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Reimbursement of salaries of seconded employees is not in the nature of
Fees for Technical Services

26 September 2013

Background
Recently, the Mumbai Bench of the Income-tax
Appellate Tribunal (the Tribunal) in the case of
Temasek Holdings Advisors (I) P Ltd
1
(the taxpayer)
held that reimbursement of salary to a Singapore
company for seconded employees is not Fees for
Technical Service (FTS) under the Income-tax Act,
1961 (the Act) or India-Singapore tax treaty (tax treaty)
since the Singapore company is not rendering any
service to the taxpayer, either directly or through the
seconded employees.
Further, the Tribunal held that services of the seconded
employees have been rendered in India for the
taxpayer and tax has been deducted under Section 192
of the Act. Consequently, there was no requirement to
deduct tax under Section 195 of the Act. Also, there
was no Service Permanent Establishment (PE) of the
Singapore Company because it was not rendering any
service to the taxpayer through seconded employees.
_______________

1
Temasek Holdings Advisors (I) P. Ltd. v. DCIT (ITA No. 4203/Mum/2012)
Taxsutra.com
Facts of the case
The taxpayer, an Indian company, is a wholly
owned subsidiary of Temasek Holding Pte Ltd
(THPL) which is an Asia investment firm based at
Singapore.
The taxpayer renders investment advisory
services to THPL which includes identifying and
analysing potential investment particulars in
India, evaluating political and economic scenario
for the investment purpose in India and
monitoring and making recommendation to THPL
in respect of specified investment in India,
specifically for unlisted companies.
The aforesaid services are solely provided by the
taxpayer and not by THPL for which THPL is
paying 21 percent mark-up to the taxpayer and
also reimbursement of some expenditure on
actual basis.

2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.































Once it is not disputed that two persons were
seconded employees and they have been deputed
to India as per the terms of secondment
agreement, then the payment of salary and
reimbursement made by the taxpayer to THPL
cannot be disputed.
The reimbursement of salary cannot be said to be
the income chargeable to tax under the Act and
the same cannot be subject to TDS under Section
195 of the Act.
Once the services of the seconded employees
have been rendered in India for the taxpayer, tax
needs to be withheld under Section 192, which
has been done in this case. Consequently, there
was no need to deduct tax under Section 195 of
the Act.
Even under Explanation 2 to Section 9(1)(vii) of
the Act, if the consideration is chargeable under
the head salary, the same will not be termed as
FTS. In support of its contention the taxpayer
relied on various decisions
2
.
The secondment agreement creates the obligation
for the payment of salary and the liability to
reimburse the same. In the case of Petroleum
India International
3
there was no issue of Section
195 or FTS. Further, the decision of the Supreme
Court in the case of Emil Webbers
4
is not
applicable to the facts of the present case.
The Madras High Court
5
in the case of Verizon
Data Services Pvt. Ltd has not affirmed the
decision of the AAR
6
. The High Court has not
expressed any view and therefore, it cannot be
held that any law has been laid down by the AAR
which has been affirmed by the High Court.
Reimbursement of other expenditure
All the expenditure was incurred on behalf of the
taxpayer for the Indian operation only and
therefore, the same needs to be reimbursed to the
THPL which has incurred this expenditure.
______________
2
Abbey Business Services India Pvt. Ltd. v. DCIT [2012] 53 SOT 401
(Bang), ACIT v. CMS (I) Operations & Maintenance Co. P. Ltd. [2012] 135
ITD 386 (Chen), ITO v. CMS (I) Operations & Maintenance Co. P. Ltd. (ITA
No.1264/Mds./2012), ITO v. Ariba Technologies (I) Pvt. Ltd. (ITA
no.616/Bang/2011), DIT v. HCL Infosystem Ltd.[2005] 274 ITR 261 (Del),
HCL Infosystems Ltd [2002] 76 TTJ 505 (Del), Dolphin Drilling Ltd. v. ACIT
[2009] 29 SOT 612 (Del), Cholamandalam MS General Insurance Co. Ltd. Re
[2009] 309 ITR 356 (AAR), DDIT v. Tekmark Global Solutions LLC (Tekmark)
[2010] 38 SOT 7 (Mum), CIT v. Karistorz Endoscopy India P. Ltd. (ITA No.13
of 2008 (Del), ACIT v. Karistorz Endoscopy India P. Ltd. (ITA
No.2929/Del/2009), and IDS Software Solutions (I) P Ltd. v. ITO [2009] 32
SOT 25 (Bang)
3
ACIT v. Petroleum India International (ITA No.8086/Mum./2003) and (C.O.
No.6/Mum/2009), dated 28 September 2012)
4
Emil Webber v. CIT [1993] 200 ITR 483 (SC)
5
Verizon Data Services Pvt Ltd v. AAR, ITO, ACIT [Writ Petition No. 14921 of
2011, dated 9 August 2011]
6
Verizon Data Services Pvt Ltd [2011] 337 ITR 192 (AAR)
By virtue of secondment agreement, THPL has
seconded two of its employees to the taxpayer, to assist
in rendering of investment advisory services. Further,
since the said employees were on the payroll of THPL,
the salary of these employees was paid by them after
deducting taxes.
Key highlights of the seconded agreement are as
follows:
Supervision, direction and control of the deputed
employees is with the taxpayer
THPL does not bear any responsibility or risk for
the results produced by the work of the deputed
employees
The salary cost of the deputed employees is borne
by the taxpayer and the cost of the deputed
employees is charged back by THPL to the
taxpayer on actual basis without any mark-up.
During the years under consideration, the taxpayer
reimbursed the salaries of seconded employees,
expenditure of seconded employees, business
promotions, professional fees, etc, to THPL.
The Assessing Officer (AO) held that the secondment
agreements between the taxpayer and THPL are
unregistered and, date and place in the agreement has
not been mentioned. These agreements are colourable
device with an intention to avoid tax liabilities in India.
Since these payments have been made, without
deducting Tax Deducted at Source (TDS) under Section
195 of the Act, the AO disallowed the expenditure under
Section 40(a)(i) of the Act.
For Assessment Year (AY) 2007-08, the Commissioner
of Income-tax (Appeals) [CIT(A)] confirmed the order
passed by the AO. Further, for AY 2008-09 the Dispute
Resolution Panel (DRP) held that the reimbursement of
salary cost and other expenditure has to be treated as
FTS under the tax treaty.
Issues before the Tribunal
Whether reimbursement of salary cost is treated as
FTS?
Whether such reimbursement of salary and other
expenditure is liable for withholding of tax?
Taxpayers contentions
Reimbursement of salary cost
THPL had deducted the tax under Section 192 of the
Act when they paid salary to employees and the same
has been deposited in India. Once the tax has been
deducted on the salary, again there was no requirement
to deduct tax on account of reimbursement of such
salary.

