We have people seconded to us from our overseas group companies, they work under our control, and we only reimburse their salary cost — do we still have to withhold tax under section 195?
Yes. The Delhi High Court held on 25 April 2014 that the overseas group companies remained the real employers of the secondees, so what they supplied was the service of trained personnel, not a bare loan of staff. The payment was fees for technical services under Article 13 of the India-UK DTAA and, because the secondees passed their quality-control know-how on to the Indian staff, made-available services under Article 12 of the India-Canada DTAA. The overseas entities also had a service permanent establishment. Calling the payment a reimbursement, and charging no mark-up, made no difference. Section 195 applied and the writ petition was dismissed.
Decided by the High Court (Delhi High Court; S. Ravindra Bhat and R.V. Easwar JJ, judgment delivered by S. Ravindra Bhat J) on 2014-04-25, reported as W.P.(C) No.6807/2012 (Delhi High Court). It bears on section 195, section 9(1)(vii), section 90 of the Income Tax Act 1961, in TDS Defaults and Residence & Treaty Benefit matters.
This is the judgment the department reaches for whenever an Indian subsidiary reimburses salary cost for seconded expatriates. It refuses to let the label on the payment settle its character: the Court asks who the employee can sue for his salary, whose retirement and social security plans he stays in, and who can end the employment as opposed to merely ending the secondment. On those tests the overseas employer wins, and the payment becomes consideration for services. It also shuts two doors at once. Nil mark-up does not remove the charge, because a related party demanding only what it spent would otherwise escape tax altogether. And diversion of income by overriding title does not apply, because the overseas employer's duty to pay the secondee arises under a different contract from the Indian company's duty to pay the overseas employer. Morgan Stanley is read as supporting a service PE where the deputationist keeps his lien.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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CIOP is an Indian company, wholly owned by Centrica Plc of the UK. Its group companies in the UK and Canada had outsourced back-office work — debt collection, consumer billing, monthly jobs — to third-party Indian vendors, and CIOP was set up in March 2008 to sit between them and those vendors and police quality. It was paid its costs plus a 15 per cent mark-up and offered that to tax. Being new, it asked the overseas entities for staff. Four managers — general, operations, delivery and relationship — were seconded for fixed terms. They worked under CIOP's control and supervision, CIOP bore the risks and rewards of their work, but they stayed on the overseas payrolls and in the overseas retirement and social security plans, and CIOP reimbursed the actual documented cost to the overseas entities. CIOP withheld tax under section 192 on their salaries. On its advance ruling application the Authority held the reimbursement was income accruing to the overseas entities, that they had a service PE, and that section 195 applied — though it declined to call the managerial services fees for technical services. CIOP challenged that ruling by writ petition.
The writ petition was dismissed and the Authority's ruling stood, with no order as to costs. The Court went further than the Authority on one point. It held that the overseas entities did provide technical services to CIOP through the secondees, so the payment was fees for technical services under Article 13 of the India-UK DTAA, whose definition expressly includes the provision of the services of technical or other personnel. Under the narrower India-Canada Article 12 the make-available threshold was also crossed, because the secondees were imparting their quality-control expertise to CIOP's own employees so that they could carry on without assistance. The overseas entities remained the real employers, so there was a service permanent establishment. The payment was not a reimbursement in substance, and the doctrine of diversion of income by overriding title did not apply. Tax was therefore deductible under section 195 on the amounts paid to the overseas entities.
The Court took the treaty first, since the DTAA governs where it covers the field. Technical is not confined to engineering or applied sciences; it takes its broader dictionary meaning and extends to know-how, techniques and technical knowledge. The India-UK definition itself includes supplying personnel, so the distinction CIOP drew between rendering services itself and merely seconding staff made no difference. On the India-Canada make-available test, the Court looked at why the secondment happened: CIOP was newly formed and lacked the skill set, and the secondees were to tide it over until its own employees could do the work — which is a transfer of soft intellectual property, not a mere rendition of service. On the employment question the Court agreed that substance governs, but found the substance ran against CIOP. The secondees could not sue CIOP for their salary; no document obliged CIOP to bear their salary cost; CIOP could end the secondment but not the employment; and the overseas benefits and social security continued. Operational control over daily work and responsibility for failures were too sparse to displace the subsisting employment abroad. Morgan Stanley was applied, not distinguished: where the deputationist keeps a lien on his job with the foreign enterprise, a service PE emerges. On reimbursement the Court followed the reasoning in AT and S India — the word is not determinative, and absence of a mark-up would otherwise let any related-party service escape tax, which conflates the charge with the deductions that may follow. Diversion by overriding title failed because the overseas entity's obligation to the secondee arises under a separate agreement on independent terms.
