Salary reimbursement and make-available test defeat FTS and royalty taxation under the India-France treaty

A cost-to-cost reimbursement of expatriate salary, where the employee was employed by the Indian entity and the amount was taxed as salary in his hands, was not fees for technical services in the payer's hands because it did not represent consideration for managerial, technical or consultancy services. Receipts from global information support and allied services were also not royalty, and although the services involved managerial and technical support under domestic law, the India-France DTAA applied because the services did not make available technical knowledge, experience, skill, know-how or processes. The treaty prevailed as the more beneficial provision, so the disputed income was not chargeable and the additions were deleted.

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Issues: (i) Whether reimbursement of salary cost paid by the non-resident assessee to an expatriate employee and recovered from the Indian entity without markup was taxable as fees for technical services; (ii) Whether receipts from global information support and allied services were taxable as royalty or fees for technical services under the Act and the India-France DTAA.

Issue (i): Whether reimbursement of salary cost paid by the non-resident assessee to an expatriate employee and recovered from the Indian entity without markup was taxable as fees for technical services.

Analysis: The expatriate was found to be employed by the Indian entity as its CEO, with salary, allowances, provident fund and superannuation benefits fixed and taxed as salary in his hands. The amount paid by the assessee in France was only a part of the salary liability of the Indian entity and was later recovered on a cost-to-cost basis. The consideration therefore did not represent payment for managerial, technical or consultancy services rendered by the assessee, nor did it accrue to the assessee in its own right as income. On these facts, the statutory exclusion where the recipient's income is chargeable under the head salaries applied, and the reimbursement could not be treated as fees for technical services.

Conclusion: The receipt was not taxable as fees for technical services and the addition was liable to be deleted.

Issue (ii): Whether receipts from global information support and allied services were taxable as royalty or fees for technical services under the Act and the India-France DTAA.

Analysis: The services rendered under the agreement covered managerial functions, accounting, human resources, purchasing, manufacturing, quality, and information-system support. These services involved rendering of managerial and technical support, so they fell within the domestic definition of fees for technical services under section 9(1)(vii) of the Act. However, they did not involve imparting of information or transfer of technical know-how so as to constitute royalty under section 9(1)(vi). Under the India-France DTAA, as modified by the protocol's most favoured nation clause and the India-UK treaty language, technical services were taxable only if they made available technical knowledge, experience, skill, know-how or processes. The services here did not make available any such enduring knowledge to the Indian entity, and managerial services were outside the treaty scope. The treaty provision being more beneficial, it prevailed over the Act.

Conclusion: The receipts were neither royalty nor taxable fees for technical services under the DTAA, and the addition was liable to be deleted.

Final Conclusion: The entire disputed income was held not chargeable in the assessee's hands, and the appeal succeeded.

Ratio Decidendi: A reimbursement of an employee's salary cost, taxed as salary in the employee's hands and recovered on a cost-to-cost basis, is not fees for technical services in the payer's hands; further, where treaty language requires services to make available technical knowledge, mere technical or managerial support that does not transmit enduring know-how is not taxable as fees for technical services under the treaty.

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