Seconded employee salary reimbursements to Indian affiliates-whether they are FTS u/s9(1)(vii)/Article 12(4); held non-taxable

Whether reimbursement of salary costs of seconded employees received from Indian entities constituted FTS under s. 9(1)(vii) and Article 12(4) of the India-Japan DTAA was the dominant issue. The Tribunal held that the appointment documents established an employee-employer relationship between the seconded personnel and the Indian entities, and the remittances were pure cost reimbursements without any profit element. Since the underlying payments were salaries to employees, they could not be recharacterized as consideration for technical services. Consequently, the reimbursements were not taxable as FTS, and the appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether amounts received on a cost-to-cost basis as reimbursement of salaries relating to seconded employees can be treated as Fee for Technical Services under section 9(1)(vii) and Article 12(4) of the applicable tax treaty, or are not chargeable as FTS where the payments are in substance salary reimbursements arising from an employer-employee relationship with Indian entities.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Characterisation of salary reimbursements for seconded employees as FTS under section 9(1)(vii) and Article 12(4)

Legal framework (as discussed and applied by the Tribunal): The Court proceeded on the basis that FTS under section 9(1)(vii) is not attracted where the payment is in the nature of salary, and that Article 12(4) of the treaty excludes from "fees for technical services" payments that are to an employee (i.e., where the payment is essentially salary-related and tied to an employment relationship rather than consideration for services rendered by the foreign entity).

Interpretation and reasoning: The Tribunal treated the determinative facts as: (a) seconded employees entered into separate employment contracts/appointment arrangements with the Indian entities; (b) the Indian entities paid salary to the secondees and deducted tax at source on such salary; and (c) the reimbursements to the non-resident were on a pure cost-to-cost basis without any mark-up, which fact was not disputed by the Assessing Officer. On these facts, the Tribunal accepted that an employer-employee relationship existed between the secondees and the Indian entities, and that the reimbursements represented only restoration of salary costs rather than consideration for technical services rendered by the non-resident. The Tribunal relied on the coordinate bench decision in a group-company matter on materially identical facts and applied its reasoning to conclude that salary reimbursements cannot be recharacterised as FTS merely because the personnel were seconded from abroad.

Conclusions: The Tribunal held that the reimbursements received towards salaries of seconded employees, being cost reimbursements without profit element and referable to salaries paid/borne in substance by the Indian entities with tax deducted on salary, cannot be assessed as FTS under section 9(1)(vii) or Article 12(4). The relevant ground challenging FTS characterisation was allowed, and other non-pressed grounds were dismissed without adjudication on merits.

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