India: Reimbursement Of Salaries Paid Under A Secondment Agreement Does Not Attract Withholding Tax In India, Rules Ahmedabad Tribunal

Last Updated: 12 April 2017
Article by SKP  

In a recent case1, the Ahmedabad Tribunal ruled that reimbursement made by an Indian company to a foreign company towards the cost of employees seconded by it to the Indian company does not attract tax withholding in India.

This judgement assumes significance in light of certain other court judgements holding that such reimbursements could attract tax in India. Recently, the Bangalore Tribunal, on similar facts, had ruled that such reimbursements attract tax withholding in India. (Please refer our earlier Tax Alert for more details).

Facts of the case

  • The taxpayer (BHD) was an Indian company. It entered into a secondment agreement with BHI, an entity based in the United States of America (USA), for the secondment of skilled personnel.
  • The seconded employees were working under the control and supervision of BHD.
  • The seconded employees were receiving a salary from BHI. They also received housing allowance, loan in local currency and an advance on salary from BHD.
  • The tax due in India on salary income earned by the seconded employees was paid by BHD.
  • The salaries paid by BHI to the seconded employees were reimbursed by BHD on a cost to cost basis, after reducing the tax payments made by BHD in India.
  • The amount reimbursed to BHI was paid entirely by BHI to the seconded employees.
  • BHD did not withhold any taxes on the reimbursement of costs to BHI.

Issue before the Tribunal

The issue before the Tribunal was whether the payment made to BHI under the secondment arrangement required tax withholding in India.

Taxpayer's contentions

  • The payments made to BHI did not involve any profit element and were in the nature of reimbursement.
  • The taxes due in India on the salaries earned by the seconded employees were already paid by BHD. Since due taxes on salaries were already paid in India, there was no loss to revenue by not withholding taxes on payment to BHI.

Revenue's contention

  • The seconded employees continued to be employees of BHI. Therefore, the payments made by BHD were for the supply of skilled manpower and were in the nature of Fees for Technical Services (Fees for Included Services under the India-USA tax treaty).
  • Furthermore, the work done by the seconded employees of BHI created a Service Permanent Establishment (PE) in India and accordingly the entire amount which was paid to BHI, being attributable to PE, was taxable in India at 40% on gross basis (in absence of information about the expenditure incurred).

Observations of the Tribunal

  • Section 195 of the Income Tax Act, 1961 (ITA), provides for tax withholding on payments to non-residents and does not apply to payments in the nature of salaries.
  • To examine the applicability of withholding tax, what is relevant is whether the nature of income embedded in the payment made is taxable in India under the head 'salaries'. It is irrelevant whether the seconded employees continue to be in the employment of the foreign entity or otherwise.
  • Since due taxes were withheld in India on the payment of salaries to the seconded employees, BHD does not have any tax withholding obligations on reimbursements to BHI.
  • Furthermore, the payment made to BHI is in turn paid by BHI to the seconded employees. Hence, even if a Service PE is constituted, there is no profit element involved in the hands of the Service PE and therefore the payment made would not attract tax withholding.
  • Furthermore, the Revenue did not bring any material on record to demonstrate that services provided by the seconded employees satisfied the 'make available' criteria under the India-USA tax treaty. Accordingly, the payments made could not be considered as Fees for Included Services under the India-USA tax treaty.

SKP's Comments

This ruling would be beneficial to defend concluded transactions where taxes are not withheld on reimbursement of salary costs of seconded employees.

Though this ruling is favourable, it does not discuss the other rulings on similar issues, including the Delhi High Court in the case of Centrica India2 (against which a Special Leave Petition has been dismissed by the Supreme Court of India). In these rulings, courts have held that reimbursement of salary costs of seconded employees attracts tax withholding in India since the legal employer of such seconded employees was the foreign entity.

The Tax Authorities in the instant case have not argued that while payment of salaries does not attract section 195, the payment is being made to BHI, which is a corporate entity and not an employee of BHD. Therefore, while payment made to BHI is towards reimbursement of salary costs, those costs are salaries qua the seconded employees and not in the hands of BHI.

Therefore, there is an active possibility that the Tax Authorities may challenge this decision before the High Court. As such, at present, this decision may not be a strong supporting precedent for planning future engagements.


1 Burt Hill Design Private Limited vs Deputy Director of Income Tax [TS-127-ITAT-2017(Ahd)]

2 Centrica India Offshore Private Limited vs DCIT [364 ITR 336](Del)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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