GST

Section 195-Latest Judgements Issues Covered


A Commission to Foreign Agents
B Purchase of property from Non Resident
C Principle of Mutuality
D Section 206AA
E Secondment of Employees
F Applicability of Surcharge & Cess
G Applicability of Interest u/s 234B
H Section 195(2) vs 195(3)
I Reimbursement
J Time of Payment
K Income Chargeable to Tax

SECTION 195-LATEST JURISPRUDENCE
Compiled by CA.ARUN GUPTA
19/12/2013

  1. Commission to foreign agent

    1. Angelique International Ltd vs DCIT (2012) 28 taxmann.com 219 (Delhi Bench)
      FACTS

      • In the course of its export business activities, the assessee paid commission to its foreign agents for their services.
      Assessee's Contentions
      • The assessee submitted that the agents operated out of India and provided their services outside India and none of them had any office or place of profit or any other business connection in India. Thus, no part of the income of the foreign agents arose in India and, consequently, no tax was to be deducted from the commission payments.
      Revenue's Stand
      • The Assessing Officer held that the exporter utilizes the information, data and know how, as gathered by the agent, to further his business activities and thus, there was an element of consultancy, technical and managerial services for which the commission in question was paid for services rendered regarding the nature of products and inspection, timing and prices of products and detailed technical and other formalities; that thus, the provisions of section 9 would come into play.
      • Since the assessee had not deducted tax at source under section 195, the Assessing Officer disallowed the amount of commission paid under section 40(a)( ia).
      CIT(A)'s Observations
      • On appeal, the Commissioner (Appeals), he deleted the addition of Rs. 37,87,26,158 made by the Assessing Officer.

      HELD

      • That the relationship between the assessee and its agents was on a principal to principal basis;
      • That the agents of the assessee did not have any PE in India and it was on account of services rendered by the agents that the payments were made by the assessee to them, which payment could not be considered as if for technical services, nor could be taken as a job which was managerial in nature.
      • The assessee was held not to be liable for TDS under Chapter XVII-B of the Act.
      • In CIT v. EON Technology (P.) Ltd. [2012] 343 ITR 366 /[2011] 203 Taxman 266/ 15 taxmann.com 391 (Delhi), under similar facts and circumstances, the High Court held that such export commission was not income chargeable to tax in India and, hence, not liable to tax deduction at source.
      • In Dy. CIT v. Divi's Laboratories Ltd. [2011] 131 ITD 271 / 12 taxmann.com 103 (Hyd.), it was held that commission paid to a non-resident agent for services rendered outside India is not chargeable to tax in India and that hence, no disallowance can be made.
      • In view of the above, there is no error whatsoever in the order of the Commissioner (Appeals) in this regard and the same is hereby confirmed.

    2. ACIT vs Avon Organics Ltd. (2012) 55 SOT 260 (Hyderabad Bench)
      FACTS

      • The assessee was engaged in manufacturing and sale of chemicals and bulk drugs.
      • During course of assessment proceedings, the Assessing Officer noted that the assessee had claimed expenditure towards payment of commission to foreign agents but no tax had been deducted at source.
      • The assessee was asked to explain as to why commission payment should not be disallowed under section 40(a)(i) since no tax had been deducted at source on the payment made.
      Assessee's Contentions
      • The assessee explained that export commission was paid to foreign agents for the services rendered by them in connection with effectuating exports sales and the payments were made directly to the bank account of the agent through telegraphic transfer;
      • That as the foreign agents operated in their respective countries and no part of the income arose in India, tax was not required to be deducted at source on the payments made to the foreign agents.
      Revenue's Stand
      • The Assessing Officer rejected the contention of the assessee by observing that non-residents were paid by way of telegraphic transfer obtained from banks at Hyderabad and, therefore, the banks acted as agents of non-resident and received the payment on their behalf in India.
      • Accordingly, the Assessing Officer held that the commission paid was deemed to have been received in India.
      • The Assessing Officer further held that remittance towards commission to a Bank in India coupled with the fact that the credits towards commission was made in the books of account of the assessee maintained in India would make the commission liable to tax in India as per section 5(2)(a).
      CIT(A)'s Observations
      • On appeal by the assessee, the Commissioner (Appeals) reversed the holding of the Assessing Officer and deleted the addition made under section 40(a)(i).

      HELD
      Merely because remittances were telegraphically transferred from banks in India will not lead to inference that income accrued in India

      • The Assessing Officer has come to the conclusion that the commission payments were deemed to have been received in India only because the telegraphic transfer of the remittances towards commission was made from a bank in India. Apart from these things, the Assessing Officer has got no other material on record to show that the foreign agents either rendered any services in India or have any permanent establishment in India. Only because the remittances towards commission were telegraphically transferred to the foreign agents from the banks in Hyderabad will not lead to the inference that the income to the foreign agents accrued or arose in India in terms of section 5(2)(a).

