Ruling clarifies obligations for seconded employees

By Sumes Dewan and Shradha Puri, KR Chawla & Co
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In a recent judgment passed by the Authority for Advance Rulings (AAR) in the matter of Cholamandalam MS General Insurance Company, it was held that if a foreign company – in this case, Hyundai Marine & Fire Insurance Company Korea (HMFICL) – seconds a technician to a company in India and receives from the Indian company a substantial part of the salary and benefits for the seconded employee, such reimbursement cannot be construed as a “fee for technical services” as defined in explanation 2 to section 9(1) (vii) of the Income Tax Act, 1961 (ITA), or in article 13.4 of the double taxation avoidance agreement (DTAA) between India and South Korea.

Sumes Dewan Partner KR Chawla & Co
Sumes Dewan
Partner
KR Chawla & Co

The applicant in the present case, Cholamandalam, seconded an employee of a Korean company, HMFICL. The employee had foreign language skills and familiarity with insurance business practices that would be of use to Cholamandalam in the expansion of its business activities.

In order to gain access to the skills of the employee, Cholamandalam entered into a secondment agreement with HMFICL, which was effective for a period of two years.

Under the terms of the agreement, the HMFICL employee was seconded to engage in certain specified activities for Cholamandalam, such as introducing potential new customers, assisting in developing insurance products for the Indian market, advising on pricing and on the design of the company’s reinsurance programmes, and furnishing expertise on a range of issues to help establish and develop the business, including actuarial and accounting systems, marketing, information technology and investment.

Under the terms of the agreement, Cholamandalam was required to reimburse HMFICL only a part of the salary and other benefits payable to the seconded employee, which included emoluments such as basic salary, house rent allowance, personal allowance, gratuity and medical, furniture and car expenses.

Debit notes were required to be raised by HMFICL on Cholamandalam on a monthly basis for amounts due to cover the benefits, according to a scale of reimbursement that was fixed in the terms of the agreement.

Further, it was specified that HMFICL remained the employer of the seconded technician, and would continue to pay the employee’s salary. HMFICL was also responsible for deducting tax from the salary payable to the employee, and such tax was deposited with the income tax department in India.

Cholamandalam submitted that the payments it had made to HMFICL were in the nature of part-reimbursement of the salary and benefits payable by HMFICL to the seconded employee, and that therefore no income had accrued to HMFICL in India on account of such reimbursement.

Shradha Puri Associate KR Chawla & Co
Shradha Puri
Associate
KR Chawla & Co

However, the income tax department contended that the payment made by Cholamandalam to HMFICL constituted fees paid for providing the services of technical personnel, and that the nature of the services performed by the seconded employee was essentially technical and consultative.

The income tax department argued that the income should be deemed to accrue to HMFICL in India under both the provisions of the ITA and article 13 of the DTAA between India and Korea.

The question framed for consideration by the AAR was whether the amount paid or payable by the applicant (Cholamandalam) to HMFICL under the terms of the agreement was in the nature of income accruing to HMFICL, in respect of which tax would be liable to be deducted at source by the applicant, under section 9(1)(vii) of the ITA.

In addressing the question, the AAR drew attention to explanation 2 to section 9(1)(vii) of the ITA, which defines “fees for technical services” as “any consideration for the rendering of any managerial, technical or consultancy services (including provision of services of technical or other personnel) but does not include consideration for any construction, assembling, mining or like projects undertaken by the recipient or consideration which would be the income of the recipient chargeable under the head ‘salary’”. Article 13.4 of the DTAA defines fees for technical services in similar terms.

The AAR was of the view that Cholamandalam had not paid any fee to HMFICL for the service of deputizing its employee having technical knowledge, and that the part-reimbursement of salary could not be construed as consideration for offering the technical services of the seconded employee.

The AAR held that the payment made to HMFICL had gone towards the part-reimbursement of the cost borne by HMFICL for employment of the seconded employee, and thus it cannot be inferred that such reimbursement represents a fee for technical services.

Based on this finding, the AAR held that no tax was liable to be deducted at source by Cholamandalam in respect of the payments made or to be made to HMFICL under the terms of the agreement.

Sumes Dewan is a partner and Shradha Puri is a senior associate at KR Chawla & Co Advocates & Legal Consultants. The firm is headquartered in New Delhi and has offices in Chennai, Bangalore and San Francisco, as well as a representative office in Singapore.

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