Delhi High Court
M/S. Centrica India Offshore Pvt. ... vs Commissioner Of Income Tax-I & ... on 25 April, 2014
Author: S.Ravindra Bhat
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 26.02.2014
Pronounced on: 25.04.2014
+ W.P.(C) No.6807/2012
M/S. CENTRICA INDIA OFFSHORE PVTL. LTD. .....Petitioner
Through: Mr. N. Venkataraman, Sr. Adv. with Ms.
K.G. Rajeshwari & Mr. R. Satish Kumar, Advs.
Versus
COMMISSIONER OF INCOME TAX-I & ORS. ..... Respondents
Through: Mr. Sanjeev Sabharwal, Sr. Standing
Counsel with Mr. Ruchir Bhatia, Jr. Standing
Counsel.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE R.V. EASWAR
MR. JUSTICE S. RAVINDRA BHAT
%
1. The writ petitioner (hereafter called "CIOP") is aggrieved by
the decision of the Authority for Advance Ruling ("the Authority")
dated 14.03.2012, by which the latter held that payment by it under
the agreement - with certain overseas entities is "income accruing" to
overseas entities in view of the existence of a service Permanent
Establishment (PE) in India and that tax is liable to be deducted at
WP(C) No.6807/2012 Page 1
source under Section 195 of the Indian Income Tax Act, 1961 ("the
Act").
2. CIOP is a wholly owned subsidiary of Centrica Plc., a
company incorporated in the United Kingdom ("UK"). CIOP is
incorporated in India. British Gas Trading Ltd. ("BSTL") and
Director Energy Marketing Limited, Canada ("DEML") are also
subsidiaries of Centrica Plc. These overseas concerns are collectively
referred to hereafter as "overseas entities". They are in the business
of supplying gas and electricity to consumers across the U.K and
Canada. The overseas entities outsource their back office support
functions - for instance, debt collections/consumers‟ billings/monthly
jobs to third party vendors in India etc. To ensure that the Indian
vendors comply with quality guidelines, CIOP was established in
India on 11.3.2008. It was to act as service provider to these overseas
entities.
3. CIOP entered into service agreement with overseas entities to
provide locally based interface between those overseas entities and
Indian vendors. The scope and range of services so provided in terms
of those agreements/understanding are: (i) management assistance for
outsourced supplies in India and facilitating efficient interface back to
U.S. business of Centrica Plc; (b) ensure that outsourced suppliers
adhered to best practices and share them on e-2-e on optimal basis;
(c) expert advice on widening scope of potential services in India to
target work force through greater control and such other services as
may be requested by Centrica Plc from time to time. It is stated that
WP(C) No.6807/2012 Page 2
in terms of the agreement, the petitioner is compensated on full costs,
i.e. expenses adopted by it in the Profit and Loss Account plus a
mark-up of 15%. The petitioner is an income tax assessee and has
been filing returns and paying income tax on the income earned out
of the service agreement. To seek support during initial year of its
operation, CIOP sought some employees on „secondment‟ from the
overseas entities. For this purpose, it entered into an agreement with
the overseas entities in which the latter seconded some employees for
fixed tenure. It is stated that in terms of the secondment agreement -
copy of which has been placed on the record, the employees so
seconded work under CIOP‟s direct control and supervision.
Conversely, the overseas entities are not responsible for any error or
omission of the work of such employees. CIOP bears all risks and
rewards associated with the work performed by such employees. To
drive home this point, CIOP relies upon certain conditions in the
secondment agreement, notably Sections 2.1(C), 2.2(A), 2.3(A) and
2.3(B). It is stated that the agreements fully require the petitioner to
enter into a further individual agreement with each such employee
(secondee) in terms of a pre-determined format.
4. CIOP highlights that the terms of these secondment agreements
establish that the employees would work directly under the
supervision and direction of its board and management. It is stated
that the seconded employees came to India on deputation for short
period. However, their family and financial matters remained in their
home countries where they intended to ultimately return to after
completion of the assignment. It was, convenient, for them, therefore,
WP(C) No.6807/2012 Page 3
to receive salaries overseas. An option available to such employees
was to receive their salaries through India and later transfer their
salaries overseas. However, to avoid this, the employees continued to
remain on the payroll of the overseas entities who used to pay and
disburse the salaries. The petitioner thereafter reimbursed such salary
costs to the overseas employers. It is stated that this
arrangement/salary reimbursed is purely on cost-basis. Reliance is
placed upon Section 3.1 of the secondment agreement which in this
respect reads as follows:
"(A) PLC shall charge CIO monthly for the actual
documented costs and expenses that is incurred by PLC during
the terms of this Secondment Agreement in respect of the
Secondees during the Secondment (the „Monthly charge‟).
(B) The monthly charge shall include:
(i) all direct costs of Secondee‟s base salary and other
compensation;
(ii) costs of participation in PLC‟s retirement and social
security plans and other benefits in accordance with applicable
PLC policies; and
(iii) other costs but only if such other costs have been agreed
between CIO and PLC."
5. It is stated that the petitioner offers to tax the salaries paid to
every seconded employee in India and that it will file Income Tax
Returns in India after dispatching appropriate taxes. It therefore
withheld taxes under Section 192 of the Act with respect to the salary
paid or payable to the seconded employees. Likewise, service income
received by the petitioner from overseas entities in terms of the
service agreement is offered by it to tax under the Act. CIOP, a
WP(C) No.6807/2012 Page 4
resident Indian company, had sought advance ruling under Chapter
XIX-B of the Act by its application dated 06.11.2009 on the
following two questions:
"(i) Whether on the facts and in the circumstances of the
case, the reimbursements made by the Petitioner to
overseas entities of the actual costs of expenses incurred
under Secondment Agreement is in nature of income
accruing to the overseas entities?
(ii) If the answer to question No. 1 above is affirmative,
whether tax is liable to be deducted at source by the
petitioner under the provisions of Section 195 of the
Income-tax Act, 1961?"
6. CIOP urged, before the Authority, that in tune with the
recognized international principles, it is the real and economic
employer of the seconded employees, even though their legal
employers were the concerned overseas entities. It was also urged
that in terms of the secondment agreement, the overseas entities
were not providing any service to the petitioner. Furthermore, the
payment to the seconded employees by the overseas entities was
purely out of convenience which was in turn reimbursed on cost-
basis. The reimbursement made to such overseas entities was not
taxable as income in India because the taxes were already paid in
respect of the seconded employees in India. It was urged that the
reimbursement to the overseas entities could not be considered as
income under the time-tested doctrine of "diversion of income by
overriding title". Thus, submitted the petitioner, the presence of
the seconded employees did not create a permanent establishment
WP(C) No.6807/2012 Page 5
(PE) of such overseas entities under the Double Taxation
Avoidance Agreement (DTAA).
7. The respondent income tax authorities countered the
petitioner‟s submission by stating that the seconded employees
were rendering monthly services to the petitioner and
reimbursement to the overseas entities was in the nature of "fees
for technical services" and covered under Section 9(1)(vii) of the
Act as well as under the Double Taxation Avoidance Agreements
applicable to U.K. and Canada. It was, therefore, contended that
the overseas entities would have PE under the DTAA. The
respondent argued that CIOP could only terminate the seconded
agreement but could not terminate the contract of those seconded
employees. This proved that it was not the real employer and that
the overseas entities were the real and legal employers.
Consequently, there was no charge on the petitioner through the
overseas entities in respect of the obligation of payment of
remuneration to the seconded employees. This, according to the
respondent amounted to application of income and not diversion
of income by the overriding title.
