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The Finance Act, 2022 had inserted a new section 194R to the Income-tax Act, 1962 providing for deduction of tax at source (TDS) on benefit or perquisite in respect of business or profession.
To remove difficulties in implementing the provisions of section 194R, the Central Board of Direct Taxes (CBDT) vide Circular no. 12 of 2022, dated 16-06-2022 issued guidelines framing 10 questions and answers to give clarity on the deduction of tax at source (TDS).
Now the CBDT has issued additional guidelines to give more clarity on FAQs released earlier by the board. The summary of additional guidelines are discussed below:
1) It has been clarified by the board that the circular is applicable only in implementing provisions of section 194R. The Circular doesn’t impact the taxability of income in hands of the recipient as the same shall be governed by provisions of the Income-tax Act.
2) Section 194R wouldn’t apply in case of one-time loan settlement with borrowers or waiver of loan granted on reaching settlement with borrowers. However, this relaxation is available only when the loan has been taken from specified lenders.
3) Amount incurred by ‘Pure Agent’ for which he is reimbursed by the recipient would not be treated as a benefit/ perquisite for the purpose of section 194R. The board has taken the reference of GST Valuation Rules 2017 to define the meaning of ‘Pure Agent’.
4) In the case of out-of-pocket expenses, it has been clarified that if the out-of-pocket expense has been included as part of the professional fee and tax has been deducted under section 194J on the entire amount then no further tax deduction under section 194R is required.
5) Expenditure on participants of dealer/ business conference for days which are on account of overstay prior to the dates of conference or beyond the dates of such conference would be considered as benefit/perquisite for the purposes of section 194R. However, a day immediately before the actual start date of the conference and a day immediately following the actual end date of the conference would not be considered an overstay.
6) If benefit/perquisite is provided in a group activity in case of a dealer conference and it is difficult to match such benefit/perquisite to each participant, the benefit/perquisite provider may at his option not claim the expense, representing such benefit/perquisite, as deductible expenditure for calculating his total income.
7) If he decides to opt so, he will not be required to deduct tax under section 194R on such benefit/perquisite and therefore he will not be treated as an assessee in default under section 201.
8) If a car has been received as a gift by the car dealer from a company, then the such dealer is eligible to claim depreciation on the such car if the amount of benefit/perquisite has been included by the dealer as income in his income-tax return.
9) Section 194R is not applicable on benefit/perquisite provided by:
- An organization in the scope of The United Nations (Privileges and Immunity Act) 1947,
- An international organization whose income is exempt under a specific Act of Parliament (such as the Asian Development Bank Act 1966),
- An embassy, or
- A High Commission, legation, commission, consulate, and the trade representation of a foreign state.
10) Provision of Section 194R does not apply to the issuance of bonus or right shares by a company in which the public is substantially interested. However, bonus shares or right shares must have been issued to all shareholders.
Considering the huge population and the buoyancy of the economy in the last two decades or so and also taking note of the administrative difficulties in tracking the humungous number of transactions to be regulated without abuse, the lawmakers in their wisdom thought that mandating deduction of tax at source is the easiest and simple mechanism of tax management at the macro level. Not only does the amount of tax deducted at the source reach the coffers of the Government but also leaves a trail for the tax administration to verify or scrutinize the correctness of transactions at a later date. The consequence of non-compliance thereto liable for interest besides penalties has also prompted the taxpayers to be on guard for meticulous compliance. On the domestic front, provisions for tax deduction at source are very many. In cross-border transactions, the tax deduction is either governed by section 195 or by the double taxation treaties with a caveat that whichever is beneficial could be opted for by the taxpayers.
This refresher discusses whether payment towards reimbursement of salary of seconded employees is liable for tax deduction under section?195?vis a vis?article?12?of DTAA between India and USA in the light of decision rendered in?Flipkart Internet (P.) Ltd?v.?Dy. CIT?[2022] 139 taxmann.com 595 (Kar.).
Facts of the case
The assessee in this case was engaged in the business of information technology solutions and support services for the e-commerce industry. During the previous year relevant to the assessment year 2020-21, the assessee made payment of salaries to the deputed expatriate employees by way of reimbursement to its counterpart viz. Walmart Inc. of USA. Originally, the salaries of the deputed employees were paid by the original employer Walmart Inc. and subsequently without any markup it was reimbursed by the Indian company being the assessee viz. Flipkart Internet (P) Ltd.
