Tax Insights
from India Tax & Regulatory Services
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Reimbursement of salary and payment for support services to non-resident neither royalty nor FTS: Distinguishes Delhi High Court’s Centrica decision
August 5, 2019
In brief
Recently,1 the Pune bench of the Income-tax Appellate Tribunal (Tribunal) has held that reimbursement received by a non-resident company (taxpayer) towards salary cost of seconded expat from the Indian entity is not taxable as fees for technical services (FTS) under section 9(1)(vii) of the Income-tax Act, 1961 (the Act).
Further, the Tribunal, while deciding on the taxability of payment received towards provision of Global Information Support services (support services), held that it does not constitute royalty/ FTS under the Act. It does not make available any technical knowledge, experience, skill, know-how to the Indian entity, and hence, it does not constitute FTS under Article 13(4) of the India-France Double Taxation Avoidance Agreement (tax treaty) when read with the Protocol to India-France tax treaty and Article 13(4) of the India-UK tax treaty.
In detail
Facts
The taxpayer is a non- resident engaged in designing and building dashboards, door panels, floor coverings, sound proofing, insulation installations and other moulded plastic parts for passenger car interiors.
The taxpayer had seconded an expatriate to the Indian entity for provision of services to the Indian entity. The expat was appointed as the CEO of the Indian entity.
1 ITA No. 784/PUN/2015
During the year under consideration, the taxpayer received an amount, which inter alia, included payment towards reimbursement of salary cost (without any mark- up) of expatriate seconded to the Indian entity and payment towards support services from the Indian entity. It filed its return of income in India declaring
‘nil’ income.
For reimbursement of salary cost of expatriate, the Tax Officer (TO) alleged that the taxpayer provided technical services
through its staff, i.e., seconded employee and treated the said receipt as FTS under section 9(1)(vii) of the Act.
For payment towards support services, the TO treated the said receipts in the nature of royalty/ FTS under the Act.
Issues before the Tribunal
Whether reimbursement of salary cost of seconded expatriate is taxable as FTS under section 9(1)(vii) of the Act?
Whether receipt towards
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support services is taxable as Royalty/ FTS under the Act?
Taxpayer’s contention
For the reimbursement amount, the taxpayer contended that payment by the Indian entity was in the nature of reimbursement of expenses. The taxpayer only made payment of salary on behalf of the Indian entity, which is being recovered without any mark up, and hence, is not chargeable to tax.
With regard to support services, the taxpayer contended that it provided assistance in various facets of business operations such as management, marketing, accounting and finance, human resources and
rendered IT support services, which do not make available any technical knowledge, experience, skill or know- how, etc., to the Indian entity, and hence, it does not
constitute FTS under Article 13 of the India-France tax treaty read with para 7 of the Protocol to the India-France tax treaty.
Revenue’s contention
On the issue of expatriate salary cost reimbursement, the Revenue contended that the taxpayer rendered managerial, consultancy or technical services to the Indian entity, and hence, the payment represents FTS under section 9(1)(vii) of the Act. The Revenue further relied on the decision of the Delhi High Court (HC) in the case of Centrica India Offshore Private Limited2.
For payment towards support services, the Revenue
contended that such payment
2 Centrica India Offshore Private Limited v.
CIT [2014] 364 ITR 336 (Delhi)
was in the nature of royalty/
FTS under the Act.
Tribunal’s ruling
Reimbursement of salary cost
The Tribunal held that the amount under dispute cannot be assessed as FTS in view of the exception in the definition of FTS under Explanation 2 to section 9(1)(vii) of the Act which states that an amount shall not be considered as FTS if the consideration is income of the recipient chargeable under the head
“salaries.” In the present case, the salary of expatriate (including the salary cost reimbursed by the Indian entity to the taxpayer) was assessed to tax under the head “salaries.”
The word “recipient” in the provision should be the real recipient and chargeability has to be only in his hands. In the present case, the real recipient is the expatriate because of the employer- employee relationship with the Indian entity, and the taxpayer had no role to play in the rendition of services by the expatriate to the Indian entity.
The Tribunal further distinguished the Revenue’s reliance on the Delhi HC’s decision in the case of Centrica India Offshore Private Limited2. The Tribunal observed that in the case of Centrica India
Offshore Private Limited2, the HC had held that payment to the foreign entity was in the nature of FTS and the money paid by the Indian entity accrued to the overseas entity which may or may not apply for payment to secondees.
The Tribunal noted that in
the present case the money accrued to the expatriate in his own independent right by the virtue of his employment.
Therefore, it held that the amount received by the taxpayer was in the nature of reimbursement and was not covered within the purview of FTS under section 9(1)(vii) of the Act.
Receipt towards support services
The Tribunal noted that the taxpayer provided IT support services and managerial services to the Indian entity.
The Tribunal held that the services rendered by the taxpayer did not involve any imparting of information concerning technical, industrial or commercial knowledge to the Indian entity. A mere rendering of services did not constitute royalty under section 9(1)(vi) of the Act.
Further, it noted that the services under consideration are technical and managerial services, and hence, covered by the definition of FTS under section 9(1)(vii) of the Act.
However, the Tribunal noted that rendition of managerial services cannot be brought within the scope of FTS under Article 13(4) of the India- France tax treaty read with para 7 of the Protocol to the India-France tax treaty and Article 13(4) of the India-UK tax treaty. The technical services did not make available any technical knowledge, experience, skill, know-how, etc., to the Indian entity, and hence, are not taxable under Article 13 of the India-France tax treaty read in conjunction with the India- UK tax treaty.
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The takeaways
The litigation around taxability of reimbursement of salary cost to an overseas entity is very common with several judicial precedents for and against. This is a
welcome ruling for taxpayers to support the position that reimbursement of salary cost to overseas affiliate entities
for seconded expatriates working under the supervision, control and direction of the Indian entity, would not constitute FTS under section 9(1)(vii) of the Act.
It also aids in distinguishing the Centrica India Offshore Private Limited decision2 on the issue of taxability of
reimbursement as FTS.
Further, the Tribunal’s observation with regard to real recipient vis-à-vis literal recipient in the definition of FTS under section 9(1)(vii) of the Act is noteworthy.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
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