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Tax Alert: Salary cost reimbursement and payment towards Global Information Support Services to French Company, not taxable in India

26 July 2019

Background 

To have a uniformity across location, support its establishments in India etc., MNCs send their employees to India either on deputation or secondment. Depending upon the terms of agreement, either the Indian entity or the Foreign Company pays salary to the said employees. Where the Foreign Company pays salary to such employee, such cost is reimbursed by the Indian entity. Indian Revenue Authorities at times tries to bring such payment within the ambit of Fees for Technical Service (FTS) and hence the taxability of such payment has always been litigative.

Further, some of the Double Taxation Avoidance Agreement (DTAA) entered by India contains Most Favoured Nation (MFN) clause. This clause grants access to the favourable DTAAs that are entered post signing of the concerned DTAA.

We, at BDO, have summarized latest ruling of Pune Bench of Income-tax Appellate Tribunal[1] on this and provided our comments on the impact of this decision.

Facts of the Case

Faurecia Automotive Holding (the taxpayer), a Company being tax resident of France, is into the business of designing and building various interior components (such as dashboards, door panels, etc.) of passenger cars. During the fiscal year 2010-11, the taxpayer had received following sums from Faurecia Technology Center India Limited (Faurecia India):

  • INR 4.73 mn towards reimbursement of salary cost, in respect of an employee (i.e. Mr. Franck Euvrard) seconded to India
  • INR 266.72 mn towards support services

While the taxpayer treated both these amounts as not taxable, the Tax Officer brought them to tax.

With respect to taxing reimbursement of employee cost, the brief facts are as under:

  • As per the secondment agreement, Mr. Franck was to render services to Faurecia India. For this purpose, Mr. Franck was appointed as Faurecia India’s CEO in 2006 and was CEO till 2011.
  • His salary consisted basic Salary, housing allowance, conveyance allowance, child education allowance and special allowance etc. He had to become member of Employees’ Provident Fund
  • Mr. Franck’s leave entitlements were governed by the rules of Faurecia India
  • The taxpayer paid INR 47.30 mn directly to Mr. Franck, which was subsequently reimbursed by Faurecia India.
  • For fiscal year 2010-11, the Tax Officer proposed to tax this amount by treating that the taxpayer rendered managerial, consultancy or technical services to Faurecia India and the amount paid as quid pro quo represents payment towards technical services as covered under section 9(1)(vii) of the Income-tax Act, 1961 (the IT Act).

With respect to taxing support services, the brief facts are as under:

  • The taxpayer provided services to Faurecia India in one or several of the following areas:
    • General management
    • Communication
    • Sales and marketing
    • Program management
    • Accounting, controlling and tax
    • Treasury
    • Legal, insurance, real estate
    • General management of information system organisation
    • Information system
    • Human resources
    • General management of purchasing organisation
    • Production purchasing
    • Non production purchasing
    • Manufacturing
    • Quality
  • For the above, it received INR 26.6 mn from Faurecia India. The taxpayer treated this amount as not taxable claiming it did not make available any technical knowledge, experience, skill or know how etc. to Faurecia India and hence, the same did not fall within the meaning of FTS under Article 13 of the DTAA with France read with para 7 of the Protocol.
  • The Tax Officer taxed this amount by treating it to be royalty as defined in section 9(1)(vi) of the IT Act and also covered by Explanation 2 to section 9(1)(vii) of the IT Act as FTS.

Accordingly, the Tax Officer passed a draft order proposing to add the above amounts. The taxpayer filed objections against the draft order, which were dismissed by the Dispute Resolution Panel.

Tribunal Ruling

On further appeal, the Income tax Appellate Tribunal, Pune (the Tribunal), ruled in favour of the taxpayer. In its ruling, the Tribunal noted as under:

With respect to taxing reimbursement of employee cost

While holding that the reimbursement of employee cost is not in the nature of FTS as defined in section 9(1)(vii) of the IT Act, Tribunal observed that:

  • Any consideration received by a non-resident from rendition of managerial, technical or consultancy services shall be considered as FTS. If, however, such amount is chargeable to tax under the head ‘Salaries’ in the hands of recipient, then it would shed the character of FTS
  • Mr. Franck Euvrad was engaged by Faurecia India as its CEO. Like any other employee, his remuneration was directly fixed by Faurecia India. He was also entitled to the Provident Fund and superannuation benefits.
  • Mr. Franck Euvrad worked under control, supervision and direction of Faurecia India. Further, Faurecia India withheld tax from the payment made to Franck Euvrad and the same is offered to tax in India by Franck Euvrad as Income from Salary.
  • There is nothing like any cloak in the arrangement under which the real recipient of the amount has been suppressed and a façade has been shown
  • Once the amount paid by Faurecia India is and has been actually charged to tax under the head ‘Salaries’ in the hands of the real recipient i.e. expatriate, then going by the second exception in the Explanation to 9(i)(vii) of the IT Act, the same cannot be treated as FTS in the hands of the non-resident entity
  • It is a case of Mr. Franck Euvrad working as an employee of Faurecia India. The taxpayer had no role to play in the rendition of services by Franck Euvrad to Faurecia India, except that a part of salary payable by Faurecia India was initially paid by the taxpayer in France to Franck Euvrad, which was later on recovered without any profit element.
  • In light of the above, it is held that the sum of INR 47.30 mn received by the taxpayer from Faurecia India is not in the nature of FTS under section 9(1)(vii) of the IT Act.

