The Indian Courts/Tribunals have pronounced several judgements on varied issues relating to Corporate and International Taxation in July. We are pleased to publish the first edition of 'Direct Tax Verdicts' where we have picked six judgements of significant importance and prepared a brief analysis on them1.

Employee Secondment Taxation

Taxability of amount received towards reimbursement of salary costs of seconded employee2


  • The taxpayer, a company incorporated in USA, was engaged in the business of manufacturing and marketing storage network infrastructure products.
  • Pursuant to Secondment Agreement dated 15 February 2010, an Indian subsidiary (Ico) had engaged the services of an employee of the taxpayer.
  • During Assessment Year (AY) 2010-11, the taxpayer received a certain amount from Ico towards the reimbursement of expenses paid for the salary, bonus and other perquisites to the seconded employee.
  • The Assessing Officer (AO) took a view that the amount received by the taxpayer was in the nature of Fees for Technical Services (FTS) taxable in India.
  • Upon objections filed by the taxpayer, the Dispute Resolution Panel (DRP) confirmed the AO's view.

Bangalore Tribunal's ruling

  • The Bangalore Tribunal observed the following:

    • The secondment of employee to Ico was only for a temporary period.
    • The secondment was not for providing the general managerial/administrative service, but it was for the purpose of rendering specialised and expertise services of setting up an independent design centre.
  • Therefore, having regard to the business profile of Ico, the services provided by the seconded employee to Ico were technical in nature.
  • Accordingly, the payment by Ico to the taxpayer is taxable as FTS on a gross basis under the provisions of the Income Tax Act, 1961 (Act) as well as the Double Taxation Avoidance Agreement (DTAA) between India and USA. The fact that such payment is without any mark- up is irrelevant.
  • The Bangalore Tribunal distinguished various rulings relied on by the taxpayer and relied on its earlier decision in Flughafen Zurich AG vs DDIT [TS-96- ITAT-2017] dated 10 March 2017.

SKP's comments

The Bangalore Tribunal is consistently taking a negative view (against the taxpayer) on the issue of taxation of expatriate secondment. The Delhi High Court in Centrica India Offshore (P) Ltd had also taken a negative view on this issue. However, the recent decisions of the Bombay High Court in Marks & Spencer Reliance India (P) Ltd and the Ahmedabad Tribunal in Burt Hill Design Pvt Ltd have taken favourable views on this issue. In light of this, the litigation arising from the taxation of expatriate secondment will most likely be aggravated in the time to come and only the Supreme Court could put this litigation issue to rest. In the meanwhile, taxpayers are advised to carefully plan and examine their expatriate secondment arrangements.

India-Mauritius DTAA - Capital Gains Taxation

Taxability of Mauritius company selling shares in an Indian company under the India-Mauritius DTAA3


  • The taxpayer was incorporated in Mauritius on 4 April 1996. The Financial Services Authority of Mauritius has issued a Category 1 Global Business License to the taxpayer.
  • The taxpayer had acquired shares in Tata Industries Ltd (TIL) in June 1996 and thereafter, sold these shares to Tata Sons Ltd (TSL) in July 2009. Thereafter, the entire sale proceeds were reinvested by the taxpayer in Tata Power Limited (TPL).
  • The Mauritius Revenue Authority had also issued a Tax Residency Certificate (TRC) to the taxpayer evidencing that it was a tax resident of Mauritius during the relevant period.
  • Upon an application filed by the taxpayer, the Authority for Advance Rulings (AAR) had ruled that the transfer of shares in TIL by the taxpayer to TSL shall not be taxable in India under Article 13(4) of the India-Mauritius DTAA.
  • Being aggrieved, the Revenue filed a writ petition before the Bombay High Court.

Bombay High Court's decision

The Bombay High Court dismissed the writ petition of the Revenue after considering the beneficial provisions of the India-Mauritius DTAA overriding the Act, the beneficial Central Board of Direct Taxes (CBDT) circulars binding on the revenue and the principles laid down in Union of India vs Azadi Bachao Andolan [2003] 263 ITR 706 (SC). In this regard, the Bombay High Court observed the following:

  • The fact that the taxpayer held shares in TIL for a long period of 13 years goes to suggest the bona fide intentions of the taxpayer. Furthermore, the proceeds from the sale of shares in TIL were again invested in TPL and these shares are held by the taxpayer.
  • Considering these aspects, the AAR had observed that the taxpayer is not a fly- by-night or a shell company. While considering the factual matrix of the matter, the AAR had not perversely recorded any findings and its findings were based on the appreciation of evidence on record.
  • The objection of the Revenue, which questions the AAR ruling on the ground that the transaction/issue was designed prima facie to avoid income-tax, would not arise at this stage.
  • The reliance placed by the Revenue on Indirect Transfer Provisions of the Act (i.e. shares deriving, directly or indirectly, its value substantially from the assets located in India) would not be of any avail as the taxpayer's case was covered under the India-Mauritius DTAA.

SKP's comments

It may be noted that the India-Mauritius DTAA has been amended vide CBDT Notification dated 10 August 2016. As per the amended India-Mauritius DTAA, gains arising to a Mauritian company from alienation of shares in an Indian company up to 31 March 2019 shall be taxable at a lower rate (i.e. 50% of the tax rate applicable in India on such gains) if these shares are acquired on or after 1 April 2017. This benefit of lower rate of taxation is subject to the fulfilment of conditions in Limitation of Benefits (LoB) Article of the amended India-Mauritius DTAA.

Accordingly, it may be difficult to simply resort to this decision of the Bombay High Court for shares acquired in an Indian company by a Mauritian company on or after 1 April 2017 since independent fulfilment of conditions in the LoB Article of the amended India- Mauritius DTAA shall also be critical. Additionally, the impact of the General Anti Avoidance Rules (GAAR) provided in the Act should also be analysed.

However, this decision of the Bombay High Court could be relied on in the case of pending litigations on the eligibility of relief under the Capital Gains Article of the India-Mauritius DTAA for alienation of shares, which were acquired in an Indian company by a Mauritian company before 1 April 2017.

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1 Please note that any judgements or key developments in Direct Taxation for which specific SKP Tax Alert had

already been published in July 2017 are not covered again in this newsletter.

2 Emulex Design & Manufacturing Corporation vs DCIT in ITA No. 268/Bang/2015 (Bangalore Tribunal)

3 CIT vs JSH (Mauritius) Ltd [2017] 84 37 (Bombay High Court)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.