Payment to Parent MNC for cost of seconded personnel subject to withholding tax

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NEW DELHI. Authority for Advance Rulings(Income-Tax) vide a recent ruling  AIT-2006-248-AAR has ruled that payments made by the applicant to AT&S Austria, towards reimbursement of salary cost incurred by AT&S Austria in respect of seconded personnel, are in the nature of fees for technical services within the meaning of explanation – 2 of clause (vii) of sub-section (1) of Section 9 of the Act and article 12(4) of the DTAA and therefore they would be subject to withholding of tax at source under Section 195 of the Act .

T H E   F A C T S:

The applicant was a subsidiary of AT&S Austria, a company incorporated under the laws of Republic of Austria.  The applicant entered into various agreements with AT&S Austria.   Two agreements which are material here are Foreign Collaboration Agreement dated 17.8.2000 and Secondment Agreement dated 17.9.2002.  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.

The question before Authority 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 Income-tax 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 works under the direct control and supervision of the applicant?

T H E   R U L I N G:

Secondment agreement provides that AT&S Austria shall assign or shall cause its subsidiaries to assign to the applicant certain qualified individuals employed by the former or one or more of its subsidiaries- referred to as seconded personnel- to work for the applicant who will be compensated on terms substantially similar to the compensation they would have received as employees of its subsidiaries.  Article 2 thereof bears the heading “Secondment of Individuals and Management Services”. 

A plain reading of this clause shows that AT&S Austria retains the right over the seconded personnel and has the power to remove any seconded personnel from the applicant; the only condition attached to the exercise of this power is that it has to replace such personnel with similarly qualified individuals.  Article 3 of the secondment agreement deals with “compensation and payment”.  This article says that the applicant is under an obligation to compensate AT&S Austria all costs in Euro that have arisen directly or indirectly from secondment of personnel.  The connotation of compensation includes and is not limited to salary, bonus, benefits, personal travel, etc.  Though from the meaning of that expression are excluded expenses and costs provided in Articles 4.1 and 4.2 of the secondment agreement, nonetheless article 4.2 requires the applicant to reimburse AT&S Austria for all relocation costs of seconded personnel and their families when commencing and leaving their assignments and in addition the applicant has also to compensate AT&S Austria separately for round-trip air fares for such personnel.  It may not be out of place to mention here that Article 4 deals with “Applicant’s responsibilities”.  It is important to note that article 3.2 of the agreement imposes an obligation on the applicant, at the request of AT&S Austria, to pay a part of each individual’s compensation for each seconded personnel and that the remainder of such total amount of compensation has to be paid by the applicant to the AT&S Austria.  However, the annual compensation is subject to changes upon both parties’ written agreement.  It is provided under article 6 that the parties have understood and agreed that during the term of that agreement AT&S Austria shall have no liability whatsoever for any acts or omissions of the seconded personnel and that the applicant releases and agrees to indemnify AT&S Austria from and against any and all such liability.

Pursuant to the obligation under the FCA, the AT&S Austria has offered the services of technical experts to the applicant on the latter’s request and the terms and conditions for providing services of technical experts are contained in the secondment agreement which we have referred to above in great details.  Though the term “reimbursement” is used in the agreements, the nature of payments under the secondment agreement have to satisfy the characteristic of reimbursement and that term “reimbursement” in the agreement will not be determinative of nature of payments.  The term “reimbursement” is not a technical word or a word of art.  In Oxford English Dictionary, to reimburse means – to repay a person who has spent or lost money- and accordingly reimbursement means to make good the amount spent or lost.  However, under the secondment agreement the applicant is required to compensate AT&S Austria for all costs directly or indirectly arisen from the secondment of personnel and that the compensation is not limited to salary, bonus, benefits, personal travel etc. though salary, bonus etc. and the amounts referred to in para 4.2 of the secondment agreement form part of compensation.  The premise of the question that the payments are only in the nature of reimbursement of actual expenditure incurred by AT&S Austria is not tenable for reasons more than one.  First it is not supported by any evidence as no material (except the debit notes of salaries of seconded personnel) is placed before us to show what actual expenditure was incurred by AT&S Austria and what is being claimed as reimbursement; secondly, assuming for the sake of argument that the debit notes represent the quantum of compensation as the actual expenditure it would make no difference as the same is payable to the AT&S Austria under the secondment agreement for services provided by it.  It would, therefore, be not only unrealistic but also contrary to the terms of the agreement to treat payments under the said agreement as mere reimbursement of salaries of the seconded employees who are said to be the employees of the applicant.

