Section 195 withholding on seconded employee reimbursements fails where the payments are salary income and no FTS treaty test is met

Section 195 withholding was not attracted on remittances to a foreign parent for seconded employees because the payments were salary-related reimbursements, and the underlying income had already been taxed in India as salary. The existence of a service permanent establishment did not alter the result, as the receipts were matched by corresponding salary reimbursement expenditure and no taxable profit was shown. The fees for technical services characterisation also failed because the treaty test of making available technical knowledge, skill, know-how or processes was not satisfied. Accordingly, no tax deduction obligation arose and the consequent demand could not stand.

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Issues: (i) Whether remittances made to the foreign parent in respect of seconded employees were sums chargeable to tax other than salary income so as to attract deduction of tax at source under section 195; (ii) whether the existence of a service permanent establishment or the characterization of the payment as fees for technical services could sustain the withholding demand.

Issue (i): Whether remittances made to the foreign parent in respect of seconded employees were sums chargeable to tax other than salary income so as to attract deduction of tax at source under section 195.

Analysis: The payment to the non-resident represented salary-related reimbursement attributable to seconded employees, and the income embedded in those payments had already been brought to tax in India under the head income from salaries. Section 195 is triggered only when the payment contains a sum chargeable under the Act other than salary income, and the nature of the income governs the withholding obligation, not the manner in which tax was separately discharged in a particular year.

Conclusion: The assessee had no withholding obligation under section 195, and the demand raised under section 201 read with section 195 could not survive.

Issue (ii): Whether the existence of a service permanent establishment or the characterization of the payment as fees for technical services could sustain the withholding demand.

Analysis: The existence of a service permanent establishment was held to be immaterial because the receipts were matched by corresponding salary reimbursement expenditure, leaving no taxable profit attributable to the alleged permanent establishment. The fees for technical services characterization also failed because there was no showing that technical knowledge, skill, know-how, or processes were made available within the treaty test, and consequently section 9(1)(vii) could not be invoked more beneficially against the assessee.

Conclusion: The service permanent establishment and fees for technical services contentions did not justify tax withholding under section 195 or the consequent demand under section 201.

Final Conclusion: The withholding demands were unsustainable, the assessee's appeals succeeded, and the Revenue's appeals failed.

Ratio Decidendi: The obligation to deduct tax at source under section 195 arises only on sums chargeable to tax in India other than salary income, and where the payment is salary income already taxable in the hands of the recipients, neither a service permanent establishment nor a treaty fees-for-technical-services characterization can create a withholding liability.

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