The Indian Authority for Advance Rulings (AAR) delivered a ruling dated 6 November 2006 in the case of A. T. & S. India P. Ltd (287 ITR 421) on whether fees paid by an Indian company which was subsidiary of AT&S Austria, towards reimbursement of salary cost by AT&S Austria in respect of seconded personnel, would be subject to withholding tax in India under India's domestic tax law and/or the India-Austria tax treaty (the Tax Treaty).

(a) Facts. The Applicant (i.e. A. T. & S. India P. Ltd), an Indian company, was a subsidiary of AT&S Austria, a non-resident company. The Applicant carried on a business of manufacturing printed circuit boards. The Applicant entered into an agreement with AT&S Austria under which the latter undertook to assign or cause its subsidiaries to assign its qualified employees to the Applicant company in India. AT&S Austria, the non-resident, retained the right over the seconded personnel and had the power to remove any seconded personnel from the Applicant, the only condition being that it had to replace such personnel with similarly qualified individuals. Those employees were to work for the Applicant and would receive compensation substantially similar to what they would receive as employees of AT&S Austria or its subsidiaries. The Applicant was to compensate AT&S Austria (compensation was to include salary, bonus, personal travel, etc.) all costs in euro that had arisen directly or indirectly from the secondment of personnel.

(b) Issue. The key issue before the AARwas whether payment made by the Applicant to AT&S Austria, towards reimbursement of salary cost incurred by AT&S Austria in respect of seconded personnel, would be subject to withholding tax in India. In other words, whether payment by the Applicant under the secondment arrangement was in the nature of "reimbursement of expense" or was it a "royalty" or "fees for technical services (FTS)" and accordingly, liable to tax in India.

(c) Decision. The AAR ruled that the payments made by the Applicant to AT&S Austria were in the nature of FTS within the meaning of the Indian Income Tax Act 1961 (ITA) and under the Tax Treaty, and therefore would be subject to withholding tax in India.

The AAR observed that as per the secondment agreement, AT&S Austria had offered its services of technical experts to the Applicant on its request. Though the term "reimbursement" was used in the agreement, that term was not determinative of the payments. The payments under the agreement were not mere reimbursement of salaries of the seconded employees of the Applicant. Also, the payments made by the Applicant did not fall within the meaning of "royalties".

The AAR also observed that the argument that the payments were only in the nature of reimbursement of actual expenditure incurred by AT&S Austria was not acceptable for various reasons. Firstly, it was not supported by any evidence as no material (except the debit notes of salaries of seconded personnel) was produced to show what actual expenditure was incurred by AT&S Austria and what was being claimed was a mere reimbursement. Secondly, assuming for the sake of argument that the debit notes represent the quantum of compensation as the actual expenditure, it would make no difference as the same is payable to AT&S Austria under the secondment agreement for services provided by it. It would, therefore, be not only unrealistic but also contrary to the terms of the agreement to treat payments under the said agreement as mere reimbursement of salaries of the seconded employees who were said to be the employees of the Applicant.

The Applicant argued that it was the real employer and not AT&S Austria. From the terms of the foreign collaboration agreement (FCA) and secondment, it emerged that AT&S Austria was to provide services of its employees to Applicant on agreed terms and conditions. The secondment agreement provided that a part of the salary of the seconded personnel would be paid by the Applicant in INR while the remaining part would also be paid by the Applicant but to the AT&S Austria in EUR. The employees would return to their employment at AT&S Austria on the expiry of the assignment though while working with the Applicant, the seconded personnel sent by AT&S Austria were required to comply with the regulations and management system of the Applicant. During the secondment period, AT&S Austria had power to recall any of the seconded employees and replace them with other employees. Based on this background, the AAR concluded that the role of AT&S Austria was not of a mere "employment agent" but in effect, the seconded personnel remained the employees of AT&S Austria.

Accordingly, the AAR held that AT&S Austria and not the Applicant was the real employer of the seconded employees whose services were provided to the Applicant in India.

The AAR also observed that pursuant to the FCA, AT&S Austria had undertaken to render services to the Applicant in India, and accordingly, it had lent the services of the seconded employees on payment of compensation by the Indian company. Such compensation/consideration could be taxable in India as FTS under Sec. 9(1) of the ITA and under Art. 12 of the Tax Treaty.

As per Sec. 9(1)(vii) of the ITA, FTS means any consideration (including any lump-sum consideration) for the rendering of any managerial, technical or consultancy services including the provision of services of technical or other personnel. Accordingly, the AAR held that any consideration paid for rendering of managerial, technical or consultancy services, which include provision of services of technical or other personnel, falls within the meaning of FTS.

Further, under Art. 12(4) of the Tax Treaty, FTS has been defined to mean payments of any amount to any person other than payments to an employee of a person making payments in consideration for the services of managerial, technical or consultancy nature including the provision of services of technical or other personnel. The exception provided in the said definition of FTS is payments to an employee of a person making payments in consideration of services.

Hence, on the facts of this case, though at first glimpse, 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. The Applicant was not the real employer of the seconded employees. The subject matter of payments was not merely the salaries of such employees, which have suffered tax, but it was "compensation" that takes in its ambit other items which AT&S Austria was also entitled to receive from the Applicant under the secondment agreement. The recipient of the consideration/compensation was AT&S Austria and not the seconded employees. The fact that the employees of AT&S Austria received their salaries from the Applicant and have paid tax under the head "salaries" would be of no consequence.

Accordingly, the AAR concluded that the payments made by the Applicant to AT&S Austria were in the nature of FTS within the meaning of the ITA and under Art. 12(4) of the Tax Treaty, and therefore subject to withholding tax in India.