Seconded employee salary reimbursement is not technical fees; receivables adjustment must follow consistency where facts are unchanged.
Reimbursement of salary and related costs for seconded expatriate employees was held not to constitute fees for technical services or royalty where the employees worked under the assessee's control and supervision, the salary was borne by the assessee, and tax had already been deducted under section 192; the disallowance under section 40(a)(i) was deleted. On outstanding receivables from associated enterprises, the Tribunal applied the rule of consistency and remanded the transfer pricing adjustment for fresh consideration because an earlier year on identical facts had not imputed interest. The salary reimbursement issue was decided in favour of the assessee, and the receivables issue was sent back for reconsideration.
Issues: (i) Whether reimbursement of salary and related expenses for seconded expatriate employees was liable to disallowance under section 40(a)(i) of the Income-tax Act, 1961 as fees for technical services or royalty, despite tax deduction under section 192; and (ii) whether adjustment on outstanding receivables from associated enterprises was warranted, or the matter had to be reconsidered on the basis of consistency.
Issue (i): Whether reimbursement of salary and related expenses for seconded expatriate employees was liable to disallowance under section 40(a)(i) of the Income-tax Act, 1961 as fees for technical services or royalty, despite tax deduction under section 192.
Analysis: The secondment arrangement showed that the expatriates worked under the control, supervision and management of the assessee as its employees. Their salary cost was borne by the assessee and tax had been deducted under section 192 on the salary payments. On these facts, the reimbursement to the foreign group entities was only a reimbursement of salary expenditure and did not change the character of the underlying payment. Salary does not fall within the expression fees for technical services, and section 195 had no application where the payment was already subjected to tax as salary.
Conclusion: The disallowance under section 40(a)(i) was deleted and the issue was decided in favour of the assessee.
Issue (ii): Whether adjustment on outstanding receivables from associated enterprises was warranted, or the matter had to be reconsidered on the basis of consistency.
Analysis: The adjustment was made on the footing that delayed receivables constituted an independent financing transaction. However, the Tribunal noted that in an earlier year on identical facts no interest had been imputed by the transfer pricing authority. In the absence of any distinguishing facts, the same approach was required to be followed for subsequent years. The matter was therefore sent back for fresh consideration in accordance with the rule of consistency.
Conclusion: The transfer pricing adjustment on receivables was remanded to the TPO/AO for fresh decision and the issue was decided in favour of the assessee for statistical purposes.
Final Conclusion: The salary reimbursement addition was deleted, while the receivables issue was sent back for reconsideration, resulting in a partly favourable outcome for the assessee.
Ratio Decidendi: Where seconded expatriates work as employees under the assessee's control and salary tax has been deducted under section 192, reimbursement of that salary cost is not fees for technical services and section 195 is inapplicable; transfer pricing treatment of receivables must follow consistency absent distinguishing facts.