Secondment payments treated as fees for technical services, not salary reimbursement, triggering withholding tax obligations.

Secondment payments to a foreign company were examined to determine whether they were mere salary reimbursements or consideration for technical services under the Income-tax Act and the DTAA. The Authority found that the foreign company retained control over the seconded personnel, including the power to replace them, and that the applicant was bound to bear the costs arising from the secondment. The reimbursement label was held not to be decisive, and the foreign company was treated as the real employer. The payments were therefore characterised as fees for technical services, including provision of technical or other personnel, rather than salary income, and were subject to tax withholding under section 195.

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Issues: Whether the amounts paid by the applicant to the foreign company under the secondment arrangement were mere reimbursement of salary cost or were consideration for technical services, and whether such payments attracted deduction of tax at source under section 195.

Analysis: The Authority examined the foreign collaboration agreement and the secondment agreement and found that the foreign company retained control over the seconded personnel, including the power to replace them, and that the applicant was obliged to compensate the foreign company for costs arising directly or indirectly from the secondment. The label of reimbursement was held not to be determinative. The Authority further held that the foreign company, and not the applicant, was the real employer of the seconded personnel. On that basis, the payments were treated as consideration for the rendering of technical services, including the provision of technical or other personnel, and not as salary income in the hands of the foreign company. The exception in the treaty definition for payments to an employee of the payer was found inapplicable.

Conclusion: The payments were held to be fees for technical services within section 9(1)(vii) of the Income-tax Act, 1961 and article 12(4) of the DTAA, and were therefore subject to withholding tax under section 195.

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