2025 (9) TMI 161 - AT - Income Tax

Reimbursements for seconded employees paid cost-to-cost are not FTS and no TDS required under s.195; ss.201 relief upheld

ITAT, BANGALORE (AT) affirmed CIT(A)'s conclusion that reimbursements of salary costs paid by the assessee to its associated enterprise for seconded ... TDS u/s 195 - assessee makes payment for reimbursement of salary cost of seconded employees to its US holding company - make available clause - AO held that reimbursement made of salary cost is taxable as Fee for Technical Services [FTS] and as per provisions of section 195 tax was deductible at source - CIT(A) deleted addition - HELD THAT:- CIT(A) has followed the decision of the coordinate Bench in assessee’s own case and held that no tax is required to be deducted at source on reimbursement of salary on seconded employees on cost to cost basis. CIT(A) further followed the decision of Hon'ble jurisdictional High Court. Therefore, we do not find any infirmity in the order of the CIT(A) in holding that no tax is required to be deducted at source by the assessee on such payment made to its AE. Accordingly, the order of the CIT(A) is upheld. As we have already held that no tax is required to be deducted at source on payment of reimbursement of salary to seconded employee u/s. 195 of the Act, consequently the order passed u/s. 201(1) & 201(1A) of the Act are quashed. Appeals filed by the Revenue are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether payments described as reimbursement of salary costs paid by a resident Indian payer to its non-resident associated enterprise for seconded employees qualify as 'fee for technical services' under Explanation 2 to section 9(1)(vii) of the Income-tax Act, 1961. 2. Whether the same payments qualify as 'fees for included services' (FIS) under Article 12(4) of the India-US DTAA, including whether the 'make available' requirement is satisfied. 3. Whether the secondees were legally/economically employees of the Indian host or of the overseas seconder (i.e. the real/employer-employee relationship question) and the consequences of that determination for tax liability and withholding obligations. 4. Whether the invoiced payments characterized as 'reimbursements' lack an income element (cost-to-cost; no mark-up) such that no withholding under section 195 is triggered. 5. Whether deduction of tax under section 192 on salary paid to secondees by/through the Indian entity precludes any obligation to withhold under section 195 on amounts paid to the non-resident AE (allegation of 'double deduction' or double taxation). 6. Whether reliance on and application of precedents (including Centrica, Danfoss, AT&S, Foodworld, Flipkart, Abbey and coordinate-bench orders in the assessee's own case) is appropriate and dispositive on the above questions. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability under section 9(1)(vii) (FTS) of payments to non-resident AE Legal framework: Explanation 2 to section 9(1)(vii) defines FTS as any consideration for rendering managerial, technical or consultancy services (including provision of services of technical or other personnel), excluding consideration which would be income chargeable as 'Salaries' in the recipient's hands. Precedent treatment: Decisions of AAR/tribunals and courts (Danfoss AAR; AT&S AAR; Arthur Andersen Tribunal; Foodworld ITAT) are cited to the effect that absence of a profit element does not convert a payment for services into mere reimbursement and that payments for seconded personnel can amount to FTS even if billed on cost-to-cost basis. Interpretation and reasoning: The Court examined the nature of services provided by secondees (senior, skilled, managerial/technical roles), the contractual terms, and the economic reality that the overseas AE supplied and was compensated for personnel who performed services in India for the host. The fact that salaries were paid by the AE and other compensation elements existed (relocation, social security, allowances) supports that the payment to AE is consideration for provision of personnel/services, not mere salary disbursement. Absence of mark-up is irrelevant; element of profit is not essential to find receipt as income for services. Ratio vs. Obiter: Ratio - payments made to a non-resident AE for seconded employees who render technical/managerial/consultancy services to the Indian host fall within Explanation 2 to section 9(1)(vii) and are chargeable as FTS. Obiter - illustrative examples and policy observations on nature of 'technical' need not be exhaustive. Conclusion: The payments in question are taxable as FTS under section 9(1)(vii) when the recipient is the non-resident AE; mere labelling as 'reimbursement' or absence of mark-up does not negate taxability. Issue 2 - Taxability under DTAA (Article 12(4)) and the 'make available' requirement Legal framework: Article 12(4) (India-US DTAA) treats payments for technical/consultancy services (including provision of personnel) as FIS, but (in clause (b)) requires, for certain services, that technical knowledge/skill/know-how be 'made available' to the recipient to attract treaty taxation. Precedent treatment: The Delhi High Court in Centrica and other authorities interpret 'make available' to include transmission of know-how/skills through secondment where the secondees impart expertise enabling the host's employees to continue the work; several tribunal/AAR decisions have applied this construction to hold secondment payments within DTAA scope. Interpretation and reasoning: The Court focused on why the secondment was arranged (host lacked requisite skills), the senior/technical nature of secondees' work, contractual clauses (training, performance appraisals, allowances), and the practical likelihood that secondees transferred know-how/techniques to host personnel. The mere temporary nature of deputation did not prevent 'making available'; it suffices that know-how/skill were transmitted or made accessible during secondment so that the host could apply them thereafter. Ratio vs. Obiter: Ratio - where secondment results in the host obtaining technical/managerial knowledge, experience or processes (even if via personnel) the 'make available' threshold of the India-US DTAA is satisfied and payments qualify as FIS. Obiter - observations about breadth of 'technical' as a term and policy considerations. Conclusion: The payments satisfy the DTAA 'make available' test and are taxable as fees for included services under Article 12(4) of the India-US DTAA. Issue 3 - Employer-employee relationship (real employer / secondee status) Legal framework: Determination of the real employer relies on contractual terms, who bears ultimate rights/duties (right to terminate), who pays salaries, who bears social security liabilities, and overall economic reality; legal tests include the right of control and the right of termination. Precedent treatment: AAR/tribunal decisions (AT&S), High Court dicta (Centrica) emphasize that secondment