8. The Authority ruled against the petitioner, by the order
impugned in the present case, on 14.03.2012, inter alia, holding
that: (a) reimbursement of salary cost paid/payable by the
petitioner to overseas entities under the terms of Secondment
Agreement is in the nature of income accrued to the overseas
entities; (b) the services rendered by seconded employees are
WP(C) No.6807/2012 Page 6
managerial in nature but such services will not come within the
purview of Article 13.4 of the India-UK DTAA or Article 12.4 of
India-Canada DTAA. Therefore, consideration paid by the
Petitioner to the overseas entities cannot be held to be fees for
technical services; (c) the overseas entities constitute service PE
under the relevant DTAA on account of employees deputed by
overseas entities to the Petitioner under the terms of Secondment
Agreement; and (d) Tax is liable to be deducted at source under
Section 195 of the Act on amount paid/payable by Petitioner to
overseas entities under the Secondment Agreement
The material parts of the Authority‟s findings are extracted below:
XXXXXX XXXXXX XXXXXX
"12. What is the position in this case? The applicant was
created as a subsidiary by the overseas entity for coordinating
the services of various vendors in India to whom it has
outsourced some activities needed by it. A service agreement
was then entered into by the overseas entity with the applicant
for this purpose. The applicant was to be paid the costs it
incurred for doing the work plus 15% of it as profits or
compensation. The applicant submits that it has offered this
15% to tax in India.
13. The applicant required to be guided in the processes and
procedures of the overseas entity. For this, the overseas entity
deputed or seconded some of its employees to the applicant to
render their services in India. As we see it, those employees
continue to be the employees of the overseas entity and they
are paid their salaries and other perquisites or allowances by
the concerned overseas entity. All their service benefits are
given by the overseas entity. They, thus, remain the employees
of their original employer. On a reading of the
WP(C) No.6807/2012 Page 7
Secondment Agreement, it is seen that the right of the seconded
employees to seek their salaries and other emoluments is
against the overseas entity. They cannot claim it as of right
against the applicant.
14. The right of dismissal of the employees vests in or rests
with the overseas entity. Even though the control and
supervision of the employees and their work is with the
applicant, the applicant cannot terminate their employment. It
can only terminate the secondment agreement of the
employees.
XXXXXX XXXXXX XXXXXX
18. On the terms of the Secondment Agreement, it is difficult
to find that the amount paid by the applicant to the overseas
entities is reimbursement as sought to be emphasized by
learned counsel for the applicant. Obligation to pay the salary
rested with the overseas entities and the right of the employee
to claim it is only against the overseas entities. The employee is
conferred no right to claim the salary from the applicant nor is
the applicant burdened with an obligation to pay that salary. It
is difficult to accept the argument that what is paid by the
applicant to the overseas entity in view of its sending its
employees to the applicant for rendering service is
reimbursement of the salary paid by the employer to them.
Merely because the overseas entity is not charging the
applicant anything more than what it has paid by way of salary
and other emoluments to the concerned employee, that does
not alter the situation. The fact that in the accounts of the
applicant, this is entered as reimbursement of cost or it is not
shown as income in the account of the overseas entity, cannot
be conclusive of the question. What the Model commentary on
Article 15 concerning the taxation of income from employment
says is that where a comparison of the nature of services
rendered by the individual with the business activities carried
on by his former employer and by the enterprise to which the
services are provided points to an employment relationship
WP(C) No.6807/2012 Page 8
that is different from the former contractual relationship, then
certain additional factors may be relevant to determine
whether the employer who receives the secondees could be
treated as their employer. What we find in this case is that the
overseas entity has created an Indian company as its
subsidiary for ensuring that the services to be rendered to it by
various Indian vendors are properly coordinated. The overseas
entity wants their services to be consistent with its business and
policies. The applicant having been newly constituted, was
presumably not in a position to render help to the various
vendors in the matter of fulfilling their obligations or in the
matter of ensuring compliance with the processes and
practices employed by the overseas entities.
The Secondment Agreement is specifically based on the fact
that CIO has asked the overseas entity to provide staff with
knowledge of various processes and practices employed by the
overseas entity and experience in managing and applying such
processes and practices. On a look at the list of employees, it is
seen that the persons seconded are concerned with managerial
functions and they are to oversee the applicants' operations
and to be overall responsible for its activities and functions.
This, therefore, appears to be a case where some employees
qualified in the processes and procedures of the overseas entity
are lent to the applicant, the Indian entity, a subsidiary, to
perform the functions envisaged for it. What is paid by the
applicant to the overseas entity in view of this lending of
service of certain employees, would really spell in the realm of
compensation paid for managerial services. Of course, it
remains for us to consider whether it is taxable and if it is,
whether it is taxable in India.
XXXXXX XXXXXX XXXXXX
20. Here, the enterprise to which the employees are sent is
the subsidiary of the original employer. The persons well
versed in the processes and procedures of that employer are
sent to the subsidiary to enable the subsidiary to perform the
work for which it was created in accordance with the processes
WP(C) No.6807/2012 Page 9
and procedures of the original employer. The work is also
really that of the employer, in the sense, that it is to coordinate
the work of the vendors of the employer situated in the other
State. It is a work needed by the original employer. On the
terms of the agreement entered into by CIO with the overseas
entity and the separate agreements entered into with the
seconded employees, we have held that the obligation to pay
the salary is that of the original employer and the right of the
employees to claim that salary is against the original
employer. The work of the employer in India, is not
unconnected with the activity of their original employer, the
overseas entity. On the other hand, it is part of it. In this
situation, we are of the view that even if we are able to
postulate two work relationships - we find it difficult to do so -
the one responsible for the remuneration, the overseas entity,
has to be found to be the employer.
XXXXXX XXXXXX XXXXXX
26. In the case on hand, as can be seen, the secondee
employees are all rendering managerial services. They are
General Manager, Operations Manager, Delivery Manager
and Relationship Manager respectively. It is true, as pointed
out by the Revenue, that even the separate agreements do not
specify the nature of the services required to be provided by
the employees. There is no material as of now to indicate that
they are performing any technical functions or consultancy
functions. They can be said to be managing the business of the
subsidiary as requested by Centrica Plc., consistent with its
aims. There is no acceptable argument except reliance upon a
ruling by this Authority in Version Data Services India Private
Limited (AAR No.865 of 2010). We may notice that the High
Court of Madras has in a Judgment in Writ Petition No. 14921
of 2011, set aside the finding of this Authority on that question
and has remanded the relevant question for a re-consideration.
To that extent, the finality of the Version Ruling has now gone.
So, the reliance placed on that Ruling by the Revenue is of no
avail.
WP(C) No.6807/2012 Page 10
27. On the materials now available, it is not possible to hold
that the managerial services being rendered in this case, will
come within the purview of Article 13.4 of the India-UK
Convention or Article 12.4 of the Indo-Canada Convention.
Hence, the consideration paid by the applicant to the overseas
entities for getting the services of these employees cannot be
held to be fees for technical services. In view of the above, it is
not necessary to consider the question whether the service is
made available to the applicant."
CIOP‟S contentions
9. CIOP, the petitioner submits that the Authority fell into error in
overlooking that there is a strong underlying master-servant
relationship in the case of secondment whereas in service agreements,
the relations between the parties is between two principals, i.e. the
service provider is an independent contractor. In this regard, learned
senior counsel relied upon the decision reported as Kishore v. ESIC,
2007 (4) SCC 579. It is submitted that in terms of the secondment
agreement, the control of the petitioner over the seconded employee
is complete in almost all aspects, such as - (i) dictating the scope and
nature of work to be undertaken; (ii) right of supervision; (iii) right to
issue instructions and directions; (iv) right to dictate that the
seconded employees would not have any entitlement to seek salaries
and other emoluments against the petitioner; (v) right to terminate the
secondment agreement even though not the service itself.