      No evidence on record to show that any part of services are rendered in India or foreign agents had a business connection or PE in India

      • As per section 9, the basic criteria provided in the section is about accrual of or arising of income in India by virtue of connection with the property in India or control or management vested in India. Unless these conditions were satisfied, it cannot be held that income has accrued or arisen in India. Section 195 has to be read along with charging sections 4,5 and 9. The provisions contained under section 195 were not meant that the moment there is a remittance, the obligation to deduct TDS automatically arise. Considering the fact that the Assessing Officer has not brought any material on record to show that the foreign agents have rendered any part of the services in India or have a permanent establishment and business connection in India, it cannot be said that any part of the commission payment made to them accrued or arisen in India requiring deduction of tax under section 195(1). Accordingly the finding of the Commissioner (Appeals) that no disallowance under section 40(a)(i) could be made is agreed with.

    3. ACIT vs Priyadarshini Spinning Mills (P.) Ltd. (2012) 55 SOT 432 (Hyderabad Bench)
      FACTS

      • The assessee was engaged in manufacture and sale of cotton and synthetic yarn.
      • It entered into an agreement with foreign agents and paid commission to them for rendering services outside India.
      • The Assessing Officer after examining the agreements with the foreign agents came to a conclusion that though the agreement was silent on the mode and manner of payment of commission and there was also no written instructions from the agents, the fact that the assessee had paid commission for purchasing DDS from banks and sent them through courier reveals the intention of parties that it was done on the oral request of the foreign agents.
      • Therefore, the payment of commission was liable to be taxed in India under section 5(2)(a). The assessee having failed to deduct tax at source the entire commission amount was disallowed under section 40(a)(i).
      Assessee's Contentions
      • On appeal, the assessee contended that the non-resident agents appointed by assessee did not carry on any business operations in India nor they had any permanent establishment in India. They acted as assessee's selling agents outside India. The commission earned by the non-resident agents were for services rendered by them outside India. In these circumstances, the commission paid to them could not be treated as income deemed to have accrued or arisen in India.
      • The assessee further submitted that the commission amounts were directly remitted to the agents and were not received by them or anyone else on their behalf in India.
      CIT(A)'s Observations
      • The Commissioner (Appeals) held that no disallowance could be made under section 40(a)(i ) as the commission paid to non-resident agents were not subject to tax in India.
      • On revenue's appeal :

      HELD
      Condition precedent for deduction of tax is the income must be chargeable under the provisions of the Act

      • Section 40(a )(i) makes it clear that the disallowance shall be made in case of any payment made which is chargeable under this Act and is payable outside India or in India to a non-resident not being a company or to a foreign company on which tax is deductible at source. Therefore, the first condition required to be fulfilled is the payment must be chargeable under the Act, thereafter the question of deduction of tax will arise. Section 195(1) also prescribes that tax has to be deducted while making payment to non-resident which is chargeable under the provisions of the Act. Therefore, the condition precedent for deduction of tax is the income must be chargeable under the provisions of the Act.
      Agreement recorded that the foreign agents were appointed to act as sales agents of assessee outside India
      • In the facts of the present case, the agreement entered into by the assessee with foreign agents revealed that they have been appointed to act as sales agents outside India in their respective countries. The payment has also been made by DDs and sent to the respective non-resident agents through courier. The Assessing Officer has disallowed commission payment under section 40(a)( i) by inferring that since the DDs were purchased in India and sent through courier, it has been done at the request of the non-resident agents even though there is nothing in the agreement to come to such an inference.

      Nothing on record to suggest that the income is chargeable to tax in India or the payment has been received by the non-resident agents in India or by any other person on their behalf

      • As is evident from the assessment order, excepting this inference by the Assessing Officer, there is nothing on record to suggest that the income is chargeable to tax in India or the payment has been received by the non-resident agents in India or by any other person on their behalf. There is also no finding by the Assessing Officer that the non-resident agents have a permanent establishment in India or have any business connection in India, by virtue of which the payment of commission would have accrued or arose in India. The facts available on record clearly suggest that the non-resident agents did not carry out any business operations in India and has acted as selling agents of the assessee outside India. Therefore, the commission earned by them for services rendered by them outside India cannot be considered as income chargeable to tax in India. That apart the submission of the authorized representative that DTAA between India and concerned countries stipulates that the income of an enterprise of contracting State shall be taxable on in that State unless enterprise carries on business in the order contracting State through permanent establishments also requires consideration. The Assessing Officer has not established the fact on record that anyone of the non-resident agents is carrying on business through a permanent establishments. Therefore, when the commission paid to the non-residents are not chargeable to tax under the provisions of the Act, no deduction of tax is required to be made under section 195(1).
      • The reasoning of the Assessing Officer that since the DDs have been purchased from banks in India and have been sent through courier, the payment of commission deemed to have been paid in India is also not acceptable. It is worth nothing that earlier while the Tribunal has set aside the assessment to the file of the Assessing Officer, a clear direction was given to find out whether the payment has been made in India at the request of the foreign agents. It is found that the Assessing Officer has failed to bring any material on record to show that the payments were made to the non-resident agents in India at the request of the foreign agents.
      • In the instant case, the Assessing Officer has failed to bring any material on record on the basis of which it could be concluded that commission paid to foreign agents is chargeable to tax in India. Unless the income is chargeable to tax in India, then tax is not required to be deducted under section 195(1).
      Conclusion
      • From the facts and materials available on record, no definite conclusion can be made that the commission paid to foreign agents is chargeable to tax in India. Therefore, the disallowance made under section 40(a)( i) is not sustainable. Hence, there is no reason to interfere with the finding of the Commissioner (Appeals) on this issue. The grounds raised by the revenue are rejected.
      • In the result, the appeal of the revenue stands dismissed.

