The Hindu Business Line : First principles on seconded staff

AT&S is Europe's number 1 printed circuit board (PCB) producer, announces www.ats.net. The company, based in Austria, has factories in India (Nanjangud), China (Shanghai) and Korea (Ansan). The Nanjangud plant produces multi-layer PCBs for mid-range and large-scale series, `used predominantly in the areas of industrial and medical technology, and in the automotive industry.' The company is `the largest manufacturer of PCBs in India.'

Recently, AT&S India Ltd, a subsidiary of AT&S (Austria Technologie & Systemtechnik Aktiengesellschaft), approached the Authority for Advance Rulings (AAR) to seek clarification about certain employee payments. A matter of interest, because the case on hand is almost the opposite of the one discussed in these columns not long ago (`How UK collected tax on Indian salary', Business Line, December 2).

The UK case, if you remember, was about an Indian subsidiary (British Gas India) sending its staff to its parent company BG in the UK, on deputation. Conversely, the current issue is about AT&S employees working in the Indian subsidiary on secondment from Austria, in pursuance of a `secondment agreement' of September 2002.

AT&S India made payment to AT&S Austria, `towards reimbursement of salary cost incurred by AT&S Austria in respect of seconded personnel.' Facts that AT&S India placed before the Authority were that:

Payments were only in the nature of reimbursement of actual expenditure incurred by the parent company.

AT&S Austria was not engaged in the business of providing technical services in the ordinary course of its business.

Parent company did not charge the Indian company any separate fee for secondment.

Seconded personnel worked under the direct control and supervision of the Indian company.

The question before the AAR was whether the company should deduct tax on the payments made. The Commissioner of Income-tax, Kolkata, the taxman in this case, was of the view that under the secondment agreement between the two companies, AT&S Austria undertook to provide the services of the qualified technical personnel employed by it to the Indian company.

AT&S Austria paid these personnel `salary, bonus and other benefits'; and AT&S India had to reimburse the cost incurred on such employees. On whether the payment was only a reimbursement of cost, the taxman could not agree. He was of the view that AT&S Austria was `a provider of technical services through personnel in its employment' to AT&S India. Accordingly, `any payment in lieu of such services' would come within the meaning of FTS (fees for technical services) under Section 9(1)(vii) of the Income-Tax Act and Article 12 of DTAA (Double Taxation Avoidance Agreement) between India and Austria, said the Department. Which meant a deduction of tax at 10 per cent on gross basis.

Regardless of how the Indian company described the outgoings, "the payments under the agreement are in the nature of FTS, which accrues or arises in India if paid by a resident for utilising 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," said the Department.

K.K. Chythanya, who represented AT&S India, submitted that pursuant to the secondment agreement, employees sent by AT&S Austria became employees of the Indian company, as evident from the employment agreements and the statement of TDS (tax deduction at source). Such employees received a part of their salaries from the Indian company, the balance from AT&S Austria, on behalf of the applicant (AT&S India) `as a matter of convenience.'

Chythanya cited the commentary of OECD (Organisation for Economic Cooperation and Development) on Article 15 of the Model Convention, and also `the commentaries by Klaus Vogel on Double Taxation Conventions' to support his plea that the real employer of the seconded employees was AT&S India and not AT&S Austria. A key defence that the Indian company relied on, but the Authority was to demolish this, as you will read.

Real question `sidetracked'

The Department's side was vocal. T.N. Chopra, who spoke for the Commissioner, `vehemently argued' at the Authority that the payments in focus could not be called reimbursements. They fell within the meaning of royalty and fees for technical services, he said.

"The real question is being sidetracked by bringing in the employment agreements between the seconded employees and the applicant," he said. The seconded employees were technical personnel with technical qualifications and, therefore, the payments to AT&S Austria for the services rendered by them evidently answered the definition of FTS, averred Chopra. "The so-called employment agreements are afterthought and are produced at a belated stage," he opined.

Syed Shah Mohammed Quadri, Chairman of the Authority, and A. S. Narang and A Sinha, Members, studied the agreements on collaboration and secondment between the two companies. The word `reimbursement' in the agreement would not be determinative of the nature of payments, they said. `Reimbursement' is not a technical word or a word of art, they said and referred to Oxford English Dictionary for the meaning of the word: "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."

"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," observed the Authority, as one reads in the text of the ruling dated November 6, on www.taxindiaonline.com. What were the reasons? First, the payments were not supported by `any evidence;' no material (except the debit notes of salaries of seconded personnel) had been placed before the AAR to show what actual expenditure was incurred by AT&S Austria and what was being claimed as reimbursement. And second reason, according to the AAR, was that the payments were as per the secondment agreement.

After studying the Articles of the DTAA, the Authority said that the payments made by AT&S India did not fall under the meaning of `royalties.'

Exception of no avail

What was of relevance to the case was `fees for technical services' (FTS), defined as follows: "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 defence, or exception, AT&S India was banking upon, as you can notice comes after the `other than... ' phrase.

On this the OECD commentary relied upon by Chythanya came in handy for the Authority. In international hiring-out of labour, substance should prevail over form, and `each case should be examined to see whether the functions of employer were exercised mainly by the intermediary or by the user,' is a point that the Authority emphasised, citing the OECD. "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," noted the Authority.

"The applicant is not the real employer of the seconded employees. The subject matter of payments is not merely the salaries of such employees," reasoned the Authority. 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'."

As a result, AT&S India could not call in aid the exception to the definition of FTS, said the AAR, before ruling that the payments were in the nature of fees for technical services on which tax had to be deducted by the Indian company. A decision that merits detailed study by those in the international taxation circuit.

Tailpiece

"Does taxation promote saving or vice versa?"

"I thought they were opposites!"

http://Detaxification.blogspot.com

D. Murali

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