH E PAY AND EMOLUMENTS ARE BORNE BY IT. FOR CONVENIENCE, THE PA Y IS DISBURSED BY THE OVERSEAS ENTITY, BUT THAT AMOUNT IS REIMBURS ED TO THE OVERSEAS ENTITY. RELIANCE IS FIRSTLY PLACED ON THE CONCEPT OF ECONOMIC EMPLOYER, DISCUSSED BY KLAUS VOGEL IN 'DOU BLE TAXATION CONVENTIONS', ESPECIALLY THE FOLLOWING EXTRACTS: - '8. INTERNATIONAL HIRING OUT OF LABOUR PARAGRAPH 2 HAS GIVEN RISE TO NUMEROUS CASE OF ABUSE THROUGH ITA NOS.1356 & 1 357/B/13 16 ADOPTION OF THE PRACTICE KNOWN AS INTERNATIONAL HIR ING OUT OF LABOUR. IN THIS SYSTEM, A LOCAL EMPLOYER WIS HING TO EMPLOY FOREIGN LABOUR FOR ONE OR MORE PERIODS OF LESS THAN 183 DAYS RECRUITS THROUGH AN INTERMEDIARY ESTABLISHED ABROAD WHO PURPORTS TO BE THE EMPLOYER AND HIRES THE LABOUR OUT TO THE EMPLOYER. THE WORKE R THUS FULFILLS PRIMA FACIE THE THREE CONDITIONS LAID DOWN BY PARAGRAPH 2 AND MAY CLAIM EXEMPTION FROM TAXATION IN THE COUNTRY WHERE HE TO TEMPORARILY WORKING. TO PREVENT SUCH ABUSE, IN SITUATION OF THI S TYPE, THE TERM 'EMPLOYER' SHOULD BE INTERPRETED IN THE CONTEXT OF PARAGRAPH 2. IN THIS RESPECT IT SHOULD B E NOTED THAT THE TERM 'EMPLOYER' IS NOT DEFINED IN TH E CONVENTION BUT IT IS UNDERSTOOD THAT THE EMPLOYER I S THE PERSON HAVING RIGHTS ON THE WORK PRODUCED AND BEARING THE RELATIVE RESPONSIBILITY AND RISKS. IN C ASES OF INTERNATIONAL HIRING OUT OF LABOUR, THESE FUNCTI ONS ARE TO A LARGE EXTENT EXERCISED BY THE USER. IN THI S CONTEXT, SUBSTANCE SHOULD PREVAIL OVER FORM, I.E. E ACH CASE SHOULD BE EXAMINED TO SEE WHETHER THE FUNCTION S OF EMPLOYER WERE EXERCISED MAINLY BY THE INTERMEDIARY OR BY THE USER. IT IS THEREFORE UP TO THE CONTRACTING STATES TO AGREE ON THE SITUATIONS IN WH ICH THE INTERMEDIARY DOES NOT FULFILL THE CONDITIONS REQUIRED FOR HIM TO BE CONSIDERED AS THE EMPLOYER WITHIN THE MEANING OF PARAGRAPH 2. IN SETTING THIS QUESTION, THE COMPETENT AUTHORITIES MAY REFER NOT O NLY TO THE ABOVE MENTIONED INDICATIONS BUT TO A NUMBER OF ITA NOS.1356 & 1 357/B/13 17 CIRCUMSTANCES ENABLING THEM TO ESTABLISH THAT THE R EAL EMPLOYER IS THE USER OF THE LABOUR (AND NOR THE FOR EIGN INTERMEDIARY); THE HIRER DOES NOT BEAR THE RESPONSIBILITY OR RISK FOR THE RESULTS PRODUCED BY THE EMPLOYEES WORK; - THE AUTHORITY TO INSTRUCT THE WORKER LIES WITH THE USER; - THE WORK IS PERFORMED OR A PLACE WHICH IS UNDER THE CONTROL AND RESPONSIBILITY OF THE USER; - THE REMUNERATION TO THE HIRER IS CALCULATED ON THE BASIS OF THE TIME UTILIZED, OR THERE IS IN OTHER WA YS A CONNECTION BETWEEN THIS REMUNERATION AND WAGES RECEIVED BY THE EMPLOYER; - TOOLS AND MATERIALS ARE ESSENTIALLY PUT AT THE EMPLOYEES DISPOSAL BY THE USER : - THE NUMBER AND QUALIFICATIONS