    4. ACIT vs Capricorn Food Products India Ltd. (2013) 38 taxmann.com 158 (Chennai Bench)

      Assessee exporter claimed deduction on commission paid to agents based abroad who were canvassing for assessee in overseas markets. During the relevant year the assessee had effected payments to foreign agents.

      Held that such payments were not income of non residents exigible for tax in India. Neither subsequent circular allegedly withdrawing benefits given to assessee, nor addition of Explanation to Section 9(2) through Finance Act,2010 with retrospective effect from 01-06-1976 would have any effect on taxability of such income earned by non resident agents outside India during the relevant assessment year in course of their business or profession carried out outside India.

  2. Purchase of Property from Non Resident

    1. R.Prakash vs ITO (2013) 38 taxmann.com 123 (Bangalore Bench)
      FACTS

      • The assessee purchased a property for a total consideration of Rs. 1.20 crores. One of the co-owners of said property was a non-resident. She had given a General Power of Attorney (GPA) to other co-owner who was a resident of India.
      • The resident co-owner executed the sale deed in favour of the assessee for herself and as GPA holder of non-resident co-owner.
      • In the course of assessment, the Assessing Officer opined that since one of the co-owners was a non-resident, the assessee was required to deduct tax at source under section 195 on whole of the sale consideration.
      • On assessee's failure to deduct tax at source, the Assessing Officer treated the assessee as 'assessee in default' within meaning of section 201(1).
      • The Commissioner (Appeals) upheld the order of Assessing Officer.
      • On second appeal:

      HELD

      • It is not in dispute that co-owners were entitled to half share each over the property that was sold to the assessee. In fact, the sale deed clearly acknowledges the receipt of sale consideration of Rs. 1.20 crore by both the vendors in equal shares. The share of each of the vendors would, therefore, be Rs. 60 lakhs. To the extent of Rs. 60 lakhs paid to non-resident co-owner, the provisions of section 195 are attracted and the assessee ought to have deducted tax at source while making payments to her.
      • Therefore, it is held that the assessee can be considered as an 'assessee in default' only to the extent of Rs. 60 lakhs paid to the non-resident.
      • In the result, the appeals are treated as partly allowed.

    2. Syed Aslam Hashmi vs ITO (2013) 55 SOT 441 (Bangalore Bench)


      FACTS-I

      Facts
      • The assessee, a non-resident Indian (NRI), purchased a residential flat at Bangalore from one G. The Hong Kong address given by G in the sale deed indicated that she was an NRI seller.
      • The Assessing Officer noted that as per section 195 , the assessee failed to make TDS at 20 per cent of the sale consideration of Rs.61,62,500 (plus surcharge and education cess) before making payment to the NRI seller. Accordingly, he initiated proceedings under section 201(1) treating the assessee to be an assessee in default.
      • The assessee, however, claimed that he was under the impression that the seller was an Indian resident based at Pune and that he was not made aware of section 195 by the professional who guided him in the matter.
      • The Assessing Officer, however, discarded the Explanations of assessee and held him to be an assessee-in-default under section 201(1).
      • The Commissioner (Appeals) upheld the order of Assessing Officer. The assessee went in appeal.

      Issue involved

      • Whether NRI assessee's contention that he thought seller to be an Indian resident based at Pune or he was not aware of the provisions of section 195 would absolve him from treating him assessee-in-default under section 201(1) for failing to make TDS under section 195 from sale consideration payable to the NRI seller.