The assessee entered into an agreement called Master Service Agreement (MSA) for the purpose of the secondment of employees by the foreign company and the provision of services. The expenditure by way of salary paid by the foreign company in foreign soil to its employees was to be reimbursed by the Indian company. The agreement had two parts?viz.?(i) relating to the provision of services; and (ii) secondment of employees. The controversy was about the requirement for withholding tax for the reimbursement made for the salary of seconded employees by way of a writ before the Court. Thus, the scope of this write-up is about the need for withholding of tax in the case of payment of salary by way of reimbursement where it was originally paid by the employer outside India and the reimbursement made subsequently by the Indian company to the foreign company which did not include any profit element embedded in it by way of mark-up etc.
The foreign company seconded four employees to an Indian company and it had entered into an agreement with those employees by the name "Global Assignment Arrangement" which would make the employees work on a secondment basis and based on the such agreement the employees were deputed to work in India. Besides this, the Indian company gave a letter of appointment to the employees so seconded with details of their responsibilities. The Indian company also made a payment towards the provident fund in the capacity of the employer of seconded employees and the employees were in India on 'employment visa'.
Legal precedents
It would be useful to take stock of legal precedents with regard to the issues in hand. The following precedents are worth noting:
Transmission Corpn. of AP Ltd?v.?CIT?[1999] 105 Taxman 742/239 ITR 587/155 CTR 489 (SC)explained the applicability of section 195 as under (i) Where the person responsible for paying to a non-resident, any interest or any sum chargeable under the provisions of this Act (other than interest on securities and salary), shall at the time of payment deduct income-tax thereon at the rates in force. Sub-section (1) of section 195?excludes?from its operations the sum which is to be paid as interest on securities or?the sum which is chargeable under the head 'salaries'?as the deduction on such sum would be governed by other sections,?viz.?section?192?and section?193;(ii)?Where the person responsible for paying any sum chargeable under the Act to a non-resident considers that whole of such sum would not be chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine "the appropriate proportion of such sums so chargeable"; upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable. In essence, this deals with section 195(2); (iii) Not only this, sub-section (3) to section 195 provides that any person entitled to receive any interest or other sum on which income-tax is to be deducted under sub-section (1) may make an application in the prescribed form to the Assessing Officer for grant of a certificate authorizing him to receive such interest or other sum without deduction of tax under the sub-section; and (iv) Further, section?197?provides that the recipient can file an application to the Assessing Officer for a certificate that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax and the Assessing Officer, if satisfied, can grant such certificate as may be appropriate. The Court held that the?obligation of the assessee to deduct tax under section 195 is limited only to the appropriate proportion of income chargeable under the Act.
In GE India Technology Centre (P.) Ltd.?v.?CIT?[2010] 7 taxmann.com 18/193 Taxman 234/327 ITR 456/234 CTR 153 (SC)?it was held that the most important expression in section 195(1) consists of the words 'chargeable under the provisions of the Act'. A person paying interest or any other sum is not liable to deduct tax if such sum is not chargeable to tax under the Income-tax Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and the payment does not arise out of any contract or obligation such payment cannot be regarded as income under the Income-tax Act, 1961. It may be noted that section 195 covers composite payments which have an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct tax at source in respect of such composite payments. However, the obligation is limited to appropriate proportion of the income chargeable to tax forming part of the sum of money paid/payable to the non-resident.
CIT?v.?De Beers India Minerals (P.) Ltd.?[2012] 21 taxmann.com 214/208 Taxman 406/346 ITR 467 (Kar.)the assessee entered into an agreement with a company in Netherlands who had a team of experts specialised in performing air borne geophysical services for clients, processing of the data acquired during the survey and provide necessary reports. The services are engaged to conduct the air borne survey for providing high quality, high resolution, geophysical data suitable for selecting probable kimberlite targets. For the technical services rendered by them, the assessee paid consideration. Article 12 of DTAA between India and Netherlands contained "make available" clause. Only if the recipient is capable of using technical knowledge without reference to provider of service the test is satisfied and to be treated as technical service. It was held that the services so rendered by the foreign company did not enable the Indian company to undertake survey and have technical knowledge to be executed / exploited without reference to the foreign company. Though ownership of data and maps vested with the Indian company, the test of "make available" was not satisfied and accordingly it was held that it did not satisfy the requirement of technical services contained in DTAA and hence the liability to deduct tax at source was not attracted.
