Vildirect: IncomeTax-caselaws-2012-VIL-959-ITAT-BLR

2012-VIL-959-ITAT-BLR

Income Tax Appellate Tribunal BANGALORE

I.T.A. No.629(Bang.)/2010 & 630(Bang.)/2010

Date: 29.02.2012

M/s CATERPILLAR INDIA PVT. LTD.

THE DEPUTY DIRECTOR OF INCOME-TAX, INTERNATIONAL TAXATION, CIRCLE-I (I) , BANGALORE

For the Petitioner : Shri. K.R.Sekhar, CA
For the Respondent : Shri Etwa Munda, CIT-II

BENCH

SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER

JUDGMENT

PER SMT. P. MADHAVI DEVI, JM;

This appeal is against the order of the CIT(A) confirming the order of the AO passed u/s 201(1) and 201(1A) of the IT Act, with regard to reimbursement of salary made by the assessee to Caterpillar Asia Ltd., in respect of one of its employee Mr. Graham J Lythgoe, who was deputed to the assessee company in India vide secondment agreement holding that the services of Mr. Graham J Lythgoe are in the nature of technical services and requires withholding of taxes at source.

2. The brief facts of the case are that the assessee is engaged in the business of providing back office services to Caterpillar group of companies. Its back office services include Inventory Management Support Services, Facility Design and Layout Support services and Information Technology Support and Development Services. During the relevant financial year the ITO, Int.Taxation, Ward-19(1), Bangalore noticed from the assesee’s record that the assessee has remitted USD 517,074/- to M/s Caterpillar Asia Ltd., (M/s CAL) vide a CA’s certificate dated 25-06-2007. He noticed that the remittance has been made without deduction of tax at source. In view of the same, the ITO, Int,.Taxn. Ward-19(1) initiated proceedings u/s 201 for non-deduction of TDS on the said remittance. The assessee submitted its explanation dated 24-03-2008 along with certain details. From the said details the ITO, Int.Taxn. Ward-1(2), noticed that the M/s CAL has deputed one of its employees namely Mr. Graham J.Lythgoe, to the assessee company in India and for the said purposes, the assessee has made the remittance on account of salary cost of the said ex-patriate employee which was actually paid by M/s CAL, Hongkong and the salary cost of the said employee was reimbursed by the assessee to M/s CAL and since it as a mere reimbursement, it was claimed by the assessee that there was no necessity to make TDS. The ITO, however, was not convinced with the assessee’s contentions and held that the M/s CAL is the home company and the assessee is the host company and as per the secondment agreement between the two companies, the payment of salary, bonus and other allowances are the obligation of the home company i.e. M/s CAL and the host company i.e. the assesee herein is supposed to bear only the local costs and expenses. He also observed that the assessee has no powers to terminate the employee or to extend the period of employment and therefore, the assessee company cannot claim that the employee is working under its direct control and supervision. According to him, since the assessee company has no powers to decide the salary or to terminate the employment of the deputed employee, there exists no employee and employer relationship between the Indian company and Mr. Graham J Lythgoe. Further, the ITO also observed that Mr. Graham J Lythgoe, was assigned mainly to facilitate the business operations of the assessee company in India revamp Indian engine sales and marketing operations which are fairly in the nature of managerial as well as technical services, as provided in Explanation-2 to Sec.91(vii) of the IT Act. He has also held that the services rendered by Mr. John W Mohr also makes available the skill, experience, technical know how etc. to the assessee company and as there is no tax treaty between India and Hongkong, the provisions of IT Act alone are applicable. Thus, he held that that the nature of services rendered by Mr.Graham J Lythgoe are technical services rendered on behalf of M/s CAL and remittance made by the assessee company to M/s CAL is nothing but ‘fees for technical services’. As regards the assessee’s contention that the remittances is only a reimbursement of cost and that there is no element of income requiring TDS u/s 195 of the IT Act, the ITO (Int.Taxn.) held that the M/s CAL being the employer of the expatriate employee is bound to bear the salaries and other allowance of the employees and the question of reimbursement does not arise.

4. As regards the assessee’s contention that the TDS has been made from the expatriate salary u/s 192 of the IT Act and therefore, no more TDS is required to be made u/s 195 of the IT Act, the ITO (Int.Taxn.) held that the TDS made by the assesee is actually towards employees tax liability in India and not of M/s CAL for the fees received by it for the technical services rendered by its employee Mr. Graham J Lythgoe. He accordingly, held the assessee as “an assessee in default” u/s 201(1) of the IT Act and also held that the assessee to be liable to pay interest u/s 201(1A) of the IT Act and levied the same accordingly.

4.1 Aggrieved, the assessee preferred an appeal before the CIT(A) stating that the expatriate employee of M/s CAL was deputed to the assessee company in India based on the secondment agreement between the two companies to discharge his functions in accordance with the directions of the assessee company and therefore, there was an employer/employee relationship between Mr. Graham J Lythgoe and the assessee company. The CIT(A) however, was not convinced with the said arguments and confirmed the order of the AO both on the employer/employee relationship as well as the nature of services as technical services. Aggrieved, the assessee is in second appeal before us on both the issues.

