Deduction at source under s 195 , 01 June 2011

Payment made by resident company on account of reimbursement of salary cost and other benefits of the expatriate employees to non-resident is income of non-resident liable to deduction at source under s 195 — as held by AAR in Verizon Data Services India Private Limited, In Re ; AAR No. 865 of 2010

Decided on: 27 May 2011

Fees for included services — Payment made by resident company on account of reimbursement of salary cost and other benefits of the expatriate employees to non-resident for rendering managerial and other related services is taxable as “Fees for Included Services (FIS)” at the rate of 20%.

The applicant, a resident company and a wholly owned subsidiary of a US company (Verizon US), is engaged in providing services relating to the development and maintenance of telecom software solutions and certain information technology enabled services. All services rendered by the applicant are exported from India to its parent company Verizon US. To perform certain managerial and related services, the applicant has procured the services of US based personnel who are under the employment of GTE-OC, an affiliate of the parent company. Pursuant to it, the applicant entered into a Secondment Agreement with GTE-OC and three employees were sent to India. The expatriate employees will remain employees of GTE-OC though they will be working under the control and supervision of the applicant. For the items paid or provided to the employees, the applicant is to reimburse GTE-OC on the basis of bills presented by GTE-OC. The responsibility to deduct tax under the Indian tax laws shall be upon the applicant. The applicant submits that the payments made are in the nature of reimbursement of salary and expenses paid by GTE-OC to the expatriate employees. No income arises to GTE-OC as it only represents cost to cost reimbursement. As the salary payment and benefits paid to the expatriate employees have suffered tax withholding under s 192, the same amount cannot be subjected to tax withholding under s 195. The applicant submits that GTE-OC is not rendering any services to the applicant through its expatriate employees and the reimbursement of salary cost paid by GTE-OC in respect of the provision of personnel to the applicant is for administrative convenience and should not qualify as “Fees for Included Services (FIS)” under the India-US DTAA (DTAA) and is not liable to tax in India having regard to the provision of the DTAA. The applicant further submits that GTE-OC has no fixed place from where it is carrying on business in India. If it is held that the GTE-OC has a fixed place of business, then the salary and expenses incurred on expatriate employees would be deductible as an expense from the income earned/amount received from the applicant. The net income would be nil and there will be no requirement to deduct tax at source. It was also submitted that in case the payment is held to be income in the hands of GTE-OC as Fees for Included Services, then it would be subjected to tax at the rate of 10% plus applicable surcharge and education cess on gross income.

The applicant has sought an advance ruling on the questions of whether the amounts (representing salary and benefits payable by GTE-OC to Expatriate employees) reimbursed by the applicant to GTE-OC Overseas Corporation (“GTE-OC”) is “income” accruing to GTE-OC and the same is liable to a deduction of tax in accordance with the provisions of s 195 and whether the same is taxable as “Fees for Included Services (FIS)” under the Act read with the India-USA DTAA at the rate of 20% as provided under Article 12(4)(b) of the DTAA.

The preamble of the Personnel Secondment Agreement states that to perform certain managerial services, the applicant has procured the services of US-based personnel who are under the employment of GTE-OC. The applicant is liable to bear the taxes on the remittances in consideration for the services rendered. A team of three employees has been sent by GTE-OC. One of them has assumed the position of the Managing Director of the applicant-company and the other two are to supervise and provide directions in the manner through which the activities of the applicant are to be carried out and to liaise with the parent company in the USA. The Managing Director of a company is in charge of the day to day affairs of the company. The payment of their salaries is not dependent on the applicant. These employees will continue to get their salaries from GTE-OC as long as they remain in their employment. Thus, the managerial services performed by them are as employees of GTE-OC and not as employees of the applicant. Without GTE-OC, the seconded employees have no locus standi vis-à-vis the applicant. It is a trite law that the capacity in which the person receives the amount determines its taxability in his hands. The sums that are remitted by the applicant accrue and arise to GTE-OC for providing services to the applicant. What accrues and arises to the employees is by virtue of their employment with GTE-OC. The application of the income by GTE-OC while making payment of salaries to its employees has nothing to do with its accrual. Thus, the amounts paid by the applicant to GTE-OC represent income in the hands of GTE-OC.

The contention of the applicant that the managerial services are not made available to the applicant, the services rendered by the seconded employees are not covered under Art 12(4)(b) of the DTAA is rejected. The services provided by GTE-OC are in the nature of managerial services, the payments made by the applicant are covered under “fees for included services” under Article 12(4) of the DTAA. As the services are managerial in nature, the payments are also covered under “fees for technical services” as defined under Explanation 2 to s 9(1)(vii) of the Act.

Thus, the amounts reimbursed by the applicant represent income accruing to GTE-OC and is accordingly charged to tax within the provision of s 195 and the amounts reimbursed by the applicant are taxable as “Fees for Included Services (FIS)” under the DTAA and also under the Act. “Fees for Included Services (FIS)” is taxable at the rate of 20% as provided under Article 12(4)(b) of the DTAA.