The nomenclature or lesser-than-expected amount charged for such services cannot change the nature of the services.
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Handle my notice → Ask a CA on WhatsAppYes. The Delhi High Court held on 25 April 2014 that the overseas group companies remained the real employers of the secondees, so what they supplied was the service of trained personnel, not a bare loan of staff. The payment was fees for technical services under Article 13 of the India-UK DTAA and, because the secondees passed their quality-control know-how on to the Indian staff, made-available services under Article 12 of the India-Canada DTAA. The overseas entities also had a service permanent establishment. Calling the payment a reimbursement, and charging no mark-up, made no difference. Section 195 applied and the writ petition was dismissed. This was decided by the High Court (Delhi High Court; S. Ravindra Bhat and R.V. Easwar JJ, judgment delivered by S. Ravindra Bhat J) and bears on section 195, section 9(1)(vii), section 90 of the Income Tax Act 1961. It is reported as W.P.(C) No.6807/2012 (Delhi High Court). This is the judgment the department reaches for whenever an Indian subsidiary reimburses salary cost for seconded expatriates. It refuses to let the label on the payment settle its character: the Court asks who the employee can sue for his salary, whose retirement and social security plans he stays in, and who can end the employment as opposed to merely ending the secondment. On those tests the overseas employer wins, and the payment becomes consideration for services. It also shuts two doors at once. Nil mark-up does not remove the charge, because a related party demanding only what it spent would otherwise escape tax altogether. And diversion of income by overriding title does not apply, because the overseas employer's duty to pay the secondee arises under a different contract from the Indian company's duty to pay the overseas employer. Morgan Stanley is read as supporting a service PE where the deputationist keeps his lien. If it applies to you, the first step is this: Read the secondment papers for the three facts that decided this case — who bears the salary obligation the secondee can enforce, whose retirement and social security plans he remains in, and who can terminate the employment itself — and fix those before the arrangement starts, not after the notice.
CIOP is an Indian company, wholly owned by Centrica Plc of the UK. Its group companies in the UK and Canada had outsourced back-office work — debt collection, consumer billing, monthly jobs — to third-party Indian vendors, and CIOP was set up in March 2008 to sit between them and those vendors and police quality. It was paid its costs plus a 15 per cent mark-up and offered that to tax. Being new, it asked the overseas entities for staff. Four managers — general, operations, delivery and relationship — were seconded for fixed terms. They worked under CIOP's control and supervision, CIOP bore the risks and rewards of their work, but they stayed on the overseas payrolls and in the overseas retirement and social security plans, and CIOP reimbursed the actual documented cost to the overseas entities. CIOP withheld tax under section 192 on their salaries. On its advance ruling application the Authority held the reimbursement was income accruing to the overseas entities, that they had a service PE, and that section 195 applied — though it declined to call the managerial services fees for technical services. CIOP challenged that ruling by writ petition. The matter was decided on 2014-04-25 by the High Court (Delhi High Court; S. Ravindra Bhat and R.V. Easwar JJ, judgment delivered by S. Ravindra Bhat J). On those facts the High Court held as follows. The writ petition was dismissed and the Authority's ruling stood, with no order as to costs. The Court went further than the Authority on one point. It held that the overseas entities did provide technical services to CIOP through the secondees, so the payment was fees for technical services under Article 13 of the India-UK DTAA, whose definition expressly includes the provision of the services of technical or other personnel. Under the narrower India-Canada Article 12 the make-available threshold was also crossed, because the secondees were imparting their quality-control expertise to CIOP's own employees so that they could carry on without assistance. The overseas entities remained the real employers, so there was a service permanent establishment. The payment was not a reimbursement in substance, and the doctrine of diversion of income by overriding title did not apply. Tax was therefore deductible under section 195 on the amounts paid to the overseas entities.
