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What’s New

Tax Insights

26 June 2023

Reimbursement of salary paid to employees seconded to India not taxable as FTS under India-US DTAA – Delhi bench of the Tribunal

In brief

The Delhi bench of the Income-tax Appellate Tribunal (Tribunal)¹ has held that the reimbursement of salary paid to the employees seconded to India cannot be taxed as fees for technical services (FTS) under the India-US Double Taxation Avoidance Agreement (DTAA). The Tribunal has also rejected the reliance placed by the Revenue on the Supreme Court’s decision in the case of Northern Operating Systems Private Limited² and has noted that the Supreme Court decision has to be read in the context in which it was delivered, which was taxability of manpower recruitment and supply under the service tax regime.

In detail

Facts

• The appellant, a limited liability partnership firm, is incorporated under the laws of the USA and is engaged in the business of providing professional services in the field of assurance, tax, transaction, and business advisory services to its clients across the globe.

• During the year under consideration, the appellant has seconded the employees to its affiliates in India and has received reimbursement of secondment cost from its Indian affiliates, which was not offered to tax by the appellate while filing the return of income in India.

• The appellant’s case was picked for assessment proceedings, and the Tax Officer (TO) while concluding the proceedings was of the view that the secondment cost is taxable as FTS under the India-US DTAA.

Appellant’s contentions

• The appellant placed reliance on the various terms of the secondment agreement and noted the following:

- The seconded employees were released or discharged from all the obligations and rights of

employment in the home country (USA) and were subsequently employed by the Indian affiliates for their business purpose.

1 ITA No. 2332/DEL/2022

2 CC, CE & ST v. M/s. Northern Operating Systems Private Limited [Civil Appeal No. 2289-2293 of 2021]

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- The Indian af filiates will be solely responsible to pay salary and other costs to personnel in India during the period of secondment.

- The Indian af filiates have rights to undertake the performance appraisal of the personnel as per its local policies.

- Seconded employees were the employees of the Indian affiliates, and the payroll is maintained in USA on account of administrative convenience.

• The secondment cost is not chargeable to tax in India since it is a mere reimbursement of expenses incurred by the appellant on behalf of Indian affiliates, which is cross charged on cost-to-cost basis without any embedded profit element.

• The amount of reimbursement has already been subject to tax in the hands of employees under section 192 of the Income-tax Act, 1961 (the Act).

Revenue’s contention

• The Revenue placed reliance on the Supreme Court’s decision in the case of Northern Operating Systems Private Limited², wherein it was held that the secondment of employees by the foreign company resulted in manpower supply services being rendered by the foreign company, and the payment made to the Indian entity is liable to service tax.

Tribunal’s observations and ruling

• The Tribunal has distinguished the Supreme Court decision² in the facts of the present case based on the f ollowing:

- The decision has to be read in the context in which it is delivered, which was taxability of manpower recruitment and supply under the service tax regime.

- The Karnataka High Court, in the case of Flipkart Internet Private Limited³, has observed that the Supreme Court decision² was delivered in the context of service tax, and the only question was related to the determination of the nature of services. Accordingly, the High Court held that determination of the real employer and true nature of payment would not have a conclusive bearing on analysing whether the payment is made for FTS in light of the further requirements of the DTAA (such as ‘make available’

condition), which needs to be satisfied for considering any payments within the ambit of FTS.

• The Tribunal has relied on the terms of the secondment agreement and has noted that the seconded personnel are employees of the Indian affiliates and the amount paid by the Indian affiliates to the appellant were on account of cost-to-cost reimbursements. The terms referred to by the Tribunal, inter-alia, include the f ollowing:

- Assignment will mean release of personnel by the USA entity;

- The seconded employee will function solely under the control, direction and supervision of the Indian af f iliates;

- All rules and regulations generally applicable to the employees of Indian affiliates will be applicable to the seconded employee;

- The seconded employee will work exclusively for Indian affiliates;

- The Indian af filiates will decide the nature of work during the period of secondment;

- The Indian af filiate will assume any risks for the results produced from the work performed by the seconded employee;

- The US entity will not have any obligations towards the Indian affiliate regarding the performance of the seconded employee;

3 Flipkart Internet Private Limited v. Dy. CIT [2022] 44 ITR 268 (Karnataka)

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- The privity of lien of the US entity will cease during the period of secondment.

• The Tribunal has also placed reliance on the ruling of the coordinate bench of the Tribunal (affirmed by the Delhi High Court) in the case of Boeing India Private Limited⁴, wherein after considering the terms of the secondment agreement, it was held that secondees were the employees of the appellant and not of the f oreign company.

It was also noted that the Delhi High Court has affirmed the decision of the Tribunal in the said case and was of the view that section 195 of the Act has no application once the nature of payment is determined as salary and deduction has been made under section 192 of the Act.

• Based on the above judicial precedents and observations, the Tribunal has held that cost-to-cost reimbursements on account of secondment of employees cannot be treated as FTS under the India-US DTAA, and once the amount is subject to tax in the hands of employees, then the same amount cannot be subject to tax in the hands of the appellant.

The takeaways

The above ruling is a welcome as it has evaluated the documentation and facts of the case in detail to conclude that the reimbursement is not taxable as FTS. The Tribunal has re-established the importance of the terms captured in the secondment agreement and related documentation.

4 Boeing India Private Limited v. ACIT [2020] 121 Taxmann.com 276 (Delhi-ITAT)

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pwc.in

In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corpora te 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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