      HELD-I

      Requirement of TDS under section 195 if address establishes seller to be an NRI

      • The address given (by the seller) clearly established that the seller was an NRI as she was residing abroad. It was also found that the Commissioner (Appeals) had recorded that the seller in the instant case had not filed her return of income for the relevant period or paid capital gains tax on sale of the said flat/apartment to the assessee. It is for this very reason that the legislature incorporated provisions like section 195, etc. under the Act to prevent NRI's from taking away the entire money abroad without paying due taxes thereon and over which money the Indian tax authorities will have no control once this sum of money is ferreted abroad. The claim of the assessee that he was unaware of the provisions of section 195; thought that the seller was in Pune, etc could not come to his rescue or absolve him of the duty to do what the law required him to do. In this view of the matter, it was to be opined that the assessee was liable as per provisions of section 195 to deduct tax at source at the specified rates (i.e. 20 per cent plus surcharge at the rate of 10 per cent plus education cess at the rate of 2 per cent) from the purchase price of Rs. 61,62,500 before making payment to the seller, an NRI.
      Assessee in default under section 201(1)
      • In view of the failure of the assessee to deduct taxes at source under section 195 as he was required to, the Assessing Officer held him to be an assessee-in-default under section 201(1). After considering the facts of the case, it was to be viewed that the Assessing Officer and the Commissioner (Appeals) had rightly held him to be an assessee-in-default in accordance with the provisions of section 195 read with section 201(1). This ground of the assessee was to be dismissed.

      FACTS-II

      Facts

      • In the instant case, the assessee contended that the authorities below, while quantifying the tax to be deducted at source under section 195, had erred in applying the rate on the entire sale consideration of Rs. 61,62,500 paid by him to the NRI seller for the purchase of residential flat and not on the capital gain of Rs. 9,29,753 arising on this transaction.
      • The assessee also stated that he had calculated the tax of Rs. 2,61,764 on the said capital gain arising to the NRI seller and the same was duly paid.
      Issue involved
      • Whether the assessee was justified in applying the rate of tax only on capital gain arising to the NRI seller and not on the entire sale consideration paid by him.

      HELD-II

      Requirement of making application under section 195(2) to determine the amount chargeable to tax
      • From a plain reading of section 195(1), it is clear that the assessee was liable to deduct tax at source at the specified rates (i.e. 20 per cent plus surcharge 10 per cent and education cess 2 per cent) from out of the sale consideration paid by him to the seller of the said flat purchased by him as she was an NRI. If the assessee (i.e. the person responsible for paying such sum to the NRI seller) was of the view that the whole or part of such sum viz. the sale consideration, would not be income chargeable in the hands of the recipient (i.e. in this case the seller, an NRI), section 195(2) required him to make an application to the Assessing Officer under section 197, read with section 195(2) to determine the amount chargeable and upon such determination deduct tax on such sum so determined. Similarly, section 195(3) provides such a safeguard to the recipient of such sum, which in this case is the seller who is an NRI. From a perusal of the record and also as noted by the Commissioner (Appeals) in his order, it was found that the assessee failed to make an application under section 197, read with section 195(2) to the Assessing Officer and, therefore, he should have deducted tax at the specified rates from the sale consideration to be paid.

      Consequences if the assessee failed to make application under section 195(2)

      • In the instant case of the assessee, the legal position is clear inasmuch as not having made the application under section 197, read with section 195 to the Assessing Officer for lower or no deduction of tax, he was statutorily duty bound to have deducted tax at the specified rate on the 'sum' i.e., the sale consideration, before making payment to the seller who was an NRI. Consequently, the assessee's claim that TDS was to have been made by him on the Long Term Capital Gains which he worked out at 20 per cent of Rs. 9,29,793 did not hold any water. In this view of the matter, it was to be opined that the quantification of the TDS deductible by the assessee under section 195 was correctly made by the Assessing Officer under section 201(1), and rightly upheld by the Commissioner (Appeals) at Rs. 13,82,870 being 20.4 per cent of the sale consideration of Rs. 61,62,500 and, consequently, this ground of the assessee was to be dismissed.

    3. Rakesh Chauhan vs DDIT 128 TTJ 116 (Chandigarh Bench)
      HELD:

      Where payment in question had been made by assessee to an individual resident 'P' in India in respect of purchase of land which belonged to non-residents but rights therein were assigned unequivocally to said resident as power-of-attorney holder, such payment could not be regarded as payment to non-resident so as to require deduction of tax at source under section 195

      The agreement had been entered into with the power-of-attorney holder and it was not a case that the payment had been made to 'P' as a representative nominated by the non-resident. No doubt, when non-resident himself nominates a particular agent to whom payment should be made and pursuant to that direction, the assessee pays the sum to the agent so nominated, the provisions of section 195 of the Act will apply. The payment made by the assessee to P, on the facts of this case, could not be considered as payment made to non-resident and, accordingly, section 195 did not come into play.