4.2 The learned counsel for the assessee Shri K.R.Sekhar, while reiterating the submissions made before the authorities below submitted that the “clauses” from the secondment agreement clearly establishes that there is an employer/employee relationship between the assessee and Mr. Graham J Lythgoe as far as his discharge of duties in India are concerned. He submitted that on a similar set of facts, the co-ordinate Bench of this Tribunal in the case of M/s IDS Software Solutions (India) Pvt.Ltd., Vs ITO (Int.Taxn), Bangalore in ITA No.87(Bang/2008 has decided the issue in favour of the assessee. The learned counsel for the assessee has also filed copy of the said order before us at page-176 of the paper book filed by him. He further submitted that similar issue has also been decided by the Hon’ble Delhi High Court in the case of HCL Infosystems Ltd., Vs CIT reported in 274 ITR 261(Del.)

5. The learned DR on the other hand, placed reliance upon the order of the CIT(A) and submitted that there was no employer/employee relationship between the assessee and the employee and that the employee Mr. Graham J Lythgoe, being the employee of M/s CAL has rendered technical services to the assessee company and therefore, the fees for technical services attracts the provisions of Sec.195 of the IT Act.

6. Having heard both the parties and having considered the rival contentions, we find that the facts of the case before us are exactly similar to the facts of the case before the ‘A’ Bench of this Tribunal in the case of M/s IDS Software Solutions (Ind.) Pvt.Ltd., (cited supra) wherein the Tribunal after considering the issue at length has held in para 11-17 of its order as under;

11 The secondment agreement, as we have already held, constitutes an independent contract of service in respect of the employment of Dr.Sundarrajan with the assessee company. It may be true that IDS, the US company is the employer of Dr.Sundarrajan in a legal sense but since hi services have been seconded to the assessee company under the secondment agreement and further since the assessee company is to reimburse the emoluments paid by IDS to Dr.Sundarrajan, it is the assessee companywhich for all practical purposes is to be looked upon as the employer of Dr.Sundarrajan during the relevant period. In this behalf we were referred to the views expressed by Professor Klaus Voegel in his treatise on Double Taxation Conventions under the heading ‘International Hiring Agreements” at page-885. The view put forth by him is reproduced hereunder;

“The question of who is the employer arises particularly in situations in which the employee is sent abroad to work for a foreign enterprise as well. In such cases, the determination of employer rests on the degree of personal and economic dependence of the employee towards the enterprise involved. Accordingly, the foreign enterprise does not qualify as an employer merely because the employee performs services for it or because the enterprise was issuing to the employee instructions regarding his work, or places tools, etc., at his disposals (of Hinnekens.L.Interfax 331 (1988). The 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 (BFH 114 (1986) re Germany’s DTC with Spain)”.

If this view is applied to the present case, the assessee company can be considered as the economic employer because the services are rendered by Dr. Sundarrajan to it, the salary is met or borne by it. Be that as it may, the person who actually controls the services of Dr.Sundarrajan is the assessee company. Under the secondment agreement he is to act in accordance with the reasonable requests, instructions and directions of the assessee company. He is reportable and responsible to the assessee company. He can be rejected by the assessee company in which case the US company is bound to replace him. Under clause 86 of the Articles of Association of the assessee company, which we have alreadynoticed, the assesee company may remove Dr.Sundarrajan before the expiration of the period of his office. Clause-89 of the articles empowers the Board of Directors of the assessee company to regulate the powers and duties of Dr.Sundarrajan by passing appropriate resolutions which they have already done. Thus, reading the Articles of Association as well as the second agreement together, it seems to us that Dr.Sundarrajan was an employee of the assessee company, subject to the supervision and control of its Board of Directors, in addition to being the Managing Director of the assessee company.

12. For the above reasons, we hold that Dr.Sundarrajan was an employee of the assessee company during the relevant time and the amount payable to him was not to suffer tax deducted at source at the time of remittance to IDS since the tax has been deducted and paid to the Indian Income-tax authorities.

13. The next question is whether the amount can be considered as fees for technical services within the meaning of Explanation-2 below Sec.9(1)(vii) of the IT Act. Under this Explanation fees for technical services means any consideration including lumpsum 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’. It is not denied before us on behalf of the assessee that Dr.Sundararajan is a technical person. What is however submitted is that Article II and VI of the secondment agreement would be out of pace in a contract for providing technical services. Article II as we have already seen contains eight clauses outlining the duties and obligations of the seconded employee. Article VI provides for indemnification which has also been earlier noticed by us. We are inclined to agree with the submission that these two articles are out of place in a contract for providing technical services. For example, clauses (A) to (C) of Article II make the seconded employee responsible and subservient to the assessee companywhich cannot be the case if the agreement is for providing technical services by IDS to the assessee company. Similarly, clause(E) which requires the seconded employee to also act as officer or authorized signatory or nominee or in any other lawful personal capacity for the assessee company, would also be out of ace in agreement for rendering technical services as it cannot be imagined that a technical person would also be required to act in non-technical capacities under an agreement for rendering technical services. Clause(H), on which considerable reliance was placed by the department to contend that the agreement is one for rendering technical services, is merely a clause ensuring secrecy and confidentiality of the information accessed by the seconded employee in the course of his employment with the assessee company. Such confidentiality extends not only to technical information, which would be the case if the agreement is one for rendering technical services but also to financial or accounting information, price or cost data and any other proprietary or business related information. Article VI which provides for indemnity, that is to say, the liability of the assessee company to indemnify the US company from all claims, demands etc., consequent to any act or omission by the seconded employee is also inconsistent with the claim of the department that this is an agreement for rendering technical services. The Article further provides that nothing in the agreement shall be construed as a warranty of the quality of the seconded employee. It is not usual to find such a stipulation in an agreement for rendering technical services.

