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Companies Can Challenge AAR in a Writ

20 Dec 2011

Earlier this year, the Authority for Advance Rulings had ruled in the case of Verizon Data Services India Pvt Ltd that cross-charge of salary costs under a secondment arrangement represents 'fees for included services' and taxes should be withheld while reimbursing such cross charge. Verizon India challenged this order in a writ petition before the Madras High Court. The HC has ruled that the writ petition was maintainable and the AAR had failed to consider the issue of whether the cross-charge should be considered as FIS in the light of article 12 of the Agreement for Avoidance of Double Taxation between India and US and remanded the case back to the AAR for fresh consideration. Taxand India looks at the facts of the case and considers the remedies under a writ for companies in similar situations.

Facts of the case
Verizon India, a wholly-owned subsidiary of Verizon Data Services LLC, US, was engaged in the business of software development and maintenance for the telecom industry and certain IT enabled services. These services were exported to Verizon US. Verizon India entered into a secondment agreement with GTE Overseas Corporation USA (GTE-OC), an affiliate of Verizon US for secondment of three employees. Out of the three employees, one assumed the position of Managing Director and other two assumed the role of supervisors in Verizon India. The key terms of secondment agreement were:

  • The seconded employees were to remain on the rolls of GTE-OC
  • The seconded employees were to act under control and supervision of Verizon India
  • Verizon India would be responsible for work of the seconded employees
  • GTE-OC was to pay salary and other compensation and Verizon India was to reimburse such costs to GTE-OC net of applicable taxes
  • Verizon India was responsible to withhold tax under Indian tax laws
  • GTE-OC retained the right of termination of employment of seconded employee

Taxand India discusses the questions before the AAR under section 195 of the Income Tax Act, 1961

Taxand's Take

This is an important decision, as it lays out the context in which an issue should be examined by the AAR, and also, the remedies under a writ. The 'make available' clause in a Tax Treaty is considered as a narrower provision and does not cover managerial services. The principle set out by the AAR was also contrary to the earlier ruling of the Bangalore bench of the Tribunal in the case of IDS Software Solutions, which had considered a similar issue and decided in favour of the taxpayer. The Tribunal held that where seconded employees worked under the control and supervision of the Indian entity and overseas employer does not exercises any control, the Indian entity would be treated as 'economic employer' and the payment made to the parent company should not be treated as FIS.

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Ashik Shah

Taxand's Take Author