Secondment arrangements and salary reimbursement: effective control can exclude TDS and fees for technical services treatment

In a secondment arrangement, the note explains that tax characterisation depends on who exercises effective supervision and control over the secondee. Where the assessee directs the secondee's work, the secondee reports to it, and the foreign entity is reimbursed only for salary and related costs already taxed in India, the remittance is treated as salary reimbursement rather than a payment attracting deduction of tax at source under section 195. The note also states that such an arrangement is not a contract for technical services, so it does not fall within fees for technical services under section 9(1)(vii).

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Issues: (i) Whether the secondee was an employee of the assessee so that the remittance represented salary reimbursement and not a payment attracting deduction of tax at source under section 195; (ii) whether the remittance was fees for technical services within section 9(1)(vii) of the Income-tax Act, 1961.

Issue (i): Whether the secondee was an employee of the assessee so that the remittance represented salary reimbursement and not a payment attracting deduction of tax at source under section 195.

Analysis: The appointment letter, the secondment agreement, and the board resolutions showed that the secondee was placed under the assessee's supervision and control, was reportable to the assessee, had to act on its instructions, and could be rejected or replaced at the assessee's instance. The contractual arrangement, read with the articles of association, established that the assessee was the real employer for the relevant period, and the amount remitted to the foreign company was only reimbursement of salary and related expenses already subjected to tax in India in the hands of the employee.

Conclusion: The remittance was salary reimbursement and section 195 did not require further deduction of tax; the finding was in favour of the assessee.

Issue (ii): Whether the remittance was fees for technical services within section 9(1)(vii) of the Income-tax Act, 1961.

Analysis: The secondment arrangement was not a contract for rendering technical services. Its operative clauses showed a service relationship governed by employment control, confidentiality, replacement rights, and indemnity, which were inconsistent with a pure technical-services contract. The cited advance ruling precedents were distinguished because they involved different contractual structures and situations where the foreign enterprise retained the relevant control over personnel or where actual technical consultancy services were being provided.

Conclusion: The payment was not fees for technical services and no tax was deductible on that basis; the finding was in favour of the assessee.

Final Conclusion: The assessee succeeded on the central questions of characterisation of the payment and tax deduction at source, so the appeal was allowed.

Ratio Decidendi: In a secondment arrangement, where the assessee has effective supervision and control over the secondee and the payment is only reimbursement of salary already taxed in India, the remittance is not fees for technical services and no further deduction under section 195 is attracted.

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