Employee secondment charges not fees for technical/professional services for invoking disallowance u/s 40(a)(ia)

In a recent judgment, ITAT Mumbai has held that where the assessee pays secondment charges for the employees, for all practical purposes, the assessee is the employer and the charges paid can not be said fees for technical/professional services for disallowance u/s 40(a)(ia)

Case Law Details:
ITA No. 1945/Mum/2013 Assessment Year: 2009-10
Deputy Commissioner of Income-tax vs. Mahanagar Gas Ltd
Date of Order/Judgment: 15/04/2016

Important Case Laws Covered:
ITAT Bangalore IDS Software Solutions (India) Pvt. Ltd. Vs. ITO (International Taxation) (2009)

Bombay High Court in the case of CIT Vs. Kotak Securities Ltd. in Appeal No. 3111 of 2009

Brief Facts of the Case:
During the assessment year, the assessee had incurred the secondment charges of employees seconded by Gail & British Gas to work with the assessee and had claimed a sum of Rs.193.46 lacs on account of secondment charges under the head personal cost but no TDS has been deducted on the same. The AO treated these payments as technical/professional fee liable to TDS u/s 194J and applying the provisions of section 40(a)(ia) disallowed the secondment charges paid to Gail & British Gas on the ground that no TDS has been deducted on the same. Aggrieved, assessee preferred appeal before CIT(A), who allowed the claim of the assessee.

It is to be noted that for the relevant assessment year section 40(a)(ia) as it stood before amendment by Finance Act (no. 2) of 2014 wef 01/04/2015 only covered , interest, brokerage and commission, rent, royalty, fee for technical/professional services and not the payment of salary.

Contentions of the Assessee:
(a) that employees were not the employees of assessee Mahanagar Gas Ltd. but employees of British Gas and they  worked with assessee only in view of secondment agreement.

(b) that the employers were seconded for limited time, the remuneration payable to these seconded employees were being paid by British Gas or GAIL recoverable from assessee on cost to cost basis.  

(c) that there was a subsisting employer employee relation between British Gas and expatriate. British Gas was also the person responsible for making payment to expatriate and application for deducting tax at source from salary was on British Gas. 

(d) that British Gas has deducted TDS on these remunerations paid to seconded employees and also deposited in the treasury of the Govt. of India.

(e) that since all taxes have been paid by British Gas and in view of CBDT Circular No. 720 dated 30.08.1995, second time TDS could not be deducted on the same amount.

Important Excerpts from ITAT Judgment:

…… wherein the facts discussed as regards to where the assessee entered into a ‘secondment agreement’ with a US Company and obtained the services of an employee and the question arose whether the reimbursement by the assessee to the US Company of the salary paid by the US Company was chargeable to tax as “fees for technical services” . It was held that though the US Co was the employer in a legal sense but since the services of the employee had been seconded to the assessee and since the assessee was to reimburse the emoluments and it controlled the services of the employee, it was the assessee which for all practical purposes was the employer. Accordingly, the salary reimbursed to the US Co was not chargeable to tax. Though the person deputed by the US Co was a technical person, the consideration paid under the secondment agreement was not “fees for technical services” because the fact that the seconded employee was responsible and subservient to the payer (assessee) and was required to also act as officer or authorized signatory or nominee of the assessee made it inconsistent with an agreement for providing technical services.

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