Reimbursement of Expat Salary not to be covered under FTS

Facts of the Case:

• The Assessee (Google LLC) is a foreign company incorporated in USA. During the year, the Assessee had sent certain employees on secondment to Indian entity (Google India Private limited) and paid the salary of expat employee in USA. The Assessee was reimbursed by the India entity for such salary.
• The Indian entity, while reimbursing the salary cost of expat employees to USA company, did not deduct any taxes. However, they duly deducted TDS us 192 of the Income Tax Act, 1961 (hereinafter referred as “Act”) on the salary payments. During the course of assessment proceedings, the Assessing officer (“AO”) characterized such reimbursements as fees for technical services and treated it as income of the Assessee.

Contention of the Assessing Officer:

• No employer-employee relationship exists b/w the seconded employees and Indian entity.
• Services provided by such employees are in the nature of technical, managerial, consultancy services, therefore it should be covered under the definition of fees for technical services.

The order of the AO was upheld by the Dispute Resolution Penal. Aggrieved with the order, the Assessee appealed before the Tribunal.

Decision of Tribunal:

• The tribunal observed that the there exists an employer-employee relationship between the Indian company and the seconded employees basis the assignment letter. The terms were such that seconded employees were working solely under control and supervision of the Indian entity. The tribunal further observed that the Indian company has duly deducted TDS u/s 192 of the Act and issued Form 16 to such employees. The tribunal further relied on the judgement of other courts wherein in the absence of make available, the reimbursement of salary should not be classified as FTS as per the treaty between India and USA though it was expressly mentioned in the order.
• The tribunal placed further reliance on the judgement of Biesse manufacturing company Ltd, Flipkart Internet (P) Ltd and Goldman Sachs services (P) Ltd wherein it was held that reimbursement towards salary of seconded employees made on cost-to-cost basis with no element of income are not liable for tax u/s 195 of the Act.
• Furthermore, consideration which are in the nature of salary are specifically excluded from the definition of FTS under the Act as well as the treaty between India and USA. Therefore, it was held that reimbursement of expat salary shall not come within the scope of fees for technical services under the Act or under DTAA.

SW Point of View:

Hon’ble ITAT clarifies that reimbursement of expat salary shall not be considered as FTS since such salary has been separately excluded from the definition of FTS. Also, such services does not make available technical knowledge or skills.

Prateek Sharma, Tax Associate, SW India

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