Reimbursement of salary of seconded employee not taxable in India: Mumbai ITAT

 

In an important ruling, the Mumbai bench of the Income Tax Appellate Tribunal (“ITAT”), in the case of Temasek Holdings Advisors (I) P. Ltd. (“the taxpayer”) held that reimbursement of salary of seconded employees is not chargeable to tax in India as ‘Fees for Technical Services’ (“FTS”) under the Income-Tax Act, 1961 (“the Act”) or under the Agreement for Avoidance of Double Taxation between India and Singapore (“the Treaty”). The ITAT held that no tax was therefore, required to be withheld on such reimbursements under section 195 of the Act.

Brief facts of the case

· The taxpayer, a wholly owned subsidiary of Temasek Holdings Pte Ltd (“THPL”), Singapore was engaged in rendering investment advisory services to THPL, which included identifying, analyzing potential investments in India and making recommendation to THPL;

· THPL had seconded two of its employees to the taxpayer under a secondment agreement to work exclusively for the taxpayer under the supervision and control of the Board of Directors of the taxpayer. During the period of secondment, the employees continued to be on the rolls of THPL;

· The salary of the seconded employees was to be paid by THPL and the taxpayer had to reimburse the cost of the salary and other expenses relating to the employment;

· Tax on salary of the seconded employees was deducted by THPL under section 192 of the Act and deposited in the Indian Government treasury in accordance with the Act;

· The Assessing Officer (“AO”) rejected the secondment agreement as a colorable device on the basis that it was unregistered, the date and place of execution were also not mentioned therein and that requisite approvals have not been obtained from the Government of India for such agreement;

· The AO also held that the relationship between the taxpayer and THPL was that of independent contractor and the payment cannot be treated as reimbursement, but as contractual payments. Since the taxpayer has not withheld any tax on the payment to THPL, the expenditure should be disallowed under section 40(a)(ia) of the Act.

Issue before the ITAT

· Whether the Indian company was liable to withhold taxes from payment to THPL towards the salary cost of the seconded employees and whether the payment could be disallowed under section 40a(i) of the Act for default in deduction of such taxes?

Taxpayer’s contention

· The payment to THPL only being a reimbursement of salary cost of the seconded employees, cannot be chargeable to tax under the Act and consequently, there was no requirement to withhold tax under section 195 of the Act;

· Taxes have been already been withheld from the salary while paying the seconded employees under section 192 of the Act and there cannot be a second deduction at the time of reimbursement also;

· There is no requirement in law for obtaining any approval for the agreement entered into between the taxpayer and THPL for secondment of its employees;

· The secondment agreement cannot be a sham or a colorable device, as the date of the agreement was available in the opening part of the agreement itself and the necessary affidavits from the employees were also filed during the first appellate proceedings;

· All payments including the concerned reimbursement of expenses between the taxpayer and THPL were part of proceedings before Transfer Pricing Officer and the transactions were accepted as being at Arm’s Length Price;

· Under Explanation 2 to section 9(i)(vii), if any consideration is chargeable under the head “salary”, it would be excluded from the scope of FTS under the Act.

Revenue’s contention

· No employer-employee relationship exists since there was no privity of contract between THPL and the employees and also the right of termination lies only with THPL. In the absence of such a relationship, the payments cannot be termed as reimbursement of salary;

· Seconded employees, through their advisory services, are rendering services in nature of FTS under section 9(1)(vii) of the Act;

· Since the expertise of the employees has been made available by THPL to the taxpayer, the payment should be treated as FTS under the Tax Treaty. Alternatively, once the payment is not regarded as FTS, then the provisions of service Permanent Establishment (“PE”) would become applicable and still the payment should be liable to tax in India.

Ruling of the ITAT

· An unregistered secondment agreement cannot be held as colorable device as there is no provision under law which requires such registration;

· THPL paid the salary after withholding taxes under section 192 of the Act and the secondment agreement seeks for the reimbursement of this payment of salary only. The basic conditions under the law for deducting tax on such payment and remitting it to the Government of India treasury were fulfilled;

· The taxpayer earns business income by rendering investment advisory services to THPL. The salary paid to the seconded employees is a business expenditure on which taxes should be held as deductible, but only under section 192 of the Act applicable for salary payments;

· Since the employees are not rendering services on behalf of THPL, but they are the economic employees of the taxpayer, there is no question of THPL rendering any managerial or consultancy services. For the same reason, even service PE clause would not be applicable and THPL also does not ‘make available’ any technical knowledge, experience, skill to the taxpayer;

· There cannot be double deduction of taxes on the same payment, i.e. once at the time of payment of salary and again at the time of reimbursement. Hence, reimbursement of the salary cost of the seconded employees cannot be chargeable to tax in India and there was no requirement to withhold taxes under section 195 of the Act.