Taxability of payments made by Indian companies to foreign companies has always gained attention, more so, because of inconsistency in the judgements/rulings pronounced at various fora. The matter becomes more interesting when the same payment is taxed twice.

In a recent judgement, the Authority for Advance Ruling (AAR), in the case of Verizon Data Services India Private Ltd (Verizon India), has ruled that the Indian companies hiring employees from foreign companies have to withhold tax on salary costs reimbursed to the foreign entity.

Verizon US, parent of Verizon India, sent three employees of another group company in the US (US Affiliate). A Secondment Agreement was entered in which employees would function and act exclusively under the direction, control and supervision of Verizon India. US Affiliate Company was to pay to the employees for the items which an employee is entitled to receive and Verizon India to reimburse US Affiliate Company for the items paid to the employees.

Verizon India sought an advance ruling from the AAR on the question of taxability of the reimbursement to US Affiliate Company.

Verizon India argued that the US Affiliate Company is not rendering any services to Verizon India through its expatriate employees and that they were deputed at the request of Verizon India to work under its control. The reimbursement of salary cost paid by US Affiliate Company in respect of provision of personnel to Verizon India is for administrative convenience and should not qualify as ‘Fees for Included Services' (FIS) under India-US DTAA (DTAA). Under Article 12(4)(b) of the DTAA, consideration towards technical knowledge, skill, and so on would be considered as FIS only if the technical knowhow, skills are made available to the assessee. As the expatriate employees are engaged in rendering managerial services and not technical services, the payments made to the US Affiliate Company are not in the nature of FIS and not liable to tax in India having regard to the provision of the DTAA.

Employer status

The Revenue argued that the Secondment Agreement does not bring out the complete picture of the arrangement among the Verizon India, Verizon US and the US Affiliate Company. The act of deduction of tax under Section 192 of the Act would not confer the status of an employer upon Verizon India and that the employees of US Affiliate Company do not become the employees of Verizon India. It was argued that the payment towards reimbursement of salary cost of the seconded employees was in the nature of FIS and the fact that the taxes are paid under the head “Salaries” is of no consequence.

The AAR ruled that in terms of the Secondment Agreement, the seconded employees shall remain the employees of the US Affiliate Company and payment of their salaries is not dependent on Verizon India.

It means that the managerial services performed by them are as employees of the US Affiliate Company and not as employees of Verizon India. It is a trite law that the capacity in which the person receives the amount determines its taxability in his hands.

The amounts paid by Verizon India to the US Affiliate Company represent income in the hands of the US Affiliate Company. The AAR agreed that the managerial services rendered are not technical but the AAR did not agree that the consultancy services being managerial services, the requirement under Article 12(4) of the DTAA that technical know-how, skills must be made available, ought to be satisfied. It was held that the services which are not in the nature of technical services, the make available clause would not apply.

Accordingly, the AAR held that the payments made by Verizon India are covered under “fees for included services” under Art.12 (4) of the DTAA and as per Explanation 2 to section 9(1)(vii) of the Act.

Not in sync

This ruling is not in line with the decisions pronounced in the cases of HCL Infosystems Ltd, IDS Software and Cholamandalam MS General Insurance, wherein it was held that reimbursement of salary cost of the seconded employees to the foreign company would not be subject to taxes in India.

When one applies the ratio of this ruling, it is humbly submitted that the same income would be taxed twice. When the salary is paid to the employee there would be a payment of tax. Again, when the amount is remitted by the Indian company for reimbursing its overseas parent, there would be another levy of tax.

Numerically, on salary payment of Rs 1,000 to the seconded employee, there would be a tax of Rs 309 as employee tax and Rs 106 as tax on FIS.

Since FIS is taxed on gross basis without deduction of expenses, it could lead to a case of double jeopardy for companies employing expatriates under secondment arrangement.

Further, it could lead to additional cost of employing expatriates. One would wish that this issue would be appropriately addressed in the proposed Direct Tax Code.

(K. S. Prasad is Associate Director and Gaurav Bajoria is Manager-Tax and Regulatory Services, PwC India.)

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