Centrica India Offshore (P) Ltd?v.?CIT?[2014] 51 taxmann.com 386/227 Taxman 368/364 ITR 336 (Delhi)?the assessee in this case was a subsidiary company set up to provide services to overseas entities. The overseas entities outsourced their back-office functions to the assessee located in India. It seconded the employees during initial year for ensuring quality control and build skill set of Indian company's employees. Seconded employees continue to remain in the payroll of overseas entities and the overseas entities paid their salary and thereafter it was reimbursed by the Indian entity. It was held that the payments so made though reimbursement accrued in India and it is not a case of diversion of income by overriding title.
In?DIT (Intl.Taxation)?v.?A.P.Moller Maersk AS?[2017] 78 taxmann.com 287/246 Taxman 309/392 ITR 186 (SC)?the assessee a non-resident shipping company had agents across the globe who booked cargo and acted as clearing agents for the assessee. It set up and maintained a global telecommunication facility for the convenience of agents to avoid unnecessary cost associated thereto. The centralised automated system comprised booking and communication software, hardware and a data communications network which was an integral part of international shipping business. The agents had to pay a sum for availing the facility which was similar to cost sharing arrangement incurred for automated software-based communication system. It was held that?the payment received was by way of reimbursement of expenses?incurred and the payment was on pro-rata basis for use of facility. Since it was an automated technical system, it was held that it could not be treated as any technical service provided to the agents for attracting withholding of tax on payments.
In?Engineering Analysis Centre of Excellence (P.) Ltd.?v.?CIT?[2021] 125 taxmann.com 42/281 Taxman 19/432 ITR 471 (SC)?it was held that once the DTAA applies the provisions of Income-tax Act too would apply to the extent they are more beneficial to the assessee. Where any term is defined in DTAA it has to be looked into by virtue of section?90(4)?of the Act. It is only where there is no such definition, the definition contained in the Act is to be applied. The same rationale could be found in?Union of India?v.?Azadi Bachao Andolan?[2003] 32 Taxman 373/263 ITR 706/184 CTR 450 (SC).
In?Flipkart Internet (P) Ltd's case (Supra)?the DTAA between India and USA has defined the term FIS in Article 12(4) which is more beneficial to the assessee.
Contentions of the assessee
The assessee when reimbursed the salary paid by the foreign employer to its employees outside India contended that no tax is deductible at source because the withholding tax obligation contained in section 195 would arise only when the sum paid to the non-resident is chargeable to tax in India. Reliance was placed on?GE Technology Centre (P.) Ltd. (supra).
Article 12 of the DTAA says that royalties and?fees for included services?arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.?The services rendered by the four employees does not make technology or know-how available to the Indian company and therefore it would not fall in the category of 'make available' and accordingly it would not fall within article 12 of DTAA.?Thus, it is apparent that only fees for included services is covered by article 12 and where the service does not fall in that category, it cannot be governed by article 12 of DTAA.
The actual cost of salaries of the seconded employees were only reimbursed to the foreign company and there was no mark-up in the payment for claiming that there is accrual of income in India to the foreign company. Reliance was placed on?A.P. Moller Maersk AS (Supra)
The payments made to the seconded employees by the foreign company and reimbursed subsequently without any mark-up being salary income of the employees would fall in article 16 of the treaty i.e. dependent personal services and it cannot be treated as FIS (fee for included services) by the tax authorities by applying section 9 of the Act when the tax treaty covers only "included services". An interpretation beneficial to the assessee has to be adopted and cited the rationale of?Azadi Bachao Andolan (supra).
As per the MSA it was granted unconditional right to terminate the employees and looking into the nature of control exercised by it, it would qualify to be?the real and economic employer?of the seconded employees. The disputed transaction would be governed by DTAA being beneficial which could be opted for in view of section 90(2) of the Act. Reliance was also placed on?De Beers India Minerals (P.) Ltd. (Supra).?Thus, the payment is in the nature of salaries which is excluded from the purview of section 195 and cannot be subjected to further deduction.
