With increasing globalisation of the world economy, the continuous movement of people from one jurisdiction to another has become imminent. However, such decisions have also created a significant amount of uncertainty, not only because of the social impact of such movement, but also because it creates tax complexities.
In a recent case, the Income Tax Appellate Tribunal (ITAT) had the occasion to examine the tax implications of reimbursement of salaries and other expenses in the case of AT&T Communications Services (India) Pvt. Ltd. v. Deputy Commissioner of Income Tax[1]. The ITAT held that reimbursement made by AT&T Communication Services (India) Pvt. Ltd. (AT&T India) for salary and other costs to AT&T World Personnel Services Inc., USA (AWPS) for the seconded employees working in India did not constitute fees for technical services (FTS) or fees for included services (FIS) under section 9(1)(vii) of Income Tax Act, 1961 (IT Act) or Article 12 of India-US Double Tax Avoidance Agreement (DTAA). Hence, AT&T India was not required to withhold taxes under section 195 of the IT Act.
Facts
AT&T India required certain trained personnel in India to facilitate its business operations in India for the assessment year 2012-13. It entered into a Secondment Agreement with AWPS (Agreement), an entity incorporated in the USA, which had appropriately qualified personnel on its rolls. As per the terms of the Agreement, certain employees were seconded by AWPS to AT&T India. The employees were required to function solely under the control, direction and supervision of AT&T India. However, they were to be paid by AWPS; accordingly, AT&T India was required to reimburse AWPS for all the costs incurred by it for such employees. During the relevant period, AT&T India reimbursed a sum of Rs. 4.17 Cr. to AWPS for the salary and other costs.
The assessing officer (AO) was of the opinion that AT&T India ought to have withheld tax under section 195 of the IT Act and since it had failed to do so, disallowed the sum of Rs. 4.17 Cr. The AO also relied on the decision of the Delhi High Court in the case of Centrica India Offshore Pvt. Ltd.[2]. In this case, the Court had held that, if the terms of the secondment agreement entered into by an Indian company with a foreign corporate are such that employees of the foreign corporate used their technical knowledge and skills for assisting the Indian company in conducting its business of quality control and management in accordance with global standards of the group, amounts reimbursed by the Indian company to the foreign corporate towards salaries of seconded employees should be construed as FTS or FIS after satisfaction of the ‘make available’ clause enshrined in Article 12 of the India-US DTAA. Following the same rationale, the AO concluded that the amount remitted to AWPS constituted FTS/FIS in terms of the Indo-US DTAA, as no employer-employee relationship could be brought on record between the seconded employees and AT&T India. This AO’s decision was also confirmed by the dispute resolution panel.
Arguments
AT&T India disputed the finding and decision of the tax authorities and contended that seconded employees were responsible for performing all business functions in their personal capacity effectively as employees and were not rendering any services on behalf of AWPS. Accordingly, the seconded employees were not working in India to facilitate the business of AWPS, but were working as salaried employees of AT&T India. Thus, the payments made to the seconded employees could only be classified as salary on which tax had already been withheld under section 192 of the IT Act.
ITAT’s Decision
After going through the relevant papers and documents, the ITAT decided that so long as payment to a non-resident entity was in the nature of ‘Salaries’, there is no obligation on the payer to withhold tax under section 195 of the IT Act. The ITAT also noted that payments have to be in the nature of income for withholding tax provisions under section 195 to apply. The ITAT also distinguished the decision in Centrica (supra) and held that reimbursement made by AT&T India to AWPS could not be classified as FTS/FIS under the IT Act read with the India-US DTAA.
Looking Ahead
In a typical secondment arrangement, the overseas entity seconds its employees from a global talent pool to India after which, the Indian entity takes them on board by issuing a letter of employment. The Indian entity thus becomes responsible for payment of the salary and withholds tax on the same. However, in certain situations, for administrative convenience, overseas entities make the requisite payments directly to the overseas accounts of the seconded employees, pay for their global insurance and healthcare policies and also make retirement contributions – i.e., 401(k) contributions. The overseas entities may also incur certain additional costs for administration and facilitation services being rendered by them. Such costs are subsequently claimed as reimbursements from the Indian entities.
The controversy that generally arises is to analyse such payments and confirm whether they are paid as reimbursements or whether they can be construed as payments for services to be regarded as ‘fees for technical services/included services’. If it is the former, like in the instant case, no withholding of tax is required whereas in the latter case, tax will have to be withheld under section 195 of the IT Act, as decided in the case of Centrica (supra). The taxpayer has to carefully examine the facts and circumstances of the case to ascertain the correct position. The extant decision of the ITAT is very welcome because most tax authorities were using the principles laid down in Centrica (supra) to hold that the assessee was in default.
It may be noted that if the purpose of secondment is to take forward the business of the overseas entity, thereby making available technical knowledge and skills for assisting the Indian entity in enhancing the latter’s quality control and management functions, then such payment could be construed as compensation for managerial or technical services so provided. Moreover, if such services are rendered by the seconded employees who also facilitate the business of the overseas entity in India, the payments made to overseas entities could be taxed under the provisions of the IT Act, read with the applicable provisions of the concerned DTAA, as FTS/FIS and tax would need to be withheld under section 195 of the IT Act.
On the other hand, if the seconded employees work under the control and supervision of the Indian entity and do not work to further the business or render any services on behalf of the overseas entity, then they would be construed as employees of the Indian entity. The payments made to the overseas entity for facilitating the disbursal of salary to such employees would be construed in the nature of reimbursements, like it was decided in the instant case. While the salaries paid to the employees will have to suffer withholding of taxes under section 192 of the IT Act, the subsequent reimbursements by the Indian entity to the overseas entity will not suffer any further withholding.
The ITAT has done a very good job of analysing the nature of transactions in AT&T India’s case and also distinguishing the nature of payment that was made in the case of Centrica, which resulted in the High Court holding that tax was required to be withheld.
Taxpayers should study both the decisions carefully and analyse their own situation based on the guidance provided by the Delhi High Court in the case of Centrica and the ITAT’s decision in the case of AT&T India.
[1] AT & T Communications Services (India) Pvt. Ltd. v. DCIT, ITA No. 354/Del/2017.
[2] Centrica India Offshore Pvt. Ltd. v. CIT, (2014) 364 ITR 336 (Del).
