Secondment reimbursement and transfer pricing comparability guide tax treatment of salary reimbursements and advisory margins

Reimbursement of salary and allied expenses for seconded employees was treated as non-taxable in the recipient's hands where the employees worked under the Indian company's control and tax had already been deducted under section 192 by the overseas employer; accordingly, no further deduction under section 195 arose and the related disallowance under section 40(a)(ia) was deleted. The arrangement was also not regarded as fees for technical services under section 9(1)(vii) or Article 12(4)(b) of the India-Singapore DTAA. Reimbursement of professional fees required separate examination. In transfer pricing, comparability turned on functional similarity, risk profile, and reliable segmental analysis, and the investment advisory adjustment was deleted because the assessee's comparables were functionally acceptable and the margin was treated as arm's length.

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Issues: (i) Whether reimbursement of salary and allied expenses paid to seconded employees was liable for deduction of tax at source under section 195 and, on failure, disallowable under section 40(a)(ia); (ii) Whether the transfer pricing adjustment made in respect of investment advisory services was justified.

Issue (i): Whether reimbursement of salary and allied expenses paid to seconded employees was liable for deduction of tax at source under section 195 and, on failure, disallowable under section 40(a)(ia).

Analysis: The seconded employees worked in India under the supervision and control of the Indian company. Their salary had already suffered tax deduction under section 192 in the hands of the overseas company, and the Indian company merely reimbursed that salary and routine employment-related expenses. Such reimbursement did not constitute a fresh payment chargeable to tax in the hands of the recipient so as to attract section 195. The Court also held that the arrangement was not shown to be a colourable device, and that the reimbursement of salary and incidental employee es did not amount to fees for technical services under section 9(1)(vii) or Article 12(4)(b) of the India-Singapore DTAA. Reimbursement of professional fees, however, required separate examination.

Conclusion: The disallowance under section 40(a)(ia) was deleted in respect of reimbursement of salary and allied employee expenses, while reimbursement of professional fees was remitted for fresh adjudication.

Issue (ii): Whether the transfer pricing adjustment made in respect of investment advisory services was justified.

Analysis: The assessee's comparables reflected the functions of an investment advisory enterprise, whereas the comparables adopted by the Transfer Pricing Officer were materially different in function, risk profile, and character, such as broking, asset management, rating, or other unrelated activities. The Court held that the assessee's six comparables were acceptable on functional comparability, particularly since several had been accepted in earlier and later years, and that the assessee's 21% margin was at arm's length on the material before it. On that basis, the adjustment could not be sustained.

Conclusion: The transfer pricing adjustment was deleted.

Final Conclusion: The assessee succeeded on the principal dispute regarding tax deduction on secondment reimbursement and on the transfer pricing addition, with only the professional-fee component sent back for reconsideration.

Ratio Decidendi: Reimbursement of salary paid to seconded employees, where tax has already been deducted under section 192 and the employees work under the control of the Indian company, is not a separate sum chargeable under section 195, and transfer pricing comparability must be tested by functional similarity, risk profile, and reliable segmental analysis.

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