Secondment of employees by foreign parent company to Indian subsidiary is a regular feature considering the requirements to meet their global standards of quality and to ensure proper functioning and assistance to Indian Subsidary Companies. However, taxability on reimbursements of salary by Indian company to their foreign parent is always a contentious issue. Even a slight difference in terms of secondment can result in taxability or non-taxability of reimbursements and consequent liability for TDS. Few of judgements pertaining to reimbursement of salary have been discussed hereunder:
1. Reimbursement of Salary- NON-TAXABLE: Assessee, a tax resident of USA, was providing support services to various Indian subsidiaries - Assessee seconded some of its employees to India to render their services to Indian companies under supervision and control of Board of Directors of Indian companies - The salary of said employees was paid by the assessee-company after deducting TDS under section 192, salary was duly reimbursed later on by Indian subsidiaries - Assessing Officer opined that payment received by assessee for rendering services through its employees was taxable in India as per article 12(4) of India - USA DTAA - HELD, on facts, employees seconded by assessee - company constituted its service PE in India and, therefore, payment made by Indian entity to assessee on account of reimbursement of salary was to be taxed under article 7 and not under article 12 of India-USA DTAA. Thus, payment received by the assessee is to be treated as revenue receipt and any cost incurred has to be allowed as deduction because salary is a cost to the assessee which is to be allowed. (Morgan Stanley International Incorporated vs. DDIT [2015] 53 taxmann.com 457 (Mumbai - Trib.))
2. Reimbursement of salary- TAXABLE: Assessee, an Indian company, was a wholly owned subsidiary of Centrica Plc., a company incorporated in United Kingdom ('UK'). Overseas entities outsourced their back office support functions to third party vendors in India. To ensure that Indian vendors comply with quality guidelines, assessee was established in India to act as service provider to overseas entities. To seek support during initial year of its operation, assessee sought some employees on 'secondment' from overseas entities. In terms of secondment agreement, assessee reimbursed salary cost to overseas employers. It was noticed that employees of overseas companies used their technical knowledge and skills while assisting assessee in conducting its business of quality control and management. It was also undisputed that seconded employees were also making available their technical expertise and know-how to regular employees of assessee company during initial years of its operation. HELD, on facts, amounts reimbursed by assessee to overseas companies in terms of secondment agreement amounted to 'fee for technical services' liable to tax in India and, thus, assessee was required to deduct tax at source while making said payments. (Centrica India Offshore (P.) Ltd. v. CIT [2014] 364 ITR 336(Delhi))
3. Reimbursement of salary: NON-TAXABLE if no profit element : 'A' Ltd. UK, placed a few of its employees at disposal of assessee-company - While salary of those persons was paid by UK company, charges related to services rendered by them were cross-charged by UK company to assessee - Assessing Officer held that payments made by assessee to UK based company were not in nature of reimbursement of expenses and, hence, liable for deduction of tax under section 195. HELD, since assessee was real and economic employer of employees seconded from UK Company and reimbursement of salary costs, etc. to UK Company was without any profit element, it could not be regarded as income chargeable in hands of UK Company. Therefore, reimbursement made by assessee to UK Company was not liable for TDS. (ITO vs. AON Specialist Services (P.) Ltd. [2014] 64 SOT 78 (Bangalore - Trib.))
4. Reimbursement of salary: NON-TAXABLE: Expatriation of employees under seconded agreement without transfer of technology would not fall under term make available as per article 13(4)(c) of Indo-UK DTAA, and therefore, payment made by assessee towards reimbursement of salary expenditure of employees deputed to assessee under seconded agreement could not be considered as fees for technical services. (ADIT vs. Mark & Spencer Reliance India (P.) Ltd. [2014] 147 ITD 83 (Mumbai - Trib.))
5. Reimbursement of salary pay: NON-TAXABLE: Assessee-company rendered investment advisory services to its foreign associate enterprise THPL which seconded two of its employees to assessee to assist in rendering such services - THPL paid salary to such employees after deducting tax at source under section 192, and assessee company reimbursed cost of salary to THPL as per secondment agreement – HELD, since payment was in nature of salary and tax had already been deducted by THPL under section 192, assessee was not required to deduct tax on reimbursement of same to THPL as it would result in double deduction of tax. (Temasek Holdings Advisors (I) (P.) Ltd. vs. DCIT [2013] 60 SOT 134 (Mumbai - Trib.)(URO))
6. Reimbursement of Salary- TAXABLE: Where employees of non-resident company were seconded to assessee, an Indian company, reimbursement of salaries of seconded employees by assessee to non-resident company would be income of non-resident company which would be taxable in India and liable for TDS u/s 195. (Verizon Data Services India (P.) Ltd. V. AAR [2013] 33 taxmann.com 539 (Madras HC))
7. Reimbursement of Salary: NON-TAXABLE: UK company Abbey UK entered into an outsourcing agreement with an India company whereunder services provided by Abbey UK were outsourced to Indian Company - To facilitate outsourcing agreement, a secondment agreement was entered into by Abbey UK with assessee which was its Indian group company - Under said agreement trained staff of Abbey UK was seconded to assessee. HELD, Where an Indian company pays all expenses incurred by a foreign parent company towards employees seconded to Indian company, such payment, being pure reimbursement, cannot be regarded as income in hands of foreign company and assessee was not liable for deduction of TDS u/s 195. (Abbey Business Services (India) (P) Ltd. v. Dy. CIT [2012] 53 SOT 401 (Bang.))
