20 September 2013

2013mber 2012

EY Tax Alert
Mumbai Tribunal rules reimbursement of expenses on
secondment of employees not FTS

Executive summary
Tax Alerts cover
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This Tax Alert summarises a recent ruling of the Mumbai Income Tax Appellate
Tribunal (Tribunal) in case of Temasek Holdings Advisors (I) Pvt .Ltd.
(Taxpayer) [1] on the issue of taxability of payments made by Taxpayer to its
parent company in Singapore, i.e., Temasek Holding Pte. Ltd. (Sing Co) in
relation to secondment of employees to India and certain other expenses
incurred by Sing Co for the business of Taxpayer. The Tribunal ruled that
payments made by Taxpayer towards salary and other employment costs of the
seconded employees amount to reimbursement of expenses and not payments
for any services rendered by Sing Co to Taxpayer. Such payments were not
taxable in India as the same were reimbursement of expenses and were not fees
for technical services (FTS) under the Income Tax Laws (ITL) or IndiaSingapore
Double Tax Avoidance Agreement (Singapore DTAA). Furthermore, since taxes
had already been withheld on salary payments made by Sing Co to the seconded
employees, there was no further withholding of taxes required when such
amount was reimbursed by Taxpayer. Accordingly, such reimbursement cannot
be disallowed in computation of income of Taxpayer.

[1]

[TS-418-ITAT-2013]

Background and facts

allowable as a deduction while computing

taxable business income of Taxpayer.

Taxpayer was an Indian company and a

wholly owned subsidiary of Sing Co.
Taxpayer provided investment advisory
services to Sing Co which included
identifying investment opportunities in
India, evaluating and recommending
potential investments, monitoring
specified investments in India etc.
Taxpayer was remunerated on cost plus
mark up for such services rendered
which was accepted to be at arms length
price (ALP).
Taxpayer and Sing Co entered into an
agreement under which Sing Co
seconded two of its employees to India
for assisting Taxpayer in rendering
investment advisory services to Sing Co
(Secondment Agreement).

Taxpayers contentions

It was not a case of Sing Co rendering

any services to Taxpayer for which
payment was received from Taxpayer. On
the contrary, services were rendered by
Taxpayer to Sing Co for which Taxpayer
was admittedly remunerated at an ALP.

The employees seconded to India worked

exclusively for Taxpayer under the
control and supervision of Taxpayer and
did not render services on behalf of Sing
Co. The terms of payment requires
Taxpayer to bear the employee cost.
Once it is accepted that the arrangement
is that of secondment of employees, then
payment from Taxpayer amounts to
reimbursement of salary and other
employment costs of the seconded
employees and such reimbursement is
not chargeable to tax in India.

The pictorial presentation is as follows:

Sing Co.

Salary
with TDS
Investment advisory
services;
Reimbursement of
salary and employment
costs of seconded
personnel

Taxpayer

Singapore

Employees

India

Secondment of
Personnel

As per the secondment agreement,

employees remained on the payroll of
Sing Co which paid salary to such
employees and also withheld taxes on
such salary as required under the
provisions of the ITL. Taxpayer
reimbursed the cost of salary and other
expenses relating to their employment to
Sing Co. The reimbursements were made
without withholding of taxes under the
ITL.
Tax Authority challenged the stand of
Taxpayer and held that contractual
payments made to Sing Co were for the
services availed from Sing Co.
Accordingly, such payments were taxable
in India and in the absence of withholding
of taxes, the payments were not

Aggrieved by above, Taxpayer appealed

before the First Appellate Authority
which upheld the action of the Tax
Authority. The matter was, thereafter,
appealed before the Second Appellate
Authority i.e., the Tribunal.

Tax Authoritys contentions

The secondment agreement was

unsigned and unregistered under the
Indian laws. The same was not authentic
and, hence, a colorable device intended
to avoid tax liability in India.

