Facts
M/s Verizon Data Services India Private Limited (petitioner), a wholly owned subsidiary of Verizon Data Services LLC USA (Verizon USA) entered into a Personnel Secondment Agreement (agreement) with GTE Overseas Corporation, USA (GTE-OC), an affiliate of Verizon USA on 1 April 2008.
As per the agreement, three employees of GTE-OC were seconded to India to function exclusively under the directions, control and supervision of the petitioner. GTE-OC will not be responsible for the work of the employees, the quality of results produced by their work or any liability arising out of the actions of the employees. The employees seconded shall however at all times remain employees of GTE-OC and shall not become employees of the petitioner.
GTE-OC would invoice the costs incurred in relation to the seconded employees to the petitioner on a month to month basis which the petitioner was required to reimburse.
The petitioner had made an application before the Authority of Advance Ruling (AAR) for a decision on the taxability of the payment made to GTE-OC. The AAR concluded that the transaction will be subject to tax in India as “fees for included services”.
Aggrieved by the decision of the AAR, the petitioner filed a writ petition before the Madras High Court.
Issues before the High Court
Whether the petition against the ruling of the AAR is maintainable in the Court of law?
Whether the AAR was correct in holding that the reimbursement of salary cost to GTE-OC for secondment of employees constitutes “income” accruing to GTE-OC?
If the answer to the above is affirmative, then, whether the same is liable to tax withholding in India as “fees for included services” under the Income-tax Act, 1961 (“the Act”) as well as the Double Taxation Avoidance Agreement (DTAA)?
Is there a “Permanent Establishment” (PE) of GTE-OC in India as per the DTAA and if so, whether the amount received by GTE-OC is in the nature of “business profits” attributable to such PE? In such case, is the amount of taxable income “Nil”, if the reimbursements are at actuals?
Observations and ruling of the High Court
The writ petition is maintainable as the petitioner will not be precluded from seeking remedy on a grievance against the order of the AAR. Further, the constitutional right to test the order on the ground of error apparent on its face is always available to the petitioner.
Whether the reimbursement of salary cost constitutes income accruing to GTE-OC is a pure question of fact and hence, there is no reason to interfere in the decision of the AAR.
As regards the income qualifying as fees for included services, the AAR should have examined the facts of the petitioner vis-à-vis the various categorizations under Article 12 read with the Memorandum of Understanding to the DTAA to determine whether such managerial services fit within the purview of the said definition. It is difficult to correlate the findings of the AAR to the enumeration given under Article 12(4)(b) of the DTAA. The portion of the AAR order treating the payments as fees for included services merits to be set aside and is remanded back for fresh consideration on whether the services, being purely managerial in nature, could be fitted in with consultancy services as given in Article 12(4)(b) of the DTAA.
The questions on PE and income attribution merit fresh consideration by the AAR.
Source : Verizon Data Services India Private Limited Vs. The Authority of Advance Rulings, The Income-tax Officer, The Assistant Commissioner of Income Tax , Writ Petition No. 14921 of 2011
M/s Verizon Data Services India Private Limited (petitioner), a wholly owned subsidiary of Verizon Data Services LLC USA (Verizon USA) entered into a Personnel Secondment Agreement (agreement) with GTE Overseas Corporation, USA (GTE-OC), an affiliate of Verizon USA on 1 April 2008.
As per the agreement, three employees of GTE-OC were seconded to India to function exclusively under the directions, control and supervision of the petitioner. GTE-OC will not be responsible for the work of the employees, the quality of results produced by their work or any liability arising out of the actions of the employees. The employees seconded shall however at all times remain employees of GTE-OC and shall not become employees of the petitioner.
GTE-OC would invoice the costs incurred in relation to the seconded employees to the petitioner on a month to month basis which the petitioner was required to reimburse.
The petitioner had made an application before the Authority of Advance Ruling (AAR) for a decision on the taxability of the payment made to GTE-OC. The AAR concluded that the transaction will be subject to tax in India as “fees for included services”.
Aggrieved by the decision of the AAR, the petitioner filed a writ petition before the Madras High Court.
Issues before the High Court
Whether the petition against the ruling of the AAR is maintainable in the Court of law?
Whether the AAR was correct in holding that the reimbursement of salary cost to GTE-OC for secondment of employees constitutes “income” accruing to GTE-OC?
If the answer to the above is affirmative, then, whether the same is liable to tax withholding in India as “fees for included services” under the Income-tax Act, 1961 (“the Act”) as well as the Double Taxation Avoidance Agreement (DTAA)?
Is there a “Permanent Establishment” (PE) of GTE-OC in India as per the DTAA and if so, whether the amount received by GTE-OC is in the nature of “business profits” attributable to such PE? In such case, is the amount of taxable income “Nil”, if the reimbursements are at actuals?
Observations and ruling of the High Court
The writ petition is maintainable as the petitioner will not be precluded from seeking remedy on a grievance against the order of the AAR. Further, the constitutional right to test the order on the ground of error apparent on its face is always available to the petitioner.
Whether the reimbursement of salary cost constitutes income accruing to GTE-OC is a pure question of fact and hence, there is no reason to interfere in the decision of the AAR.
As regards the income qualifying as fees for included services, the AAR should have examined the facts of the petitioner vis-à-vis the various categorizations under Article 12 read with the Memorandum of Understanding to the DTAA to determine whether such managerial services fit within the purview of the said definition. It is difficult to correlate the findings of the AAR to the enumeration given under Article 12(4)(b) of the DTAA. The portion of the AAR order treating the payments as fees for included services merits to be set aside and is remanded back for fresh consideration on whether the services, being purely managerial in nature, could be fitted in with consultancy services as given in Article 12(4)(b) of the DTAA.
The questions on PE and income attribution merit fresh consideration by the AAR.
Source : Verizon Data Services India Private Limited Vs. The Authority of Advance Rulings, The Income-tax Officer, The Assistant Commissioner of Income Tax , Writ Petition No. 14921 of 2011
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