With globalisation, movement of employees (i.e. expats) from one country to another is common phenomenon. Typically, expats are sent either on deputation or on secondment basis. While under deputation, the economic employer continues to be the foreign company, in case of secondment, the economic employer is the entity located in the country where the employee is situation.
The Indian Revenue Authorities have tried bringing both types of arrangement within the tax-net by holding that it resulted into foreign entity having Permanent Establishment (PE) in India, or the payment towards reimbursement of salary cost is Fees for Technical Services (FTS) and hence taxable in India.
Recently, the Delhi Tax Tribunal1 had an occasion to examine whether the expat would result into foreign company having PE in India or not and also whether the reimbursement of salary cost tantamount to FTS or not. We, at BDO in India, have summarised the ruling of Delhi Tribunal and provided our comments on the impact of this decision.
Facts of the case
Taxpayer, company incorporated in Singapore, is engaged in the business of franchising KFC, Pizza Hut, and Taco Bell brands for a number of territories in the Asia Pacific region (including India). For the operation of restaurant outlets, it entered into Technology Licence Agreement (TLA) with YRIPL. As per terms of TLA, the taxpayer was to receive royalty on pre-agreed percentage computed on sales of equity stores and also on royalty, initial fees and renewal fees collected from franchisee stores. The taxpayer offered this royalty income to tax in India at the rate of 10% as prescribed in the Double Taxation Avoidance Agreement (DTAA) between India and Singapore. Further, the taxpayer had deputed an employee to YRIPL for which a Deputation Agreement (DA) was in place. The salary of this employee was paid by the taxpayer and was reimbursed by YRIPL on cost to cost basis. However, the Tax Officer treated the salary reimbursement as FTS taxable at 10%. The Tax Officer also held that the expat of taxpayer constituted PE in India and thereby taxed royalty income at the rate of 40%. Aggrieved, the taxpayer preferred an appeal before the First Appellate Authority.
The First Appellate Authority while granting relief to the taxpayer held the following:
- The deputed employee, a highly qualified and experienced professional, was employed with the taxpayer as a senior counsel. He was sent on deputation to YRIPL vide DA.
- As per the clauses of DA, deputed employee was under the direct control and superintendence of YRIPL. Salary was paid by taxpayer in Singapore and it was reimbursed by YRIPL on cost to cost basis. YRIPL was also responsible for tax obligations on salary payment.
- YRIPL has deducted tax on source on salary paid and has also paid fringe benefits tax as applicable. Therefore, it is clear that tax has been collected on salary paid to deputed employee and YRIPL has claimed it as business expenditure.
- Tax officer has again taxed the same salary amount as FTS which amounts to double taxation.
- Taxpayer simply acted as conduit to pay salary in Singapore as family of the deputed employee was in Singapore.
- Taxpayer had no right/lien on deputed employee and hence there was no Service PE.
The Revenue Authorities raised following issues before the Tax Tribunal:
Re. PE in India:
The Revenue Authority contended that the royalty, which is offered to tax by taxpayer, was on account of sales in India; its employees and functions performed in India, benefits to both the taxpayer and YRIPL. The case put up by Revenue Authority was that of Service PE. The Revenue Authority was of the view that since it was a case of ancillary PE, "make available" clause was not relevant; hence it was case of FTS. Further, it was contended by Revenue Authority that as per the OECD guidelines, extraordinary expenses result into brand building hence, alternatively it was a case of Dependent Agent PE (DAPE).
Taxpayer submitted that it had no right/lien on the deputed employee. Also, in absence of any separate Service Agreement, there was no question of any Service PE. As per Article 7 of the India-Singapore DTAA, income attributable to the PE is only taxable in India. There was no income, as salary paid is expense.
Tribunal relied on the observations of the First Authority and held that taxpayer does not constitute Service PE in India. To decide whether DAPE is constituted, Tribunal referred to conditions prescribed in Article 5(8) of the India-Singapore DTAA. Tribunal observed that since the conditions are not fulfilled it cannot be said that the taxpayer has DAPE.
Re. Salary reimbursement by YRIPL taxed as FTS under Article 12 of India-Singapore DTAA
As per Article 12 of India-Singapore DTAA, FTS is taxable in India only on fulfilment of 'make available' clause. The Tax Tribunal observed that the condition of 'make available' was not fulfilled. In the absence of any element of income, it is a cost-cost reimbursement and the same cannot be treated as FTS. Taxpayer's contention that it is a case of pure reimbursement is valid. Further, the tax has already been paid by the deputed employee on salary income in India and taxing the same as FTS would amount to double taxation. The deputed employee acted as director and signed the financial statements and attended the boards meetings. He was not deputed for a short period.
Further, the Tax Tribunal distinguished Delhi High Court decision in the case of Centrica India Offshore Pvt Ltd2 on facts. It observed that in that case, salary was the responsibility of the foreign company which was reimbursed by the Indian concern including direct costs and the personnel also returned back. Centrica UK was providing services to Indian concern through seconded employees to ensure quality control and management of their vendors or outsourced activities, with the intention to provide staff with appropriate expertise and knowledge about process and practices implemented. The facts of present case are at variance and hence the Centrica ruling is not applicable.
Taxation of a Seconded and Deputed employee is a vexed issue. This decision will assist those enterprises where employees have been deputed for a longer duration. It is imperative to note that in this case, the employee was under the control of the Indian entity and not the taxpayer. Further, the DA also provided that the taxpayer shall not be held responsible for the activities carried out by the employee. While in Centrica's ruling it was observed that the employee was under the control and supervision of Centrica UK and therefore constituted PE in India. In light of this, companies should relook the agreements entered in connection with the deputation / secondment of employees.
1 DDIT vs Yum Restaurants (Asia) Pte Ltd [ITA No. 6018/Del/2012]
2 Centrica India Offshore Pvt Ltd vs CIT  364 ITR 336
Originally published 31 July 2020 .
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