Secondment reimbursements and withholding tax: genuine cost-only payments were not fees for technical services or taxable income.
A genuine secondment arrangement was treated as placing the effective employment relationship with the Indian recipient where it had the right to accept the secondees, direct their work, control performance and require withdrawal. Amounts paid on a cost-only reimbursement basis, without mark-up, were treated as pure reimbursements and not income in the hands of the foreign company. The payments were also held not to be fees for technical services under the Income-tax Act or the India-UK tax treaty because no technical knowledge, skill or know-how was made available. As no sum chargeable to tax arose, withholding under section 195 did not apply and the related disallowance failed.
Issues: (i) Whether the assessee was the real and economic employer of the seconded personnel; (ii) whether the amounts paid under the secondment arrangement were pure reimbursements and not income in the hands of the foreign company; (iii) whether such payments constituted fees for technical services under the Income-tax Act, 1961 and the India-UK tax treaty; and (iv) whether tax was required to be deducted at source and disallowance under section 40(a)(i) followed.
Issue (i): Whether the assessee was the real and economic employer of the seconded personnel.
Analysis: The secondment agreement showed that the assessee had the right to accept the secondment, direct the work, control the manner and place of performance, and require withdrawal of a secondee. The foreign entity retained only the formal payroll and legal-employment label for regulatory reasons. On the substance of the arrangement, the indicia of employment lay with the assessee.
Conclusion: The assessee was the real and economic employer of the seconded personnel.
Issue (ii): Whether the amounts paid under the secondment arrangement were pure reimbursements and not income in the hands of the foreign company.
Analysis: Clause 4 required payment of amounts equivalent to remuneration, pension contributions, expenses, statutory payments and other sums incurred by the foreign company. The record also showed reimbursement at cost without mark-up. A reimbursement that merely restores expenditure does not carry an income or profit element in the recipient's hands.
Conclusion: The payments were pure reimbursements and did not constitute income in the hands of the foreign company.
Issue (iii): Whether such payments constituted fees for technical services under the Income-tax Act, 1961 and the India-UK tax treaty.
Analysis: The arrangement was for secondment of staff, not for rendering managerial, technical or consultancy services by the foreign company. No technical knowledge, experience, skill, know-how or process was made available to the assessee so as to enable independent future use. The treaty definition was therefore not satisfied.
Conclusion: The payments did not constitute fees for technical services under the Act or under the India-UK tax treaty.
Issue (iv): Whether tax was required to be deducted at source and disallowance under section 40(a)(i) followed.
Analysis: Since the payments were reimbursements without income character and were not fees for technical services, they were not chargeable to tax in the hands of the foreign company. In the absence of a sum chargeable to tax, withholding under section 195 was not attracted, and the consequential disallowance could not survive.
Conclusion: No tax was deductible at source and the disallowance under section 40(a)(i) was unsustainable.
Final Conclusion: The assessee succeeded on all material issues, the reimbursements under the secondment arrangement were held not taxable in the hands of the foreign company, and the related disallowance was deleted.
Ratio Decidendi: In a genuine secondment arrangement, where the recipient entity exercises effective control over the secondees and reimburses only actual costs without profit element, the payment is not fees for technical services and, absent a sum chargeable to tax, no withholding obligation arises under section 195.