Income Tax Appellate Tribunal - Bangalore
Caterpillar Logistics Services India ... vs Assessee on 28 February, 2012
IN THE INCOME-TAX APPELLATE TRIBUNAL
BANGALORE BENCH 'A', BANGALORE
BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI JASON P BOAZ, ACCOUNTANT MEMBER
I.T.A. No.149(Bang.)/2010
(Assessment Years : 2008-09)
M/s Caterpillar Logistics Services India Pvt.Ltd.,
RMZ XT Campus, 1A-54th Floor,
Whitefield Road,
Sannehalli Village,
Bangalore-560 002
PAN No.AAACE4113F Appellant
Vs
The Deputy Director of Income-tax,
International Taxation, Circle-I(I),
Bangalore Respondent
Assessee by : Shri. K.R.Sekhar, CA
Revenue by : Shri Etwa Munda, CIT-II
Date of hearing : 28-02-2012
Date of pronouncement : 29-02-2012
O R D E R
PER SMT. P. MADHAVI DEVI, JM;
This is assessee's appeal for the assessment years 2008-09 against the order passed u/s 201(1) and 201(1A) of the IT Act.
2. In this appeal, the assessee is aggrieved by the order of the CIT(A) in confirming the order of the AO holding that the assessee has failed to exercise due care and caution in the discharge of its statutory obligation u/s195(1) of the IT Act while making remittance to Caterpillar Inc. USA towards the reimbursement of salary and other costs of Mr. Suryanarayana Sarwaswathulla (hereinafter referred to as 'Shri Suryanarayana') and holding that the services of Shri Suryanrayana to the assessee in India is in the nature of technical services and requires withholding of taxes at source.
3. The brief facts of the case are that the assessee is engaged in the business of providing back office services to Caterpillar group of companies. Its back office services include Inventory Management Support services, facility design and layout support services and Information Technology support and development services. During the relevant financial year the ITO, Int.Taxation, Ward-19(1), Bangalore noticed from the assessee's record that the assesseee has remitted USD 164,519/- to Caterpillar, USA vide a CA's certificate and undertaking dated 11-07-2007. He noticed that the remittance has been made without deduction of tax at source. In view of the same, the ITO, Int,.Taxn. Ward-19(1) initiated proceedings u/s 201 for non-deduction of TDS from the said remittance and issued notice dated 10-10-2007 to the assessee. The assessee submitted its letter dated 30-10-2007 along with certain details. From the said details the ITO, Int.Taxn. Ward-19(1), noticed that the Caterpillar Inc.USA has deputed one of its employees namely Mr. Suryanarayana to the assessee company in India and for the said purposes, the assessee has made the remittance on account of salary cost of the said ex-patriate employee which was actually paid to him by Caterpillar Inc. USA in USA and the salary cost of the said employee was reimbursed by the assessee to Caterpillar Inc. USA and since it as a mere reimbursement, it was claimed by the assessee that there was no necessity to make TDS. The ITO, however, was not convinced with the assessee's content ions and held that the Caterpillar Inc.USA is the home company while the assessee is the host company and as per the secondment agreement between the two companies, the payment of salary, bonus and other allowance are the obligation of the home company i.e. Caterpillar Inc.USA. and the host company i.e. the assesee herein is supposed to bear only the local costs and expenses. He also observed that the assessee has no powers to terminate the employee or to extend the period of employment and therefore, the assessee company cannot claim that the employee is working under its direct control and supervision. According to him, since the assessee company has no powers to decide the salary or to terminate the employment of the deputed employee, there exists no employer and employer relationship between the Indian company and Shri Suryanarayana. Further, the ITO also observed that Shri Suryanarayana has to impart his skills and experience in managing SAP information services division of the assessee company which is mainly related to information technology and software which are fairly in the nature of managerial as well as technical services, as provided in Explanation-2 to Sec.9(1)(vii) of the IT Act. He has also held that the services rendered by Shri Suryanarayana also makes available the skill, experience, technical know how etc. to the assessee company in managing the SAP information and to implement IT related projects and it also satisfies the conditions of 'Technical Services' as per Article-12(4) of the DTAA between India and USA. Thus, he held that that the nature of services rendered by Shri Suryanarayana are technical services and remittance made b y the assessee company to Caterpillar Inc.USA is nothing but 'fees for technical services'. As regards the assessee's contention that the remittances is only a reimbursement of cost and that there is no element of income required TDS u/s 195 of the IT Act, the ITO (Int.Taxn.) held that the Caterpillar Inc.USA being the employer of the expatriate is bound to bear the salaries and other allowance of the employees and the question of reimbursement does not arise.
