Your SlideShare is downloading. ×
Seconded employees to provide business support services constitute Service PE in India. Further such Services also ‘make available’ technical knowledge, skill, etc. and therefore taxable as FTS/FIS
Seconded employees to provide business support services constitute Service PE in India. Further such Services also ‘make available’ technical knowledge, skill, etc. and therefore taxable as FTS/FIS
Seconded employees to provide business support services constitute Service PE in India. Further such Services also ‘make available’ technical knowledge, skill, etc. and therefore taxable as FTS/FIS
Seconded employees to provide business support services constitute Service PE in India. Further such Services also ‘make available’ technical knowledge, skill, etc. and therefore taxable as FTS/FIS
Seconded employees to provide business support services constitute Service PE in India. Further such Services also ‘make available’ technical knowledge, skill, etc. and therefore taxable as FTS/FIS
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Seconded employees to provide business support services constitute Service PE in India. Further such Services also ‘make available’ technical knowledge, skill, etc. and therefore taxable as FTS/FIS

179

Published on

The Delhi High Court in the case of Centrica India Offshore Pvt. Ltd. (the taxpayer) held that secondment of employees by foreign group companies to an Indian company (i.e. taxpayer) constitute …

The Delhi High Court in the case of Centrica India Offshore Pvt. Ltd. (the taxpayer) held that secondment of employees by foreign group companies to an Indian company (i.e. taxpayer) constitute Service Permanent Establishment in India. Further, services provided by seconded employees are ‘technical or consultancy’ in nature and also ‘make available’ their know-how to the taxpayer for future consumption. Therefore, it was treated as ‘Fees for Technical/Included Services’ under the India-UK and India-Canada tax treaties.

