INCOME TAX ACT, 1961

Section 195

Tax deduction at source - Under section 195 - Fee for technical services - Reimbursement made by assessee in India to overseas entity, towards the seconded employees

Assessee was a subsidiary of Goldman Sachs (Mauritius) LIC, Mauritius. It was engaged in providing back-end support services in the nature of information technology enabled services and software development services to the Goldman Sachs Group entities. AO noticed that, assessee employed expatriate employees, and part of their salary was paid by assessee and part of it by the overesas entity, which was then reimbursed at cost by assessee. The reimbursements made by assessee was recorded as salary and payroll costs in the books of assessee. AO held that there was no employee-employer relationship between expatriate employees and assessee, and the legal/real employer of such employees was the overseas entity, and not assessee. Further, the overseas entity, had through the employees, rendered technical, managerial and consultancy services to assessee. Accordingly, reimbursement of salary and other related costs made to the overseas entity, was covered under the definition of FTS/FIS as per the provisions of section 9(1)(vii) and also as per DTAA between India and the respective countries. Held: Rendering of managerial, technical and consultancy services is governed by article 12 on 'Fees for included services' of DTAA, between India and US. Payments made to 'individual or firm of individuals for service rendered by them in independent professional capacity are specifically excluded since they are covered by article 15 on Independent Personal Services. Likewise, Article 12 specifically excludes payments made towards services rendered by an 'employee' of the enterprise since services rendered under employment are covered by article 16 on Dependent Personal Services.The definition of FTS under the Act excludes 'consideration which would be income of recipient chargeable under the head salaries. In the instant case, assessee in India was the economic and de facto employer of seconded employees. It is an admitted fact that all the seconded employees were in India for more that 183 days in a 12 month period. Further all the seconded employees had PAN card as well as filed their returns in India in respect of the 100 % salary, though assessee paid only part of the salary in India. Therefore, seconded employees were to be regarded as employees of assessee in India, and reimbursement to overseas entity, by the assessee in India was not in the nature of FTS, but 'salary', and therefore, reimbursements could not be chargeable to tax in the hands of overseas entity, and, therefore, there would be no obligation to deduct tax at source at the time of making payment under section 195.Admittedly, assessee deducted tax at source under section 192 from the 100% salary paid to seconded employees, and paid the same to the credit of Central Government. Assessee only reimbursed part of salary cost of the seconded employee to overseas entity already subjected to TDS under section 192 and, therefore, at the time of making such reimbursement, to overseas entity, no taxes were deducted at source by the assessee in respect of reimbursements made as, was in the nature of cost-to-cost reimbursement, and, no element of income was involved. Once there was no violation of provision of section 195, assessee could not be held to be an assessee-in-default under section 201(1).

Followed:Abbey Business Services India (P.) Ltd.'s (2021) 279 Taxman 284 (Karn-HC) : 2020 TaxPub(DT) 5432 (Karn-HC), In re,Cholamandalam MS General Insurance Co. Ltd.'s, Addl. CIT v. Mark & Spencer Reliance India (P.) Ltd.(2014) 147 ITD 83 (Mum-Trib) : 2013 TaxPub(DT) 2828 (Mum-Trib), DIT v. HCL Infosystems Ltd. (2005) 274 ITR 261 (Del)-HC) : 2005 TaxPub(DT0 132 (Del-HC), IDS Software Solutions India (P.) Ltd.' v. ITO (IT) (2009) 32 SOT 25 (Bang-Trib)(URO) 2009 TaxPub(DT0 1346 (Bang-Trib) and Faurecia Automotive Holding v. Dy. CIT (IT) ITA No. 784 (Pune of 2015, dated 8-7-2019] : 2019 TaxPub(DT) 5064 (Pune-Trib).

SUBSCRIBE FOR FULL CONTENT