10. Learned counsel differentiated between the concept of "legal
employment" and "economic employment" and in this context relied
upon the observations in „International Hiring-out of Labour‟ by
WP(C) No.6807/2012 Page 11
Klaus Vogel as well as principles contained in the OECD
Commentary on the Model Tax Convention. It was argued that a
legal employer appoints someone and, therefore, has the right to
terminate the employment. The economic employer, on the other
hand, enjoys the fruits of the labour, possesses the authority to
inspect and control and bears the risks and results of the work
performed by the employee. The place of employment or work would
also be that directed by the economic employer. The economic
employer may not have the legal right to terminate the employment
altogether, it would possess the right to terminate the contractual
arrangement, i.e. the secondment agreement. The payment of salary
of the seconded employee is charged from the economic employer.
Learned counsel reiterated that an overall reading of Articles 2.1, 2.2,
2.3, 3.1 and 5.2 of the secondment agreement conclusively
establishes that it was a real and economic employer of the seconded
employees and that they were acting to its dictate in the performance
of their job and not placed there to perform the tasks assigned by the
overseas entities.
11. Reliance was placed upon the judgment reported as CIT v. Eli
Lilly and Co. India Private Limited, (2009) 312 ITR 225 (SC), to say
that the determinative factors for examining whether the home salary
paid by the foreign company in foreign currency abroad can be held
to be "deemed" or "accrued" or "assigned" in India depends on an in-
depth analysis of facts and arrangements in each case. If the salary or
remuneration paid by the foreign company is for rendition services in
India then the payment fell within Section 9(4)(i) read with Section
WP(C) No.6807/2012 Page 12
192(1). Learned counsel relied upon a recent ruling of the Division
Bench of this Court in DIT v. M/s. E-Funds IT Solution, ITA
735/2011. Similarly, reliance was also placed upon the ruling in
Morgan Stanley and Co., In Re, 2006 (284) ITR 260 (SC). The
petitioner submits that the substance and not the form of the
arrangement should be looked into. The over-emphasis on a singular
factor such as legal employment of the seconded employee and the
right to terminate it by its overseas entities would distort the correct
picture which is that effective and overall control is that of the
petitioner. The mere secondment of such employees would not
amount to rendition of services through them by the overseas entities.
12. It is urged that in terms of the service agreement with the
overseas entities, the petitioner charges on cost plus mark-up at 15%;
in turn it charges reimbursement due from the overseas entities as
secondment agreement as salary costs in its books of accounts. This
cost is included in the service receivable on cost plus 15% mark-up
basis. Thus, the petitioner offers its income to taxation in India.
Maintaining that the two arrangements, i.e. the secondment
agreement entered into between the petitioner and the overseas
entities on the principal-to-principal basis is distinct from the
individual agreements entered into with the seconded employees, it is
argued that whilst the former is a contract for service, the latter - by
each individual seconded employee with the petitioner, CIOP are
contracts for service. It is again reiterated that the overseas entities
supplied gas and electricity to U.K. and Canada-based consumers.
These overseas entities outsource their non-integral business to third
WP(C) No.6807/2012 Page 13
party vendors in India. The petitioner merely provides business
support services in relation to such outsourced processes. The non-
integral and non-revenue generating business of such overseas
entities, therefore, constitute the integral revenue generating business
activities of the petitioner. It can, therefore, by no stretch of
imagination be said to carry-on business on behalf of the overseas
entities. Nor can it be concluded that the overseas entities are renting
their employees to other entities or providing managerial services to
the petitioner. It was argued that the law declared in Morgan (supra)
was misapplied. In this regard, learned counsel relied upon the
following observations of the Supreme Court:
"As regards the question of deputation, we are of the view that
an employee of MSCo when deputed to MSAS does not become
an employee of MSAS. A deputationist has a lien on his
employment with MSCo. As long as the lien remains with the
MSCo the said company retains control over the
deputationist‟s terms and employment. The concept of a
service PE finds place in the U.N. Convention. It is constituted
if the multinational enterprise renders services through its
employees in India provided the services are rendered for a
specified period. In this case, it extends to two years on the
request of MSAS. It is important to note that where the
activities of the multinational enterprise entails it being
responsible for the work of deputationists and the employees
continue to be on the payroll of the multinational enterprise or
they continue to have their lien on their jobs with the
multinational enterprise, a service PE can emerge."
13. It is submitted that without fulfilling both criteria, i.e. the
foreign enterprise assuming responsibility for the deputed personnel‟s
work and the employee being on the payroll or retaining their lien on
WP(C) No.6807/2012 Page 14
employment there would no service PE. In the present case, the first
is significantly absent and as regards the second, the payment is made
exclusively out of the petitioner‟s funds.
Respondent‟s contentions:
14. According to the respondent the secondment Agreement dated
December 1, 2008 is premised on the following facts: (a) CIOP has
asked the overseas entities to provide staff with knowledge of various
processes and practices employed by PLC and the experience in
managing and applying such processes and practices, and (b) subject
to the provisions of this Secondment Agreement, the overseas entities
nominated and CIOP accepted the secondees. The above facts, says
the respondent, clearly show that the staff seconded to India (in the
CIOP) must possess the knowledge of various processes and
practices employed by the overseas entities and experience in
managing and applying such processes and practices. It has also been
stated in terms of the Service Agreement dated December 1, 2008
that CI OP has to provide the following advisory and support services
- (a) Assistance in managing the partnership with outsourced
suppliers in India and facilitating an efficient interface back to the
UK businesses of the overseas entity; (b) Ensuring that outsourced
suppliers follow best practices, share such best practices and that
processes utilized in India and in e2e are optimized; (c) Expert advice
on widening the scope of potential services delivered in India through
a direct workforce with greater control; and (d) Such other services
that may be requested by overseas entities from time to time.
WP(C) No.6807/2012 Page 15
15. Therefore, the scope of services contemplated by the Service
Agreement and the capabilities required in the seconded employees,
when seen together, according to the respondent, indicate that the
arrangement is not a simple secondment which normally happens in
enterprises operating in multiple locations to familiarize the
employee with the operations being carried out in the other location.
This is a case where operations in India require the expertise of
employees of the non-resident companies and their ability to
implement processes and practices in the applicant company. The
objective of utilization of such services is to create and effective
interface between the outsourced suppliers of the overseas entities,
ensuring that those suppliers follow best practices etc. To that extent,
there definitely arose technical expertise which the seconded
employees had to possess to support the business of the overseas
entities (although being seconded to the applicant company in India).
16. The respondent submits that it is also necessary to see if such
services (in the form of expertise and capability of implementation)
amount to „technical services‟ under the provisions of the domestic
tax act and the relevant provisions of the applicable treaties. Section 5
of the Act is the charging section and in case of non-residents clause
(2) states as follows:
"(2) Subject to the provisions of this Act, the total income of
any previous year of a person who is a non-resident includes
all income from whatever source derived which -
(a) is received or is deemed to be received in India in such
year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in
India during such year."
WP(C) No.6807/2012 Page 16
17. The Revenue also relies on Section 9 of the Act, which
provides for income which is deemed to accrue or arise in India.
Section 9(1)(vii) of the Act states as follows:
"(vii) Income by way of fees for technical services payable by
-
(a) The Government; or
(b) A person who is a resident, except where the fees are
payable in respect of services utilized in a business or
profession carried on by such person outside India or for
the purposes of making or earning any income from any
source outside India; or
(c) A person who is a non-resident, where the fees are payable
in respect of services utilized in a business or profession
carried on by such person in India or for the purposes of
making or earning any income from any source in India:
(d) [Provided that nothing contained in this clause shall apply
in relation to any income by way of fees for technical
services payable in pursuance of an agreement made before
the 1st day of April, 1976, and approved by the Central
Government.]
[Explanation 1. - For the purposes of the foregoing
proviso, an agreement made on or after the 1st day of April,
1976, shall be deemed to have been made before that date if
the agreement is made in accordance with proposals
approved by the Central Government before that date.]
