Salary reimbursement for seconded employees was not Fee for Technical Services under the income tax treaty and domestic law.

Reimbursements received from Indian group entities for salary paid to seconded employees were held not to constitute Fee for Technical Services under section 9(1)(vii) of the Income-tax Act or Article 12(4) of the India-Japan DTAA. The Tribunal treated the payments as salary reimbursements on a cost-to-cost basis, with no mark-up, and noted that the secondees worked under the control of the Indian entities. It also relied on the fact that tax had been deducted at source on the salary payments. On these facts, the reimbursement could not be recharacterised as consideration for technical services and was therefore outside the FTS charge under both the Act and the treaty.

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Issues: Whether reimbursements received by the assessee from Indian group entities towards salary paid to seconded employees were chargeable to tax in India as Fee for Technical Services under section 9(1)(vii) of the Income-tax Act, 1961 and Article 12(4) of the India-Japan DTAA.

Analysis: The dispute turned on the character of the payments made by the Indian entities. The Tribunal found that the arrangement was identical to an earlier decision involving the assessee's group company. The record showed that the reimbursements were on a cost-to-cost basis without any mark-up, that the seconded employees worked under the control of the Indian entities, and that tax had been deducted at source on the salary payments. On these facts, the payments retained the character of salary reimbursement and could not be recharacterised as technical services. The Tribunal accordingly treated the reimbursement as falling outside the scope of fee for technical services under the Act and the treaty.

Conclusion: The reimbursements for salary paid to seconded employees were not taxable as Fee for Technical Services and the issue was decided in favour of the assessee.

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