OF THE EMPLOYEES ARE NOT SOLELY DETERMINED BY THE HIRER.. THE COURT ALSO NOTES THAT THE MODEL TAX CONVENTION ON INCOME AND ON CAPITAL (CONDENSED VERSION, JULY 2010) IN TH IS CONTEXT, STATES AS FOLLOWS: - '8.14 WHERE A COMPARISON OF THE NATURE OF THE SERVICES RENDERED BY THE INDIVIDUAL WITH THE BUSINE SS ACTIVITIES CARRIED ON BY HIS FORMAL EMPLOYER AND BY THE ENTERPRISE TO WHICH THE SERVICES ARE PROVIDED POINTS TO AN EMPLOYMENT RELATIONSHIP THAT IS DIFFER ENT ITA NOS.1356 & 1 357/B/13 18 FROM THE FORMAL CONTRACTUAL RELATIONSHIP, THE FOLLOWING ADDITIONAL FACTORS MAY BE RELEVANT TO DETERMINE WHETHER THIS IS REALLY THE CASE: WHO HAS THE AUTHORITY TO INSTRUCT THE INDIVIDUAL REGARDING THE MANNER IN WHICH THE WORK HAS TO BE PERFORMED. - WHO CONTROLS AND HAS RESPONSIBILITY FOR THE PLACE A T WHICH THE WORK IS PERFORMED; - REMUNERATION OF THE INDIVIDUAL IS DIRECTLY CHARGED BY THE FORMAL EMPLOYER TO THE ENTERPRISE TO WHICH THE SERVICES ARE PROVIDED (SEE PARAGRAPH 8.15 BELOW) - WHO PUTS THE TOOLS AND MATERIALS NECESSARY FOR THE WORK AT THE INDIVIDUALS DISPOSAL - WHO DETERMINES THE NUMBER AND QUALIFICATIONS OF THE INDIVIDUALS PERFORMING THE WORK; - WHO HAS THE RIGHT TO SELECT THE INDIVIDUAL WHO WILL PERFORM THE WORK AND TO TERMINATE THE CONTRACTUAL ARRANGEMENTS ENTERED INTO WITH THAT INDIVIDUAL FOR THAT PURPOSE; 29. THE ISSUE WHICH ARISES FOR THE CONSIDERATION OF TH E COURT IN THIS CASE IS WHETHER THE SECONDMENT OF EMPLOYEES BY BSTL AND DEML, THE OVERSEAS ENTITIES, FALLS WITHIN ARTICLE 12 OF T HE INDIA-CANADA AND ARTICLE 13 OF THE INDIA-UK DTAAS, WHICH EMBODY THE CONCEPT OF A SERVICE PERMANENT ESTABLISHMENT (A 'SERVICE PE '). IN TERMS OF THOSE ARTICLES, THE COURT MUST DETERMINE WHETHER TH E OVERSEAS ENTITIES RENDERED 'TECHNICAL SERVICES' UNDER ARTICL E 13 OF THE INDIA- UK DTAA AND 'INCLUDED SERVICES' UNDER ARTICLE 12 OF THE INDIA- CANADA DTAA. IN ESSENCE, THE INQUIRY IS WHETHER ANY TAX LIABILITY ITA NOS.1356 & 1 357/B/13 19 OF THE OVERSEAS ENTITY ARISES FOR THE PROVISION OF SERVICES TO CIOP IN INDIA, SUCH THAT THE TRIGGER IN THE DTAAS COMES INT O PLAY. THIS MUST NECESSARILY DEPEND ON THE PHRASING OF EACH DTA A, CONSTRUED ON ITS OWN TERMS, IN LIGHT OF GENERAL PRINCIPLES AS DETERMINED BY THE COURTS. SINCE THE QUESTION OF TECHNICAL SERVICES HA S BEEN CONSIDERED BY THE DTAA, THIS TAKES PRECEDENCE OVER THE TAXING REGIME UNDER SECTION 9 OF THE ACT. 30. THE INDIA-UK DTAA DEFINES 'FEES FOR TECHNICAL SERV ICES' AS 'PAYMENTS OF ANY KIND OF ANY PERSON IN CONSIDERATIO N FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICES OF A TECHNICAL OR OTHER PERSO NNEL)'. IN THIS CASE, THE OVERSEAS ENTITIES