The Authority for Advance Rulings (Income Tax) New Delhi (AAR) ruled on the obligation of an Indian company to deduct tax at source for payments made to a Korean company under a secondment agreement in Cholamandalam General Insurance Co Ltd v CIT, on 29 January.
The applicant, Cholamandalam, sought an advanced ruling on whether it was obliged to deduct tax at source for payments made to Hyundai Marine & Fire Insurance Korea (HMFICL) in connection with a secondment agreement the two parties had entered into. Cholamandalam is engaged in the business of non-life insurance and was interested in building business relationships with Indian companies which were subsidiaries or joint ventures of foreign companies.
Within the company’s organization were two divisions dealing respectively with the Korean and Japanese market segments in India. In relation to these divisions, Cholamandalam required individuals from the respective jurisdictions abroad who possessed knowledge of insurance business practices, the Korean language and other related information that would be useful to the company in the expansion of its business activities.
In pursuing the above objective, the agreement between HMFICL (the provider) and Cholamandalam (the recipient) was entered into on 13 March 2006, effective for a period of two years. Pursuant to this agreement, an employee of HMFICL, Shin Bong In, was seconded to engage in various activities under Cholamandalam’s supervision and control.
Cholamandalam reimbursed HMFICL only a part of the salary and other benefits payable to the seconded employee as specified in the agreement. The scale of reimbursement was fixed according to clause 3.3, read with schedule I to the agreement. Debit notes were raised by HMFICL on Cholamandalam on a monthly basis for the amounts due. No part of the salary or benefits was payable by Cholamandalam to HMFICL’s seconded employee and he had no right or authority to conclude any contract on behalf of Cholamandalam. HMFICL continued to be Shin’s employer and continued to pay his salary. HMFICL deducted tax from the seconded employee’s salary and this was deposited with the income tax department in India.
Cholamandalam claimed that the payments made by it to HMFICL, as part-reimbursement of the salary and expenses that were payable by HMFICL to its seconded employee, did not qualify as income arising to HMFICL in India. HMFICL has no permanent establishment in India and therefore it was contended that Cholamandalam was not legally obliged to deduct tax at source.
However, the income tax department stated that the amount paid by Cholamandalam to HMFICL under the secondment agreement qualified as fees paid for technical services provided by technical personnel to Cholamandalam. It also maintained that the work performed by the seconded employee essentially amounted to technical and consultancy services. The income tax department argued that income would accrue to HMFICL in India both under the provisions of the Income Tax Act, 1961 (ITA), as well as article 12 of the double tax avoidance agreement (DTAA) between India and Korea. Hence, Cholamandalam was liable to deduct tax at source in line with section 195 of the ITA.
Rejecting the contentions of the income tax department, the AAR held that simply because HMFICL provided technical services and received from Cholamandalam a substantial part of the salary payable by HMFICL, it could not be inferred that the part-reimbursement in terms of the secondment agreement represented a fee for technical services within the meaning of explanation 2 to section 9(1)(vii) of the ITA or article 13.4 of the DTAA between India and Korea.
Therefore, Cholamandalam was not liable to deduct tax at source with respect to the payments made or to be made to HMFICL under the terms of the secondment agreement. It was also established that the amount paid by Cholamandalam did not qualify as consideration for the services offered by the seconded employee.
For more on this case, see Correspondents (Ruling clarifies obligations for seconded employees).
The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at [email protected], [email protected] or [email protected] Readers should not act on the basis of this information without seeking professional legal advice.