There is no employer-employee
relationship between Taxpayer and the
seconded employees. The privity of
employment contracts lies with Sing Co
and right of termination also lies with
Sing Co.

Under the secondment agreement, the

employees are placed in India to render
services to the Taxpayer on behalf of
Sing Co.

Only a part of the employees time is

spent in India. There are no details
available with regard to allocation of
salary amount and quantification of
salary cost considered for the purpose of
reimbursement.
Rendering of advisory and managerial
services by employees in India amounts
to provision of services of technical or
other personnel which is taxable as FTS
under the ITL. Under the Singapore
DTAA, it would be taxable in India either
due to trigger of service permanent
establishment (service PE) or as FTS as
defined under the Singapore DTAA.

expenses disbursed by Sing Co on behalf

of Taxpayer.

Seconded employees are not rendering

services on behalf of Sing Co. There is no
arrangement of rendering of managerial
or consultancy services by Sing Co,
either directly or through the seconded
employees. On the contrary, Taxpayer is
rendering the services to Sing Co. Hence,
payments made to Sing Co are not in the
nature of FTS provisions under the ITL as
well as the Singapore DTAA.

Adverse ruling of the Authority of

Advance Rulings in case of Verizon Data
Services[2] [337 ITR 192] was
distinguished on facts. In the case of
Verizon, it was held that US company
was rendering services through its
employees to an Indian company and any
payments in this regard were held to be
taxable in India. As against this, in the
present case, Sing Co is not rendering
any service in India through the
seconded employees.

Taxes from salary were withheld by Sing

Co while paying salaries to the
employees. There cannot be a double
deduction of tax deducted at source
(TDS) once at the time of payment of the
salary and again on the reimbursement
made by Taxpayer to Sing Co.

Accordingly, payment of salary and other

employment costs as reimbursement of
expenses are not taxable in India. Hence,
disallowance of expense in the hands of
Taxpayer for failure to withhold taxes
cannot be accepted.

Tribunals ruling

For the secondment agreement to be

valid there is no requirement that it
should to be registered under some
Indian statutory law or need to have
approval from the Government of India.
If the Tax Authority had any doubt about
the authenticity of the secondment
agreement, it could have very well
required Taxpayer to substantiate the
same. This premise of the Tax Authority
for coming to the conclusion that the
secondment agreement is a colourable
device cannot be upheld.

The concept of secondment is that an

employee is temporarily transferred to
another job to a different party, for a
defined period of time or for a specific
purpose to work under control and
supervision of the other company. The
secondment is for the mutual benefit of
the parties. This concept is prevalent in
most part of the world.

In the present case, the seconded

employees worked under the control and
supervision of and for the business of
Taxpayer. They worked exclusively for
Taxpayer in its Indian operations only.
Their services can be terminated by
either party and the entire cost of
employment of such employees is paid by
Sing Co and reimbursed by Taxpayer as
per the advice raised from time to time.
Accordingly, payments by Taxpayer to
Sing Co amount to reimbursement of

[2]

Please refer EY Tax Alert dated 31 May 2011 titled AAR rules
reimbursement of seconded employee salary is fees for included
services.

Comments
Cross-border secondment of
personnel between affiliates is not
uncommon in multinational groups.
Presence of seconded employees in
India poses various tax challenges
under the ITL as well tax treaties.
Indian judiciary have given
divergent views on the tax
implications arising from the
specific facts of each case. In the
present ruling, Tribunal has ruled
favourably in the facts under
consideration and held that in a
secondment arrangement, no
services were rendered by the
parent to the subsidiary when the
parent seconded its employees who
worked under the control and
supervision of the subsidiary.
Accordingly, employment costs of
seconded employees incurred by the
home country (legal) employer
which are later recovered from host
country employer amounted to
reimbursement of expenses which
did not trigger tax liability in India.
This ruling may be useful for
taxpayers to ascertain the tax
impact of similar business
arrangements.

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