HAVE, THROUGH THE SECON DED EMPLOYEES, UNDOUBTEDLY PROVIDED 'TECHNICAL' SERVICES TO CIOP, ESPECIALLY SINCE THAT EXPRESSION EXPRESSLY INCLUDES THE PROVISION OF THE SERVICES OF PERSONNEL. THE SECONDED EMPLOYEES, WHO WORK, SO TO SAY, FOR CIOP ARE PROVIDED BY THE OVERSEAS ENTITIES AND THE WORK CONDUCTED BY THEM THUS, I.E. ASSISTANCE IN CONDUCTING THE BUSINE SS OF COIP OF QUALITY CONTROL AND MANAGEMENT IS THROUGH THE OVERS EAS ENTITIES. THE NATURE OF THE SERVICES - CAST AS 'BUSINESS SUPP ORT SERVICES' BY CIOP - AS ALSO CLEARLY WITHIN THE HOLD 'TECHNICAL O R CONSULTANCY. THESE SERVICES ENVISAGE THE PROVISION OF QUALITY SE RVICE BY VENDORS TO THE OVERSEAS ENTITIES, WHICH CIOP, AND THE SECON DEES, ARE TO OVERSEE. THIS REQUIRES THE SECONDEES TO DRAW FROM T HEIR TECHNICAL KNOWLEDGE, AND FALLS WITHIN THE SCOPE OF THE TERM. THIS READING OF 'TECHNICAL' SERVICES DOES NOT LIMIT ITSELF ONLY TO TECHNOLOGICAL SERVICES, BUT RATHER, EXTENDS TO KNOW-HOW, TECHNIQU ES AND TECHNICAL KNOWLEDGE. THIS IS SUPPORTED BY CLAUSE 4 OF ARTICLE 12 ITSELF, WHICH ITA NOS.1356 & 1 357/B/13 20 LISTS THESE VARIOUS SUB-CATEGORIES. INDEED, THE TER M 'TECHNICAL' HAS NOT BEEN DEFINED IN THE DTAA, AND MUST BE ACCORDED ITS BROADER DICTIONARY MEANING, UNLESS LIMITED BY THE PARTIES T O THE INSTRUMENT. THE AAR IN INTERTEK TESTING SERVICES INDIA (P.) LTD , IN RE [2008] 307 ITR 418/175 TAXMAN 375 (AAR) , CONSIDERED THIS QUESTION IN DETAIL, AND RIGHTLY HELD THAT 'WHAT IS MEANT BY THE EXPRESSION 'TECHNICAL'? SHOUL D IT BE CONFINED ONLY TO TECHNOLOGY RELATING TO ENGINEERING MANUFACT URING OR OTHER APPLIED SCIENCES? WE DO NOT THINK SO. THE EXPRESSIO N 'TECHNICAL' OUGHT NOT TO BE CONSTRUED IN A NARROW SENSE.' THIS READING WAS SUPPORTED BY THE SUPREME COURT, IN THE CONTEXT OF SECTION 9(1)(IV) OF THE ACT IN CONTINENTAL CONSTRUC TION LTD. V. CIT [1992] 195 ITR 81/60 TAXMAN 429 . FURTHER, THE COURT NOTES THAT THE DISTINCTION TO BE DRAWN BY CIOP BETWEEN THE PRO VISION OF SERVICES BY THE OVERSEAS ENTITIES THEMSELVES AND TH E 'MERE' SECONDMENT OF EMPLOYEES DOES NOT MAKE A DIFFERENCE, SINCE THE SERVICES PROVIDED THE OVERSEAS ENTITIES IS THE PROV ISION OF TECHNICAL SERVICES THROUGH THE SECONDEES - AN INSTANCE ENVISA GED UNDER ARTICLE 13 ITSELF. 31. THE ISSUE OF ARTICLE 12 OF THE INDIA-CANADA TREATY INVOLVES A MORE NUANCED INQUIRY. ARTICLE 12 ALSO INCORPORATES FEES FOR 'INCLUDED SERVICES'. WHILST THIS INCLUDES 'TECHNICA L SERVICES OR CONSULTANCY SERVICE' UNDER CLAUSE 4, IT STATES THAT 'FEES FOR INCLUDED SERVICES' 'MEANS PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THROUGH THE PROVISION OF SERVIC ES OF TECHNICAL OR OTHER PERSONNEL) IF SUCH