India: Reimbursement Of Salary Paid Under A Secondment Arrangement Does Not Attract Withholding Tax In India, Rules Bombay High Court

Last Updated: 19 May 2017
Article by SKP  

In a recent case1, the Bombay High Court in a brief order confirmed the view of the Mumbai Tribunal that the reimbursement of salary paid under a secondment arrangement does not attract Withholding Tax (WHT) in India.

This judgment assumes significance in light of the contrary judgments of Indian courts and tribunals so far on this issue. Recently, the Bangalore Tribunal2 decided this issue in favour of the Revenue whereas the Ahmedabad Tribunal3 decided this issue against the Revenue.

Facts of the case

  • The taxpayer is a joint venture company between Marks & Spencer Plc (UK Co) and Reliance Retail Ltd (RRL).
  • A Service Agreement was initially entered on 6 October 2008, whereby UK Co and RRL agreed to provide assistance to the taxpayer (a joint venture company) to operate the business.
  • Subsequently, pursuant to an agreement dated 31 July 2009, UK Co provided certain personnel to the taxpayer for carrying out functions such as management of setting up of business, property selection, retail operation, product selection and setting up a merchandise team.
  • The taxpayer paid an amount to UK Co towards the part cost of these deputed personnel without applying any WHT on such payment.

Tax proceedings up to Tribunal

The Tax Officer took a view that the taxpayer committed a default by remitting the amount to UK Co without applying any WHT and hence, he treated the taxpayer asAssesse-In-Default (AID).

Upon an appeal by the taxpayer, the Commissioner of Income Tax (Appeals) (CIT(A))4 rejected the order of the Tax Officer. The CIT(A) took a view that the remitted amount was only a reimbursement of expenses and cannot be treated as income deemed to accrue or arise in India.

Upon an appeal by the Revenue, the Tribunal5 also rejected the view of the Tax Officer and held as under:

  • The expatriation of employees under the secondment agreement for assisting the taxpayer in the business and in the areas of consultancy, management, etc. without the transfer of technology would not fall under the term 'make available' as per Article 13(4)(c) of the Double Taxation Avoidance Agreement (DTAA) between India and the UK (India-UK DTAA).
  • Accordingly, the payment in question does not fall under the term 'Fees for Technical Services' (FTS) as per the provisions of the India-UK DTAA6.
  • If the payment is only a reimbursement of expenses, the same cannot be regarded as income in the hands of the payee/recipient even under the Income Tax Act, 1961 (ITA).
  • There is no dispute about the fact that the taxpayer has made the payment towards part reimbursement of salary expenditure, which clearly shows that there is no element of profit in such payment. Even other various agreements support this fact.
  • Furthermore, the entire amount of salary received by the personnel of UK Co has been subjected to tax in India at the highest average rate of tax. Therefore, there is no question of any default on the part of the taxpayer.
  • The payment made by the taxpayer is actually payment made to the employees deputed in India, but routed through UK Co. Since payment to the employees was already subjected to tax in India, there is no question of treating the taxpayer as an AID for not applying WHT.

Bombay High Court judgment

In a brief order, the Bombay High Court did not find the order of the tribunal perverse or vitiated by any error of law apparent on the face of the record. Accordingly, the Bombay High Court dismissed Revenue's appeal.


1 DIT vs Marks & Spencer Reliance India (P) Ltd in Income Tax Appeal No. 893 of 2014 pronounced on 3 May 2017

2 Flughafen Zurich AG vs DDIT [TS-96-ITAT-2017] (Bang) dated 10 March 2017 - Please refer to our previous Tax Alert dated 21 March 2017 for more details

3 Burt Hill Design Pvt Ltd vs. DDIT [TS-127-ITAT-2017] (Ahd) dated 28 March 2017 - Please refer to our previous Tax Alert dated 5 April 2017 for more details

4 The First Appellate Level in India

5 ADIT v Marks & Spencer Reliance India (P) Ltd [2013] 38 < em> 190 (Mumbai Tribunal)

6 The tribunal followed the decisions in CIT vs De Beers India Minerals (P) Ltd [2012] 346 ITR 467 (Kar) and Mahindra & Mahindra Ltd vs DCIT [2010] 122 ITD 216 (Mumbai Tribunal) (SB)

SKP's comments

Although the Bombay High Court has not passed the speaking order, it could be beneficial to defend the concluded transactions where taxes are not withheld on reimbursement of salary costs of seconded employees. However, it may be noted that the Bombay High Court's order is silent on Permanent Establishment risk to foreign entity in India.

Furthermore, the Bombay High Court has not considered/discussed the earlier order of the Delhi High Court7 (against which a Special Leave Petition (SLP) was dismissed by the Supreme Court of India8). Subsequent to the Delhi High Court's decision, there have been certain tribunal rulings9 that followed the Delhi High Court's decision by seemingly taking a view that as the 'legal employer' of the seconded employees was the foreign entity, the reimbursement of salary costs of seconded employees attracts WHT in India.

Under international tax jurisprudence, the concept of 'economic employer' has been commonly accepted where the entity under whose control and supervision the seconded employee is working10 could be considered the employer in real sense (economic employer). Prior to the Delhi High Court's order, there have been rulings even in India that accepted the 'economic employer' concept while deciding the issue of WHT applicability to salary reimbursements pursuant to the secondment arrangement. These rulings, which were on the lines of international tax jurisprudence, seem to have taken a more pragmatic view of the issues arising from the taxation of secondment of employees.

A question arises as to whether one can take a view that the Delhi High Court order has attained finality upon dismissal of SLP. The answer to this is probably in negative if one goes by the recent Supreme Court order,11 though rendered in a different context/issue. In such a scenario, the issue of taxation of seconded employees might be aggravated due to the two conflicting decisions of High Courts (namely the current decision of the Bombay High Court against the Revenue and the Delhi High Court decision in favour of the Revenue).


7 Centrica India Offshore (P) Ltd vs CIT [2014] 364 ITR 336 (Del)

8 Reported in 227 Taxman 368

9 Food World Supermarkets Ltd vs DCIT [2015] 63 < em> 43 (Bangalore Tribunal) and Intel Corporation vs DDIT [2016] 76 < em> 125 (Bangalore Tribunal)

10 Please note that this is one of the main factors (not the only factor) in relation to the concept of 'economic employer'

11 M/s Palam Gas Service vs Commissioner of Income Tax [TS-170-SC-2017] in Civil Appeal No. 5512 of 2017 pronounced on 3 May 2017

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