Explanation [2]. - For the purposes of this clause, "fees for
technical services" means any consideration (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,
assembly, mining or like project undertaken by the recipient
or consideration which would be income of the recipient
chargeable under the head "salaries".]
WP(C) No.6807/2012 Page 17
18. It is submitted that two of the overseas entities are tax residents
of UK and one is a tax resident of Canada. The Revenue relies on the
relevant provisions of the DTAA (in the case of the DTAA with UK,
on Article 13 and in the case of DTAA with Canada, on Article 12).
It then submits that an examination of the Secondment agreement and
the materials on record show that the arrangement between CIOP and
the overseas entities amounts to the latter providing managerial
services. Here, it is argued that the term "managerial services" is not
defined in Section 9 of the Act and as such resort may be had to the
explanation of meaning rendered in various judicial precedents
available. Yet, the expression „management‟ should be interpreted in
terms of its normal business or ordinary meaning. In this context, it is
argued that the term management includes handling of manpower and
their affairs. The expression „managerial services‟ has also been
interpreted as follows: (a) It signifies services for management of
affairs or services rendered in performing management functions; and
(b) A managerial service is towards the adoption and carrying out the
policies of an organization. It is of a permanent nature for the
organization as a whole.
19. Further, it is argued that the following services have been held
to be managerial services: (a) Hiring and training commercial agents
(OECD Report Treaty Characterisation Issues Arising from E-
commerce); (b) Overall management and direction [Advance Ruling
No. P 28 (242 ITR 208)]; (c) Development and administration of
dealer network, sales and marketing, service etc. (d) Managing
WP(C) No.6807/2012 Page 18
financial operations, (e) Supplier development and materials
management, including development if local suppliers.
20. The Revenue placed reliance on the decision of the Delhi High
Court in the case of CIT v. Bharti Cellullar Ltd., 319 ITR 139, where
the scope of the meaning „managerial service‟ was examined. The
Court held as follows:
"We have already pointed out that the expression „fees
for technical services‟ as appearing in Section 194J of
the said Act has the same meaning as given to the
expression in Explanation 2 to Section 9(1)(vii) of the
said Act. In the said Explanation the expression „fees for
technical services‟ means any consideration for
rendering of any „managerial, technical or consultancy
services‟. The word „technical‟ is preceded by the word
„managerial‟ and succeeded by the word „consultancy‟.
Since the expression „technical services‟ is in doubt and
is unclear, the rule of noscitur a sociis is clearly
applicable. The said rule is explained in Maxwell on The
Interpretation of Statutes (Twelfth Edition) in the
following words:- "Where two or more words which are
susceptible of analogous meaning are coupled together,
noscitur a sociis, they are understood to be used in their
cognate sense. They take, as it were, their colour from
each other, the meaning of the more general being
restricted to a sense analogous to that of the less
general." This would mean that the word „technical‟
would take colour from the words „managerial‟ and
„consultancy‟ between which it is sandwiched. The word
„managerial‟ has been defined in the Shorter Oxford
English Dictionary, Fifth Edition as:- „of pertaining to,
or characteriastic of a manager, esp. a professional
manager of or within an organization, business,
establishment, etc.‟ The word „manager‟ has been
defined, inter alia, as:-„a person whose office it is to
manage an organization, business establishment, or
WP(C) No.6807/2012 Page 19
public institutions, or part of one; a person with the
primarily executive or supervisory function within an
organization etc; a person controlling the activities of
an organization etc.; a person controlling the activities
of a person or team in sports, entertainment etc.‟. It is
therefore, clear that a managerial service would be one
which pertains to or has the characteristic of a manager.
It is obvious that the expression „manager‟ and
consequently „managerial service‟ has a definite human
element attached to it. To put it bluntly, a machine
cannot be a manager."
21. The Revenue emphasizes the positions adopted by the
secondees in the applicant company. The secondees are the General
Manager, Operations Manager, Delivery Manager and Relationship
Manager. It is urged that there can under the circumstances be no
doubt that the said deputed or seconded employees were rendering
managerial services to the Petitioner and as such the remuneration
payable in respect of these secondees was in the nature of „fees for
technical services‟ in terms of Section 9(1)(vii) of the Act.
22. It is argued that Article 13 of the DTAA between India and UK
defines the term „technical services‟ as follows:
"Fees for technical services" 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 personnel) which:
(a) are ancillary and subsidiary to the application or
enjoyment of the right, property or information for
which a payment described in paragraph 3(a) of this
article is received; or
(b) are ancillary and subsidiary to the enjoyment of the
property for which a payment described in paragraph
3(b) of this Article is received; or
WP(C) No.6807/2012 Page 20
(c) make available technical knowledge, experience,
skill, know-how or processes, or consist of the
development and transfer of a technical plan or
technical design
The Revenue states that the term "managerial service" is not
included in the scope of the term „technical service‟ within the
meaning of the term in Article 13 of the DTAA (revised treaty
as entered into in 1993). However, it is urged that the Court
should hold that the services of the deputed employees fall
within the meaning of the term as contained in Article 13(3),
which includes „making available technical knowledge,
experience, skill, know-how or processes.‟ In terms of the
scope of work emerging from the Service Agreement and the
Secondment Agreement it is clear that the seconded employees
are being sent to India with knowledge of various processes
and practices employed by PLC and the experience in
managing and applying such processes and practices. This
leaves no element of doubt that the seconded employees are
making available their experience and skill in managing and
applying the processes and practices. The whole objective of
their secondment is to train and familiarize the staff in India so
that once the secondment ceases, the staff in India can apply
the processes and practices and that in itself would be
sufficient to conclude that the condition of „make available‟ is
also satisfied.
WP(C) No.6807/2012 Page 21
23. It is also argued that the expression „make available‟ has been
interpreted by the Authority in some recent rulings, Anaphram Inc.
(305 ITR 394), Cushman and Wakefield (s) Pte. Ltd. (172 Taxman
179), ISRO Satellite Centre (220 CTR 20) and others. The genesis of
these decisions is that the recipient should be able to apply the same
subsequently. It is contended that the secondees would be making
available their expertise and skill to the Indian operations of the
applicant company and hence the remuneration would clearly fall
within the scope of „fees for technical services‟ as contained in
Article 12 of the DTAA between India and UK.
24. Referring to Article 12 of the DTAA between India and
Canada, it is argued that the meaning of the expression „fees for
included services‟ is similarly couched as the term „fees for technical
services‟ under Article 13 of the DTAA between India and UK.
Reliance is also placed on the decision of the Authority in the case of
AT&S India (P) Ltd. (287 ITR 421) which occasioned the
examination, (in respect of the DTAA between India and Austria)
whether the services rendered under a seconded agreement would be
in the nature of technical services so as to attract withholding tax
provisions under Section 195 of the Act. The Authority held that the
services were in the nature of „technical services‟ and the
reimbursements of salary and other costs were liable for deduction of
tax at source. On the issue of reimbursements in that case, the
Authority held that the contention that payments are only
reimbursements of actual expenditure is not supported by any
WP(C) No.6807/2012 Page 22
evidence and there is no material to show what was the actual
expenditure and what was claimed as a reimbursement.
Provisions of the DTAA between India and UK and India and
Canada
25. Article 13 of the DTAA between India and UK provides as
follows:
"ARTICLE 13 - Royalties and fees for technical services-
1. Royalties and fees for technical services arising in a
Contracting State and paid to a resident of the other
Contracting State may be taxed in that other State.