SERVICES MAKE AVAILABLE TECHNICAL ITA NOS.1356 & 1 357/B/13 21 KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW, OR PROCESSE S OR CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN.' THIS SECOND QUALIFICATION FOR THE TECHNICA L KNOWLEDGE ETC. TO BE 'MADE AVAILABLE' IS AN ESSENTIAL, AND ADDITIO NAL, REQUIREMENT UNDER THE INDIA-CANADA DTAA. THIS PHRASING ALSO FIN DS MENTION IN ARTICLE 13 OF THE INDIA-UK DTAA, THIS REQUIREMENT I S DISJUNCTIVE FROM THE REST OF THE PROVISION, UNLIKE IN THE INDIA -CANADA DTAA. THE INDIA-UK DTAA STATES THAT 'FEES FOR TECHNICAL S ERVICES' 'MEANS PAYMENTS OF ANY KIND OF ANY PERSON IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICES OF A TECHNICAL OR OTHER PERSO NNEL) WHICH OR MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKI LL KNOW-HOW OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AND TRANSF ER OF A TECHNICAL PLAN OR TECHNICAL DESIGN.' IN ORDER FOR THE AMOUNTS PAID TO THE OVERSEAS ENTITIES IN THE TRANSACTION COVERED BY THE INDIA-CANADA DTAA, THUS, IT MUST NOT ONLY BE SHOWED THAT TECHNIC AL SERVICES WERE PERFORMED, BUT THAT SUCH KNOWLEDGE ETC. WAS 'MADE A VAILABLE'. XXXXXXXXXX 37. THIS BRINGS THE COURT TO THE NEXT ISSUE, CONCERNIN G REIMBURSEMENT AND THE DOCTRINE OF DIVERSION OF INCO ME BY OVERRIDING TITLE. THIS COURT NOTICES THAT A CASE WI TH ALMOST IDENTICAL CIRCUMSTANCES, IN IN RE: AT & S INDIA (P.) LTD. (SU PRA), ALSO CAME UP BEFORE THE AAR. THERE, AN AGREEMENT BETWEEN AT&S INDIA AND ITS PARENT, AT& AUSTRIA WAS ENTERED INTO, BY WHICH AT&S AUSTRIA UNDERTOOK TO ASSIGN OR CAUSE ITS SUBSIDIARIES TO AS SIGN ITS QUALIFIED EMPLOYEES TO THE AT&S INDIA. THESE INDIVIDUALS WERE TO WORK FOR AT&S INDIA AND RECEIVE COMPENSATION SUBSTANTIALLY S IMILAR TO WHAT ITA NOS.1356 & 1 357/B/13 22 THEY WOULD HAVE RECEIVED AS EMPLOYEES OF AT&S AUSTR IA. THEY WERE ENGAGED BY AT&S INDIA ON A FULL TIME BASIS. TH E QUESTION BEFORE THE AAR WAS IDENTICAL TO THIS CASE: 'WHETHER PURSUANT TO THE SECONDMENT AGREEMENT ENTER ED INTO BY THE APPLICANT WITH AT&S AUSTRIA, THE PAYMENT TO BE MADE BY THE APPLICANT TO AT&S AUSTRIA, TOWARDS REIMBURSEMENT OF SALARY COST INCURRED BY AT&S AUSTRIA IN RESPECT OF SECONDED PER SONNEL, WOULD BE SUBJECT TO WITHHOLDING TAX UNDER SECTION 195 OF THE IT ACT, IN VIEW OF THE FACTS THAT (1) THE PAYMENTS ARE ONLY IN THE NATURE OF REIMBURSEMENT OF ACTUAL EXPENDITURE INCURRED BY AT& S AUSTRIA. (2) AT&S AUSTRIA IS NOT ENGAGED IN THE BUSINESS OF PROV IDING TECHNICAL SERVICES IN THE ORDINARY COURSE OF ITS BUSINESS, (3 ) AT&S AUSTRIA IS NOT CHARGING THE APPLICANT ANY SEPARATE FEE FOR THE SECONDMENT AND (4) THE SECONDED PERSONNEL WORK UNDER