In a recent Bombay High Court case, the taxpayer was resident in India and the sole owner of a business which provided personnel on an as-needed basis to foreign companies.(1) The taxpayer entered into an agreement with a Kuwait-based company for the provision of personnel. The Kuwait-based company paid a fixed sum as consideration to the taxpayer, which the latter used to remunerate the employee.
The tax officer held that on paying the employee, the taxpayer should have deducted tax under Section 195 of the Income Tax Act. Section 195 of the act requires taxpayers to deduct tax on any payment (other than salary payments) made to non-residents. The taxpayer contended that the employee had only been loaned to the Kuwait-based company and was under the taxpayer's employment.
The first appellate authority and the Tax Tribunal ruled in the taxpayer's favour. On further appeal to the Bombay High Court, the court stated that the contract clearly indicated that the person concerned was an employee of the taxpayer and that the taxpayer had loaned the employee to the Kuwait-based company on a deputation basis for an ongoing project. Further, in the event of any complaint against the employee, only the employer (ie, the taxpayer) could terminate the employment relationship. Thus, the Kuwait-based company enjoyed supervisory power and control over the employee only as long as they worked on the project, whereas the employee's relationship with the taxpayer would continue after the project's completion. Therefore, the Bombay High Court confirmed that the taxpayer was not required to deduct tax at the source under Section 195 of the Income Tax Act.
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