2. However, such royalties and fees for technical services may
also be taxed in the Contracting State in which they arise
and according to the law of that State; but if the beneficial
owner of the royalties or fees for technical services is a
resident of the other Contracting State, the tax so charged
shall not exceed:
(a) In the case of royalties within paragraph 3(a) of this
Articles, and fees for technical services within paragraphs
4(a) and (c) of this Article,-
(i) During the first five years for which this Convention has
effect;
(aa) 15 percent of the gross amount of such royalties or
fees for technical services when the payer of the royalties
or fees for technical services is the Government of the first-
mentioned Contracting State or a political sub-division of
that State, and
(bb) 20 percent of the gross amount of such royalties or
fees for technical services in all other cases; and
(ii) During subsequent years, 15 percent of the gross amount of
such royalties or fees for technical services; and
(b) in the case of royalties within paragraph 3(b) of this
Article and fees for technical services defined in paragraph
4(b) of this Article, 10 percent of the gross amount of such
royalties and fees for technical services.
WP(C) No.6807/2012 Page 23
XXXXXX XXXXXX XXXXXX
4. For the purposes of paragraph 2 of this Article, and subject
to paragraph 5, of this Article, the term "fees for technical
services" 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 personnel) which:
(a) are ancillary and subsidiary to the application or
enjoyment of the right, property or information for which a
payment described in paragraph 3(a) of this article is
received; or
(b) are ancillary and subsidiary to the enjoyment of the
property for which a payment described in paragraph 3(b)
of this Article is received; or
make available technical knowledge, experience, skill know-
how or processes, or consist of the development and transfer
of a technical plan or technical design.
5. The definitions of fees for technical services in paragraph
4 of this Article shall not include amounts 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 paragraph 3(a)
of this Article;
(b) for services that are ancillary and subsidiary to the
rental of ships, aircraft, containers or other equipment 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 services as
defined in Article 15 (Independent personal services) of this
Convention.
6. The provisions of paragraphs 1 and 2 of this Article shall
not apply if the beneficial owner of the royalties or fees for
WP(C) No.6807/2012 Page 24
technical services, being a resident of a Contracting State,
carries on business in the other Contracting State in which
the royalties or fees for technical services arise through a
permanent establishment situated therein, or performs in
that other State independent personal services from a fixed
base situated therein, and the right, property or contract in
respect of which the royalties or fees for technical services
are paid is effectively connected with such permanent
establishment or fixed base. In such case, the provisions of
Article 7 (Business profits) or Article 15 (Independent
personal services) of this Convention, as the case may be,
shall apply.
7. Royalties and fees for technical services shall be deemed
to arise in a Contracting State where the payer is that State
itself, a political sub-division, a local authority or a resident
of that State. Where, however, the person paying the
royalties or fees for technical services, whether he is a
resident of a Contracting State or not, has in a Contracting
State a permanent establishment or a fixed base in
connection with which the obligation to make payments was
incurred and the payments are borned by that permanent
establishment or fixed base then the royalties or fees for
technical services shall be deemed to arise in the
Contracting State in which the permanent establishment or
fixed base is situated.
8. Where, owing to a special relationship between the payer
and the beneficial owner or between both of them and some
other person, the amount of the royalties or fees for
technical services paid exceeds for whatever reason the
amount which would have been paid in the absence of such
relationship, the provisions of this Article shall apply only to
the last-mentioned amount. In that case, the excess part of
the payments shall remain taxable according to the law of
each Contracting State, due regard being had to the other
provisions of this Convention.
9. The provisions of this Article shall not apply if it was the
main purposes or one of the main purposes of any person
concerned with the creation or assignment of the rights in
WP(C) No.6807/2012 Page 25
respect of which the royalties or fees for technical services
are paid to take advantage of this Article by means of that
creation or assignment."
26. Similarly, Article 12 of the DTAA between India and Canada
reads as follows:
"ARTICLE 12 : Royalties and fees for included services -
1. Royalties and fees for included services arising in
a Contracting State and paid to a resident of the
other Contracting State may be taxed in that other State.
2. However, such royalties and fees for included services
may also be taxed in the Contracting State in which they
arise and according to the laws of that State; but if the
beneficial owner of the royalties or fees for included
services is a resident of the other Contracting State, the tax
so charged shall not exceed :
(a) in the case of royalties referred to in sub-paragraph
(a) of paragraph 3 and fees for included services as defined
in this Article (other than services described in sub-
paragraph (b) of this paragraph) :
(i) during the first five taxable years for which this
Agreement has effect,
(A) 15 per cent of the gross amount of the royalties or fees
for included services as defined in this Article, where the
payer of the royalties or fees is the Government of that
Contracting State, a political sub-division or a public sector
company; and
(B) 20 per cent of the gross amount of the royalties or fees
for included services in all other cases; and
(ii) during the subsequent years, 15 per cent of the gross
amount of the royalties or fees for included services; and
(b) in the case of royalties referred to in sub-paragraph
(b) of paragraph 3 and fees for included services as defined
in this Article that are ancillary and subsidiary to the
WP(C) No.6807/2012 Page 26
enjoyment of the property for which payment is received
under paragraph 3(b) of this Article, 10 per cent of the
gross amount of the royalties or fees for included services.
XXXXXX XXXXXX XXXXXX
4. For the purposes of this Article, „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
services of technical or other personnel) if such services :
(a) are ancillary and subsidiary to the application or
enjoyment of the right, property or information for which a
payment described in paragraph 3 is received; or
(b) make available technical knowledge, experience, skill,
know-how, or processes or consist of the development and
transfer of a technical plan or technical design.
5. Notwithstanding paragraph 4, fees for included services
does not include amount paid :
(a) for services that are ancillary and subsidiary, as well
as inextricably and essentially linked, to the sale of property
other than a sale described in paragraph 5(a);
(b) for services that are ancillary and subsidiary to the
rental of ships, aircraft, containers or other equipment 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 personal 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 firm of individuals (other than a
company) for professional services as defined in Article 14.
6. The provisions of paragraphs 1 and 2 shall not apply if
the beneficial owner of the royalties or fees for included
services, being a resident of a Contracting State, carries on
business in the other Contracting State in which the
WP(C) No.6807/2012 Page 27
royalties or the fees for included services arise, through a
permanent establishment situated therein, or performs in
that other State independent personal services from a fixed
base situated therein, and the right, property or contract in
respect of which the royalties or fees for included services
are paid is effectively connected with such permanent
establishment or fixed base. In such a case the provisions of
Article 7 or Article 14, as the case may be, shall apply.
7. Royalties and fees for included services shall be deemed
to arise in a Contracting State when the payer is that State
itself, a political sub-division, a local authority or a resident
of that State. Where, however, the person paying the
royalties or the fees for included services, whether he is a
resident of a Contracting State or not, has in a Contracting
State a permanent establishment or a fixed base in
connection with which the obligation to pay the royalties or
the fees for included services was incurred, and such
royalties or fees for included services are borne by that
permanent establishment or fixed base, then such royalties
or fees for included services shall be deemed to arise in the
Contracting State in which the permanent establishment or
fixed base is situated.
8. Where by reason of a special relationship between the
payer and the beneficial owner or between both of them and
some other person, the amount of the royalties or fees for
included services, having regard to the use, right,
information or services for which they are paid, exceeds the
amount which would have been agreed upon by the payer
and the beneficial owner in the absence of such relationship,
the provisions of this Article shall apply only to the last
mentioned amount. In that case, the excess part of the
payments shall remain taxable according to the law of
each Contracting State, due regard being had to the other
provisions of this Agreement."
27. The material portions of the Secondment Agreement entered
into by CIOP are also reproduced below:
WP(C) No.6807/2012 Page 28
"ARTICLE 2 TERMS OF SECONDMENT
2.1 Secondment
(A) At the request of CIO, PLC shall assign relevant
individuals to perform the Duties at the Secondment
Location for the Secondment Period, and to report to
CIO in accordance with the Secondment Agreement,
and in particular Attachment A thereto.