THE DIRECT CO NTROL AND SUPERVISION OF THE APPLICANT?' IN HOLDING THAT THE OBLIGATION UNDER SECTION 195 WO ULD BE TRIGGERED, THE AAR HELD AS FOLLOWS: 'FROM THE ABOVE ANALYSIS OF BOTH THE AGREEMENTS IT IS CLEAR THAT PURSUANT TO THE OBLIGATION UNDER THE FCA, THE AT&S AUSTRIA HAS OFFERED THE SERVICES OF TECHNICAL EXPERTS TO THE AP PLICANT ON THE LATTER'S REQUEST AND THE TERMS AND CONDITIONS FOR P ROVIDING SERVICES OF TECHNICAL EXPERTS ARE CONTAINED IN THE SECONDMEN T AGREEMENT WHICH WE HAVE REFERRED TO ABOVE IN GREAT DETAILS. T HOUGH THE TERM 'REIMBURSEMENT' IS USED IN THE AGREEMENTS, THE NATU RE OF PAYMENTS UNDER THE SECONDMENT AGREEMENT HAS TO SATISFY THE C HARACTERISTIC OF REIMBURSEMENT AND THAT THE TERM 'REIMBURSEMENT' IN THE AGREEMENT WILL NOT BE DETERMINATIVE OF NATURE OF PAYMENTS. TH E TERM ITA NOS.1356 & 1 357/B/13 23 'REIMBURSEMENT' IS NOT A TECHNICAL WORD OR A WORD O F ARTICLE IN OXFORD ENGLISH DICTIONARY, TO REIMBURSE MEANSTO RE PAY A PERSON WHO HAS SPENT OR LOST MONEYAND ACCORDINGLY REIMBUR SEMENT MEANS TO MAKE GOOD THE AMOUNT SPENT OR LOST. HOWEVE R, UNDER THE SECONDMENT AGREEMENT THE APPLICANT IS REQUIRED TO C OMPENSATE AT&S AUSTRIA FOR ALL COSTS DIRECTLY OR INDIRECTLY A RISEN FROM THE SECONDMENT OF PERSONNEL AND THAT THE COMPENSATION I S NOT LIMITED TO SALARY, BONUS, BENEFITS, PERSONAL TRAVEL, ETC. T HOUGH SALARY, BONUS, ETC. AND THE AMOUNTS REFERRED TO IN PARA 4.2 OF THE SECONDMENT AGREEMENT FORM PART OF COMPENSATION. THE PREMISE OF THE QUESTION THAT THE PAYMENTS ARE ONLY IN THE NATU RE OF REIMBURSEMENT OF ACTUAL EXPENDITURE INCURRED BY AT& S AUSTRIA IS NOT TENABLE FOR REASONS MORE THAN ONE. FIRST IT IS NOT SUPPORTED BY ANY EVIDENCE AS NO MATERIAL (EXCEPT THE DEBIT NOTES OF SALARIES OF SECONDED PERSONNEL) IS PLACED BEFORE US TO SHOW WHA T ACTUAL EXPENDITURE WAS INCURRED BY AT&S AUSTRIA AND WHAT I S BEING CLAIMED AS REIMBURSEMENT; SECONDLY, ASSUMING FOR TH E SAKE OF ARGUMENT THAT THE DEBIT NOTES REPRESENT THE QUANTUM OF COMPENSATION AS THE ACTUAL EXPENDITURE, IT WOULD MA KE NO DIFFERENCE AS THE SAME IS PAYABLE TO THE AT&S AUSTR IA UNDER THE SECONDMENT AGREEMENT FOR SERVICES PROVIDED BY IT. I T WOULD, THEREFORE, BE NOT ONLY UNREALISTIC BUT ALSO CONTRAR Y TO THE TERMS OF THE AGREEMENT TO TREAT PAYMENTS UNDER THE SAID AGRE EMENT AS MERE REIMBURSEMENT OF SALARIES OF THE SECONDED EMPLOYEES WHO ARE SAID TO BE THE EMPLOYEES OF THE APPLICANT. TO SHOW THAT THE REAL EMPLOYER OF SUCH EMPLOYEES IS THE APPLICANT AND NOT THE AT&S AUSTRIA, MR. CHAITANYA INVITED OUR ATTENTION TO ITA NOS.1356 & 1 357/B/13 24 VARIOUS EMPLOYMENT AGREEMENTS ENTERED INTO BETWEEN THE APPLICANT AND THE SECONDED