MORGAN STANLEY INTERNATIONAL INCORPORATED VS DDIT,MUMBAI ITAT,ITA NO. 6882/MUM/2011
ISSUE INVOLVED :-
Whether secondment of employees to India by assessee to render their services to Indian subsidiary companies, would constitute assessee’s service PE in India to be taxable in terms of Article 7 or the salary cost of said employees reimbursed by Indian companies was taxable in India in terms of article 12 of Indian USA DTAA.
DTAA INVOLVED :
INDIA US DTAA
FACTS OF THE CASE:-
The assessee,a tax resident of USA, was providing support services to various Indian subsidiary companies. The assessee seconded its five employees to India to render their services to the Indian companies under supervision and control of the Board of Directors of the Indian companies. The salary of said employees was paid by the assessee-company after deducting TDS under section 192 of the Income Tax Act 1961. Subsequently, the entire salary paid by the assessee had been reimbursed by the Indian companies to the assessee. The assessee claimed that since the payment received was on account of reimbursement of expenses, it was not taxable in India as there was no element of income involved in it.However the Assessing Officer held that the payment received by the assessee for rendering the services through its employees was taxable in India as per article 12(4) of DTAA, being in the nature of ‘fees for included services’ (FIS). Accordingly, he added the entire amount of reimbursement of salary to assessee’s taxable income. The Commissioner (Appeals) upheld the assessment order. Assessee approached the Tribunal against the order of CIT(A).
REVENUE’S CONTENTIONS :-
- That the employees were highly qualified personnel having technical skills and experience to render services to the Indian company in India. Since, the assessee is in the business of rendering support services and therefore, it was through these employees, the assessee has rendered services to the Indian companies, which has to be taxed as FIS under Article 12 of the treaty.
- That though the employees have been deputed in India and required to work under the general supervision and control of Indian companies, however, the assessee is responsible for the review, discipline, promotion, appraisal and all other HR and administrative matters of the deputed persons.
- That the Hon’ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd. v. CIT, 364 ITR 336/224 Taxman 122/44 taxmann.com 300, while interpreting Article 13 of India-UK-DTAA and Article 12 of India-Canada-DTAA, on similar kind of transaction has held that secondment of employees of overseas entities who have been paid salary by the overseas entity and reimbursed to the assessee company by the Indian company was held to be payment for technical services within the meaning of FIS clause and also under make available clause of Article 12.
ASSESSEE’S CONTENTIONS :-
- That as per terms and conditions, it has been clearly mentioned that the employees have been sent to India for rendering the services for the Indian companies, and they would be under complete supervision and control of Board of the Directors of the Indian companies. The day to day responsibility and activities would be supervised by the Indian Companies only and the employees are answerable for their services to them.
- The entire payment of salary is borne by the assessee company and on such payment of salary, TDS u/s 192 has been deducted and also deposited in the Indian Government account. The entire salary has been reimbursed by the Indian company to the assessee in terms of secondment letter.
- That the amount received by the assessee is towards reimbursement of salary cost and does not involve any element of income. The reimbursement is cost recharge arising out of expenditure incurred by one person on behalf of the another and not for provision of services. There is no specific provision for taxing the reimbursement.
- That by deputing employees to the Indian Companies, the assessee has not rendered any service nor has made available any kind of technical knowledge , experience, skill, know how etc.
- That without prejudice , if the seconded employees are to be treated as employees of assessee working in India for the assessee and the payment received is taxable income in India, then it has to be seen from the angle that the seconded employees will constitute Service PE of the assessee in India and therefore, the taxability of the income shall be governed by Article 7 and not Article 12 and in such cases there would be no tax payable, because assessee would be entitled to deduction of the expenditure incurred on salary and on which proper deduction of tax u/s 192 has already been deducted.
The Hon’ble Mumbai Tribunal discussed the relevant Articles of Indo US DTAA and observed & held as under:-
- That under a classic secondment agreement, the seconded employees who are under employment of non-resident parent company are deputed or transferred to subsidiary company in the overseas countries to work for special assignments which are more technical and managerial in nature. These seconded employees usually work under direct control and supervision of the subsidiary entities in their country. Since these seconded employees belong to the main parent entity, therefore, they continue to receive their remuneration and salaries with all social security and benefits from the parent entity. The salary cost and remuneration are reimbursed by the subsidiary company to the parent entity. Strictly speaking on paper they remain the employees of the parent entities but they are under direct supervision and control of subsidiary entity, where their day-to-day activities are managed and governed by them and so much so they can be removed by them. Once the terms of secondment is over, they revert back to their parent company entity.
- That in the instant case, one is proceeding on the premise that the seconded employees are the real employees of the assessee who have come to India to render services and once they are rendering services on behalf of assessee in India then, they constitute service PE in India. Such an establishment of PE under these circumstances have been dealt by the Supreme Court in the case of DIT (IT) v. Morgan Stanley & Co. 292 ITR 416/162 Taxman 165. The Supreme Court held that the employees of overseas entities to the Indian entity constitute services PE in India.
- Thus, from the aforesaid decision it is amply clear that such deputed employees if continued to be on pay rolls of overseas entities or they continue to have their lien with jobs with overseas entities and are rendering their services in India, service PE will emerge. It is therefore, held that the seconded employees or deputationist working in India for the Indian entity will constitute a service PE in India.
- That Para 6 of Article 12 makes it amply clear that taxability of ‘royalty’ and ‘fees for included services’ shall not apply, if the resident of the contracting state (USA) carries on the business in other contracting states (India) in which FIS arises through PE situated therein, then in such case the provisions of article 7, i.e., ‘Business profits’ shall apply.
- That now, if the taxability of such payment has to be examined and determined on the basis of computation of business profit under article 7, then the salary paid by the assessee would amount to cost to the assessee, which is to be allowed as deduction while computing the business profit of the PE in India.
- Thus, the payment made by the Indian entity to the assessee on account of reimbursement of salary cost of the seconded employees will have to be seen and examined under article 7 only, that is, while computing the profits under article 7, payment received by the assessee is to be treated as revenue receipt and any cost incurred has to be allowed as deduction because salary is a cost to the assessee which is to be allowed.
- That accordingly, the Assessing Officer is directed to compute the payment strictly under terms of article 7 and not under article 12 of the DTAA. In view of the aforesaid finding, the grounds raised by the assessee is treated as allowed.
In this case , Judgements of Hon’ble Supreme Court in the case of Morgan Stanley & Co. (supra)and the decision of Delhi High Court in the case ofCentrica India Offshore (P.) Ltd. v. CIT 364 ITR 336/224 Taxman 122/44 taxmann.com 300 have been analysed by the Mumbai Tribunal. The tribunal arrived at a very logical conclusion that deputed employees, if continued to be on pay rolls of overseas entities or they continue to have their lien with jobs with overseas entities and are rendering their services in India, Service PE will emerge and in that case any payment received on account of rendering of service of such employees will have to be governed under article 7 as per unequivocal terms of para 6 of article 12 of DTAA. Thus even if such payments are FTS/FIS, tax cannot be deducted under Article 12 as Article 12(6) takes such payments outside the purview of Article 12 to the purview of Article 7. The Mumbai Tribunal also clarified that while determining the business profits as per Article 7, salary paid would be allowed as deduction and directed the AO to compute the payment strictly under the terms of Article 7. This would practically lead to Nil profits and hence reimbursement would not lead to any taxation in India.