It is obvious that AT&S Austria is to provide services of its employees on terms and conditions agreed to between the parties.  The secondment agreement provides that a part of the salary of seconded personnel will be paid by the applicant in Indian rupees and the remaining part shall be paid by the applicant to the AT&S Austria in Euro.  The employees would go back to AT&S Austria on the expiry of the assignment though while working with the applicant the seconded personnel sent by the AT&S Austria are required to comply with the regulations and management system of the applicant.  During the period the said seconded employees will be working under the applicant, the AT&S Austria has power to recall any one of them and replace them with other employees.  It is also clear that the applicant cannot pay any amount over and above the salary fixed by the AT&S Austria to the employees in India.  From the facts and circumstances and the reasons mentioned above we cannot but conclude that the role of AT&S Austria is not of a mere employment agent and that in effect the seconded personnel remain the employees of AT&S Austria.  Keeping the criteria mentioned in the above quotations, we have no hesitation in concluding that the AT&S Austria and not the applicant is the real employer of the seconded employees whose services have been lent to the applicant on the terms and conditions settled between the applicant and the AT&S Austria even though while working under the applicant they would have to abide by the employment agreement.

The term “fees for technical services” as defined in clause (4) of article 12 of DTAA means payments of any amount to any person other than payments to an employee of a person making payments in consideration for the services of a managerial, technical or consultancy nature including the provision of services of technical or other personnel.  The exception provided in the said definition of FTS is payments to an employee of a person making payments in consideration of services.  Here, on the facts of this case, though at first blush salaries paid by the applicant to the seconded employees would appear to fall outside the ambit of the definition of FTS.  On a close examination this impression will be dispelled.  We have held above that the applicant is not the real employer of the seconded employees.  The subject matter of payments is not merely the salaries of such employees, which have suffered tax, but compensation which, as noted above, takes in its ambit other items also which AT&S Austria is entitled to receive from the applicant under the secondment agreement.  And further the recipient of the consideration of compensation is AT&S Austria and not the seconded employees and the compensation is not the income of AT&S Austria chargeable under the head ‘salaries’.  The fact that employees of AT&S Austria have received their salaries from the applicant and have paid tax under the head ‘salaries’ is of no consequence.  From the above discussion, it follows that the payments, referred to as compensation in the secondment agreement, paid to AT&S Austria by the applicant, are for rendering “services of technical or other personnel” and the exception to the definition cannot be called in aid.

The first premise of the question has been found against the applicant.  The second premise that AT&S Austria is not engaged in the business of providing technical services in the ordinary course of its business cannot be accepted because we are not shown the memorandum of Association of that the company to find out as to what business it is authorized to carry on and what is the real business of AT&S Austria.  In any event as per the FCA and the secondment agreement, AT&S Austria has undertaken to provide technical services and that would negative the claim of the applicant.  In as much as we have already held above that payments which AT&S Austria would be receiving, are in the nature of the fee for technical services, it is not material for the purpose of the question whether AT&S Austria is charging any separate fee for the secondment of the employees.  In our view the fourth and the last premise that the seconded personnel work under the direct control or supervision of the applicant would not militate against holding that compensation paid by the applicant to AT&S Austria, is in the nature of fees for technical services.

Payments made by the applicant to AT&S Austria are in the nature of fees for technical services within the meaning of explanation – 2 of clause (vii) of sub-section (1) of Section 9 of the Act and article 12(4) of the DTAA and therefore they would be subject to withholding of tax at source under Section 195 of the Act.

(  Click here for full text of Ruling AIT-2006-248-AAR )