EMPLOYEES AND ALSO THE CERTIFICATE OF DEDUCTION OF TAX AT SOURCE ON THEIR GLOBAL SALARY. ALL THE EMPLO YMENT AGREEMENTS ARE SIMILARLY WORDED. WE HAVE CAREFULLY GONE THROUG H THE EMPLOYMENT AGREEMENT BETWEEN THE APPLICANT AND MR. MARKUS STOINKELLNER. THE DURATION OF THE EMPLOYMENT IS FRO M 1ST SEPT., 2005 TILL 30TH AUG., 2008. IN ARTICLE 3 THEREOF SAL ARY OF THE EMPLOYEE IS NOTED AS THE REMUNERATION, PERQUISITES AND OTHER ENTITLEMENTS AS DETAILED IN APPENDIX-A. HOWEVER, AP PENDIX-A DOES NOT SPECIFY ANY AMOUNT. ALL THAT IT SAYS, IS THAT T HE SALARY WILL BE AS FIXED AND AGREED BETWEEN THE EMPLOYEE AND THE COMPA NY FROM TIME TO TIME AND THAT SUCH SALARY MAY BE PAID EITHER IN INDIA OR OUTSIDE INDIA BUT THE TOTAL SALARY SHALL NOT EXCEED THE SAL ARY FIXED AS ABOVE, BUT NO FIXED SALARY IS MENTIONED IN THE EMPLOYMENT AGREEMENT. OTHER PERQUISITES AND ENTITLEMENTS ARE : TRAVEL EXP ENSES, TRANSPORT, BOARDING, LODGING; AND ANNUAL LEAVE OF 30 DAYS PER YEAR; AND HOME LEAVE WHICH THE EMPLOYEE WILL BE ENTITLED TO ONCE. THE APPLICANT SHALL HAVE TO ORGANIZE AN ECONOMIC CLASS RETURN FLI GHT TICKETS TO GO ON HOME LEAVE. THE EMPLOYMENT AGREEMENT ALSO PROVID ES THAT THE EMPLOYEE WILL BE RESPONSIBLE FOR MEETING ALL REQUIR EMENTS UNDER INDIAN TAX LAWS INCLUDING TAX COMPLIANCE AND FILING OF RETURNS AND THE APPLICANT IS AUTHORIZED TO DEDUCT TAXES FROM TH E COMPENSATION AND BENEFITS PAYABLE.' 38. THE MERE FACT THAT CIOP, AND THE SECONDMENT AGREEM ENT, PHRASES THE PAYMENT MADE FROM CIOP TO THE OVERSEAS ENTITY AS 'REIMBURSEMENT' CANNOT BE DETERMINATIVE. NEITHER IS THE FACT THAT THE OVERSEAS DOES NOT CHARGE A MARK-UP OVER AND ABO VE THE COSTS OF ITA NOS.1356 & 1 357/B/13 25 MAINTAINING THE SECONDEE RELEVANT IN ITSELF, SINCE THE ABSENCE TO MARKUP (SUBJECT TO AN INDEPENDENT TRANSFER PRICING EXERCISE) CANNOT NEGATE THE NATURE OF THE TRANSACTION. IT WOU LD LEAD TO AN ABSURD CONCLUSION IF, ALL ELSE CONSTANT, THE FACT T HAT NO PAYMENT IS DEMANDED NEGATES ACCRUAL OF INCOME TO THE OVERSEAS ENTITY. INSTEAD, THE VARIOUS FACTORS CONCERNING THE DETERMI NATION OF THE REAL EMPLOYMENT LINK CONTINUE TO OPERATE, AND THE C ONSEQUENT FINDING THAT PROVISION OF EMPLOYEES TO CIOP WAS THE PROVISION OF SERVICES TO CIOP BY THE OVERSEAS ENTITIES TRIGGERS THE DTAAS. THE NOMENCLATURE OR LESSER-THAN-EXPECTED AMOUNT CHARGED FOR SUCH SERVICES CANNOT CHANGE THE NATURE OF THE SERVICES. INDEED, ONCE IT IS ESTABLISHED, AS IN THIS CASE, THAT THERE WAS A PROV ISION OF SERVICES, THE PAYMENT MADE MAY INDEED BE PAYMENT FOR SERVICES - WHICH MAY BE DEDUCTED IN ACCORDANCE WITH LAW - OR REIMBURSEME NT FOR COSTS INCURRED. THIS, HOWEVER, CANNOT BE USED TO