  3. Income Chargeable to tax-MUTUALITY

    1. Sumitomo Mitsui Banking Corpn vs DDIT (2012) 145 TTJ 649 (Mumbai SB)
      ISSUES INVOLVED :-

      1. Whether the interest and commission paid to Head Office and other overseas branches by the assessee bank branch is allowable as deduction?
      2. Whether the interest and commission paid to Head Office and other overseas branches by the assessee bank branch is chargeable to tax in India in the hands of Head Office and other overseas branches ?
      FACTS OF THE CASE:-

      The assessee bank branch credited/paid interest and commission to its Head Office and other overseas branches. The Assessing Officer did not allow deduction towards interest and commission paid to head office and other overseas branches on the ground that there was failure on the part of the assessee to deduct tax at source. Thus the disallowance was made u/s 40(a)(i) on the premise that the said amount of interest received by head office and other overseas branches was taxable in their hands. The Assessing Officer summed up his view by holding that firstly, the interest income in the hands of head office is liable to tax and further no deduction can be allowed to the Indian branch towards interest paid to head office because of the application of section 40(a)(i).

      Further commission paid/payable by the assessee to head office and other overseas branches was also disallowed.

      The CIT(A) upheld the disallowance of interest paid by the assessee on the ground of mutuality and also directed that the interest income cannot be charged to tax in the hands of the head office because of mutuality.

      REVENUE'S CONTENTIONS :-
      1. That the amount received as interest and commission by head office and other overseas branches was taxable in their hands and hence assessee was liable to deduct tax at source under section 40(a)(i).
      2. On the principle of mutuality also interest and commission paid to self cannot be allowed as deduction.
      ASSESSEE'S CONTENTIONS :-
      1. That since interest and commission has been paid to head office and other overseas branches and not to different entity and hence it was interest and commission paid to self and there was no liability for deduction of tax at source on the same.
      2. Mutuality applies in relation to income earned by the Indian branch from head office/other overseas branches. As such the interest income so earned cannot be charged to tax.
      3. That though the interest and commission paid to head office and other overseas branches is not taxable in hands of recipient on the principle of mutuality but same is allowable as deduction to determine taxable profits of assessee branch in India as per the provisions of DTAA.

      HELD:-
      Mumbai Bench discussed the relevant provisions of Income Tax Act and observed & held as under :-

      1. That the interest and commission received by the head office and other overseas branches cannot be charged to tax in hands of recipients by the reason of principle of mutuality.
      2. Since the principle of mutuality is applicable on transactions between Indian branch and head office and other overseas branches, there cannot be any income or any expenditure due to such internal transactions.
      3. Though no deduction of any expenditure is allowable on the principle of mutuality ,however as per the provisions of DTAA the assessee is entitled to deduction of interest paid to head office and other overseas branches.
      4. That the principle of mutuality is applicable under domestic law as a result of which no deduction can be allowed in respect of payments made by Indian branch to its head office and other overseas branches. It is only by virtue of the provisions of DTAA read with the relevant clauses of the Protocol that the assessee became entitled to deduction of interest paid to its head office and other overseas branches.
      5. However commission paid by the assessee to its head office and other overseas branches is not covered along with the deductibility of interest as per the provisions of the relevant clauses of the DTAA. Resultantly, the deductibility of commission by the assessee to its head office and other overseas branches would come for consideration under the domestic law alone.
      6. That as the inter office commission has been paid by the assessee to its head office and other overseas branches, it is obviously a transaction with the self. Accordingly the rule of mutuality applies and the assessee cannot be allowed any deduction in regard of commission.

      Comments :-

      It seems from the above decision that in case of interest the assessee has got double benefit. The recipient of interest has been held to be not taxable on the principles of mutuality in the domestic law and payer of the interest has got deduction while calculating profits in India relying on the provisions of DTAA. But this is the correct legal position. This position has been upheld by the Mumbai Tribunal in an another latest judgement in the case of BNP Paribas SA wherein also the present ruling has been relied upon. However this double benefit is not available in case of commission and hence commission would not be taxable in hands of recipient on the principle of mutuality and it would be allowable as expenditure also in hands of payer on the principle of mutuality.

    2. DDIT vs Mizuho Corporate Bank Ltd (2012) 54 SOT 117 Mumbai SB)
      Interest paid by Indian Branch of assessee bank to its overseas head office in Japan was not chargeable to tax in India

      Section 9, read with section 195, of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India - Assessment year 2004-05 - Whether interest paid by Indian Branch of assessee bank to its overseas head office in Japan was not chargeable to tax in India - Held, yes - Whether, consequently, provisions of section 195 would not apply in respect of aforesaid payment - Held, yes

