Indian tax tribunal ruling wherein it was held that cost to cost reimbursement of salaries of seconded employees is not Fee for technical service (‘FTS’) and not taxable in the hands of foreign company.

• The taxpayer, being a US Limited Liability Partnership, is engaged in the business of providing professional assurance/ tax advisory services globally. During the subject year, the taxpayer received payments on account of reimbursement of salary paid to the employees seconded by the taxpayer to Indian counterpart;
• The tax authorities held that the cost-to-cost reimbursement of salaries of seconded employees are taxable as FTS as per Article 12 of the India-US Double Taxation Avoidance Agreement (“DTAA”);
• The tax tribunal rejected the tax authority’s reliance on the Supreme Court ruling in Northern Operating Systems by holding such payments are in the context of manpower recruitment and supply which was subject to service tax regime. The only question for determination therein was whether supply of manpower was covered under the ‘taxable service’ provided by a foreign company to an Indian company whereas for FTS the ‘make available’ clause needs to be satisfied;
• The tax tribunal noted numerous clauses in the deputation agreement and observed that the seconded personnel would function solely under the control, direction and supervision of Indian entity and the Indian entity shall decide the nature of work to be given to such employees and shall remain responsible for such work and also that the US taxpayer shall not take any responsibility or assume any risk for the results of such work;
• In this context, it held that cost to cost reimbursement on account of secondment of employees cannot be treated as FTS as defined under Article 12 of India USA-DTAA and also that seconded personnel are employees of Indian entity whose income has been taxed as salary in their respective hands;
• The tax tribunal placed reliance on co-ordinate bench ruling in Boeing India and affirmed that TDS under section 195 would not be applicable once the nature of payment is determined as salary and tax has been deducted under Section 192;
• Accordingly, it was held that the taxpayer was not liable to tax on reimbursement of seconded employees’ salary as Fee for Technical Services.

It is imperative to note that the deputation agreement is carefully drafted and also, there exists a clear documentation to substantiate that the seconded personnel was in substance the employee of the Indian entity.