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The clause “Make available”, Cross charged on deputation of “employees” – Part 2

Mar 18, 2020

Taxability of ‘Fees for technical services’/'Fees for included services' in matters of cross border deputation of employees is one of the most contentious issues with the Income Tax Department trying to bring such payment within the ambit of Fees for Technical Service. One of the most significant issues is the tax liability of the non-resident on the income proposed to be generated in India on provision of managerial, technical or consultancy services in India. As per the terms of agreement, either the Indian entity or the Foreign Company pays salary to the said employees on deputation. 

Bangalore ITAT in 2019 constituted Special Bench to decide on taxability of expats' salary reimbursements, the matter has been adjourned to July, 2020 and recently Mumbai ITAT reported in, ruled that amount received by assessee by way of salary and other costs recharge in relation to deputing its Vice-President to its Indian subsidiary, constitutes Fees for Included Services (FIS) under Article 12 of the India-USA DTAA. ITAT rejected assessee's plea that no technology / expertise / knowhow was 'made available' in India by virtue of employee's deputation and remarked that “The experience of an expert lies in the mind of an expert and if an expert having knowledge and expertise is transferred from one tax jurisdiction to the another tax jurisdiction, then it cannot be said that only the employees were per se transferred and not the technology”; 

Owing to the discrepancy in the view of courts in interpretation of the legal propositions, it is difficult to establish a principle for ascertaining the taxability of expatriate employees. 

In continuation of our Taxsutra Database Insight Part 1, which was on Make available on design and drawing, we bring to you Part 2 of the insight on “Make Available - Cross charge on deputation of ‘employee’” wherein we have compiled 8 rulings which interpret on whether reimbursement of cost towards the services rendered by deputed employees/seconded employees tantamounts to "making available", the technical knowledge to Indian entity & hence taxable as fees for included services...and what is crucial for bringing to tax and in Part 3 of the insight, we will cover 8 more rulings on the aforesaid subject, giving more perception of the prevailing law on the issue.....lots more! 

The clause “Make available”, Cross charged on deputation of “employees” – Part 2

1) [TS-6082-ITAT-2015(Bangalore)-O] : Salary reimbursement for seconded employee taxable as FTS - ITAT holds that payment made by assessee (an Indian co.) to Hong Kong based company for secondment of employees (senior & experienced professionals), taxable as fees for technical services (‘FTS’), Sec 195 TDS applicable; ITAT hold that services of the personnel deputed under the secondment agreement amounts to rendering of managerial consultancy services to assessee; Rejects assessee’s stand that payment was in the nature of reimbursement of salary, holds “all the payment made by the assessee to non-resident on account of FTS or royalty are chargeable to tax irrespective of any profit element in the said payment or not”; Rules that concept of income .......... 

2) [TS-6588-ITAT-2017(Bangalore)-O] – ITAT : Characterizes payment to NR for employee secondment as FTS, rejects salary-reimbursement plea - ITAT rules that payment received by assessee (a Swiss company engaged in providing operations and management services to airports) from Bangalore International Airport Ltd. (‘BIAL’) for secondment of skilled personnel, constitutes FTS under the Act as well as under India-Switzerland DTAA for AY 2007-08; Rejects assessee’s stand that payment was not FTS, but salary reimbursements as the ................... 

3)  [TS-718-HC-2012(Bombay)-O] - HC: Technical services through 'deputed technicians' taxable as FTS under DTAA - Composite contracts involving deputing or providing technical personnel for carrying out technical work amounts to rendering of 'technical services'; Technical repairs fees received by Japanese company taxable as FTS under erstwhile India-Japan DTAA; Japanese company did not merely place technical personnel at the disposal of Indian company, but also carried out technical repairs work; Inclusive definition under Explanation 2 to Sec 9(1)(vii) is merely clarificatory................ 

4) [TS-370-ITAT-2012(Mumbai)-O] - ITAT: Deputation of technicians not a simple manpower supply, taxable as FIS - Non-resident assessee not a mere recruiting agency, but a leader in telecom engineering having qualified technical personnel; Contract for providing technical manpower did not involve simple supply of manpower; Deputed personnel were assessee's employees; Providing such personnel to Indian company 'made available' assessee's expertise; Consideration received by assessee for providing technical personnel taxable as fees for included services under Indo-US DTAA and cannot be regarded as business profits.............. 

5) [TS-5003-AAR-2011-O] – AAR: Employee deputation taxable as FTS under IT Act and Treaty - Salary reimbursement to parent company for employees deputed to Indian subsidiary taxable as 'managerial services' under India-US treaty..... 

6) [TS-6326-ITAT-2019(Chennai)-O] - ITAT: Expats' salary & other costs recharge to Foreign Group Co. - FTS , not reimbursements - ITAT rules that reimbursements of salary costs and other costs [relating to travel, food expenses etc.] on seconded employees by assessee (an Indian Co.) to its Foreign Group Co. during AY 2010-11, constitutes Fees for Technical Services (FTS) u/s.9(1)(vii) of the Income-tax Act, holds that TDS u/s.195 is applicable; Rejects assessee's stand that the remittances (other than for salary) were in the nature of pure reimbursements as they included travel expenses - airfare, food........... 

7) [TS-6710-ITAT-2019(Pune)-O] - ITAT: Expat's salary cost recharge to French Co., not FTS; Distinguishes Centrica ruling - ITAT rules that the reimbursement towards expat's salary cost received by a French Co. [assessee] from its Indian counterpart, not FTS u/s 9(1)(vii) of the Act, rejects Revenue's stand that since assessee provided technical services through its employee, the amount was liable to be taxed as FTS; ITAT observes that the expatriate was engaged by the Indian entity as its CEO and was working under the supervision & control of the Indian entity, further his remuneration was directly ............ 

8) [TS-312-HC-2012(KAR)-O] - HC: Mere fact that there were certain technical inputs or that the assessee immensely benefited from services rendered, resulting in value addition to assessee’s employees, is wholly irrelevant. Kar HC holds that the expression ‘make available’ has a specific meaning in the context of tax treaties, and there is no need to adopt the day-to-day meaning of this expression..........


Click here to Read - Taxsutra Database Insight - “Make available” – Payment towards supply of designs & drawings whether Royalty u/s 9(1)(vi) - Part 1

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