Seconded employees and service permanent establishment: salary reimbursement held outside fees for included services and taxed under business profits rules

Reimbursement of salary cost for seconded employees working in India under the Indian entity's supervision was held not taxable as fees for technical services or fees for included services under section 9(1)(vii) and Article 12, because the arrangement involved a service permanent establishment and fell within the treaty exclusion. The receipt had to be examined under Article 7 as business profits, with the salary cost allowed as a corresponding deduction. The Tribunal rejected taxation under Article 12 and deleted the assessment addition, granting relief to the assessee.

---

---

Issues: Whether reimbursement of salary cost paid by the Indian entity to the foreign company in respect of seconded employees was taxable as fees for technical services or fees for included services, or whether it was to be examined only under the business profits article because the seconded employees constituted a service permanent establishment.

Analysis: The seconded employees were deputed to work in India under the Indian company's supervision, while salary was paid by the foreign company and reimbursed at cost. The Tribunal held that the existence of a service permanent establishment brought the case within the exclusionary clause of the treaty provision dealing with royalties and fees for included services, so such receipts could not be taxed under Article 12 as fees for included services. Instead, the receipt had to be considered under Article 7 while computing business profits, with salary cost allowed as deduction. The Tribunal therefore rejected the Revenue's approach of taxing the reimbursement under section 9(1)(vii) and Article 12.

Conclusion: The reimbursement of salary cost was not taxable as fees for technical services or fees for included services under section 9(1)(vii) and Article 12; it had to be dealt with under Article 7, resulting in relief to the assessee.

Final Conclusion: The assessment addition was deleted and the assessee's appeal succeeded because the payment was held to fall outside Article 12 and to be governed by the business profits article.

Ratio Decidendi: Where seconded employees create a service permanent establishment and the treaty contains an exclusion for such cases, reimbursement of their salary cost cannot be taxed as fees for included services under the treaty but must be considered under the business profits article.

---