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. 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 2 wherein, we presented 8 landmark rulings on the issue, we bring to you Part-3 comprising of 8 more rulings on the issue covering aspects such as technical services ‘made available’ through deputed personnel, whether the salary recharge on their behalf amounts to FTS or are mere reimbursements; whether payments for ‘managerial services’ amounts to FTS under the India-France DTAA; deductibility of salary expenses of seconded employees upon constitution of service PE and more... 

The clause “Make available”, Cross charge on deputation of “employees” - Part 3

1) [TS-8950-ITAT-2018(Chennai)-O] - ITAT: Technical services ‘made available’ through deputed personnel; Salary recharge - FTS, not reimbursements - Chennai ITAT rules that payment received by a foreign company from its Indian subsidiary towards salary cost recharge of employees deputed in India, constitutes FTS for AY 2013-14 and not mere reimbursements; Notes that the personnel seconded to Indian subsidiary were all in senior Technical / Managerial positions and the ultimate responsibility and the direction, control and supervision of the personnel vested with Panasonic Corporation (resident of Japan); Rules that.............

2) [TS-5001-HC-2004(Delhi)-O] - TDS from payment to technicians – HC: Remittances were by way of ‘salaries’ and not ‘fee for technical services’ – HC upholds ITAT's order that, fee for technology transfer and for transfer of know-how had already been quantified and separately received; Technicians were deputed and services were placed at disposal of assessee during deputation period and that assessee was liable to pay not only salary but also tax thereon, held that assessee had rightly considered payment as salary and had rightly deducted tax at source u/s 192.....

3) [TS-5588-HC-2016(Delhi)-O] – HC : Reverses AAR ruling, reads India-UK’s restrictive FTS definition into French treaty - HC reverses AAR ruling, holds that payment by an Indian company to a French company for management services does not constitute Fees for Technical Services ('FTS') under India-France DTAA, Sec 195 TDS not applicable; Notes that FTS definition under India-UK DTAA excludes ‘managerial services’ from its ambit, holds that by virtue of Clause 7 of Protocol to the India-France treaty ...........

4) [TS-6083-ITAT-2014(Mumbai)-O] - ITAT : Employee secondment creates PE, but salary expense deductible; Centrica HC ruling inapplicable - Employee secondment by US co. (‘assessee’) to its India subsidiary creates service PE, however employee salary expense a cost against salary recharge received by assessee from Indian subsidiary; Such recharge not Fees for included service, but governed by Article 7 of India-US DTAA in view of para 6 of Article 12; Rejects Revenue’s reliance on Delhi HC ruling in Centrica to hold reimbursement taxable as FIS, holds Delhi HC did not take into account para 6 of Article 12 ...........

5) [TS-7719-ITAT-2018(MUMBAI)-O] - ITAT: Salary reimbursement for seconded employee not FTS - ITAT holds that payment received by assessee (Singapore company) during AY 2006-07 & 2007-08 from its associated enterprise in India, MSAS towards reimbursement of salary for seconded employees, not FTS under Act as well as India-Singapore DTAA, also deletes 23% transfer pricing mark-up on salary reimbursement; Assessee had seconded one of its employees for development of business of MSAS and salary of employee was cross charged on MSAS; ITAT rejects AO’s contention that it was FTS as services were rendered by employee with technical experience and it was not in nature of reimbursement; Holds that payment.............

6) [TS-5037-SC-2014-O] - SC dismisses assessee's SLP against HC decision; HC had held that secondment of employee from Canadian & UK Group companies to Indian assessee creates Permanent Establishment ('PE'); HC rejected assessee's plea that it was economic employer & that salary payment made was merely reimbursement; HC concluded that real employer continued to be foreign companies and deputed employees' work could not be regarded as stewardship; Though affirming ...........

7) [TS-8584-ITAT-2019(Kolkata)-O] - ITAT: India employee's foreign assignment allowance for rendering services in Switzerland, not taxable - ITAT rules that foreign assignment allowance received by assessee outside India  for rendering services in Switzerland was not taxable in India u/s 5(2)(b) for AY 2014-15, rules that “….admittedly no services were rendered in India for which the foreign assignment allowance was received by the assessee, the same was not chargeable to tax in India even in terms of the deeming provisions of Section 9(1)(ii)”, quashes revision u/s. 263; During relevant AY, assessee was sent to Switzerland on account of ................

8) [TS-9941-ITAT-2018(BANGALORE)-O] - ITAT: IBM India deducted tax at source u/s. 192 on salary paid to expatriate employee, reimbursement of salary cost to ‘IBM overseas entity’ did not constitute income in the hands of recipients; ITAT further holds that ‘IBM overseas entity’ did not have Permanent Establishment (PE) in India, and hence, amount received from IBM India not chargeable to tax in India; In absence of the provision in the DTAA to tax Fees for Technical Services the same would be taxed as per the .............

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Click here to Read - Taxsutra Database Insight - The clause “Make available”, Cross charge on deputation of “employees” – Part 2

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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