2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.



Relying on the decision of Siemens Akeiongesellschaft
7

it was contended that reimbursement of expenditure
cannot constitute income and no tax was required to be
deducted under Section 195 of the Act. Further, the
decision of the Supreme Court in the case of
Kanchanganga Sea Food
8
is not applicable to the facts
of the present case.
Tax departments contentions
In the absence of any employee-employer relationship
between the taxpayer and the seconded employees,
the taxpayer does not have any liability to pay the
salary to these employees and therefore, there was no
question of reimbursement. The payment was FTS
under the Act and also under the tax treaty. However, if
it is not a salary or FTS then there was a Service PE,
hence the payment was to be taxed in India.
On reference to the appointment letter of both the
employees, it was contended that the privity of contract
is between the THPL and the employee and the right of
termination also lies with the THPL. In support of its
contention the tax department relied on the decision of
Petroleum India International.
The nature of duties has not been mentioned in the
secondment agreement and on a perusal of Form 16 of
the two employees, it indicates that the allocation of
salary and the purpose the reimbursement was not
clear.
The tax department relied on the decision of the AAR in
the case of Verizon Data Service India Pvt. Ltd. Further,
the tax department also relied on various AAR rulings
9

where it has been held that payments made in
pursuance of secondment agreement cannot be held to
be reimbursement of expenditure and withholding of tax
under Section 195 of the Act was required on such
payment.
Reference to Explanation 2 to Section 9(1)(vii) of the
Act indicates that managerial and consultancy services
are treated as FTS. The services provided by seconded
employees are in the nature of advisory and managerial
service.
The phrase including the provisions of service of
technical or other personnel in Explanation 2 to Section
9(1)(vii) of the Act, is meant for the employees sent to
render service only. This will include the seconded
employees because it is through these personnel, the
services have been rendered and therefore, the
payments are FTS.


__________________
7
CIT v. Siemens Akeiongesellschaft [2009] 310 ITR 320 (Bom)
8
Kanchanganga Sea Foods Ltd v. CIT [2010] 325 ITR 540 (SC)
9
Centrica India Offshore Pvt. Ltd v. CIT (AAR No. 856/2010)
AT&S India Pvt. Ltd (AAR No.670/2005)
Danfoss Industries Pvt. Ltd. v. CIT (AAR No.606/2002)




Relying on various rulings
10
, the tax department
contended that the payment is also taxable under
Article 12(4)(b) of the tax treaty since these two
persons are making available the expertise to the
taxpayer.

These two employees were sent by the THPL to
work in India with the taxpayer and the employees
have rendered services on behalf of the THPL.
Therefore, this is a case of a Service PE and the
payment was made on account of the services and
not the salary. The taxpayer relied upon the AAR
ruling in the case of Centrica India Offshore Pvt.
Ltd.

The Transfer Pricing Officer (TPO) is not supposed
to look into the other nature of transactions or
reimbursement of expenditure since before him,
the matter is whether the international transactions
undertaken by the AE are at arms length or not.
Tribunals ruling
Reimbursement of salary
An agreement between the two parties need not
necessarily be registered as there is no provision
under the law which provides that such
secondment agreement needs to be registered or
any approval from the Government of India is
required.

