Seconded employees does not come within ‘FTS’ or ‘FIS’: ITAT

Google US has received a favourable ruling from the Bengaluru bench of the Income Tax Appellate Tribunal (ITAT) in a recent case in which it was compensated for employee costs by Google India. The compensation were for employees who were seconded here.

Revenue authorities had tried to classify such salary reimbursements of Rs 20.6 crore and Rs 39.5 crore, respectively, as fees for “technical services” (FTS) as per Explanation 2 to Section 9(1)(vii) of the Act as well as “Fees for Included services” (FIS) as per Article 12(4) of the DTAA between India and USA (India-US Tax Treaty). two financial years (which were the subject of the tax dispute). This would entail withholding commitments for Google India. But, due to certain provisions in the secondment agreement, the ITAT bench determined that such payment could not be considered income of the US corporation.

According to tax experts, global corporations frequently second (depute) important personnel to their Indian subsidiary. For administrative purposes, the deputed employees’ salaries are paid into their overseas bank accounts by the foreign employer. In turn, the Indian company reimburses the foreign company for the salary expense. When Indian tax officials attempt to treat the reimbursement as income of the foreign company, litigation ensues. “It is critical to have explicit secondment agreements, the specifics of which should be mentioned in the assignment letters issued to employees,” a tax expert advised.

The assignment letters to the employees who were seconded to India in this case explicitly stated that the expats were working under the supervision of Google India. Google US was not liable for the work done by seconded personnel.

The letter sample said, “You shall abide by Google India’s direction and control during the duration of your secondment, including all of Google India’s rules, procedures, working practises, and regulations. You will be under Prasad Ram’s daily management and supervision at Google India.” Additionally, the US corporation lacked the authority to unilaterally recall any seconded employees. Additionally, the letter stated that there was no assurance of employment with Google US upon return to the United States.

The tribunal bench observed that tax had been properly withheld from Google India’s salary income and submitted with the Indian Treasury.

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