4. As regards the assessee's contention the TDS has been made from the expatriate employee's salary u/s 192 of the IT Act and therefore, no more TDS is required u/s 195 of the IT Act. The ITO (Int.Taxn.) held that the TDS made by the assesee is actually towards employee's tax liability in India and not of Caterpillar Inc.USA for the fees received by it for the technical services rendered by its employee Shri Suryanarayana. He accordingly, held the assessee to be 'an assessee in default' u/s 201(1) of the IT Act and also held that the assessee to be liable to interest u/s 201(1A) of the IT Act and levied the same accordingly.
4.1 Aggrieved, the assessee preferred an appeal before the CIT(A) stating that the expatriate employee of Caterpillar Inc USA, Sri Suryanarayana Saraswathulla was deputed to the assessee company based on the secondment agreement to discharge his functions in accordance with the directions of the assessee company and therefore, there was an employer/employee relationship between the assessee company and Shri Suryanarayana and the remittance to the Caterpillar Inc.USA was only reimbursement of the salary paid by it to the employee in USA. CIT(A) however, was not convinced with the said arguments and confirmed the order of the AO both on the employer/employee relationship as well as the 'fee for technical services'. Aggrieved, the assessee is in second appeal before us.
4.2 The learned counsel for the assessee Shri K.R.Sekhar, while reiterating the submissions made by the assessee company before the authorities below submitted that the clauses from the secondment agreement clearly establishes that there is an employer/employee relationship between the assessee and Shri Suryanarayana, as far as his discharge of duties in India are concerned. He submitted that Shri Suryanarayana being a U.S Citizen could not be brought on the pay roll of the assessee company as that would make Shri Suryanarayana, lose his social security benefits available in USA. He submitted that it was the request of Shri Suryanarayana that the salary should be paid to him by the US Company for discharge of his duties by him in India to the assesee company, so that he does not lose his social security benefits available in USA and therefore, it has been included in the secondment agreement that the payment shall be made by Caterpillar Inc. USA in USA which shall be reimbursed by the assessee company. He drew our attention to the various clauses of secondment agreement to demonstrate that the assesee was under the direct control and supervision of the assesssee company in accordance with the policies, rules and guidance applicable to the assessee company. He also drew our attention to the clauses of the secondment agreement in terms of which the employee can be removed, if he is not able to fulfill his job responsibilities and the home company i.e. CaterpillarInc.USA shall not be responsible for or assume any risk for the results produced from the work performed by the seconded employee. He submitted that on a similar set of facts, the co-ordinate Bench of this Tribunal in the case of M/s IDS Software Solutions (India) Pvt.Ltd., Vs ITO (Int.Taxn), Bangalore in ITA No.87(Bang/2008 has decided the issue in favour of the assessee. The learned counsel for the assessee has filed copy of the said order before us at page-176 of the paper book filed by him. He further submitted that similar view has also been taken by the Hon'ble Delhi High Court in the case of HCL Infosystems Ltd., Vs CIT reported in 274 ITR 261(Del.)
5. The learned DR on the other hand, placed reliance upon the order of the authorities below and submitted that there was no employer/employee relationship between the assessee and the employee and the employee Shri Suryanarayana being the employee of the Caterpillar Inc.USA has rendered technical services to the assessee company and therefore, the fees for technical services attracts the provisions of Sec.195 of the IT Act.
6. Having heard both the parties and having considered the rival contentions, we find that the facts of the case before us are exactly similar to the facts of the case before the 'A' Bench of this Tribunal in the case of M/s IDS Software Solutions (Ind.) Pvt.Ltd., (cited supra) wherein the Tribunal after considering the issue at length has held in para 11-17 of its order as under;
"11 The secondment agreement, as we have already held, constitutes an independent contract of service in respect of the employment of Dr.Sundarrajan with the assessee company. It may be true that IDS, the US company is the employer of Dr.Sundarrajan in a legal sense but since his services have been seconded to the assessee company under the secondment agreement and further since the assessee company is to reimburse the emoluments paid by IDS to Dr.Sundarrajan, it is the assessee company which for all practical purposes is to be looked upon as the employer of Dr.Sundarrajan during the relevant period. In this behalf we were referred to the views expressed by Professor Klaus Voegel in his treatise on Double Taxation Conventions under the heading 'International Hiring Agreements" at page-885. The view put forth by him is reproduced hereunder;
"The question of who is the employer arises particularly in situations in which the employee is sent abroad to work for a foreign enterprise as well. In such cases, the determination of employer rests on the degree of personal and economic dependence of the employee towards the enterprise involved. Accordingly, the foreign enterprise does not qualify as an employer merely because the employee performs services for it or because the enterprise was issuing to the employee instructions regarding his work, or places tools, etc., at his disposals (of Hinnekens.L.Interfax 331 (1988). 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 (BFH 114 (1986) re Germany's DTC with Spain)".
