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1 PwC pwc.in

Tax Insights

11 March 2023

Salary reimbursements of seconded employees do not come within the scope FTS or FIS under the Act or DTAA – Bangalore bench of the Tribunal

In brief

The Bangalore bench of the Income-tax Appellate Tribunal (Tribunal)¹ held that the cost-to-cost reimbursement of seconded employees’ to the appellant (foreign company) by its Indian AE was not taxable as fees for

technical services (FTS) or f ees for included services (FIS) under the Income-tax Act, 1961 (the Act) and Article 12 of the India–US Double Taxation Avoidance Agreement (DTAA).

In detail

Facts

• The appellant being a foreign company had seconded its employees to its Indian AE. For administrative convenience, the appellant had paid the salary of seconded employees in their home country bank account, and the actual cost incurred by the appellant for the same was reimbursed by the Indian AE on cost to cost basis.

• The appellant received a notice under section 148 of the Act for the assessment years (AYs) 2010–11 and 2012–13. The reason being it had received payments from the Indian AE and had not filed a return of income for those years.

• During reassessment proceedings, the case was also referred to the Transfer Pricing Officer (TPO) to determine the arm’s length price for payments received by the appellant. The TPO held that the transactions were at arm’s length price and no adjustment was required.

• However, the Tax Officer (TO) relied on the Delhi High Court decision² and held that the relationship between the Indian AE and seconded employees was not that of an employer-employee; rather, the relationship was between the appellant and the seconded employees.

• The TO f urther held that the services provided by the seconded employees are in the nature of tec hnical, managerial and consultancy services. Hence, the payments received by the appellant are to be treated as FTS as per explanation 2 to section 9(1)(vii) of the Act.

1 IT(IT)A Nos. 167/Bang/2021 & 688/Bang/2022

2 Centrica India Offshore Private Limited [2014] 348 ITR 45 (Delhi)

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• The TO f urther held that while providing services, seconded employees imparted a skill set of technical and managerial nature to the concerned manpower of the Indian AE, and accordingly, payments received by the appellant would qualify as FIS under the India–US DTAA.

Appellant’s contentions

• The appellant urged that payments were merely reimbursement of salaries on a cost-to-cost basis and cannot be treated as FTS or FIS. To support its contention, the appellant submitted sample copies of assignment letters and Form 16 demonstrating that tax has been deducted by the Indian AE on the salary paid to the seconded employees under section 192 of the Act.

• The appellant further submitted that the issue is squarely covered by the Karnataka High Court’s decision³ and the same is also followed by the Bangalore coordinate bench of the Tribunal⁴.

Tribunal observations and ruling

• Observations of the Tribunal from the assignment Letters entered between the appellant and the seconded employees:

- Seconded employees should only work for the Indian AE and the service provided by seconded employees are solely for the benefit of the Indian AE.

- Seconded employees will report to the Indian AE management and will work under the control and supervision of the Indian AE.

- For administrative convenience, the salary would be disbursed by the appellant in the home country bank account of the seconded employees on behalf of the Indian AE and the appellant would obtain reimbursement of the same on a cost-to-cost basis.

- The appellant will not be responsible and will not assume any risk for the work undertaken by seconded employees for the Indian AE.

- Once employees are seconded to the Indian AE, they do not have an employment guarantee upon return to the US af ter the secondment period.

• Seconded employees were registered with the Foreigners Regional Registration Office and were also contributing towards social security benefits in India.

• The employees were seconded to India on ‘employment visa’.

• The tax has been duly deducted under section 192 of the Act against the salary paid or payable to the seconded employees.

• Following the Karnataka High Court’s decision³, which was also followed by the Bangalore coordinate bench of the Tribunal⁴, the Tribunal held that the amount paid by the Indian AE to the appellant as salary reimbursement of seconded employees does not come within the scope of FTS or FIS as per the Act or India–US DTAA.

The takeaways

Salary reimbursements of seconded employees on a cost-to-cost basis by an Indian AE to foreign entities have been a contentious issue. The Tribunal’s ruling on the issue is welcome and is relevant to be considered by taxpayers entering secondment arrangements.

The Tribunal has reaf firmed that payments made to non-resident entities for employees seconded to India are mere reimbursements based on employment arrangements existing between an Indian AE and seconded employees and are not taxable as FTS or FIS under the Act or DTAA. This ruling reasserts that the terms of the employment agreement, assignment letters and facts of the secondment arrangement between the foreign entity, Indian entity and seconded employee would be the critical factors for determining whether salary reimbursement would be taxable as FTS or not.

3 Flipkart Internet Private Limited v. DCIT 488 139 taxmann.com 595 (Karnataka High Court)

4 Biesse Manufacturing Company Private Limited v. ACIT [2023] 146 taxmann.com 242 (Bangalore ITAT) & Goldman Sachs Services Private Limited v. DCIT [2022] 138 taxmann.com 162 (Bangalore ITAT)

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In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.

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