14. The department has drawn our attention to the ruling of the Authority for Advance Rulings in the case of AT & S India Pvt.Ltd.,(2006) 287 ITR 21. In his case the agreement entered into by the Indian company with its Austrian parent company was titled “Foreign Collaboration Agreement”. Article 4 of the agreement obliged the Austrian company to provide all assistance and cooperation to the India company in its venture by providing appropriate support technology. Article 4.2 required the Austrian company to offer the services of its technical experts to the assessee for working on the project that was being executed. There was another agreement called the secondment agreement between the India and Austrian companies and it inter-alia provided that the Austrian company can at any time remove the seconded person and replace him with similarly qualified persons. Referring to the secondment agreement, the AAR observed that a plain reading of the above clause would show that the Austrian company retained the right over the seconded personnel and had the power to remove any seconded personnel from the assessee company which has control and supervision of the work of the seconded employee namely, Dr. Sundararajan. He was appointed as Managing Director by the Board of Directors of the assessee company and not by IDS. In fact, the assessee company could even terminate the services of Dr. Sundararajan as Managing Director during the period of eight months during which he was to serve the assesseee company. There was no separate foreign collaboration agreement of the kind which was entered into between the Indian and the Austrian companies in the ruling of the AAR. It appears to us on a reading of the ruling of the AAR that in that case the secondment agreement was subservient to the foreign collaboration agreement. These are thus the features which distinguish the present case from the decision of the AAR. We are, therefore, unable to apply the said decision to the present case.

15. The department has also relied on another ruling of the AAR in South West Mining Ltd., In Re (2005) 278 ITR 233. This is a clear case of technical consultants visiting India for collecting random samples for the purpose of sending reports from abroad on the basis of the analysis of the samples. The question was whether the fees paid to the non-resident consultant were fees for technical services. There can be no doubt that the services rendered by the non-resident consultants were technical and consultancy services. In this case there was no secondment agreement. It was a clear and simple case of rendering technical services. This case has nothing in common with the present case.

16. For the above reasons, we are also not able to hold that the payment to IDS represented fees for technical services.

17. In the result, we hold that the assesseee was not liable to deduct tax from the amount representing reimbursement of the salary paid by IDS to Dr. Sundararajan while remitting the same to IDS u/s 195 of the IT Act. The salary paid by the assessee to Dr.Sundararajan has been made the subject of tax deducted at source and the same has been remitted to the Indian Income tax authorities”.

In the case before us also, similar covenants are there in the secondment agreement. The relevant clauses of the secondment agreement are reproduced hereunder;

“2. Engagement of the Expatriate

CAL shall depute the expatriate to CCPL and CCPL would engage the expatriate to facilitate its business operations until such time as either party shall terminate this agreement pursuant to Clause-7 on the following terms and conditions.

2.1 CAL shall not be responsible for or assume any risk for the results produced from the work performed by the expatriate while under deputation to CCPL. The expatriate shall function under the control, direction and supervision of CCPL and in accordance with the policies, rules and guidelines generally applicable to CCPL employees during the period of deputation.

2.2 During the period of this agreement, for administrative convenience, CAL shall make payment of salary, bonus and all other benefits to the expatriate as per terms agreed with the expatriate (on behalf of CCPL) and intimate CCPL in writing of the same.

2.3 CCPL shall reimburse CAL all the actual salary and related costs of the expatriate in relation to the period of this agreement. For this purpose, CAL would produce the necessary documentary evidence supporting the payment of salary and other related costs to CCPL to enable the latter make the payment.

2.4 All other costs and expenses in India relating to the expatriate including without limitation, reasonable expenses relating to boarding & lodging food & beverage, traveling and other miscellaneous expenses associated with performance of work by the expatriate shall be borne by CCPL. In addition, CCPL may also make an additional payment by way of a special allowance to the expatriate during the period of deputation.

2.5 CCPL shall be responsible for complying with the requirements of withholding tax under the Indian tax laws on salary and other related entitlements paid to the expatriate.

3. Invoicing

CAL shall raise invoices on CCPL on a quarterly basis in respect of the reimbursement of expatriate’s salary and all other related costs”.

As the facts of the case before us are exactly the same, as reproduced above, we do not see any reason to take any other view. In view of the same, assessee’s appeal is allowed.

9. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on the 29th February, 2012.

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