Reimbursements of Secondee salaries not Fees for Technical Services

 In a recent ruling, the Delhi ITAT held that reimbursements received by Toshiba Corporation from its Indian group companies towards salaries of seconded employees cannot be characterised as Fee for Technical Services (FTS) under the Income-tax Act, 1961 or the India–Japan DTAA. The Tribunal concluded that once the employer–employee relationship with the Indian entities is established, salary payments fall outside the ambit of FTS.

In the present case, Toshiba Corporation (Japan) paid salaries abroad to 26 employees seconded to various Toshiba entities in India. The Indian companies reimbursed these salary costs without markup, and tax was duly withheld under Section 192. The Assessing Officer, however, treated the reimbursements as FTS, relying in part on the Supreme Court’s ruling in Northern Operating Systems. The CIT(A) upheld this view.
Before the ITAT, the taxpayer produced employment contracts, appointment letters, Form 16s issued by Indian entities, and reimbursement documentation, all demonstrating that the secondees were working under the control and supervision of the Indian companies, which also had the right to terminate their employment. The Tribunal observed that the AO had misread the appointment contracts and that the Northern Operating Systems ruling (rendered in the context of service tax, not income tax) was distinguishable. Relying on Delhi High Court decision in Boeing India and Karnataka High Court decision in Flipkart Internet (all holding that salary reimbursements cannot be treated as FTS), the ITAT ruled that the salary payments cannot be characterised as FTS.
This decision reiterates that where secondees are effectively employees of the Indian entity, reimbursements of their salary costs cannot be recharacterised as FTS, even if payments are routed through the foreign parent. Substance of the employment relationship remains the determining factor for taxability.