With respect to taxing support services

As royalty:

For concluding that the payment towards support services is not in the nature of Royalty, the Tribunal observed that:

  • The word “imparting” read in conjunction with “knowledge, experience or skill”, it becomes crystal clear that the same refers to providing some technical, industrial or commercial know-how etc. to be used by the recipient and not consuming it as such as a service received.
  • The consideration to fall within the ambit of Royalty must be towards use of some right, property or information concerning technical, industrial or commercial knowledge etc. and not a mere rendering of services involving some technical expertise etc.
  • The IT support services rendered by the taxpayer, which are otherwise technical in nature, do not involve any imparting of information concerning technical, industrial or commercial knowledge to Faurecia India. The same being a mere rendering of services, cannot be brought within the scope of section 9(1)(vi) of the IT Act.

As FTS

For concluding that the payment towards support services is also not in the nature of FTS, the Tribunal observed that:

  • As per para 7 of the Protocol, if India has entered into a DTAA with a third state which is a member of the OECD and the scope of the term FTS under such DTAA with a third state is limited vis-à-vis its scope given in the DTAA with France, then such limited scope as per the DTAA with the third state shall stand substituted in place of para 4 of Article 13 of the DTAA with France.
  • India has entered into a DTAA with UK, which is a member of the OECD. Article 13 of such DTAA with UK has a narrower definition of the term FTS.
  • In view of the MFN clause in the Protocol, Article 13(4) of the DTAA with UK shall overshadow Article 13(4) of the DTAA with France and limit the scope of the DTAA with France to the extent provided in the DTAA with UK.
  • The term managerial is missing so far as the scope of FTS under the DTAA with UK is concerned.
  • The second departure in the DTAA with UK from the DTAA with France is that the ‘scope’ of technical consultancy services in the DTAA with UK has been restricted to ‘make available’ any technical knowledge, experience, skill knowhow or processes etc.
  • Thus, Article 13(4)(c) of the DTAA with UK, when read in place of Article 13(4) of the DTAA with France, deciphers that FTS shall mean any payment for rendering of any technical or consultancy services which ‘make available’ technical knowledge, experience or skill etc. to the recipient.
  • The services rendered by the taxpayer to Faurecia India are in the nature of managerial and also technical in nature. In so far as the managerial services are concerned, the consideration for them goes out of the purview of FTS as the term ‘managerial’ is absent in Article 13(4) of the DTAA with UK.
  • As far as the remaining Technical services are concerned, these are of coordinating the information system and assisting Faurecia India in computerisation of systems, office automation and utilisation of personal computers which fall into three categories namely Operations, Technical Support and Studies. On going through the nature of such services, it manifests that these do not result in making available any technical knowhow etc to Faurecia India.
  • In view of the above, payment towards support services should not be taxable as FTS under the DTAA.

BDO Comments 

  • Reimbursements has always been under the lens of the Revenue Authorities and the cost incurred towards seconded employee is no exception. Judiciary is divided when it comes to taxability of salary paid to seconded employees. This Ruling is a welcome ruling as it has categorically observed that the amount remitted by Faurecia India to the taxpayer was a pure reimbursement. In coming to this conclusion, it has deep dived into the factual matrix (including the secondment agreement) before concluding that the payment is pure reimbursement and hence not taxable.
  • Further, on facts, the Tribunal has distinguished Delhi High Court’s ruling in the case of Centrica India Offshore Pvt Ltd[2], wherein it was held that the seconded employees ‘made available’ technical knowledge to Indian entity and hence taxable as fees for included services.
  • Also, with respect to amount paid towards support services rendered to Faurecia India, the Tribunal has applied the MFN clause of India-France DTAA and considered the definition as provided under India-UK DTAA. It is pertinent to note that by applying MFN clause, the narrower definition of FTS is considered by the Tribunal and has thereby treated the income as not taxable in India

[1] Faurecia Automotive Holding vs DCIT (ITA No. 784/Pun/2015

[2] (2014) 364 ITR 336 (Delhi). SLP filed before Supreme Court has been dismissed