2025 (3) TMI 97 - HC - Income Tax

Deduction u/s 195 - Payments made for the reimbursement of salaries to seconded employees - Assessee an Indian Company is a subsidiary of a foreign entity in Singapore said foreign entity had entered into Inter Company Master Service Agreement with Holding Company Walmart Inc Delaware which is a USA entity. US entity provides services to various affiliates across the globe pursuant to Master Service Agreement and accordingly the Walmart seconded its employees to the Assessee Company. For the seconded service the Assessee company having deducted the TDS remitted the salary amount to the US entity by way of reimbursement. HELD THAT - Contention of the Revenue that the Assessee had failed to place all the material to demonstrate the kind of services rendered by the seconded employees were not made available and that they were not requisitioned for the purpose of training the regular employees of the Assessee is too farfetched to gain acceptance. So is the submission that in the course of training there would be transmission of technical knowledge experience skill know-how and that would satisfy the requirement of make available . If that idea was lurking in the mind of the Assessing Officer he could have called for such information from the sources that be. We have to keep in mind that arrangements of the kind do obtain in a shrunk globe and that all indicia of employer-employee relationship which ordinarily obtain in the native Service/Industrial Jurisprudence cannot be expected in the realm of international business of the kind. If Triple Test namely (i) Direct Control (ii) Supervision (iii) Direction is satisfied vide ABBEY BUSINESS 2020 (12) TMI 570 - KARNATAKA HIGH COURT a strong case is made out as to the existence of employer employee relationship the absence of a few indicia notwithstanding. An argument to the contrary would offend the stark truths of business world. Added the assertion of the Assessee-Company that the amount is reimbursed to the Walmart after deducting the TDS from the salaries earned by the seconded employees in India is not disputed by the Revenue. We hasten to clarify that in saying this we are not invoking the doctrine of estoppel. Decided in favour of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

1. Whether the payments made by the Assessee-Company to Walmart Inc. qualify as reimbursement of salaries for seconded employees or as fees for technical services (FTS) under Section 9(1)(vii) of the Income Tax Act, 1961.

2. Whether the Assessee-Company was required to deduct tax at source under Section 195 of the Income Tax Act on such payments.

3. Whether the Single Judge's decision to set aside the Assessing Officer's order and direct the issuance of a 'Nil Tax Deduction at Source' certificate was correct.

ISSUE-WISE DETAILED ANALYSIS

1. Nature of Payments: Reimbursement vs. Fees for Technical Services

Relevant legal framework and precedents: The determination of whether payments constitute fees for technical services is guided by Section 9(1)(vii) of the Income Tax Act and the India-US Double Taxation Avoidance Agreement (DTAA), particularly Article 12.

Court's interpretation and reasoning: The Court found that the payments made by the Assessee-Company were reimbursements for salaries of seconded employees, not fees for technical services. The Court noted the presence of an employer-employee relationship between the Assessee-Company and the seconded employees, as evidenced by the terms of the Master Service Agreement (MSA) and employment letters.

Key evidence and findings: The MSA outlined that the Assessee-Company had control over the seconded employees, including the ability to terminate their services in India. The seconded employees were subject to the same rules and regulations as domestic employees, and their salaries were subject to tax deductions under Section 192 of the Income Tax Act.

Application of law to facts: The Court applied the principles from the ABBEY BUSINESS SERVICES INDIA (P) LTD. case, reinforcing the view that the secondment agreement constituted an independent contract of service with the Assessee-Company.

Treatment of competing arguments: The Revenue's argument that there was no employer-employee relationship and that the payments were for technical services was rejected. The Court emphasized the indicia of employment and the absence of a "make available" clause under the DTAA, which is necessary for the classification as FTS.

Conclusions: The Court concluded that the payments were reimbursements, not FTS, and thus not subject to tax deduction under Section 195.

2. Requirement to Deduct Tax Under Section 195

Relevant legal framework and precedents: Section 195 of the Income Tax Act requires tax deduction at source for payments to non-residents if such payments are chargeable to tax in India.

Court's interpretation and reasoning: The Court held that the Assessee-Company was not required to deduct tax at source on reimbursements of salaries, as these were not chargeable to tax under the DTAA.

Key evidence and findings: The Court referenced the GE INDIA TECHNOLOGY CENTRE PVT. LTD. case, which clarified that Section 195(2) applications are maintainable even if the entire sum is not taxable.

Application of law to facts: The Court found that the Assessee-Company's application under Section 195(2) was valid, as the payments were not chargeable to tax due to the DTAA provisions.

Treatment of competing arguments: The Revenue's contention that the payments were FTS and thus taxable was dismissed. The Court noted that the payments did not meet the "make available" criteria under the DTAA.

Conclusions: The Court determined that the Assessee-Company was not obligated to deduct tax under Section 195 for these payments.

3. Validity of the Single Judge's Decision

Relevant legal framework and precedents: The Single Judge's decision was based on the interpretation of the DTAA and the Income Tax Act, supported by precedents like ABBEY BUSINESS SERVICES INDIA (P) LTD.

Court's interpretation and reasoning: The Court upheld the Single Judge's decision, finding it consistent with established legal principles and precedents.

Key evidence and findings: The Court noted the legal reasoning in the ABBEY case, which supported the view that the secondment constituted an independent contract of service.

Application of law to facts: The Court applied the reasoning from previous cases to affirm the Single Judge's order for a 'Nil Tax Deduction at Source' certificate.

Treatment of competing arguments: The Revenue's arguments against the Single Judge's reliance on ABBEY were rejected, as the review of that decision had been denied, affirming its legal standing.

Conclusions: The Court concluded that the Single Judge's decision was correct and sustainable.

SIGNIFICANT HOLDINGS

The Court established that:

- Payments made for the reimbursement of salaries to seconded employees do not qualify as fees for technical services under Section 9(1)(vii) of the Income Tax Act or the India-US DTAA.

- The application of Section 195(2) by the Assessee-Company was valid and consistent with the law, as the payments were not chargeable to tax.

- The Single Judge's decision to direct the issuance of a 'Nil Tax Deduction at Source' certificate was upheld, aligning with the ABBEY BUSINESS SERVICES INDIA (P) LTD. precedent.

In conclusion, the appeal was dismissed, affirming the Single Judge's order and clarifying the application of tax laws to the specific facts of the case.