Amount received by foreign company from Indian subsidiary towards reimbursement of salary cost of deputed employees, is Fees for technical Services (FTS)
Global Tax Update : October 2018 / India
The taxability of reimbursement of salary cost of deputed employees has been a matter of litigation. Taxpayers contend that since the reimbursements do not constitute income in the hands of the foreign company and there is no element of profit in the reimbursements, there is no requirement to withhold any taxes.
However, the tax authorities for the following reasons contend that the reimbursements of salary costs should still be considered as fees for technical services:
- The deputed employees never ceased to be employees of the foreign company (i.e. there was no termination of employment). Therefore, the salary paid was borne out of the inherent obligation of the foreign company as employer.
- The deputed employees are not free to move anywhere, but are required to go back to the tax payer on expiry of their tenure. Therefore, they retain a lien on their employment with the tax payer.
- All the employees are senior personnel deputed to Indian Company to lend their experience as employees of the tax payer. The deputed personnel have come to India to imbibe the culture of the group and ensure application of group policies and other quality standards in the Indian Company. This clearly demonstrates that once the standards are imbibed/retained, there is no need for personnel to come again for technical service and the Indian Company can apply itself. Hence the services have also “made available” the technical knowledge/ skill and experience.
- The mere fact that as per the agreement the employees would be performing under the direction and control of the Indian Company, does not change their status of employment with the foreign Company, of which they are employees. The arrangement is a very common method adopted by a service provider and also adopted not only in the private sector but by the government also, on deputation. In absence of reconciliation of receipts by the foreign Company, what was reimbursed is a part of the salary and it not social security cost alone.
- The receipts are to be considered as FTS, irrespective of the fact whether it is received with mark-up or cost-to-cost basis*.
* Reliance was placed on the decisions of Bangalore ITAT in case of Food World Supermarket Ltd. (63 taxmann.com 43) and Delhi High Court in the case of Centrica India Offshore (P.) Ltd. (44 taxmann.300).
* This Article is based on the relevant Japanese or specific country’s tax law and other authorities in effect on the date of this Article. This Article would not be guaranteed updating if there are any changes in Japanese tax law, any other law, or interpretations by the courts or tax authorities thereof after the date of this Article.