  4. Section 206AA

    1. Bosch Ltd. vs ITO (2013) 155 TTJ 354 (Bangalore Bench)
      Applicability of Section 206AA :

      • The provisions of Section 206AA clearly override the other provisions of the Act. Therefore, a non-resident whose income is chargeable to tax in India has to obtain PAN and provide the same to the assessee deductor. The only exemption given is that non-resident whose income is not chargeable to tax in India is not required to apply and obtain PAN. However, where the income is chargeable to tax irrespective of the residential status of the recipients, every assessee is required to obtain the PAN and this provision is brought to ensure that there is no evasion of tax by the foreign entities.
      • In the instant case, the recipients are non-residents and admittedly the income exceeds the taxable limit prescribed by the relevant Finance Act. In the circumstances, the recipients are bound and are under an obligation to obtain the PAN and furnish the same to the assessee. For failure to do so, the assessee is liable to withhold tax at the higher of rates prescribed under section 206AA i.e 20 per cent and the Commissioner (Appeals) has rightly held that the provision of section 206AA are applicable to the assessee.
      • As regards grossing up under section 195A, it can be seen that the income shall be increased to such amount as would after deduction of tax thereto at the rate in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement. A literal reading of section implies that the income should be increased at the rates in force for the financial years and not the rates at which the tax is to be withheld by the assessee.
      • In view of the same, it is opined that the grossing up of the amount is to be done at the rates in force for the financial year in which such income is payable and not at 20 per cent as specified under section 206AA.

  5. Secondment of Employees
    ISSUES INVOLVED AND PREVALENT LAW

    In the most common scenario, the Overseas Parent Company second their employees to Indian Subsidiary Company. The overseas employer remains the legal employer of the seconded employees and Indian subsidiary becomes the economic employer of the said employee.

    The overseas employer remains the legal employer so that employee does not have to suffer on account of social security schemes or other employment benefits which depend upon the continuity of the employment with said company or in home country. However the Indian company becomes the economic employer which means that employee works under direct control,direction and supervision of the Indian Subsidiary .The overseas company does not become responsible for the work and performance of the employee. The risk and reward of the work done by the seconded employee would go to the Indian Company. The Indian Company has the right to demand the replacement of the employee and parent company also retains the right to replace or terminate the employee.However for administrative convenience the seconded employee remains on the payroll of the overseas company. The parent overseas company pays salary to the seconded employee which is reimbursed on cost to cost basis by the Indian Subsidiary. Certain local benefits such as accommodation, local conveyance etc. is provided locally by the Indian Subsidiary to such seconded employee.

    Now in the abovesaid case, even if employee is paying taxes on the Income earned in India by way of salary , the following tax implications may arise:-

    Withholding tax obligations on Indian Subsidiary in case of reimbursement of salary of seconded employee on the contention that reimbursement of salary to Overseas Company is ,in actual, payment for Technical or Consultancy Services.

    Revenue has been contending on following lines to establish that reimbursement of salary has to be treated as Fees for Technical Services:-

    1. That reimbursement of salary by the Indian Subsidiary to the parent overseas company is actually payment for technical or managerial or consultancy services provided by the overseas parent company .
    2. That services performed by the seconded employee are actually performed on behalf of the parent company and not as employee of the Indian Company.
    3. That the amount received by the parent company is in fact receipt of income and further payment of the salary is only application of the income on which employee is liable to tax as per his nature of income and residential status.
    4. That Indian subsidiary of the employee is not legal employer and therefore payment by Indian company to overseas company could not be construed to be reimbursement of the salary.
    5. That the parent company has the right of dismissal and further in absence of obligation of Indian company to pay salary to the employee , it cannot be said to be an economic employer.
    6. That in the secondment arrangement , the right of the seconded employees to seek their salaries is against the parent overseas company and they cannot claim it as right against Indian Company.

    Though in few rulings , the above stand of the revenue has found favour with the Courts and AAR (such as Virizon Data Services India(AAR) ,AT&S India (P) Ltd.(AAR), Target Corporation Indian (P) Ltd.(AAR) , however in most of the cases (like Abbey Business Services (India) Pvt. Ltd.(Bang-Trib), Tekmark Global Solutions LLC (Mum-Trib),IDS Software solutions India(P) Ltd. (Bang Trib) ,Cholamandalam (AAR)), the Courts and AAR have ruled that the said reimbursement of the salary on cost to cost basis is not chargeable to tax in India and cannot be termed as Fees for Technical Services on the following grounds:-

    1. That agreement between the Indian Company and overseas parent company is an agreement for secondment of staff and not agreement for rendering of services by the parent overseas company , hence the reimbursement of salary on costs to cost basis cannot be regarded as Fees for Technical services.
    2. The Indian Subsidiary company exercising the rights to hire or accept secondees, right to control, supervise, instruct and terminate secondees from secondment along with being liable on its own account for their performance is real and economic employer of the secondees as against the foreign company which is only a legal employer.
    3. In this context, substance should prevail over the form , i.e. employer should be the person who is having the rights on the work produced and bearing the relative responsibility and the risks.
    4. That parent company opts to remain legal employer to protect their interest relating to benefit of pension contributions, social security and other benefits under laws of home country.
    5. That overseas parent company does not render any service to Indian enterprise and is only paying salary to the seconded employee for administrative convenience. The amount reimbursed by the Indian company on cost to cost basis would only be reimbursement of salary and therefore no sum is chargeable to tax in India which requires deduction of tax at source.
    6. (vi) Since seconded employee works under direct control, supervision and instructions of the Indian Company and does not render any service on behalf of parent overseas company , the secondment would not tantamount to rendering any technical, professional or consultancy service.