(B) CIO shall designate a Secondee to fill certain positions
within CIO‟s Organization, integrate Secondee into
CIO‟s and authorize Secondee to perform the Duties at
the Secondment Location for the Secondment Period in
accordance with the Secondment Agreement.
(C) CIO shall have the right to specify the scope and
nature of Secondee‟s work and the results to be
achieved, and to direct Secondee in the performance of
the Duties.
(D) CIO shall require Secondee to enter into a Secondee
Agreement in the form of Attachment B.
2.2 Conduct
(A) Secondee shall be integrated into CIO‟s organization
for the Secondment Period and consequently shall be
subject to
(1) The supervision and control of CIO;
(2) All applicable rules, regulations, policies and other
practices established by CIO for its employees; and
(3) instructions and directions of CIO pursuant to
Sections 2.2(A) (1) and (2)
(B) Secondee shall comply with the provisions of Section
2.2 (A) and
(C) Secondee shall perform the duties with due diligence
and in a good competent professional and sale manner
WP(C) No.6807/2012 Page 29
in accordance with applicable laws and regulations,
standards and practices, and the supervision and
control of CIO.
2.3 Status of PLC and Secondees.
(A) PLC will not be responsible for the errors/ omission or
for the work performed by the Secondees.
(B) CIO will bear all risk in respect of the work performed
by the secondees and benefits from the outputs.
xxx xxx xxx
2.5 Remuneration
CIO will bear the cost of monthly remuneration and
reimbursement of costs of secondees
2.6 PLC‟s Benefit Plans
Secondees will retain their entitlement to participate in
PLC‟s retirement and social security plans and other
benefits in accordance with applicable PLC policies.
The monthly cost of such participation and benefits will
be borne by CIO.
Article 3: Costs
1.1 Monthly Charge
(A) PLC shall charge CIO monthly for the actual
documented costs and expenses that are incurred by
PLC during the term of this Secondment Agreement in
respect of the Secondees during the Secondment (the
"Monthly Charge")
(B) The monthly Charge shall include
i. all direct costs of Secondee‟s base salary and other
compensation
WP(C) No.6807/2012 Page 30
ii. Costs of participation in PLC‟s retirement and
social security plans and other benefits in accordance
with applicable PLC, policies; and
iii. other costs but only if such other costs have been
agreed between CIO and PLC.
xxx xxx xxx xxx
5.2 CIO‟s Right to Terminate the Secondment
(A) CIO may terminate this Secondment Agreement upon
30 days prior written notice to PLC.
(1) In the event of Change in control of PLC or any or
its affiliates providing Secondee;
(2) If secondee repeatedly fails to comply with CIO‟s
workplace rules, regulations and policies, or the
directions given by CIO‟s management, or
(3) If Secondee after receiving notice of unsatisfactory
performance fails to perform the duties in a manner
that in CIO‟s reasonable judgment is satisfactory.
(B) CIO may terminate this secondment Agreement
immediately without notice to PLC.
(1) If secondee engages in serious misconduct or
violates any substantive or material laws, which in
CIO‟s reasonable judgment significantly impairs
secondee‟s ability to perform the duties or to live and
work in the secondment location; or
(2) If secondee materially breaches the confidentiality
obligations under this secondment agreement, or if
applicable, the secondee Agreement.
Immediately after any termination without notice CIO
shall notify PLC setting out the reasons for such
termination.
PLC‟s Right to Terminate the Secondement
WP(C) No.6807/2012 Page 31
Secondee shall be assigned to CIO for the Secondment
period and PLC will use all reasonable endeavors not
to withdraw secondee during the secondment period
except that PLC shall have the right to immediately
withdraw secondee in case of Force Majeure, or a
personal emergency concering the Secondee PLC shall
promptly give notice setting out the general
circumstances of such Force Majeure event or
personal emergency.
xxx xxx xxxx"
28. CIOP relies on the concept of economic employment as
opposed to legal employment and submits that the formal jural or legal
relationship of employer and employee as between the seconded
employee and the overseas entity is of no significance. It is argued that
for all practical purposes, CIOP is the real employer, because the
content of the work or employment, the entire direction and
supervision over the seconded employees work and the pay and
emoluments are borne by it. For convenience, the pay is disbursed by
the overseas entity, but that amount is reimbursed to the overseas
entity. Reliance is firstly placed on the concept of Economic
employer, discussed by Klaus Vogel in „Double Taxation
Conventions‟, especially the following extracts:
"8. International hiring out of labour Paragraph 2 has
given rise to numerous case of abuse through adoption of
the practice known as International hiring out of labour.
In this system, a local employer wishing 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 worker thus fulfills prima facie the
three conditions laid down by paragraph 2 and may
WP(C) No.6807/2012 Page 32
claim exemption from taxation in the country where he to
temporarily working. To prevent such abuse, in situation
of this type, the term "employer" should be interpreted in
the context of paragraph 2. In this respect it should be
noted that the term "employer" is not defined in the
convention but it is understood that the employer is the
person having rights on the work produced and bearing
the relative responsibility and risks. In cases of
international hiring out of labour, these functions are to a
large extent exercised by the user. In this context,
substance should prevail over form, i.e. each case should
be examined to see whether the functions 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 which 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
only to the above mentioned indications but to a number
of circumstances enabling them to establish that the real
employer is the user of the labour (and nor the foreign
intermediary);
- the hirer does not bear the responsibility or risk for the
results produced by the employee‟s 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 ways a connection
between this remuneration and wages received by the
employer;
- tools and materials are essentially put at the employee‟s
disposal by the user:
- the number and qualifications of the employees are not
solely determined by the hirer.
WP(C) No.6807/2012 Page 33
xxx xxx xxx xxx"
The Court also notes that the Model Tax Convention on Income and
on Capital (Condensed Version, July 2010) in this context, states as
follows:
"8.14 Where a comparison of the nature of the services
rendered by the individual with the business activities
carried on by his formal employer and by the enterprise
to which the services are provided points to an
employment relationship that is different 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 at
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 individual‟s 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;
WP(C) No.6807/2012 Page 34
- who has the right to impose disciplinary sanctions
related to the work of that individual:
- who determines the holidays and work schedule of that
individual."
29. The issue which arises for the consideration of the Court in this
case is whether the secondment of employees by BSTL and DEML,
the overseas entities, falls within Article 12 of the 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 the overseas entities
rendered "technical services" under Article 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 of the overseas
entity arises for the provision of services to CIOP in India, such that
the trigger in the DTAAs comes into play. This must necessarily
depend on the phrasing of each DTAA, construed on its own terms, in
light of general principles as determined by the Courts. Since the
question of technical services has 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 services‟ as
"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 personnel)". In this case,
the overseas entities have, through the seconded employees,
undoubtedly provided „technical‟ services to CIOP, especially since
WP(C) No.6807/2012 Page 35
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 business of COIP of quality
control and management is through the overseas entities. The nature
of the services - cast as "business support services" by CIOP - as also
clearly within the hold "technical or consultancy". These services
envisage the provision of quality service by vendors to the overseas
entities, which CIOP, and the secondees, are to oversee. This requires
the secondees to draw from their 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, techniques and technical knowledge. This is supported by clause
4 of Article 12 itself, which lists these various sub-categories. Indeed,
the term „technical‟ has not been defined in the DTAA, and must be
accorded its broader dictionary meaning, unless limited by the parties
to the instrument. The AAR in Intertek Testing Services India Pvt. Ltd.
v. CIT X, (2008) 220 CTR (AAR) 540, considered this question in
detail, and rightly held that
"What is meant by the expression „technical‟? Should it be
confined only to technology relating to engineering,
manufacturing or other applied sciences? We do not think so.
