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.
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