If this view is applied to the present case, the assessee company can be considered as the economic employer because the services are rendered by Dr. Sundarrajan to it, the salary is met or borne by it. Be that as it may, the person who actually controls the services of Dr.Sundarrajan is the assessee company. Under the secondment agreement he is to act in accordance with the reasonable requests, instructions and directions of the assessee company. He is reportable and responsible to the assessee company. He can be rejected by the assessee company in which case the US company is bound to replace him. Under clause 86 of the Articles of Association of the assessee company, which we have already noticed, the assesee company may remove Dr.Sundarrajan before the expiration of the period of his office. Clause-89 of the articles empowers the Board of Directors of the assessee company to regulate the powers and duties of Dr.Sundarrajan by passing appropriate resolutions which they have already done. Thus, reading the Articles of Association as well as the second agreement together, it seems to us that Dr.Sundarrajan was an employee of the assessee company, subject to the supervision and control of its Board of Directors, in addition to being the Managing Director of the assessee company.
12. For the above reasons, we hold that Dr.Sundarrajan was an employee of the assessee company during the relevant time and the amount payable to him was not to suffer tax deducted at source at the time of remittance to IDS since the tax has been deducted and paid to the Indian Income-tax authorities.
13. The next question is whether the amount can be considered as fees for technical services within the meaning of Explanation-2 below Sec.9(1)(vii) of the IT Act. Under this Explanation fees for technical services means any consideration including lumpsum consideration for the rendering of any managerial, technical or consultancy services, including the provision of services of technical or other personnel, but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'salaries'. It is not denied before us on behalf of the assessee that Dr.Sundararajan is a technical person. What is however submitted is that Article II and VI of the secondment agreement would be out of pace in a contract for providing technical services. Article II as we have already seen contains eight clauses outlining the duties and obligations of the seconded employee. Article VI provides for indemnification which has also been earlier noticed by us. We are inclined to agree with the submission that these two articles are out of place in a contract for providing technical services. For example, clauses (A) to (C) of Article II make the seconded employee responsible and subservient to the assessee companywhich cannot be the case if the agreement is for providing technical services by IDS to the assesse company. Similarly, clause(E) which requires the seconded employee to also act as officer or authorized signatory or nominee or in any other lawful personal capacity for the assessee company, would also be out of ace in agreement for rendering technical services as it cannot be imagined that a technical person would also be required to act in non-technical capacities under an agreement for rendering technical services. Clause(H), on which considerable reliance was placed by the department to contend that the agreement is one for rendering technical services, is merely a clause ensuring secrecy and confidentiality of the information accessed by the seconded employee in the course of his employment with the assessee company. Such confidentiality extends not only to technical information, which would be the case if the agreement is one for rendering technical services but also to financial or accounting information, price or cost data and any other proprietary or business related information. Article VI which provides for indemnity, that is to say, the liability of the assessee company to indemnify the US company from all claims, demands etc., consequent to any act or omission by the seconded employee is also inconsistent with the claim of the department that this is an agreement for rendering technical services. The Article further provides that nothing in the agreement shall be construed as a warranty of the quality of the seconded employee. It is not usual to find such a stipulation in an agreement for rendering technical services.
