Secondment payments treated as taxable income of foreign principal, with withholding required on salary reimbursement character

Payments under a secondment arrangement were treated as taxable income of the foreign principal, not mere salary reimbursement, where the seconded employees remained on that principal's payroll, retained service benefits, and continued to be subject to its employment control. On that basis, the recipient company was required to deduct tax at source under section 195 of the Income-tax Act, 1961. For payroll processing charges, the record was insufficient to determine the substantive tax character conclusively, so no final ruling was given on chargeability; however, withholding was still required at the applicable rates, subject to the outcome of assessment proceedings.

---

---

Issues: (i) Whether the amount paid by the applicant to the foreign principal under the secondment arrangement was mere reimbursement of salary costs or income taxable in the hands of the foreign principal with an obligation to deduct tax at source; (ii) Whether the payroll processing charges payable to the foreign principal were liable to tax in India and whether tax was deductible at source on such payments.

Issue (i): Whether the amount paid by the applicant to the foreign principal under the secondment arrangement was mere reimbursement of salary costs or income taxable in the hands of the foreign principal with an obligation to deduct tax at source.

Analysis: The seconded personnel remained employees of the foreign principal because their salaries and service benefits continued to be paid by that principal, the right of dismissal continued to rest with it, and there was no material showing cessation of the original employment. The applicant had only the right to terminate the secondment, not the employment. On that basis, the payment made by the applicant could not be treated as reimbursement of salary expenditure. It represented consideration for making available the services of the seconded employees and constituted income in the hands of the foreign principal.

Conclusion: The amount paid under the secondment arrangement was not reimbursement. It was income of the foreign principal, and the applicant was required to deduct tax at source under section 195 of the Income-tax Act, 1961.

Issue (ii): Whether the payroll processing charges payable to the foreign principal were liable to tax in India and whether tax was deductible at source on such payments.

Analysis: The record did not contain adequate particulars about the duties of the seconded employees or the precise nature of the payroll-processing service, and therefore it was not appropriate to give a definitive ruling on the chargeability of those payments under the treaty or otherwise. The question of the tax character of the payroll processing charges was left to be decided by the assessing authorities on a fuller factual examination. Even so, the applicant's obligation to withhold tax could still be determined at the present stage in accordance with the Act, subject to final adjudication on taxability.

Conclusion: No final ruling was given on the chargeability of the payroll processing charges, but the applicant was held obliged to deduct tax at source at the rates prescribed by the Act, subject to the outcome of the assessment proceedings.

Final Conclusion: The ruling upheld tax withholding on both streams of payment, finally deciding the secondment issue against the applicant and leaving the substantive tax character of the payroll-processing payment open while maintaining a withholding obligation.

Ratio Decidendi: Where seconded employees continue to remain on the payroll and under the employment control of the foreign principal, payments made by the recipient company are not reimbursement of salary but taxable income of the foreign principal, attracting withholding under section 195.

---