Secondment reimbursement not taxable as fees for technical services where Indian entities controlled employees and salaries were taxed

Cost-to-cost reimbursement for seconded employees was not treated as fees for technical services under Article 12 of the India-USA DTAA where the deputation arrangement showed the Indian entities exercised control, direction and supervision over the personnel, who worked exclusively for them and whose salaries were already taxed under withholding provisions. The foreign entity's role in facilitating payment and recovering the salary cost did not, on these facts, convert a salary reimbursement into taxable technical service consideration. The addition was therefore deleted, as the arrangement did not establish that the assessee rendered technical services through the seconded employees.

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Issues: Whether the cost-to-cost reimbursement paid in respect of seconded employees was taxable as fees for technical services under Article 12 of the India-USA DTAA and whether the seconded personnel were, in substance, employees of the Indian entities, so that the amounts constituted reimbursement of salary costs rather than taxable consideration in the hands of the assessee.

Analysis: The deputation agreement showed that, during the period of assignment, the seconded personnel functioned under the control, direction and supervision of the Indian entities, worked exclusively for them, and the Indian entities were responsible for their work and for salary-related payments. The tax had already been deducted on the salaries in the hands of the seconded personnel under the applicable withholding provisions. The mere fact that the foreign entity facilitated payment and recovered cost from the Indian entities did not, on these facts, convert a salary reimbursement into fees for technical services. The arrangement did not establish that the assessee itself rendered technical services to the Indian entities through the seconded employees in a manner that would attract Article 12 taxation.

Conclusion: The reimbursement on account of secondment was not taxable as fees for technical services, and the impugned addition was liable to be deleted in favour of the assessee.

Ratio Decidendi: Cost-to-cost reimbursement for seconded employees, where the Indian entity is the real employer for the period of secondment and the salaries are taxed as employment income, is not chargeable again as fees for technical services merely because the foreign entity routes or recovers the salary cost.

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