CLAIM TH AT THE ENTIRE AMOUNT IS IN THE NATURE OF REIMBURSEMENT, FOR WHICH THE TAX LIABILITY IS NOT TRIGGERED IN THE FIRST PLACE. THIS WOULD MEA N THAT IN ANY CIRCUMSTANCE WHERE SERVICES ARE PROVIDED BETWEEN RE LATED PARTIES, THE DEMAND OF ONLY AS MUCH MONEY AS HAS BEEN SPENT IN PROVIDING THE SERVICE WOULD REMOVE THE TAX LIABILITY ALTOGETH ER. THIS IS CLEARLY AN INCORRECT REASONING THAT CONFLATES LIABILITY TO TAX WITH SUBSEQUENT DEDUCTIONS THAT MAY BE CLAIMED. 13. THE SLP FILED AGAINST THE JUDGMENT OF HONBLE DELHI HIGH COURT HAS BEEN DISMISSED BY THE HONBLE SUPREME COU RT IN 227 TAXMAN 368. THEREFORE THE VIEW TAKEN BY THE HONBLE HIGH COURT HAS ITA NOS.1356 & 1 357/B/13 26 ATTAINED FINALITY. THE CONCEPT OF INCOME INCLUDES POSITIVE AS WELL AS NEGATIVE INCOME OR NIL INCOME. IN THE CASE OF PAYM ENT BEING FTS OR ROYALTY AS PER SEC. 9(1) OF THE ACT IT IS IRRELEVAN T WHETHER ANY PROFIT ELEMENT IN THE INCOME OR NOT. IT IS NOT ONLY A MAT TER OF COMPUTATION OF TOTAL INCOME WHEN THE CONCEPT OF PROFIT ELEMENT IN PAYMENT IS RELEVANT. IF THE PAYMENT BEING FTS OR ROYALTY IS MADE TO NON- RESIDENT, THEN THE CONCEPT OF TOTAL INCOME BECOMES IRRELEVANT AND THE PROVISIONS OF SEC. 44D RECOGNIZE THE GROSS PAYMENT CHARGEABLE TO TAX. THUS ALL THE PAYMENT MADE BY THE ASSESSEE TO NON-RE SIDENT ON ACCOUNT OF FTS OR ROYALTY AN CHARGEABLE TO TAX IRRESPECTIVE OF ANY PROFIT ELEMENT IN THE SAID PAYMENT OR NOT. HOWEVER, THERE IS AN EXCEPTION TO THIS RULE OF CHARGING THE GROSS AMOUNT WHEN THE NO N-RESIDENT IS HAVING FIXED PLACE OF BUSINESS OR PE IN INDIA AND T HE AMOUNT IS EARNED THROUGH THE PE, THEN THE EXPENDITURE INCURRED IN TH E RELATION TO THE PE FOR EARNING SAID AMOUNT IS ALLOWABLE AS PER THE P ROVISIONS OF SEC. 44DA OF THE ACT. THEREFORE, IN VIEW OF THE JUDGMEN T OF HONBLE DELHI HIGH COURT IN THE CASE OF CENTRICA (SUPRA), T HE PAYMENT MADE TO FOREIGN COMPANY DFCL PARTAKES THE CHARACTER OF FTS AS PER THE DEFINITION UNDER EXPLANATION 2 TO SEC . 9(1)(VII) O F THE ACT. THE DECISIONS RELIED UPON BY THE ASSESSEE IN THE CASE O F IDS SOFTWARE SOLUTIONS (SUPRA) AND ABBEY BUSINESS SOLUTION (SUPR A) WOULD NOT ITA NOS.1356 & 1 357/B/13 27 HELP THE CASE OF THE ASSESSEE WHEN THERE IS A DIREC T JUDGMENT OF HONBLE DELHI HIGH COURT ON THIS POINT. 