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Direct Tax Alert - Reimbursement of social security, insurance, and other costs not taxable as Fees for Technical Services

21 May 2021


In order to maintain standards and quality across different locations, many multinational companies deploy their personnel at various locations (including different geographic locations). When a person is deputed to a country other than his home country, an arrangement is generally made for meeting their statutory contributions such as social security contribution in their home countries, insurance etc.

India has seen inflow of many expats over the years. Depending upon the arrangement, either the Indian entity or the Foreign entity would pay salary and social contribution to such expats. In a situation where the Indian entity pays salary to the expat and the Foreign Company pays the social contribution (which is later on reimbursed by the Indian entity), a question may arise as to whether such payment could be regarded as Fees for Technical Services (FTS) or not. Recently, the Authority for Advance Ruling (AAR)1 had an occasion to examine this issue. We, at BDO in India, have summarised this ruling and provided our comments on the impact of this decision.

Facts of the case

The taxpayer, a wholly owned Indian subsidiary of a Switzerland based company PMK and part of K-Group, had signed a memorandum of understanding with the State Government of a certain Indian State for establishing a manufacturing plant. Considering the large scale foreign direct investment in India and ensuring consistency in quality and safety standards of the K group, the taxpayer required experienced employees who are familiar with K group methodology and processes to be employed on local payroll in its new manufacturing facility in India. Hence, the taxpayer requested KRP, a wholly owned subsidiary of PMK, to supply such experienced personnel. As per the inter-company agreement executed between the taxpayer and KRP, for disbursing social security contribution, insurance and relocation expenses of such personnel in their home country was to be disbursed by KRP and subsequently reimbursed by the taxpayer. The issue raised before the AAR was whether the Tax Authorities are justified in treating all payments from the taxpayer to KRP to be in the nature of Fees for Technical Services (FTS).

Taxpayer’s contention

  • The taxpayer has withheld tax under section 192 of the IT Act on the entire amount (inclusive of the reimbursement to KRP) paid by it.
  • KRP charges an administration fee for managing the disbursements to be made on behalf of the taxpayer. The taxpayer has withheld appropriate taxes under section 195 of the IT Act from the administration fees paid to KRP.
  • Apart from social security, insurance, relocation expenses no other part of the salary is paid by KRP or PMK or the taxpayer outside India.
  • Arrangement of KRP making part payment of the salary to the expatriate personnel, on behalf of the applicant, is only facilitative in nature and to facilitate the expatriate personnel to meet their financial commitments in their home countries. Therefore, there is no income accruing from such an arrangement.
  • The taxpayer relied on CBDT Circular No. 720 dated 30 August 1995 to state that no tax withholding is applicable on reimbursement since salary payments have already suffered tax withholding under section 192 of the IT Act.
  • KRP merely disbursed payments to expatriate personnel on behalf of the taxpayer and hence such payments do not amount to FTS as defined under Article 12(4) of the Tax Treaty. Further, as KRP does not have PE in India, such payments should be taxed as business profits under Article 7 of the Tax Treaty.

Tax Officer’s ​contention

  • The taxpayer had hired expatriate personnel with familiarity of K Group methodology and process and the main intention behind such recruitment is to ensure quality and safety standards of K Group and for equipping the Indian employees in delivering to these standards. Thus, it can be concluded that their services are of “Technical” in nature.
  • Reliance placed on judicial pronouncements2 to contend that the payment is towards FTS.
  • KRP has bifurcated the consideration towards technical services into the following to escape the tax liability:
    • Direct salary payment to expatriate personnel;
    • Reimbursements for salary payment outside India; and
    • Administration fee for acting as payroll disbursement agent.

Taxpayer’s rej​oinder

  • There exists an “Employer-Employee” relationship between the taxpayer and the expatriate personnel and hence the payment made to the expatriate is in nature of “salary” which has been charged to tax in India.
  • KRP is not rendering any managerial, technical or consultancy services to the taxpayer. Further, the expatriate would be rendering services to the taxpayer in their own capacity and not for and on behalf of KRP. Also, the expatriate works under the control, supervision, and directions of the taxpayer.
  • A without prejudice submission was made that the taxpayer is entitled to claim benefit as per Para 5 of the Protocol to the India-Switzerland tax treaty which provides for taxation of FTS in accordance with the provisions of the Tax Treaty between India and a member of OECD countries entered into after the signing of the amending protocol, where such provisions provide for a lower rate or restrictive scope of taxation on royalties/FTS etc. The scope for FTS contained in the India-Portugal tax treaty (which was executed after the execution of the India-Switzerland tax treaty) being restrictive, the taxpayer can apply such restrictive scope.


AAR held that the social security, insurance, relocation expenses being in the nature of committed and obligated payments are in the nature of reimbursements and not FTS. While coming to this conclusion, the AAR made following key observations:

  • There is no lien on employment of the seconded employees with the taxpayer and also the taxpayer has the power to terminate the employment.
  • The employee is forbidden to supply his capacity to work to someone else during the period of employment with the taxpayer
  • The taxpayer is solely responsible for all payment to expatriates and that no salary payments are made by the taxpayer outside India.
  • To meet the obligation of the expatriate personnel abroad, social security contribution, insurance, relocation cost, etc., were deposited by KRP and the taxpayer reimbursed the same to KRP on cost to cost basis.
  • The concerned employee is offering the entire salary and perquisites and social security/insurance/relocation receipts in the tax return and on which tax has been deducted in India.
  • The Delhi High Court’s decision in case of Centrica (supra) is distinguishable on facts.
  • KRP is not exercising any operational or functional control over the employees. It is merely paying statutory payments on behalf of the personnel in their home countries. This is clearly a supportive function performed by KRP.

BDO comments

Taxability of reimbursement has been a vexed issue and the judiciary is also divided on it. While a pure reimbursement is generally not taxable, a reimbursement where some component of profit element is embedded could be taxed as FTS. While AAR is not binding on taxpayers, other than the taxpayer who has made the application, and the tax officer, it could have persuasive value. This ruling will help all the multinationals who are taking assistance of their counterparts to pay the social security etc. of expatriates in their home countries.

1CTBT Pvt. Ltd, In Re (AAR No. 1366 of 2012)

2Flughafen Zurich, AG vs DDIT (International Taxation) (2017) 79 199

   Centrica India Offshore (P.) Ltd vs CIT (2014) 364 ITR 336