The signed secondment agreement was duly filed
and in which the date has already been mentioned
in the operating part of the agreement. Accordingly,
the secondment agreement cannot be held to be a
colourable device.

Even if the relationship between the taxpayer and
the THPL is that of an independent contractor and
reimbursement of salary is a contractual payment,
there is no requirement to deduct tax since the
THPL has paid the salary after withholding of tax
under Section 192 of the Act.

The taxpayer was not a beneficiary of the
expenditure because the seconded employees
have been paid salary by THPL who are working in
India for the taxpayer and the taxpayer is merely
reimbursing the same.


______________
10
Shell India Markets Pvt. Ltd. (AAR no.833/2009)
Mersen India Pvt. Ltd. (AAR No.1074/2010)
Perfetti Van Mille Holding V.V (AAR no.869/2010)
2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.




By rendering service to THPL, the taxpayer is earning
business income and salary paid is a business
expenditure on which tax has already been deducted
by THPL since the liability to withhold the tax on
salary falls within the purview of Section 192 of the
Act. There cannot be a double deduction of tax - once
at the time of payment of the salary and again on the
reimbursement.
The decision of the AAR in the case of Verizon Data
Service India Pvt. Ltd. is not applicable to the facts of
the present case since in that case the seconded
employees of US Company were rendering services
in India and those services were rendered only
through the Indian company. Whereas, in the present
case the taxpayer is rendering service to THPL on a
mark-up basis and THPL was not rendering any
service in India through the taxpayer. Further, the
Madras High Court had dismissed the Writ Petition
filed by the taxpayer against this AAR ruling and no
opinion has been given by the High Court which has
persuasive value in the present case.
The decision of Danfoss Industries Pvt Ltd
11
was not
applicable to the facts of the present case. Further,
THPL is not rendering any service to the taxpayer and
seconded employees are working for the taxpayer.
Accordingly, managerial or consultancy services were
not rendered by THPL either directly or through the
seconded employees. Hence, provisions of Section
9(1)(vii) of the Act do not apply.
Further, such reimbursement is not taxable under
Article 12(4) of the tax treaty since the THPL is
neither rendering any services to the taxpayer nor
they are making available any kind of technical
knowledge, experience, skill or process to the Indian
company.
The Service PE would exist only when THPL is
rendering services in India through its seconded
employees. However, in the present case THPL is not
rendering any service to the taxpayer through
seconded employees.
Accordingly, on the reimbursement of salary,
reimbursement of expenditure, expenditure relating to
information technology and business promotion,
withholding of tax was not required and therefore,
there would be no disallowance under Section 40(a)(i)
of the Act.




__________________
11
Danfoss Industries Pvt. Ltd. [2004] 268 ITR 1 (AAR)




Reimbursement of other expenditure
The expenditure relating to seconded employees
such as meals, travelling, training, etc, was not
liable for TDS under the Act. Further, business
promotion expenditure and information technology
expenditure are also not liable for TDS since they
are neither for technical services nor for any
professional services. The Supreme Courts
decision in the case of Kanchanganga Sea Food
is not applicable to the facts of the present case.
In the case of professional fees, the expenditures
have been incurred for the purpose of the
taxpayer in India and these payments were made
by the THPL which has been reimbursed by the
taxpayer. TDS provisions are attracted to the
payment for professional services and it does not
make any difference whether the payment was
made by THPL and reimbursed by the taxpayer.
Our comments
Taxation of reimbursement to the foreign companies,
pursuant to secondment contracts has been a subject
matter of litigation before the courts from a long time.
The Indian tax authorities have been contending that
by sending employees to India, the foreign entities are
actually rendering services to the Indian companies or
carrying out business in India in the form of a PE in
India.
In the present case, the Tribunal held that the
Singapore Company had nothing to do with the
seconded employees except for paying their salary.
The Indian company was the economic employer of
the seconded employees. Further the employees were
rendering services purely for the Indian company.
Accordingly, the reimbursements were purely in the
form of salary from which tax was duly deducted and
deposited by the Indian company hence no further tax
withholding was required.
Recently, the Mumbai Tribunal in the case of Mark &
Spencer Reliance India P. Ltd
12
held that merely
providing employees or assisting the taxpayer in the
business and in the area of consultancy,
management, etc. would not constitute make
available of the services of any technical or
consultancy in nature under the India-UK tax treaty.
The Tribunal held that since the amount of salary
received by taxpayers personnel had been subjected
to tax in India, there was no default in deduction of tax
on the part of the taxpayer.
_____________
12
Mark & Spencer Reliance India P. Ltd. (ITA No. 905/M/2012)
Taxsutra.com
2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.



Note: - The present ruling has dealt with various issues,
however, this flash news has been prepared on the issue of the
reimbursement of salary and other costs.




2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.




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