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
179
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
2
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Seconded employees to provide business support services constitute Service PE in India. Further such Services also ‘make available’ technical knowledge, skill, etc. and therefore taxable as FTS/FIS 2 May 2014 B Background The Delhi High Court (High Court) in the case of Centrica India Offshore Pvt. Ltd. 1 (the taxpayer) held that secondment of employees by foreign group companies to an Indian company (i.e. taxpayer) constitutes Service Permanent Establishment (PE) in India. Further services provided by seconded employees are ‘technical or consultancy’ in nature and also ‘make available’ their know-how to the taxpayer for future consumption. Therefore, it was treated as ‘Fees for Technical/Included Services’ under the India-UK and India-Canada tax treaties. Facts of the case  The taxpayer, an Indian company, is a wholly owned subsidiary of Centrica Plc., a company incorporated in the U.K. Centrica Plc. also has overseas subsidiaries (overseas entities) located in different countries. These entities are in the business of supplying gas and electricity to consumers across the U.K. and Canada. ________________ 1 Centrica India Offshore Pvt. Ltd. v. CIT [W.P.(C) No. 6807/2012] – Taxsutra.com  The overseas entities outsource their back office support functions to the taxpayer. The taxpayer was acting as a service provider to these overseas entities. Accordingly, the taxpayer entered into ‘service agreement’ with overseas entities to provide locally based interface between overseas entities and Indian vendors. In terms of the agreement, the taxpayer is charging full costs plus a mark-up of 15 percent to overseas entities.  To seek support during initial year of its operation, the taxpayer sought some employees on ‘secondment’ from the overseas entities and therefore, it entered into a ‘secondment agreement’ with the overseas entities.  The taxpayer reimbursed salary cost to overseas employers on cost to cost basis. The taxpayer offers salaries paid to every seconded employee for taxation purpose and withheld their taxes in India. Further, service income received by the taxpayer from overseas entities in terms of the ‘service agreement’ is offered to tax under the Income-tax Act, 1961 (the Act).
  • 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  On appeal to Authority for Advance Rulings (AAR) for taxability of reimbursement of cost incurred in terms of secondment agreement, the AAR held that services rendered by seconded employees were managerial in nature but does not fall within the purview Fees for Technical Services (FTS) under the tax treaty 2 . The AAR ruled that overseas entities constitute Service PE on account of employees deputed by overseas entities under the terms of secondment agreement.  The taxpayer filed a writ petition before the High Court challenging the AAR ruling. High Court’s ruling Fees for Technical Services  In the present case, overseas entities have provided ‘technical’ services to taxpayer, since the expression FTS/Fees for Included Services (FIS) expressly includes the provision of the services of personnel. The seconded employees, who work for the taxpayer, were seconded by overseas entities and work conducted by them was through the overseas entities.  The nature of the services treated by the taxpayer as ‘business support services’ which also falls within the meaning of ‘technical or consultancy’. The services envisage the provision of quality service by vendors to the overseas entities, which taxpayer, and the secondees, is to oversee. This requires the secondees to draw from their technical knowledge.  As per Article 12(4) of the India-Canada tax treaty, the ‘technical’ services does not limit itself only to technological services, but rather, extends to know-how, techniques and technical knowledge. The term ‘technical’ has not been defined in the tax treaty, and must be accorded its broader dictionary meaning, unless limited by the parties to the instrument.  The AAR in the case of Intertek Testing Services India Pvt. Ltd 3 has held that the expression ‘technical’ ought not to be construed in a narrow sense and it was supported by the Supreme Court in the case of Continental Construction Ltd 4 .  Provision of services by the overseas entities themselves and ‘mere’ secondment of employees does not make a difference, since the services provided by the overseas entities is the provision of technical services under Article 13 of India-UK tax treaty. ________________ 2 India-Canada tax treaty and India-UK tax treaty 3 Intertek Testing Services India Pvt. Ltd. v. CIT [2008] 220 CTR 540 (AAR) 4 Continental Construction Ltd. v. CIT [1992] 195 ITR 81 (SC)  The technical knowledge to be ‘made available’ is an essential, and additional, requirement under the India-Canada tax treaty. This clause is also there in Article 13 of the India-UK tax treaty. This requirement is disjunctive from the rest of the provision unlike in the India-Canada tax treaty. Accordingly, in order to cover the transaction by the India-Canada tax treaty, it must not only be showed that technical services were performed, but that such knowledge etc. was ‘made available’.  The secondees are imparting their technical expertise and know-how onto the other regular employees of the taxpayer. The secondment agreement entered by the taxpayer was to provide support for the initial years of operation, till the necessary skill-set was acquired by the resident employee group.  The activity of the secondees was thus to transfer their technical ability, to ensure quality control vis- à-vis the Indian vendors, or in other words, ‘make available’ their know-how of the field to the taxpayer for future consumption. Service PE  There was no purported employment relationship between the taxpayer and the secondees. None of the documents, including the attachment to the secondment agreements, reveals that the latter can terminate the secondment arrangement. There was no entitlement or obligation, clearly spelt out, whereby the taxpayer has to bear the salary cost of these employees.  The secondees cannot sue the taxpayer for default in payment of their salary. All direct costs of such seconded employee's basic salary and other compensation, cost of participation in overseas entities' retirement and social security plans and other benefits in accordance with its applicable policies and other costs were ultimately paid by the overseas entity.  The taxpayer has given the right to terminate the secondment agreement, the services of the secondees vis-à-vis the overseas entities. However, the original and subsisting employment relationship could not be terminated. Rather, employment relationship remained independent, and beyond the control of the taxpayer.  The concept of a legal and economic employer, as considered by Klaus Vogel, is when ‘a local employer wishing to employ foreign labour for one or more periods of less than 183 days recruits through an intermediary established abroad who purports to be the employer and hires the labour out to the employer. In this case, the temporal element of the three-way employment relationship is crucial.
