Authorities have looked at different aspects to decide on the taxability of remittance made
Author : Sandeep Ladda & Kapil Sirsalewal/DNA
The opening of the Indian economy has witnessed an exponential growth in investment by foreign companies in India, which has led to extensive deputation/ secondment of expatriates of foreign companies in India.
Typically, a secondment agreement provides that the seconding foreign company (FCo) would pay the secondee his salary in his home country and the Indian company (ICo) would reimburse the same to the FCo, generally without any mark-up or profit.
Under the provisions of the Indian Income tax Act, 1961 (Act), payments qualifying as fees for technical services (FTS) made to the FCo, are liable to tax in India. The definition under the Act provides that FTS also includes consideration for provision of services of technical or other personnel.
Thus, the key question that needs to be addressed is whether a secondment arrangement can be construed to be provision of technical services under the Act and whether the reimbursement received by an FCo is liable to tax in India in the hands of the FCo.
Recently, the Bangalore Tribunal (in IDS Software's case) held that payment made under secondment arrangement by an ICo to an FCo was not FTS, and hence not liable to tax in India.
It was held that the ICo was the 'economic employer' of the secondee and employer-employee relationship existed between the ICo and the secondee. The key reasons were that the secondee's employment as managing director was ratified by the ICo and that the secondment agreement between the ICo and the FCo constituted an independent employment contract between the ICo and the secondee. Also, the secondee worked exclusively for the ICo and under its supervision/ direction/ control, the secondee's costs were borne by the ICo and the ICo had discretion to reject or remove the secondee. Further, the FCo did not warrant the quality of the secondee and the ICo was to indemnify the FCo for any claim arising due to the secondee.
Hence, it was held that the secondee was an employee of the ICo and reimbursement made by the ICo to the FCo represented salary for services rendered by the secondee to the ICo and was not for services rendered by the FCo to the ICo. Thus, salary, which has already been subject to tax deduction at source (TDS) in India, cannot suffer further TDS while remitting the same to the FCo.
In its judgment, the Tribunal differentiated the ruling of Authority for Advance Ruling - AAR (in AT&S's case), where it was held that remittance made under a secondment arrangement by ICo to FCo was FTS and liable to tax in India.
In AT&S's case, the AAR had held that the secondment agreement was entered into pursuant to an existing foreign collaboration agreement (FCA), under which the FCo was to provide expertise, support, technology and services of its technical experts to the ICo for the project covered by the FCA. Also, FCo (rather than ICo) had the right to remove the secondee, showing that FCo retained the right over secondee. Further, there was no evidence that remittance made by the ICo to the FCo was only towards salary costs —- it was in fact in the nature of compensation, which included other items as well.
It is pertinent to note here that remittance made in AT&S's case was held to be FTS, although the secondee was working under direct supervision or control of the ICo, a separate employment contract existed between the ICo and the secondee, and the ICo was to indemnify the FCo for claims arising due to the secondee.
In another decision (in Cholamandalam Insurance's case), covering a similar issue, the AAR held that remittance made under a secondment arrangement was not FTS. Whilst the AAR observed that the FCo 'did' provide services of technical personnel to the ICo, in the same breath, it also observed that that does not automatically mean the reimbursement was FTS —- what needs to be seen is whether remittance made can be construed as consideration for provision of services of technical personnel. In view of the essence of the transaction, it was concluded that the intention of parties for entering into a secondment agreement was for mutual benefit and not to derive income for services, and hence no consideration was involved.
Hence, it appears that appellate authorities have looked at different aspects of secondment arrangements to decide on the taxability in India of remittance made. Apparently, there is no single 'indicia' that would conclusively decide such taxability in India. Thus, one needs to be cognisant of the entire spectrum of facts and circumstances while entering into secondment arrangements.
Sandeep Ladda is associate director and Kapil Sirsalewal, assistant manager, PricewaterhouseCoopers. Views are personal.