14. The department has drawn our attention to the ruling of the Authority for Advance Rulings in the case of AT & S India Pvt.Ltd.,(2006) 287 ITR 21. In his case the agreement entered into by the Indian company with its Austrian parent company was titled "Foreign Collaboration Agreement". Article 4 of the agreement obliged the Austrian company to provide all assistance and cooperation to the India company in its venture by providing appropriate support technology. Article 4.2 required the Austrian company to offer the services of its technical experts to the assessee for working on the project that was being executed. There was another agreement called the secondment agreement between the India and Austrian companies and it inter-alia provided that the Austrian company can at any time remove the seconded person and replace him with similarly qualified persons. Referring to the secondment agreement, the AAR observed that a plain reading of the above clause would show that the Austrian company retained the right over the seconded personnel and had the power to remove any seconded personnel from the assessee company which has control and supervision of the work of the seconded employee namely, Dr. Sundararajan. He was appointed as Managing Director by the Board of Directors of the assessee company and not by IDS. In fact, the assessee company could even terminate the services of Dr. Sundararajan as Managing Director during the period of eight months during which he was to serve the assesseee company. There was no separate foreign collaboration agreement of the kind which was entered into between the Indian and the Austrian companies in the ruling of the AAR. It appears to us on a reading of the ruling of the AAR that in that case the secondment agreement was subservient to the foreign collaboration agreement. These are thus the features which distinguish the present case from the decision of the AAR. We are, therefore, unable to apply the said decision to the present case.
15. The department has also relied on another ruling of the AAR in South West Mining Ltd., In Re (2005) 278 ITR 233. This is a clear case of technical consultants visiting India for collecting random samples for the purpose of sending reports from abroad on the basis of the analysis of the samples. The question was whether the fees paid to the non-resident consultant were fees for technical services. There can be no doubt that the services rendered by the non-resident consultants were technical and consultancy services. In this case there was no secondment agreement. It was a clear and simple case of rendering technical services. This case has nothing in common with the present case.
16. For the above reasons, we are also not able to hold that the payment to IDS represented fees for technical services.
17. In the result, we hold that the assessee was not liable to deduct tax from the amount representing reimbursement of the salary paid by IDS to Dr. Sundararajan while remitting the same to IDS u/s 195 of the IT Act. The salary paid by the assessee to Dr.Sundararajan has been made the subject of tax deducted at source and the same has been remitted to the Indian Income tax authorities".
In the case before us also, similar covenants are there in secondment agreement. The relevant clauses of the secondment agreement are reproduced hereunder;
Secondment of employee:
Throughout the term of this agreement, Home company agrees to second the employee identified in Exhibit-A attached hereto and hereby made a part hereof ('Employee'), on a full time basis to host company, to perform for Host company the duties set forth in Exhibit-B and hereby made a part hereof, as amended from time to time by the mutual written agreement of the parties ('duties').
During the term of this agreement and for four (4) years thereafter, Host company shall not solicit the employment of other retention of the Employee without the prior written consent of Home Company. Unless otherwise agreed to in writing between the parties, the Employee shall perform the duties at Host Company's premises and devote all of his working time and energy to host company. Host Company shall take all reasonable actions necessary to ensure that the Employee is in compliance with all applicable local laws, regulations or other requirements applicable to immigration and such duties. The Employee will report to, and be under the direction and control of Host Company and comply with Host Company's policies and procedures applicable to the duties including without limitation, reasonable directives of Host Company concerning job safety and confidentiality in the handling of data and information.
Home Company represents that, to the best of its knowledge; (i) the Employee has or will have the professional training and the skills necessary to fulfill the functions he is to perform for the Host Company during the secondment based upon the requirements provided by Host Company, and (ii) Home Company has obtained or prompt shall obtain from the Employee his consent to the secondment.
Employee Related Costs Costs of Home Company: During the period of this agreement, for administrative convenience, the Home Company shall make payment of salary, bonus and all other benefits to the Employee, together with such taxes as may be applicable from time to time, as per the terms agreed with the Employee (collectively and individually without distinction, Costs") on behalf of the Host Company.
Host Company shall promptly reimburse Home Company for any and all Costs borne on its behalf in accordance with Sec.3.
Costs of Host Company: Unless agreed upon other wise in writing between the parties. Host Company shall bear and directly pay all the related local costs and expenses. Such costs may include, but shall not be limited to, housing, rent, utilities, furniture, company car or other transportation and any other foreign service allowances.
As can be seen from the above clauses, we find that the facts of the case are exactly the same. In view of the same, we do not see any reason to take any other view. In view of the same, the assessee's appeal is allowed.
7. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on the 29th February, 2012.
Sd/- Sd/- (JASON P BOAZ) (SMT. P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER Place: Bangalore Dated: 29-02-2012 am* Copy to : The Assessee The Revenue CIT(A) CIT DR GF(B'lore) By Order AR, ITAT, BANGALORE PAGE 15 ITA No.149(B)2010