No TDS requirement u/s 195 on employee secondment agreement

No TDS requirement u/s 195 on employee secondment agreement for payments for reimbursement to a non resident enterprises towards costs of seconded employees.

ABCAUS Case Law Citation
ABCAUS 3432 (2020) (12) HC

Important case law relied upon by the parties:
M/s Centrica India offshore Pvt. Ltd. vs. Commissioner of income tax & Ors
DIT vs. HCL Info System Ltd. 274 ITR 261

In the instant case, the Income Tax Department had challenged the order passed by the ITAT in holding that payments made by the respondent assessee to a non-resident enterprise could not be categorized as ‘fees for technical services’ u/s 9(1)(vii) of the Income Tax Act, 1961 (the Act) and as such liable for deduction of TDS u/s 195 of the Act.

The assessee was an Indian company incorporated under the provisions of Companies Act, 1956. It was subsidiary of a group company of a foreign company.

The said foreign company had entered into an agreement with the assessee company to outsource the provision of certain process and call center.

In order to facilitate outsourcing agreement an agreement for secondment of staff was entered into between the foreign company and the assessee.

For deputation of its employees, the assessee had made certain payments to foreign company part of which was salary reimbursement on which tax was deducted. 

The assessee’s application u/s 195(2) of the Act seeking authorization for payments to non residents without deduction of tax was rejected by the Assessing Officer (AO) and later its revision petition on the subject as also dismissed by the Commissioner.

Thereafter the AO found that the assessee had not deducted TDS on reimbursement of the cost of the seconded employees. According to the AO held that eld that as per the agreement, the employees seconded to India were highly skilled technical personnel and were on the payroll of the foreign company which was involved in providing technical services.

Accordingly, the AO held that  the assessee was liable to deduct TDS towards payment of ‘fees for technical services’ as per Section 9(i)(vii) of the Act, Explanation 2 and  Article 13(4)(c) of Indo-UK Double Taxation Avoidance Agreement  (the  DTAA‘).

The Commissioner of Income Tax (Appeals) dismissed the assessee’s appeal. The assessee approached the Income Tax Appellate Tribunal/ (ITAT/Tribunal) which held that assessee established that payment made to non resident was not taxable in India.  It was further held that there was no obligation on the part of the assessee to deduct the tax at source on the payments made to foreign company and therefore, the assessee could not be treated as ‘assessee in default‘ under Section 201(1) of the Act.  

The Hon’ble High Court held that the assessee had entered into a secondment agreement for securing services to assist assessee in its business. The expenses incurred by the seconded employees which were reimbursed by the assessee  was not liable to deduction to tax at source and such amount could not be considered as ‘fees for technical services’.

The Hon’ble High Court stated that the secondment agreement constitutes an independent contract of services in respect of employment with assessee.

The Hon’ble High Court also observed that as per the agreement, the seconded  employees had to work at such place as the assessee may instruct and the employees have to function under the control, direction  and  supervision  of  the  assessee  and  in accordance  with  the  policies,  rules  and  guidelines applicable  to  the  employees  of  the  assessee.  Therefore, the assessee for all practical purposes had to be treated as employer of seconded employee.

The Hon’ble High Court stated that there is no obligation in law for deduction of tax at source on payments made for reimbursement of costs incurred by a non resident enterprise and therefore, the amount paid by the assessee was not to suffer tax deducted at source under Section 195 of the Act.

Accordingly, the substantial questions of law framed were answered against the revenue and in favour of the assessee.

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