    Hence it is clear from the above discussion that if revenue is able to prove that seconded employee, in actual, is working under the direct supervision of the parent overseas company and providing technical or managerial services to the Indian subsidiary and the arrangement has been disguised as secondment arrangement, then it may lead to tax withholding obligations on the Indian Subsidiary. However if it is a genuine case of secondment of employees and intention of the parties is clear from the arrangement then mere reimbursement on cost to cost basis would not tantamount to Fees for technical services as in such a case the Indian Subsidiary becomes the economic employer of the seconded employee though he is drawing salary from parent overseas company for administrative convenience.

    As per OECD Model Convention also concept of economic employer has to be taken care of in cross border secondment of employees and substance over form has to be seen to determine as to who is the real employer of the seconded employee.

    Constitution of Service PE in India due to presence of employees in India:

    In the case of ¬¬Centrica India Offshore (P) Ltd. (AAR), the revenue has successfully contended that presence of the employees of the foreign company for rendering services for their overseas employer in India by working for specified period would create a Service PE and hence parent overseas company would become liable for taxes in India for amount received as reimbursement of salary under the head business income.

    However in another case the court has held that in case of secondment agreement the Indian Company is real and economic employer and services are rendered by employee directly to Indian company and not on behalf of foreign company and hence presence of employee in Indian would not lead to Service PE in India.(like in Tekmark Global Solutions LLC (Mum-Trib)

    CONCLUSION

    Hence it is necessary that intention of the parties involved should be clear while engaging in the secondment agreement as to control, supervision, risk and responsibility , right to termination etc. Only then risks of services being regarded as technical services or Service PE would be mitigated. If the foreign employee severs the relation with parent overseas company and becomes full time employee of Indian Subsidiary then there is no risk of parent company being regarded as Service PE in India or providing technical services through employee to Indian company. However due to protection of interests of employee in home country relating to social security etc. secondment arrangements are entered into. Hence such agreements have to be entered into supported by requisite documentation so that actual purpose is clear and not doubtful.

  6. Applicability of Surcharge and Cess

    1. ITO vs M Far Hotels Ltd. (2013) 58 SOT 261 (Cochin - Tribunal)
      FACTS

      1. The assessee deducted TDS on payments of management fee and interest made to a resident of France exclusive of surcharge and education cess in view of provisions of DTAA.
      2. The Assessing Officer opined that TDS was to be deducted inclusive of surcharge and education cess and made addition to assessee's tax liability.
      3. The Commissioner (Appeals) deleted the said addition as per the rate applicable under DTAA.

      HELD

      1. The double taxation avoidance agreement between the Government of India and France does not say anything about inclusion of surcharge and education cess for the purpose of deduction of tax at source. Therefore, there is an apparent conflict between the Income-tax Act and DTAA between the two sovereign countries with regard to deduction of tax at source on surcharge and education cess.
      2. In these circumstances, the question arises for consideration is whether the provisions of Indian Income-tax Act would prevail over the double taxation avoidance agreement between the two sovereign countries.
      3. 3. It is obvious that in respect of a taxpayer to whom the double taxation avoidance agreement applies, the provisions of the Indian Income-tax Act shall apply to the extent they are more beneficial to that taxpayer. In other words, if the provisions of DTAA are more beneficial to the taxpayer, then the provisions of DTAA would prevail over the Indian Income-tax Act. Since the DTAA is silent about the surcharge and education cess for the purpose of deduction of tax at source, this Tribunal is of the considered opinion that the taxpayer may take advantage of that provision in the DTAA for deduction of tax. The Commissioner (Appeals) has only deleted the tax components to the extent of surcharge and education cess at the rate applicable under the DTAA. Therefore, there was no infirmity in the orders of lower authority.