  • 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  The secondees were originally employees of the overseas entities and they were not hired by that entity as a false façade, whose productivity is to be ultimately traced to the taxpayer. They have only been seconded or transferred for a limited period of time to another organisation, in order to utilise their technical expertise in the latter. The secondment agreement between the taxpayer and the overseas entity, and the agreement between taxpayer and the employees, envisages an end to this exception, and a return to the usual state of affairs, when the secondees return to the overseas entities.  The employment relationship between the secondees and the overseas organisation was at no point terminated, nor was the taxpayer given any authority to even modify that relationship. The salary was paid through the overseas entity, which was not a mere conduit.  The decision of the Supreme Court in the case of Morgan Stanley supports the case of the tax department since in that case there was a different characteristic and link between the deputed employee and the parent. Further, OECD Model Commentary on Article 15 also notes that ‘the situation is different if the employee works exclusively for the enterprise in the state of employment and was released for the period in question by the enterprise in his state of residence’. This was clearly not done in the present case.  Accordingly, overseas entities constituted Service PE in India. Reimbursement and diversion of income and overriding title  The mere fact that the payment made from the taxpayer to the overseas entity as ‘reimbursement’ cannot be determinative. The fact that the overseas entity does not charge a mark-up over and above the costs of maintaining the secondees cannot negate the nature of the transaction.  The present decision is similar to AT and S India (P) Ltd. 5 wherein also it was held that withholding tax provision of Section 195 of the Act would be applicable.  Various factors concerning the determination of the real employment link continue to operate, and the consequent finding that provision of employees to the taxpayer was the provision of services to the taxpayer by the overseas entities triggers the tax treaties. _______________ 5 AT and S India (P) Ltd.( MANU/AR/0016/2006)  The nomenclature or lesser than expected amount charged for such services cannot change the nature of the services. Once it is established that there was a provision of services, the payment made may indeed be payment for services which may be deducted in accordance with law or reimbursement for costs incurred. However, this cannot be used to claim that the entire amount is in the nature of reimbursement, for which there was no tax liability arises.  Where services are provided between related parties, the demand of only as much money as has been spent in providing the service would remove the tax liability altogether. This was clearly an incorrect reasoning that conflates liability to tax with subsequent deductions that may be claimed.  The Delhi Tribunal in the case of E-Funds IT Solution 6 observed that the nature of activity undertaken by the employee is determinative of whether it constitutes a service. The Tribunal noted the distinction between stewardship activities of employees and deputationists. In the present case, the overseas entities outsource their back office support functions like debt collections, consumer billings, etc, which cannot be characterised as mere stewardship. Therefore, it is held that the real employer of these seconded employees continues to be the overseas entity.  The High Court held that the payment is not in the nature of reimbursement, but rather, payment for services rendered.  The overseas entities obligation to pay the secondees arises under a separate agreement, based on independent conditions, in relation to taxpayer’s obligation to pay the overseas entity. Assuming the agreement between the taxpayer and the overseas entity envisaged a certain payment for provision of services.  The fact that the payment under the secondment agreement was styled as reimbursement, and limited on facts to that, without any additional charge for the service, cannot be hit by that doctrine of diversion of income by overriding title either. ___________________ 6 DIT v. E-Funds IT Solution [2014] 42 taxmann.com 50 (Del)
  • 4. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Our comments The Delhi High Court in this decision discussed the concept of economic employer vis-à-vis legal employer and held that services rendered by the seconded employees constituted service PE in India. Further such services were technical in nature and also make available technical knowledge to the taxpayer. The High Court reffered to the OECD Commentary where it is stated that the foreign company may not constitute a service PE if the seconded employees work exclusively for the Indian enterprise and they were released for the period in question by the foreign enterprise which was not the case in this decision. It is important to note that the Mumbai Tribunal in the case of Temasek Holdings Advisors India (P.) Ltd. 7 held that the foreign company had nothing to do with the seconded employees except for paying their salary. The Indian company was the economic employer of the seconded employees. Further the employees were rendering services purely for the Indian company. Accordingly, the reimbursements were purely in the form of salary from which tax was duly deducted and deposited by the Indian company hence no further tax withholding was required. ____________________ 7 Temasek Holdings Advisors India (P.) Ltd. v. DCIT [2013] 60 SOT 134 (Mum)
  • 5. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

×