Secondment payments to foreign entities were taxable in India and attracted withholding tax under the treaty framework.

Secondment-linked payments to overseas group entities were treated as income in the hands of those entities, because the secondees remained their employees, the foreign entities retained the salary obligation and the Indian company merely recovered the cost. The arrangement was not treated as a true reimbursement or as diversion of income by overriding title. The amounts were also held taxable in India because the overseas entities had a service permanent establishment in India, even though the payments were not characterised as fees for technical or included services under the treaty. As the sums were chargeable to tax in India, withholding tax under section 195 was required.

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Issues: (i) Whether the amounts paid by the applicant to the overseas entities under the secondment arrangement constituted income accruing to those entities or mere reimbursement of salary costs; (ii) Whether tax was deductible at source under section 195 of the Income-tax Act, 1961 on such payments.

Issue (i): Whether the amounts paid by the applicant to the overseas entities under the secondment arrangement constituted income accruing to those entities or mere reimbursement of salary costs.

Analysis: The secondees remained employees of the overseas entities, which retained the obligation to pay salary and the right to enforce employment claims. The applicant had supervision and control for work purposes, but no obligation to pay salary and no right to terminate the underlying employment. The payments made by the applicant were therefore not true reimbursements in the sense of a pass-through without income character. The arrangement, viewed as a whole, involved the overseas entities making available managerial personnel and recovering the corresponding cost from the applicant, so the amounts constituted income in the hands of the overseas entities. The plea of diversion of income by overriding title also failed because the salary obligation had already been discharged by the overseas entities before recovery from the applicant.

Conclusion: The amounts paid by the applicant were income accruing to the overseas entities and were not excluded as mere reimbursement or by diversion of income by overriding title.

Issue (ii): Whether tax was deductible at source under section 195 of the Income-tax Act, 1961 on such payments.

Analysis: The secondees were deployed to perform managerial functions in India for the applicant, a subsidiary of the foreign group, while continuing on the payroll of the overseas entities. On these facts, the overseas entities had a service permanent establishment in India under the relevant treaty provisions. The consideration was not held to be fees for technical services or included services under the applicable treaty articles, but it remained taxable in India because of the service permanent establishment. Once the payment was chargeable to tax in India in the hands of the non-resident entities, the withholding obligation under section 195 arose.

Conclusion: Tax was deductible at source under section 195 of the Income-tax Act, 1961.

Final Conclusion: The ruling determined that the secondment-linked payments were taxable in India in the hands of the overseas entities and that the applicant was required to withhold tax on those payments.

Ratio Decidendi: Where secondees continue to remain employees of the foreign entity and the foreign entity retains the salary obligation, the recovery from the Indian subsidiary is taxable income of the foreign entity and, if chargeable in India through a service permanent establishment, attracts withholding under section 195.

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