14. THE LEARNED AR OF THE ASSESSEE HAS RAISED AN AL TERNATIVE POINT THAT THE SECONDMENT OF EMPLOYEES CONSTITUTE A SERV ICE PE AND SECONDLY THE AMOUNT WOULD BE CHARGEABLE TO TAX AS P ER THE PROVISION OF SEC. 44DA OF THE ACT. ADMITTEDLY THERE IS NO D TA BETWEEN INDIA AND HONG KONG AND UNDER THE PROVISION OF INCOME-TAX THERE IS NO CONCEPT OF SERVICE PE. HOWEVER, THE LEARNED AR OF THE ASSESSEE HAS RELIED UPON THE JUDGMENT OF HONBLE SUPREME COURT I N THE CASE OF DIT INTERNATIONAL VS. MORGAN STANELY AND CO. INC. (SUPRA) WHEREIN THE HONBLE SUPREME COURT HAS OBSERVED IN PARA 11 A S UNDER:- 11. THE CONCEPT OF PE WAS INTRODUCED IN 1961 ACT AS PART OF THE STATUTORY PROVISIONS OF TRA NSFER PRICING BY THE FINANCE ACT OF 2001. IN SEC. 92F(II I) THE WORD ENTERPRISE IS DEFINED TO MEAN A PERSON INC LUDING A PE OF SUCH PERSON WHO IS PROPOSED TO BE ENGAGED I N ANY ACTIVITY RELATING TO THE PRODUCTION. UNDER TH E CENTRAL BOARD OF DIRECT TAXES CIRCULAR NO.14 OF 200 1 IT HAS BEEN CLARIFIED THAT THE TERM PE HAS NOT BEEN DE FINED IN THE ACT BUT ITS MEANING MAY BE UNDERSTOOD WITH REFERENCE TO THE DTAA ENTERED INTO BY INDIA. THUS THE ITA NOS.1356 & 1 357/B/13 28 INTENTION WAS TO RELY ON THE CONCEPT AND DEFINITION OF PE IN THE DTAA. HOWEVER, VIDE FINANCE ACT, 2002, THE DEFINITION OF PE WAS INSERTED IN THE INCOME-TAX ACT , 1961 (FOR SHORT, THE IT 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. THIS IS WHERE THE DIFFERENCE LI ES BETWEEN THE DEFINITION OF THE WORD PE IN THE INCLUS IVE SENSE UNDER THE INCOME-TAX ACT AS AGAINST THE DEFIN ITION OF THE WORD PE IN THE EXHAUSTIVE SENSE UNDER THE DT AA. THIS ANALYSIS IS IMPORTANT BECAUSE IT INDICATES THE INTENTION OF PARLIAMENT IN ADOPTING AN INCLUSIVE DEFINITION OF PE SO AS TO COVER SERVICE PE, AGENCY PE, SOFTWARE PE, CONSTRUCTION PE, ETC. 15. THE HONBLE APEX COURT WHILE ANALYZING THE DEFI NITION OF PE U/S 92F(III) OF THE ACT HAS OBSERVED THAT THE INTEN TION OF PARLIAMENT IN ADOPTING AN INCLUSIVE DEFINITION OF PE COVERS THE S ERVICE PE, AGENCY PE, SOFTWARE PE, CONSTRUCTION PE ETC. 16. SINCE THIS PLEA HAS BEEN TAKEN BY THE ASSESSEE FOR THE FIRST TIME BEFORE THIS TRIBUNAL AND THERE IS NO DTA BETWEEN IN DIA AND HONG KONG THEREFORE, THIS CONCEPT OF SERVICE PE REQUIRES A PROPER EXAMINATION OF ALL THE RELEVANT FACTS AS WELL AS PR OVISIONS ON THE POINT ITA NOS.1356 & 1 357/B/13 29 WHETHER IT CONSTITUTE A SERVICE PE IN INDIA. ACCOR DINGLY, THE ISSUE IS REMITTED TO THE RECORD OF THE AO FOR ADJUDICATION O F THE PLEA RAISED BY THE ASSESSEE THAT THE SECONDMENT OF THE EMPLOYEES C ONSTITUTE A SERVICES PE AND ACCORDINGLY PROVISIONS OF SEC. 44DA WOULD BE APPLICABLE. NEEDLESS TO SAY, THE AO TO ADJUDICATE ISSUE AFTER AFFORDING AN OPPORTUNITY OF HEARING TO THE ASSESSEE. 17. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 28TH OCT, 2015. SD/- SD/- (JASON P BOAZ) (VIJAYPAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER VMS. BANGALORE DATED : 28/10/2015 COPY TO :1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER ASST. REGISTRAR, I TAT, BANGALORE.