  7. Applicability of Interest u/s 234B
    Non-resident not liable to pay advance tax on account of default of payer.

    1. DDIT vs Lucent Technologies International Sales Ltd. (2013) 55 SOT 271 (Delhi Bench)
      1. Combined reading of the provisions of section 209(1)(d) with the provisions of section 234B makes it clear that the liability to pay interest under section 234B would arise only if advance tax is payable after making the necessary adjustment for tax deductible at sources. The amount of (Tax deductible) would obviously mean the tax as was required to be deducted in respect of a particular income and not the tax which has actually being deducted at source.
      2. Responsibility of an assessee to pay advance tax arises under the provisions of section 208 read with sections 209 and 210.The mode of computation of advance tax is given in section 209. As long as the assessee has discharged its obligation to pay advance tax as per the provisions of section 208 read with sections 209 and 210 he cannot be held liable for defaulting in payment of advance tax. Section 234B and section 234C only provide a method of computation of interest in case of default by an assessee to pay advance tax as stipulated in sections 208, 209 and 210.
      3. The undisputed fact in the present case remained that the tax on the entire income received by the assessee was required to be deducted at appropriate rates by the respective payers under section 195. Had the payer made the deduction of tax at the appropriate rate, the net tax payable by the assessee would have been Nil.Thus, there was no liability to pay advance tax by the assessee. Under similar facts, the High Court of Delhi in the case of Jacabs Civil Incorporated/Mitsubishi Corpn. has been pleased to hold that section 195 puts an obligation on the payer i.e. any person responsible for paying any tax at source at the rates in force from such payments and if payer has defaulted in deducting tax at source, the department can take action against the payer under the provisions of section 201. In such a case , the non resident is liable to pay tax but there is no question of payment of advance tax and, therefore, it cannot be held liable to pay interest under section 234B on account of default of the payer in deducting tax at source from the payments made to the non-resident.
      4. Respectfully following the above decision of Jurisdictional High Court in the case of Jacabs Civil Incorporated/Mitsubishi Corpn. the Commissioner (Appeals) has deleted the interest charged under section 234B in question. Since the issue raised in the ground of the present appeal is squarely covered by the decision of Jurisdictional High Court in the case of Jacabs Civil Incorporated/Mitsubishi Corpn. followed by the Commissioner (Appeals), there is no infirmity in the first appellate order in this regard

  8. Section 195(2) vs 195(3)

    1. Biocon Pharmaceuticals (P) Ltd. vs ITO (2013) 36 taxmann.com 291(Bang)

      Section 195 of the Income-tax Act, 1961 - Deduction of tax at source - Payments to non-resident [Sub-sections (2) and (3)] - Whether, since application for non-deduction of tax at source can be made only under section 195(3), any such application made under section 195(2) is not valid - Held, yes

  9. Income Chargeable to tax-REIMBURSEMENT

    1. C.U.Inspections(I)(P)Ltd. vs DCIT (2013) 142 ITD 761 (Mumbai Bench)

      An amount will be liable to tax withholding if it inter alia contains some income element and, therefore, if the amount paid by the assessee is not taxable in the hands of the recipient, there can be no question of making any disallowance under provision of section 40(a)(ia). A conjoint reading of sections 195 and 40(a)(ia) brings to the fore that the disallowance can be made only if the amount paid is chargeable to tax in the hands of the recipient. In other words, if the amount is not chargeable to tax in the hands of the recipients, there cannot be any scope for deduction of tax at source.

      Other examples: Payment for royalty to third party through F Co., Payment to trainers overseas through F Co., Reimbursement of admin expenses.

  10. Income Chargeable to tax-Time of Payment(Entries in Books)

    1. ACIT vs Ashok Bhan 115 Taxmann 222 (Kar HC)

      Assessee not obliged to deduct TDS only on basis of entries in books of accounts when agreement is pending for approval.

    2. Pfizer Corpn. vs CIT 129 Taxmann 459 (Bom HC)

      Dividend income paid to non resident is deemed to accrue in India only on payment and not on deduction.

    3. United Breweries Ltd vs ACIT 83 Taxmann 263 (Kar HC)

      Liability u/s 195 arise as soon as entry is made in books of accounts irrespective of permission received from RBI.

  11. Income Chargeable to tax-OTHER CASES

    1. Sandoz (P)Ltd. vs ACIT (2013) 34 taxmann.com 280 (Mumbai Bench)

      Payment of advertisement expenses by the assessee to non resident not chargeable to tax in absence of PE.

    2. Reliance Infocom Ltd. vs DDIT (2013) 39 taxmann.com 140 (Mumbai Bench)

      In view of the agreement and various judicial pronouncements the Hon'ble Tribunal has held that there is a distinction between a case where the software is supplied along with hardware as part of the equipment and there is no separate sale of the software and a case where the software is sold separately. In the case, where the software is an integral part of the supply of equipment, the consideration for that is not assessable as "royalty". However, in a case where the software is sold separately, the consideration for it is assessable as "royalty". On facts, the assessee had acquired the software independent of the equipment. It had received a license to use the copyright in the software belonging to the non-resident and the supplier continued to be the owner of the copyright and all other intellectual property rights. As there was a transfer of the right to use the copyright, the payment made by Reliance to Lucent was "for the use of or the right to use copyright" and constituted "royalty" under s. 9(1)(vi) of the Act and Article 12(3) of the India-USA DTAA.