does not necessarily sever employment with the original employer; the real employer remains the seconder where contractual rights, payroll and social benefits remain with the overseas employer. Interpretation and reasoning: The Court found the overseas AE continued to pay salaries, retained termination rights and social security obligations, and the secondment was temporal. Evidence (salary payment by AE, benefits under home-country laws, right to recall) indicates the secondees remained employees of the AE; control exercised by host during secondment did not alter legal employment status. Ratio vs. Obiter: Ratio - secondees remained employees of the overseas AE (seconder), not of the Indian host; hence payments to the AE are not salaries in the AE's hands but compensation for providing personnel/services. Obiter - discussion on interplay of control vs. right to terminate. Conclusion: The real legal/economic employer was the overseas AE; seconded personnel did not become employees of the Indian host for purposes of classifying recipient income. Issue 4 - Nature of payments: reimbursement vs consideration for services Legal framework: Characterisation depends on substance over form; 'reimbursement' label is not determinative - the courts examine contractual obligations, whether amounts compensate for services rendered, and whether income element exists. Precedent treatment: Danfoss (AAR) and AT&S (AAR) held that payments termed reimbursement can still embody an income element and be consideration for services; Arthur Andersen (tribunal) held TDS may apply even where services are charged at cost. Interpretation and reasoning: The Court analysed the secondment agreement terms, the broad compensation components, lack of evidence that amounts merely equal actual expenses, and the commercial quid pro quo nature of payments. It rejected the proposition that absence of mark-up or use of term 'reimbursement' converts the transaction into a non-taxable reimbursement. Ratio vs. Obiter: Ratio - payments labelled reimbursement but made in consideration of provision of personnel/services constitute income of the AE and are taxable; the label and cost-to-cost billing do not preclude section 195 obligations. Obiter - examples illustrating irrelevance of profit-element. Conclusion: The payments were not mere reimbursements; they were consideration for services rendered by the AE through secondees and thus taxable in the AE's hands. Issue 5 - Interaction of withholding obligations under sections 192 and 195; double taxation argument Legal framework: Section 192 applies to tax deduction on salary payments (employer) and section 195 to withholding on payments to non-residents; both operate independently where separate taxable events exist. Precedent treatment: Authorities show concurrent operation of different TDS provisions (example: resident payer deducting under service-specific sections and payee later liable under salary provisions) and courts have rejected the view that a deduction under one section automatically negates another distinct withholding obligation. Interpretation and reasoning: The Court treated the two payments as distinct transactions: (a) salary income in the hands of the secondee (taxable and subject to section 192 by the real employer), and (b) consideration to the AE for providing personnel/services (taxable in AE's hands and subject to section 195). The fact that the Indian entity may have deducted tax under section 192 on behalf of the secondee does not discharge the separate withholding obligation on payments to the AE. Administrative convenience or payment on behalf does not extinguish statutory duties of withholding under the proper head. Ratio vs. Obiter: Ratio - sections 192 and 195 are independent; deduction under section 192 does not obviate a separate duty to withhold under section 195 where the payment to non-resident is itself chargeable. Obiter - policy comments on administrative convenience. Conclusion: Both withholding provisions operate independently; payment of TDS under section 192 does not by itself eliminate a section 195 liability where payable amounts to consideration to a non-resident AE. Issue 6 - Applicability and effect of precedents relied upon by parties Legal framework: Binding and persuasive force of prior decisions, coordinate-bench and jurisdictional High Court rulings are relevant; tribunal followed coordinate-bench/High Court holdings where applicable. Precedent treatment: The Court noted authorities favouring revenue (Danfoss, AT&S, Foodworld, Centrica, Arthur Andersen) establishing taxability of secondment payments; however, the CIT(A) relied on coordinate-bench ITAT orders in the assessee's own case and jurisdictional High Court decisions (Flipkart; Abbey) to hold against immediate section 195 withholding for the years under appeal. Interpretation and reasoning: The Bench considered that the CIT(A) properly followed coordinate-bench decisions and the jurisdictional High Court, which directed consideration of facts and in some instances issued certificates or held nil deduction where legal construction so warranted. Where the issue was covered in favour of the assessee by coordinate benches/high court in relevant years, the Tribunal upheld the CIT(A)'s orders on grounds of consistency with those authorities. Ratio vs. Obiter: Ratio - where the issue is covered by binding or coordinate-bench and jurisdictional High Court precedent in the assessee's favour, the appellate authority correctly applied those precedents and the Tribunal upheld that application. Obiter - discussion distinguishing other authority is explanatory. Conclusion: Although legal analysis supports revenue position on substance, the CIT(A) correctly applied coordinate-bench and jurisdictional High Court authority applicable to the assessment years; Tribunal upheld the CIT(A) for consistency with those precedents and dismissed the revenue appeals. OVERALL CONCLUSIONS 1. On the legal and factual merits the payments to the non-resident AE for seconded personnel constitute consideration for managerial/technical/consultancy services (including provision of personnel) and are chargeable as FTS under section 9(1)(vii) and as FIS under Article 12(4) of the India-US DTAA where 'make available' is satisfied. 2. The secondees were held to remain employees of the overseas AE (real employer), and contractual/economic indicators establish that the payments were not mere reimbursements of non-taxable expense. 3. Sections 192 and 195 operate independently; deduction under section 192 does not automatically negate section 195 obligations. 4. Notwithstanding the above substantive conclusions, the appellate order under challenge was upheld because the CIT(A) had followed coordinate-bench and jurisdictional High Court decisions applicable to the assessment years; accordingly, the Tribunal dismissed the revenue appeals and sustained the CIT(A) orders quashing the section 201(1)/201(1A) demands for those years.