It is quite common that when Indian company receives technology from foreign company, it also receives services of technical persons who are competent in the field of such technology. The technical persons are sometimes provided by the foreign company for specific jobs or for short duration and many a times, they are deputed for a longer period. Sometimes they are directly employed by the Indian company, while in other cases the foreign company deputes technical persons under an agreement which is popularly called “The Secondment Agreement”. They are paid salary, bonus and other benefits by the foreign company and the Indian company reimburses the cost incurred on such employees by the foreign company.
It is, therefore, argued that what the Indian company is paying to the foreign company is actual reimbursement of cost and therefore such payment is not liable to tax in India.
The above issue came up for consideration before Authority for Advance Rulings ( AAR No. 865 of 2010). In this case an American company sent three employees under secondment agreement to work for its subsidiary in India. The employees shall function and act exclusively under the direction, control and supervision of Indian company. The American company shall make payment to the employee and the Indian company shall reimburse the American company.
The Authority vide its decision dated 27.05.2011 noted that while the seconded employees are providing services to the Indian company, they will remain the employees of the American company.
The Authority finally held that the amount reimbursed by the Indian company to the American company represents income accruing to the American company and it is accordingly chargeable to tax as ‘fee for technical services’.
Similar issue was also considered by the Authority in the case of AT & S India Pvt. Ltd. (287 ITR 421) wherein the Authority took a similar view that the sum paid shall be liable to tax as Fees for Technical Services in India.
On the other hand, a contrary view has been taken by the various benches of the Hon’ble ITAT on similar issue. The Hon’ble Bangalore Tribunal in the case of M/s IDS Software Solutions India P Ltd v ITO ITA No. 87/Bang/2008 has held that the Indian company shall be treated as economic employer of the seconded employee. The Tribunal further observed that the sum paid shall be chargeable as salary in India in the hands of the seconded employee. It was therefore held that the reimbursement paid to the parent company can not be regarded as fees for technical services since explanation 2 to section 9(1)(vii) provides that any sum which would be income of the recipient chargeable under the head “salaries” should not be considered as Fees for Technical Services.
Similar view was also taken by the Hon’ble Delhi Tribunal and appeal against which was dismissed by the Hon’ble Delhi High Court in the case of CIT v Karl Stroz Endoscopy India (P) Ltd., in ITA No. 13 of 2008 dated 13.09.2010.
It is obvious that the decision of AAR is in direct contradiction of the decisions taken by various benches of ITAT and the Delhi High Court. Reading of the Authority’s decision also reveals that neither the ITAT and High Court judgments were brought to the notice of the Authority nor the Authority considered such decisions on its own.
With utmost respect the decision of the Hon’ble AAR requires a review because the said decision completely upsets the principle followed in large number of settled cases.
In the meantime, it may be kept in mind that when expatriates are deputed to work in India under a secondment agreement, the amount paid by the Indian company in respect of services of such employees may be treated as ‘fee for technical services’ in the hands of the foreign company. The legal position however could be different if the seconded employee totally breaks his employment with the foreign company and comes under direct employment of the Indian company.
H.P.Agrawal
(Author is a Sr. Partner in S.S. Kothari Mehta & Co.)
