Secondment is not “rendering of services”, if the other entity is their ‘real and economic employer’ – Bang ITAT


Abbey Business Services (India) (P.) Ltd v DCIT [2012] 23 taxmann.com 346 (Bangalore – Trib.)

Facts of the case:

The assessee-Indian company(Abbey India) incorporated on 22-1-2004 under the Companies Act, 1956 entered into an agreement for secondment of staff with its overseas parent company (Abbey National Plc., UK) on 4-2-2004. The secondment agreement contained inter alia the following clauses 3.2 to 3.6

3.2 Particular Secondments

Abbey India and Abbey UK shall complete, sign and date a Secondment Term Sheet in respect of each employee agreed between them to be seconded to Abbey India in accordance with the terms of this Agreement.

3.3 Duration of Secondment

3.3.1 (Subject as below) each Secondment shall be for the period of Secondment specified in the Secondment Term Sheet or as may be otherwise agreed between the parties.

3.3.2 Abbey UK shall at the written reasonable request of Abbey India from time to time immediately withdraw any Secondee from Secondment as Abbey India shall specify and Abbey UK may terminate a particular Secondment prematurely at any time where deemed necessary or desirable by Abbey UK for any reason.

3.3.3 A particular Secondment will also come to an end if terminated by the Secondee through leaving the employment of Abbey UK or terminating his or her secondment to India or by Abbey UK terminating the employment of the Secondee for any reason.

3.5 Supervision and Control

The parties agree that the Secondees shall be under the direct management, supervision and control of Abbey India during the applicable periods of Secondment. It is further agreed that :

(a) Abbey UK shall not be responsible for and shall not be liable for any loss or damage occasioned by the Secondees’ work.

(b) the authority to instruct the Secondees shall lie with Abbey India, and

(c) the Secondees’ work shall be performed at such place as Abbey India may instruct.

3.6 Responsibility for Employment Liabilities

This Agreement is not intended to and nothing in this Agreement shall have the effect of constituting the Secondees as employees of Abbey India and the Secondees shall be and remain employees of Abbey UK during Secondment. The Secondees shall not be entitled to any remuneration nor employment benefits from Abbey India and it is agreed that Abbey UK shall, as employer of the Secondees, be responsible for all such remuneration and benefits (including without limitation Pension Contributions) and all other liabilities as employer and for accounting to the Inland Revenue in the United Kingdom and all other authorities for all taxes, National Insurance or similar contributions.”

Clause 4 reads as under :

4. Payment for Secondment

4.1 In consideration of the Secondment of Staff by Abbey UK, Abbey India shall make payments to Abbey UK (in Sterling) equivalent to the Remuneration, Pension Contributions, Expenses, Statutory Payments and any other sums incurred by Abbey UK applicable to each Secondee during his or her period of Secondment.

4.2 The payments under Clause 4.1 shall be made quarterly in arrears against detailed invoice submitted by Abbey UK.”

• In the period relevant to assessment year 2005-06, 168 employees were seconded by Abbey National Plc. to the assessee under the secondment agreement. The salary costs of these employees incurred and paid by Abbey National Plc. UK amounted to Rs. 16,62,04,340 on which the TDS deducted and paid to the credit of the central government amounted to Rs.4,98,68,399.

• Other administration costs incurred in respect of the employees seconded under the secondment agreement amounted to Rs.10,96,26,174. Thus the total amount to be reimbursed to Abbey National Plc. UK under the secondment agreement was Rs. 27,58,30,154 which comprised of salary and administration expenses which were debited to the profit and loss account in the books of account of the assessee in the relevant period and were claimed as deduction in computing the total income under the Income Tax Act.

• The assessee filed its return of income for assessment year 2005-06 on 31-10-2005 declaring a total income of Rs. 2,61,87,279. The return was processed under section 143(1) of the Act and the case was taken up for scrutiny by issue of notice under section 143(2) on 31-10-2006 which was served on the assessee.

• The Assessing Officer consequently held that the assessee was liable to the deduct tax under section 195 of the Act in respect of reimbursements made to Abbey National Plc., UK under the secondment agreement and since no tax was deducted under section 195 of the Act, the entire payment made by the assessee amounting to Rs.27,58,30,514 was disallowed by the Assessing Officer under section 40(a)(i) of the Act. CIT(A), in appeal, allowed partial relief to assessee.

Held

  • Reimbursement ,by definition, involves no income element.
  • Reimbursement follows the incurrence of expenditure by replacing the quantum of disbursement.
  • Reimbursement of salary costs to a foreign company under a secondment agreement does not involve profit element and is not liable to income tax. If however, there is a surplus, surplus would be taxed.
  • Section 9(1)(vii) of the Act is attracted if (i) there is a rendering of service (ii) for which a consideration should follow.
  • When the requirements of employer-employee relationship such as the right to hire or accept the secondment, right to control and supervise, right to instruct, right to terminate from secondment are satisfied as in the case of the Indian subsidiary and secondees, overseas parent was only an employer in a legal sense and Indian subsidiary was their ‘real and economic employer’. Mere fact that secondees remained on overseas parent’s payroll would not lead to the conclusion that the overseas parent is their actual employer There is no rendering of services by overseas parent once Indian subsidiary is real and effective employer of secondees.
  • Consideration means something given in return for obtaining or getting a thing. The reimbursement of salary costs and other administration costs did not contain any mark up. As the reimbursement to overseas parent did not result in any profit or gain or income to it, these reimbursements cannot be treated as ‘consideration.’
  • The reimbursement also cannot be regarded as ‘provision of services of technical or other personnel.’ The use of the words ‘services of’ in the above expression mandates the rendering of some sort of work through the act of the services of technical or other personnel. In the instant case, overseas parent company has not rendered any services to the assessee. It has only deputed secondees to the assessee. The expression ‘provision of services of technical or other personnel’ used in the definition of ‘fees for technical services’ is thus not satisfied.
  • In the result, assessee’s appeal allowed and entire disallowance u/s 40(a)(ia) deleted.

Source: www.taxmann.com

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