[Opinion] Controversy regarding withholding tax on reimbursement of salary of seconded employees

V. K. Subramani – [2022] 142 taxmann.com 218 (Article)

Considering the huge population and the buoyancy of economy in the last two decades or so and also taking note of the administrative difficulties in tracking the humungous number of transactions to be regulated without abuse, the lawmakers in their wisdom thought that mandating deduction of tax at source is the easiest and simple mechanism of tax management at macro level. Not only does the amount of tax deducted at source reaches the coffers of the Government but also leaves a trail for the tax administration to verify or scrutinize the correctness of transactions at a later date. The consequence of non-compliance thereto liable for interest besides penalties have also prompted the taxpayers to be on guard for meticulous compliance. In the domestic front, provisions for tax deduction at source are very many. In cross border transactions, the tax deduction is either governed by section 195 or by the double taxation treaties with a caveat that whichever is beneficial could be opted for by the taxpayers.

This refresher discusses whether payment towards reimbursement of salary of seconded employees is liable for tax deduction under section 195 vis a vis article 12 of DTAA between India and USA in the light of decision rendered in Flipkart Internet (P.) Ltd v. Dy. CIT [2022] 139 taxmann.com 595 (Kar.).

Facts of the case

The assessee in this case was engaged in the business of information technology solutions and support services for e-commerce industry. During the previous year relevant to the assessment year 2020-21, the assessee made payment of salaries to the deputed expatriate employees by way of reimbursement to its counterpart viz. Walmart Inc. of USA. Originally, the salaries of the deputed employees were paid by the original employer Walmart Inc. and subsequently without any mark-up it was reimbursed by Indian company being the assessee viz. Flipkart Internet (P) Ltd.

The assessee entered into an agreement called Master Service Agreement (MSA) for the purpose of secondment of employees by the foreign company and the provision of services. The expenditure by way of salary paid by the foreign company in foreign soil to its employees was to be reimbursed by the Indian company. The agreement had two parts viz. (i) relating to provision of services; and (ii) secondment of employees. The controversy was about the requirement for withholding tax for the reimbursement made for the salary of seconded employees by way of a writ before the Court. Thus, the scope of this write up is about the need for withholding of tax in the case of payment of salary by way of reimbursement where it was originally paid by the employer outside India and the reimbursement made subsequently by the Indian company to the foreign company which did not include any profit element embedded in it by way of mark-up etc.

The foreign company seconded four employees to Indian company and it had entered into an agreement with those employees by name “Global Assignment Arrangement” which would make the employees work on secondment basis and based on such agreement the employees were deputed to work in India. Besides this, the Indian company gave a letter of appointment to the employees so seconded with details of their responsibilities. The Indian company also made payment towards provident fund in the capacity of employer of seconded employees and the employees were in India on ’employment visa’.

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