The expression „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 Construction Ltd. v. CIT,
WP(C) No.6807/2012 Page 36
195 ITR 117. Further, the Court notes that the distinction to be drawn
by CIOP between the provision of services by the overseas entities
themselves and the „mere‟ secondment of employees does not make a
difference, since the services provided the overseas entities is the
provision of technical services through the secondees - an instance
envisaged 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 "technical 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 services of technical or other personnel) if such
services ... make available technical knowledge, experience, skill,
know-how, or processes or consist of the development and transfer of
a technical plan or technical design." This second qualification for the
technical knowledge etc. to be „made available‟ is an essential, and
additional, requirement under the India-Canada DTAA. This phrasing
also finds mention in Article 13 of the India-UK DTAA, this
requirement is disjunctive from the rest of the provision, unlike in the
India-Canada DTAA. The India-UK DTAA states that „fees for
technical services‟ "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
personnel) which ... or make available technical knowledge,
experience, skill know-how or processes, or consist of the development
WP(C) No.6807/2012 Page 37
and transfer 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 technical
services were performed, but that such knowledge etc. was „made
available.‟
32. The mere rendition of service is not an "included service" that
triggers tax liability. Instead, the enterprise must „make available‟ the
skill behind that service to the other party, i.e the Indian recipient. The
definition, as it appears, is more restricted that in the India-UK DTAA.
The question is whether the higher threshold, is met in this case. The
service provided by the secondees is to be viewed in the context in
which their secondment or deputation was necessitated. The overseas
entities required the Indian subsidiary, CIOP, to ensure quality control
and management of their vendors of outsourced activity. For this
activity to be carried out, CIOP required personnel with the necessary
technical knowledge and expertise in the field, and thus, the
secondment agreement was signed since CIOP - as a newly formed
company - did not have the necessary human resource. The secondees
are not only providing services to CIOP, but rather tiding CIOP
through the initial period, and ensuring that going forward, the skill
set of CIOP‟s other employees is built and these services may be
continued by them without assistance. In essence, the secondees are
imparting their technical expertise and know-how onto the other
regular employees of CIOP. Indeed, it is admitted by CIOP that the
reason for the secondment agreement was to provide support for the
initial years of operation, till the necessary skill-set is acquired by the
WP(C) No.6807/2012 Page 38
resident employee group. The activity of the secondees is thus to
transfer their technical ability to ensure quality control vis-à-vis the
Indian vendors, or in other words, „make available‟ their know-how of
the field to CIOP for future consumption. The secondment, if viewed
from this angle, actually leads to a benefit that transmits the
knowledge possessed by the secondees to the regular employees.
Indeed, any other reading would unduly restrict the Article 12 of the
DTAA, which contemplates not only a formal transfer of intellectual
property, but also other techniques and skills („soft‟ intellectual
property, if it can be called as such) required for the operation of a
business. The skills and knowledge required to ensure that the task
entrusted to CIOP - quality control - is carried on diligently certainly
falls within the broad ambit of Article 12.
33. This Court is also mindful of the broader context of a service
PE in which this case operates. In that regard, COIP has advanced
several arguments to negate any liability to deduct income tax under
Section 195 of the Act. (1) there is no service PE, since CIOP is the
economic employer, whilst the overseas entities are only the legal
employers, (2) the payment made by CIOP to the overseas entities is
only by way of reimbursement, which does not form part of the
income of those entities, and in any case, (3) that payment is not the
income of the overseas entities on account of the doctrine of
„diversion of income by overriding title‟. The Court will address these
arguments in turn.
WP(C) No.6807/2012 Page 39
34. To determine the existence of a service PE, CIOP argues that
the Court must look towards the substance of the employment
relationship and not the form. This is correct. In the present case, the
seconded employees are to be integrated into CIOP, for the
agreed period and are subject to its supervision and control. The rules,
regulations, policies and other practices of CIOP for its employees
were applicable to these employees too. The seconded employee‟s
duties and functions were dictated by the instructions and directions of
the CIOP. He/she had to perform the duties assigned with due
diligence in accordance with the applicable laws and regulations,
standards and practices and control of CIOP. The overseas entities
were not responsible for any errors or omissions of such seconded
employees or for their work. CIOP bore all risks in relation to the
work of seconded employees, and reaped the benefit from the output.
CIOP also bore the cost of monthly remuneration and reimbursement
of cost to seconded employees. However, crucially, these seconded
employees retained their entitlement to participate in the overseas
entities‟ retirement and social security plans and other benefits in
terms of its applicable policies, and the salary was properly payable by
the overseas entitle, which claimed the money from CIOP. There was
no purported employment relationship between CIOP and the
secondees. None of the documents, including the attachment to the
secondment agreements placed on record (between the secondees and
CIOP) reveal that the latter can terminate the secondment
arrangement; there is no entitlement or obligation, clearly spelt out,
whereby CIOP has to bear the salary cost of these employees. The
WP(C) No.6807/2012 Page 40
secondees cannot in fact sue the CIOP for default in payment of their
salary- no obligation is spelt out vis-à-vis the Petitioner. All direct
costs of such seconded employee's basic salary and other
compensation, cost of participation in overseas entities' retirement and
social security plans and other benefits in accordance with its
applicable policies and other costs were ultimately paid by the
overseas entity. Whilst CIOP was given the right to terminate the
secondment, (in its agreement with the overseas entities) the services
of the secondee vis-à-vis the overseas entities - the original and
subsisting employment relationship - could not be terminated. Rather,
that employment relationship remained independent, and beyond the
control of COIP.
35. The concept of a legal and economic employer, as considered
by Vogel (relied upon by CIOP), is when "a local employer wishing 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." In this
case, the temporal element of the three-way employment relationship
is crucial. The secondees were - originally - employees of the
overseas entities. They were not hired by that entity as a false façade,
whose productivity is to be ultimately traced to CIOP. Rather, the
secondees were regular employees of the overseas entities. There is
no dispute with this fact. They have only been seconded or transferred
for a limited period of time to another organization, CIOP, in order to
utilize their technical expertise in the latter. The secondment
agreement between CIOP and the overseas entity, and the agreement
WP(C) No.6807/2012 Page 41
between CIOP and the employees, envisages an end to this exception,
and a return to the usual state of affairs, when the secondees return to
the overseas entities. The employment relationship between the
secondee and the overseas organization is at no point terminated, nor
is CIOP given any authority to even modify that relationship. The
attachment of the secondees to the overseas organization is not
fraudulent or even fleeting, but rather, permanent, especially in
comparison to CIOP, which is admittedly only their temporary home.
Today, CIOP attempts to cast that employment relationship as a
tenuous link because, for the duration of the secondment, CIOP pays
the salary of these. Even here, the salary is ultimately paid through the
overseas entity, which is not a mere conduit. Crucially, the social
security, emoluments, additional benefits etc. provided by the overseas
entity to the secondee, and more generally, its employees, still govern
the secondee in its relationship with CIOP. It would be incongruous to
wish away the employment relationship, as CIOP seeks to do today, in
the face of such strong linkages. Whilst CIOP may have operational
control over these persons in terms of the daily work, and may be
responsible (in terms of the agreement) for their failures, these limited
and sparse factors cannot displace the larger and established context of
employment abroad.
