Salary reimbursements for seconded employees were not fees for technical services where the Indian entity controlled the work and paid at cost.

Reimbursements by Indian entities to a foreign assessee for salary paid to seconded employees were held to retain their character as salary reimbursement, not fees for technical services, because the secondees had separate employment arrangements with the Indian entities, worked under their control and supervision, and the payments were made at cost without markup. The India-Japan DTAA definition of fees for technical services also excluded payments to an employee, and the cited authorities supported that such reimbursements cannot be recharacterised as FTS. The issue was therefore answered in favour of the assessee, and the reimbursements were not taxable as fees for technical services.

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Issues: Whether reimbursements made by Indian entities to the foreign assessee towards salary paid to seconded employees were liable to be treated as fees for technical services under the Income-tax Act, 1961 and the India-Japan DTAA.

Analysis: The record showed that the seconded personnel entered into separate employment arrangements with the Indian entities, were paid salary by those entities, worked under their control and supervision, and had tax deducted at source on the salary payments. The reimbursements were made at cost without markup. On these facts, the payments retained the character of salary reimbursement and did not acquire the character of consideration for technical services. The treaty definition of fees for technical services also excluded payments to an employee, and the cited judicial authorities supported the view that salary reimbursements to secondees cannot be recharacterised as FTS.

Conclusion: The issue was answered in favour of the assessee. The reimbursements were not taxable as fees for technical services.

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