The Court took the treaty first, since the DTAA governs where it covers the field. Technical is not confined to engineering or applied sciences; it takes its broader dictionary meaning and extends to know-how, techniques and technical knowledge. The India-UK definition itself includes supplying personnel, so the distinction CIOP drew between rendering services itself and merely seconding staff made no difference. On the India-Canada make-available test, the Court looked at why the secondment happened: CIOP was newly formed and lacked the skill set, and the secondees were to tide it over until its own employees could do the work — which is a transfer of soft intellectual property, not a mere rendition of service. On the employment question the Court agreed that substance governs, but found the substance ran against CIOP. The secondees could not sue CIOP for their salary; no document obliged CIOP to bear their salary cost; CIOP could end the secondment but not the employment; and the overseas benefits and social security continued. Operational control over daily work and responsibility for failures were too sparse to displace the subsisting employment abroad. Morgan Stanley was applied, not distinguished: where the deputationist keeps a lien on his job with the foreign enterprise, a service PE emerges. On reimbursement the Court followed the reasoning in AT and S India — the word is not determinative, and absence of a mark-up would otherwise let any related-party service escape tax, which conflates the charge with the deductions that may follow. Diversion by overriding title failed because the overseas entity's obligation to the secondee arises under a separate agreement on independent terms. In the words reproduced by the source cited on this page: "The nomenclature or lesser-than-expected amount charged for such services cannot change the nature of the services."
It was decided by the High Court on 2014-04-25 and is reported as W.P.(C) No.6807/2012 (Delhi High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 195, section 9(1)(vii), section 90, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The writ petition was dismissed and the Authority's ruling stood, with no order as to costs. The Court went further than the Authority on one point. It held that the overseas entities did provide technical services to CIOP through the secondees, so the payment was fees for technical services under Article 13 of the India-UK DTAA, whose definition expressly includes the provision of the services of technical or other personnel. Under the narrower India-Canada Article 12 the make-available threshold was also crossed, because the secondees were imparting their quality-control expertise to CIOP's own employees so that they could carry on without assistance. The overseas entities remained the real employers, so there was a service permanent establishment. The payment was not a reimbursement in substance, and the doctrine of diversion of income by overriding title did not apply. Tax was therefore deductible under section 195 on the amounts paid to the overseas entities. It arises in TDS Defaults and Residence & Treaty Benefit matters, on section 195, section 9(1)(vii), section 90 of the Income Tax Act 1961, and was decided by Delhi High Court; S. Ravindra Bhat and R.V. Easwar JJ, judgment delivered by S. Ravindra Bhat J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If you want the payment treated as outside the charge, put on record the evidence that the overseas entity released the employee for the period and that the Indian company alone owes him his salary; the OECD commentary point the Court relied on turns on exactly that. Do not run the argument that a cost-to-cost reimbursement with no mark-up cannot be income, or that diversion by overriding title applies — the Court dealt with both and rejected them. Where the treaty has a make-available condition, check whether the secondees are also training your regular staff; that is what tipped the India-Canada analysis against the assessee here.
Validity check could not be completed. A Delhi High Court Division Bench judgment of 25 April 2014. Only the judgment text was before me; I made no citator check, and I could not confirm whether the Supreme Court has since dealt with a special leave petition against it. Check the subsequent history before relying on it. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The harvested text is clipped: roughly 38,800 characters from the middle are missing. What survives is the opening — the facts, the questions put to the Authority, the Authority's extracted findings and the start of CIOP's arguments — and the closing analysis from the treaty discussion at paragraph 29 to the order at paragraph 41. The Revenue's arguments, the authorities cited by both sides, and the Court's paragraphs 12 to 28 are not before me, so the full route by which the Court reached the treaty question is not visible. The batch line also listed section 40(a)(i); nothing in the surviving text turns on it, and this was a writ against an advance ruling, not a disallowance appeal, so it is left out. The source printed no reporter citations, so the case number is used instead. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The writ petition was dismissed and the Authority's ruling stood, with no order as to costs. The Court went further than the Authority on one point. It held that the overseas entities did provide technical services to CIOP through the secondees, so the payment was fees for technical services under Article 13 of the India-UK DTAA, whose definition expressly includes the provision of the services of technical or other personnel. Under the narrower India-Canada Article 12 the make-available threshold was also crossed, because the secondees were imparting their quality-control expertise to CIOP's own employees so that they could carry on without assistance. The overseas entities remained the real employers, so there was a service permanent establishment. The payment was not a reimbursement in substance, and the doctrine of diversion of income by overriding title did not apply. Tax was therefore deductible under section 195 on the amounts paid to the overseas entities.
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