36. In this context, the decision of the Supreme Court in Morgan
Stanley (supra) offers support for the Authority‟s viewpoint, rather
than the contrary stance. In that case, the Court considered various
forms of PEs, agency, service etc, each of which contemplate a
different characteristic and link between the deputed
WP(C) No.6807/2012 Page 42
employee/organization and the parent. In the context with which we
are presently concerned, the following observations are critical:
"15. As regards the question of deputation, we are of the view
that an employee of MSCO when deputed to MSAS does not
become an employee of MSAS. A deputationist has a lien on his
employment with MSCO. As long as the lien remains with the
MSCO the said company retains control over the deputationist's
terms and employment. ... It is important to note that where the
activities of the multinational enterprise entails it being
responsible for the work of deputationists and the employees
continue to be on the payroll of "the multinational enterprise or
they continue to have their lien on their jobs with the
multinational enterprise, a service PE can emerge. ... A
deputationist under such circumstances is expected to be
experienced in banking and finance. On completion of his
tenure he is repatriated to his parent job. He retains his lien
when he comes to India. He lends his experience to MSAS in
India as an employee of MSCO as he retains his lien and in that
sense there is a service PE (MSAS) under Article 5(2)(1). We
find no infirmity in the ruling of the ARR on this aspect. In the
above situation, MSCO is rendering services through its
employees to MSAS. Therefore, the Department is right in its
contention that under the above situation there exists a Service
PE in India (MSAS). Accordingly, the civil appeal filed by the
Department stands partly allowed."
In fact, even the OECD Commentary on Article 15 of the Model
Convention, on which learned counsel for CIOP has placed great
reliance, interestingly notes that "[t]he situation is different if the
employee works exclusively for the enterprise in the state of
employment and was released for the period in question by the
enterprise in his state of residence." This was clearly, and critically,
not done in this case.
WP(C) No.6807/2012 Page 43
37. This brings the Court to the next issue, concerning
reimbursement and the doctrine of diversion of income by overriding
title. This Court notices that a case with almost identical
circumstances, in In Re: AT and S India (P) Ltd.,
MANU/AR/0016/2006, 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 assign its qualified employees to the AT&S India.
These individuals were to work for AT&S India and receive
compensation substantially similar to what they would have received
as employees of AT&S Austria. They were engaged by AT&S India
on a full time basis. The question before the AAR was identical to this
case:
"Whether pursuant to the secondment agreement entered 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
personnel, 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 providing 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 control and
supervision of the applicant?"
In holding that the obligation under Section 195 would be triggered,
the AAR held as follows:
WP(C) No.6807/2012 Page 44
"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 applicant on
the latter's request and the terms and conditions for providing
services of technical experts are contained in the secondment
agreement which we have referred to above in great details.
Though the term "reimbursement" is used in the agreements, the
nature of payments under the secondment agreement has to
satisfy the characteristic of reimbursement and that the term
"reimbursement" in the agreement will not be determinative of
nature of payments. The term "reimbursement" is not a
technical word or a word of Article In Oxford English
Dictionary, to reimburse means--to repay a person who has
spent or lost money--and accordingly reimbursement means to
make good the amount spent or lost. However, under the
secondment agreement the applicant is required to compensate
AT&S Austria for all costs directly or indirectly arisen from the
secondment of personnel and that the compensation is not
limited to salary, bonus, benefits, personal travel, etc. though
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 nature
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 what actual expenditure was incurred by AT&S Austria
and what is being claimed as reimbursement; secondly,
assuming for the sake of argument that the debit notes represent
the quantum of compensation as the actual expenditure, it
would make no difference as the same is payable to the AT&S
Austria under the secondment agreement for services provided
by it. It would, therefore, be not only unrealistic but also
contrary to the terms of the agreement to treat payments under
the said agreement as mere reimbursement of salaries of the
seconded employees who are said to be the employees of the
applicant.
WP(C) No.6807/2012 Page 45
To show that the real employer of such employees is the
applicant and not the AT&S Austria, Mr. Chaitanya invited our
attention to 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 employment agreements are similarly worded. We have
carefully gone through the employment agreement between the
applicant and Mr. Markus Stoinkellner. The duration of the
employment is from 1st Sept., 2005 till 30th Aug., 2008. In
Article 3 thereof salary of the employee is noted as the
remuneration, perquisites and other entitlements as detailed in
Appendix-A. However, Appendix-A does not specify any
amount. All that it says, is that the salary will be as fixed and
agreed between the employee and the company 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 salary fixed as
above, but no fixed salary is mentioned in the employment
agreement. Other perquisites and entitlements are : travel
expenses, 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 flight tickets to go on home leave. The
employment agreement also provides that the employee will be
responsible for meeting all requirements under Indian tax laws
including tax compliance and filing of returns and the applicant
is authorized to deduct taxes from the compensation and
benefits payable."
38. The mere fact that CIOP, and the secondment agreement,
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 above the costs of
maintaining the secondee relevant in itself, since the absence to mark-
up (subject to an independent transfer pricing exercise) cannot negate
the nature of the transaction. It would lead to an absurd conclusion if,
WP(C) No.6807/2012 Page 46
all else constant, the fact that no payment is demanded negates accrual
of income to the overseas entity. Instead, the various factors
concerning the determination of the real employment link continue to
operate, and the consequent 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
provision of services, the payment made may indeed be payment for
services - which may be deducted in accordance with law - or
reimbursement for costs incurred. This, however, cannot be used to
claim that the entire amount is in the nature of reimbursement, for
which the tax liability is not triggered in the first place. This would
mean that in any circumstance where services are provided between
related parties, the demand of only as much money as has been spent
in providing the service would remove the tax liability altogether. This
is clearly an incorrect reasoning that conflates liability to tax with
subsequent deductions that may be claimed.
39. So far as the decision in M/s. E-Funds IT Solution, goes, the
judgment notes the distinction between stewardship activities of
employees and deputationists, which had been highlighted in Morgan
Stanley. The Division Bench in E-Funds highlighted that the nature of
activity undertaken by the employee is determinative of whether it
constitutes a service. In the present case, the overseas entities
outsource their back office support functions like debt
collections/consumers‟ billings/monthly jobs to third party vendors in
WP(C) No.6807/2012 Page 47
India. The seconded employees in the present case, oversee quality
control of the work of such vendors. This work cannot be
characterized as mere stewardship. What could have been left to CIOP
to do is in fact being done through the seconded employees, whose
expertise and training lends quality and content to the Indian entity.
Therefore, it is held that the real employer of these seconded
employees continues to be the overseas entity concerned.
40. The final issue concerns the „diversion of income by overriding
title‟. Here, CIOP argues that the payment made to the overseas entity
is not income that accrues to the overseas entity, but rather, money
that it is obligated to pass on to the secondees. In other words, this
money is overridden by the obligation to pay the secondees, and thus,
is not „income‟. This is insubstantial for two reasons. One, in view of
the above findings that: (a) the payment is not in the nature of
reimbursement, but rather, payment for services rendered, (b) the
employment relationship between the overseas entities and CIOP -
from which the former‟s independent obligation to pay the secondees
arises - continues to hold, no obligation to use money arising from the
payment by CIOP to pay the secondees arises. The overseas entities‟
obligation to pay the secondees arises under a separate agreement,
based on independent conditions, in relation to CIOP‟s obligation to
pay the overseas entity. Assuming the agreement between CIOP and
the overseas entity envisaged a certain payment for provision of
services (and not styled as reimbursement). Surely no argument could
be made that such payment is affected by the doctrine of diversion of
income by overriding title. If that be the case, then, as held above, the
WP(C) No.6807/2012 Page 48
fact that the payment under the secondment agreement is styled as
reimbursement, and limited on facts to that, without any additional
charge for the service, cannot be hit by that doctrine either. The
money paid by CIOP to the overseas entity accrues to the overseas
entity, which may or may not apply it for payment to the secondees,
based on its contractual relationship with them. This, at the very least,
is independent of the relationship and payment between CIOP and the
overseas entity.
41. Accordingly, for the above reasons, this Court holds that this
writ petition is liable to be dismissed, and the ruling of the AAR
stands. No order as to costs.
S. RAVINDRA BHAT
(JUDGE)
R.V. EASWAR
(JUDGE)
APRIL 25, 2014
WP(C) No.6807/2012 Page 49