8. Reimbursement of salary -TAXABLE: Applicant company is fully-owned subsidiary of US company T. It entered into an agreement with T for seconding certain number of employees - Seconded employees shall continue to have their pay-roll processed by T but applicant is to reimburse T for those amounts and also pay T a service charge - Right to terminate employee is with T. HELD, applicant has not become employer of seconded employees, The applicant having no obligation to pay the salaries, what the US principal collects from the applicant cannot be reimbursements. It is compensation or fees paid by the applicant to the US principal for making available the services of the employees of the principal. Therefore, it has to be held that what the applicant pays to the US principal is not reimbursement in nature, but it is the income of 'T' the US principal and while paying the amounts the applicant has the obligation to withhold taxes under section 195. (Target Corpn. India (P.) Ltd., In re, [2012] 348 ITR 61 (Delhi))
9. Reimbursement of salary: NON-TAXABLE: Where no technical service was provided by expartriate employees, for reimbursement of salaries of expartriate employees, on which foreign company had deducted tax at source u/s 192, Indian company was not liable to deduct tax at source. (ACIT vs. CMS (India) Operations & Maintenance Co. (P.) Ltd. [2012] 148 TTJ 253 (Chennai))
10. Reimbursement of part of salary: NON-TAXABLE: Applicant is engaged in business of non-life insurance. It has entered into a secondment agreement with Korean insurance company (HMFICL), pursuant to which an employee of HMFICL (secondee) has been seconded to be engaged in certain specified activities under supervision and control of applicant in matters relating to Korean insurance business for a period of two years. Applicant directly reimburses HMFICL a part of salary and other benefits payable to seconded employee as provided in agreement. HMFICL continues to be employer of secondee and to pay salary to him. HELD, What the applicant pays goes towards the reimbursement of the cost borne by HMFICL on account of employment of the seconded official, that too partly. In this process, no income can be said to have been generated which answers the description of FTS. From the mere fact that HMFICL provides the services of a technical person and receives from the applicant a substantial part of the salary payable by the said company, it cannot be inferred that the part reimbursement in terms of the agreement represents the fee for technical services. This arrangement has been conceived in mutual interest. The parties never contemplated payment of a fee for technical services within the meaning of the Explanation 2 to section 9(1)(vii) or article 13.4 of the Treaty. The essence or substance of the transaction is not deriving income by way of charging a fee for the service. Therefore, no tax is liable to be deducted at source by the applicant in respect of the payments made or to be made to HMFICL under the terms of the secondment agreement. (Cholamandalam MS General Insurance Co. Ltd., In re [2009] 178 TAXMAN 100 (AAR - NEW DELHI))
11. Reimbursement of Salary -NON-TAXABLE: Assessee-company was a 100 per cent subsidiary of a US based company, namely, IDS - It entered into a secondment agreement with IDS for securing services of certain personnel from IDS to assist assessee in its business. Services of ‘S’ had been seconded to assessee-company under secondment agreement and further, assessee-company was to reimburse emoluments paid by IDS to ‘S’, and held, it was assessee-company which for all practical purposes was to be looked upon as an employer of ‘S’ during relevant period. Therefore, ‘S’ was an employee of assessee-company and amount representing reimbursement of salary paid by IDS to ‘S’ was not to suffer deduction of tax at source under section 195 at time of remittance of same to IDS, since tax had been deducted as salary and paid to Indian income-tax authorities.(IDS Software Solutions India (P.) Ltd. v. ITO (International Taxation) [2009] 32 SOT 25 (Bang.) (URO))
12. Reimbursement of salary: TAXABLE -Amount paid by assessee-company to its parent company on account of reimbursement of expenditure incurred in respect of global accounts manager could not be treated as payment of salary, so as to attract deduction of tax at source. The same represented reimbursement of expenses incurred by global account managers for taking care of global customers of Expediters Group who had operations in many countries. Undisputedly, the global management staff employed at headquarters were the employees of the parent company viz. Expeditors, USA and there being no employer employee relationship between the said employees and the assessee company, the reimbursement of expenses incurred in relation to them on proportionate basis by the assessee company to the parent company could not be treated as in the nature of salary paid by the assessee company. It was a case of reimbursement of common expenses incurred by the parent company for the benefit of all the group concerns including the assessee company which did not attract any deduction of tax and there was no question of making any disallowance by invoking the provisions of s. 40(a)(iii) for non-deduction of tax from such reimbursement. (Expeditors International (India) (P.) Ltd vs. ACIT [2008] 118 TTJ 652(DELHI))
13. Reimbursement of salary: TAXABLE: Applicant is an Indian company and subsidiary of Austrian company - It entered into agreement with Austrian company under which Austrian company has undertaken to provide services of qualified technical personnel employed by it to applicant; they are being paid salary, bonus and other benefits by Austrian company and applicant has to reimburse cost incurred on such employees. HELD, assuming for the sake of argument that the debit notes represent the quantum of compensation as the actual expenditure, it would make no difference as the same is payable to the Austrian company under the secondment agreement for services provided by it. It would, therefore, be not only unrealistic but also contrary to the terms of the agreement to treat payments under the said agreement as mere reimbursement of salaries of the seconded employees who are said to be the employees of the applicant. Payments to be made by applicant to Austrian company are in nature of fees for technical services within meaning of Explanation 2 to clause (vii) of sub-section (1) of section 9 and article 12(4) of DTAA and, therefore, they would be subject to withholding of tax at source under section 195. (AT&S India (P.) Ltd., In re [2006] 157 Taxman 198 (AAR))
Thanks and best regards
CA Rohit Gupta
B.Com, FCA,LLB,
Certificate In International Taxation
Paschim Vihar, Delhi-63
(Author is a chartered accountant and can be reached at ca.guptarohit@gmail.com / 9873832979)
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