Case nº AAR No. 670 of 2005 of Authority for Advance Rulings, November 06, 2006 (case In Re: AT and S India (P) Ltd. Vs)

Judge:For Appellant: K.K. Chythanya, Adv. and For Respondents: T.N. Chopra, Adv.
President:Syed Shah Mohammed Quadri, J. (Chairman), A.S. Narang and A. Sinha, Members
Defense:Income Tax Act, 1961 - Sections 9, 9(1), 195, 195(1), 195(2), 195(3), 197 and 245Q(1)
Resolution Date:November 06, 2006
 
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Judgment:

Syed Shah Mohammed Quadri, J. (Chairman)

  1. This application under Section 245Q(1) of the IT Act, 1961 (for short "the Act") is by an Indian resident--AT&S India Ltd. (hereinafter referred to as "the applicant"). The applicant is a subsidiary of AT&S Austria Technologie & Systemtechnik Aktiengesellschaft, Austria (for short "the AT&S Austria"), a company incorporated under the laws of Republic of Austria. The applicant is carrying on the business of manufacturing of printed circuit boards. The applicant entered into various agreements with AT&S Austria. It entered into an agreement for information technology cost sharing with AT&S Austria on 13th March, 2001 a fact which is not relevant any more for the present discussion. Among others, two agreements which are material here are foreign collaboration agreement dt. 17th Aug., 2000 and secondment agreement dt. 17th Sept., 2002. Pursuant to the latter agreement the AT&S Austria undertook to assign or cause its subsidiaries to assign its qualified employees to the applicant. They are to work for the applicant and will receive compensation substantially similar to what they would have received as employees of AT&S Austria or its subsidiaries. Such employees are to be engaged by the applicant on full time basis.

    Though in the application the applicant set forth two questions to seek advance ruling of the Authority, at the initial stage of the hearing of the application, Mr. Chythanya, learned Counsel appearing for the applicant, withdrew the first question on 1st Feb., 2006 and that is why the said information technology cost sharing agreement ceased to be relevant. Now the only surviving question is question No. 2 which reads as follows:

    Whether pursuant to the secondment agreement entered into by the applicant with AT&S Austria, the payment to be made by the applicant to AT&S Austria, towards reimbursement of salary cost incurred by AT&S Austria in respect of seconded personnel, would be subject to withholding tax under Section 195 of the IT Act, in view of the facts that (1) the payments are only in the nature of reimbursement of actual expenditure incurred by AT&S Austria. (2) AT&S Austria is not engaged in the business of providing technical services in the ordinary course of its business, (3) AT&S Austria is not charging the applicant any separate fee for the secondment and (4) the seconded personnel work under the direct control and supervision of the applicant?

  2. In regard to question No. (2), the jurisdictional CIT (for short "the CIT") would submit that under the secondment agreement the AT&S Austria has undertaken to provide the services of the qualified technical personnel employed by it to the applicant. They are being paid salary, bonus and other benefits by AT&S Austria and the applicant has to reimburse the cost incurred on such employees. It is, however, disputed that what the applicant pays to AT&S Austria is reimbursement of cost only and that it is not in the business of providing technical services. It is stated that AT&S Austria is a provider of technical services through personnel in its employment to the applicant and therefore any payment in lieu of such services falls within the meaning of fees for technical services (FTS) under Section 9(1)(vii) of the Act and Article 12 of DTAA between the Government of Republic of India and the Government of the Republic of Austria and, therefore, tax has to be deducted @ 10 per cent on gross basis. The payments under the agreement are in the nature of FTS, which accrues or arise in India if paid by a resident for utilizing such services in a business or profession carried on in India for the purpose of making or earning any income from any source in India. It is submitted that regardless of the claim of the applicant that payments under the agreement are merely reimbursement of cost, tax has to be deducted at source from such payments by the applicant. The applicant has to deduct tax at source under the provisions of Section 195 of the Act from the payments to be made to a non-resident who can file a return of income before the AO and his claim, if any, will be decided after considering all the relevant facts. On 15th Dec., 2005 the applicant filed rejoinder disputing the contentions raised by the CIT and reiterating its case.

  3. The Government of Republic of India and the Government of Republic of Austria have entered into an agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income on 5th Sept., 2001 which is notified by Notification No. GSR 682(E), dt. 20th Sept., 2001 (2001) 170 CTR (St) 32 (hereinafter referred to as "the DTAA").

  4. Mr. Chythanya has strenuously contended that pursuant to the secondment agreement on transfer of employees of AT&S Austria to the applicant, they have become employees of the applicant and this is evident from the employment agreements and the statement of TDS; a part of their salaries was being paid by the applicant and the balance was being paid by AT&S Austria on behalf of the applicant as a matter of convenience. Therefore, submits the learned Counsel, payments are in the nature of reimbursement of actual expenditure incurred by AT&S Austria which is not engaged in the business of providing technical services in the ordinary course of its business and it is not charging any separate fee for the secondment of employees who would work under the direct control and supervision of the applicant, so the payments cannot be treated as "fees for technical services" within the meaning of Expln. 2 to Section 9(1)(vii) of the Act. Referring to the DTAA, it is argued that even under Article 12(4), payments to an employee of the person making payments are excluded from the purview of "FTS". The learned Counsel placed before us the Commentary of Organization for Economic Co-operation and Development (OEGD) on Article 15 of Model Convention as also the Commentaries by Klaus Vogel on Double Taxation Conventions in support of the plea that the real employer of the seconded employees is the applicant and not AT&S Austria.

  5. Mr. T.N. Chopra, learned Counsel appearing for the CIT, has on the other hand vehemently argued that payments under the secondment agreement cannot be called reimbursements and that the payments fall within the meaning of royalty as well as fees for technical services under Section 9(1)(vii) of the Act. It is argued that the real question is being sidetracked by bringing in the employment agreements between the seconded employees and the applicant; from the letter of the applicant's counsel dt. 6th Sept., 2006 it is clear that the seconded employees are technical personnel with technical qualifications and...

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