Bangalore Tax Tribunal ruling which relied on Flipkart Internet ruling and held that the amount reimbursed by the Indian entity with reference to seconded employees does not fall within the Fee for Included Services (‘FIS’) under the Income Tax Act, 1961 (‘ITA’) or India-USA Double Taxation Avoidance Agreement (‘DTAA’).

Brief facts of the case

• A foreign company incorporated in USA seconded its employees to its Indian entity and received reimbursement of the salary payments from the Indian entity;
• The Indian entity had deducted taxes under section 192 of ITA against the salary and other allowances paid to the seconded employees and had obtained all the statutory registrations such as PF and Foreigners Regional Registrations, also made appropriate contributions towards social security which forms part of the seconded employees salary cost.
• The Assessing officer (‘AO’) observed that the secondment services are technical and managerial in nature as it provides or passes on a skill set to the concerned manpower of Indian entity for execution of technical and managerial jobs therefore such an arrangement would fall under the ambit of FIS under India-USA DTAA;
• Thus, the AO held that the foreign company is taxable for the amount received on account of secondment services.

Key excerpts from the ruling

• The Tribunal notes the fact that for the purpose of secondment of employees, the overseas entity had issued assignment letters to the seconded employees wherein it was stated that such entity shall not have the right to recall the employees in absence of Indian entity’s consent and no employment guarantee would be provided upon returning to the US after the secondment period;
• It was also noted that the definition of FTS under the ITA excludes “consideration which would be income of the recipient chargeable under the head salaries.” Article 12 of the DTAA specifically excludes payments made towards services rendered by an individual or firm of individuals in independent professional capacity and ‘employee’ of the enterprise rendered under employment since such services are the same are covered by Article 15 and 16 of the DTAA respectively.;
• The Tribunal also observed that it is evident from Form 16 issued by the Indian entity that tax had been deducted at source under section 192 of ITA;
• Also observes that the seconded employees were solely working under the control and supervision of the Indian entity and not on behalf of the overseas entity during the period of secondment. The overseas entity’s role was merely to facilitate payment of salary on behalf of the Indian entity. Also observed that the overseas entity deposits the salary of seconded employees to the bank account in USA and claims it as an reimbursement on cost-to-cost basis from Indian entity for the sake of administrative convenience;
• On perusal of reconciliation of amount payable in respect of seconded employees, Tribunal finds that the reimbursement of cost relating to remuneration is only in relation to salaries paid to those employees and only a marginal difference pertaining to foreign exchange was identifiable;
• In this regard, it holds that the AO has wrongly made an assumption that there is a service agreement between the overseas entity and the Indian entity for the provision of services through the seconded employees. Accordingly, tribunal relies on jurisdictional HC in Flipkart Internet and coordinate bench ruling in Goldman Sachs and Biesse Manufacturing wherein it was held that reimbursement made by the Indian entity to the overseas entity towards the seconded employees cannot be regarded as FIS.