Contention of the Revenue
The Revenue upheld the view of the Assessing Officer that there was no employer-employee relationship between Indian company and the seconded employees and the services rendered by them were in the nature of technical services under the Income-tax Act and DTAA. These aspects were well considered by the AO which do not require any interference.
Mere deduction of tax at source on the salary paid to seconded employees under section 192 by the Indian company does not obviate the need for tax deduction under section 195 as the section seeks withholding of tax on the gross payment and the question of examining the amount of income embedded therein does not arise.
The purpose of payment would fall within the ambit of FTS in term of section 9 as well as in terms of DTAA. The contention that provision of services of the seconded employees would not fall within the ambit of FTS has to be rejected as the services provided by them in senior positions in management and such employees were assigned by the foreign company only because of their experience in management and consultancy skills.
Thus, the payment made must be construed as FTS as defined in section?9(1)(vii)?of the Act. The fact that the seconded employees continued to be the employees in the foreign company during secondment shows that they were rendering services on behalf of the foreign employer and the tax deduction as per the provisions of section 192 will not block the applicability of section 195 in respect of the payments made to foreign company.
Analysis by the Court
It is important to note that the assessee filed an application under section 195(2) when it was rejected, a writ was preferred. The Revenue had contended that application under section 195(2) is maintainable only in respect of composite payment and that where 'nil' deduction certificate is sought, the assessee must have taken recourse to section?197. The court held that the Assessing Officer when rejected the application, he did not apply this reasoning. It was rejected on merits. The assessee wanted the impugned order to be set aside and the submission of the Revenue that section 195(2) could not be invoked is sought to be rejected. The Court held that the Assessing Officer while rejecting the application must have recorded that the application is not maintainable under section 195(2) but whereas it was decided on merits. Now, it is not open to the Revenue to canvas such point in a writ of the taxpayer.
The judicial review cannot be enlarged by considering fresh contentions which have the effect of altering the impugned order by reading into its substantive aspects which were not considered by the Assessing Officer. Further it held that section 197 is a provision to be invoked by the payee and which is not the factual scenario in the present case.
Section 195(2) is for application by a resident payer seeking grant of certificate for determining the appropriate proportion of sum chargeable to tax in the case of payment made to a non-resident recipient. Similarly, section 197 can be invoked by the recipient for obtaining a certificate. If the assessing authority is of the view that no tax is chargeable, a certificate to that effect could be issued to the person responsible for making the payment. The court applying the decision of?Transmission Corpn. of AP Ltd (supra)?held that section 195(2) could be invoked by the assessee and seek a certificate. It is not necessary that the recipient only must invoke section 197 for obtaining the certificate for nil deduction of tax at source.
The court also applied the rationale of?Engineering Analysis Centre of Excellence (P.) Ltd (Supra)?and held that when the provisions of DTAA are beneficial such as in this case where it is not an included service, it is governed by Article 16 meant for personal dependent services applicable for employees and not Article 12 meant for withholding of tax which would apply in the case of fee for included services. Thus, the writ was allowed.
Conclusion
Readers may note that Rule 29BA of the Income-tax Rules, 1962 prescribes Form 15E to be filed where a person responsible for paying to a non-resident (not being a company) or to a foreign company for determination by the Assessing Officer of the proportion of the sum chargeable to tax and the amount of withholding tax. The said Form 15E covers both section 195(2) and section 195(7). It has to be filed digitally.
In?Centrica India Offshore (P) Ltd (supra)?the non-resident entity seconded its employees to the newly incorporated Indian subsidiary and the Indian subsidiary was specifically incorporated to provide back-office support services in relation to third party vendors in India. The facts in Flipkart Internet (Supra) are distinguishable for the reason that the Indian company in this case was not a subsidiary when the employees were seconded and only subsequently the foreign company became majority stakeholder in Indian company.
Though the case was limited to withholding of tax, the decision in Flipkart Internet (supra) covers completely all the aspects of section 195 vis a vis DTAA between India and USA which covers only 'included services'. When there is no income embedded in payment it is fair that the withholding tax requirement is not mandated. In this case the resident payer deducted tax under section 192 besides the fact that there was no mark-up in the payment made to the foreign company. Also, the DTAA covered only 'fee for included services' thus the payment did not fall within the term 'fee for technical services'. If the DTAA covered 'FTS' as such instead of covering only 'included services' the decision might have been different.
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