Secondment of employees, as a concept, has evolved in the era of global commercial mobility. Secondment is where an employee of one organisation is working for one or more other organisation(s), basis a mutual understanding between the organisations. There are various concerns associated with secondment of employees like the payroll, employer – employee relationship status, control over the employee and several related issues. This phenomenon has ramifications under the tax laws.

In this context, the recent litigation in case of Flipkart Internet Private Limited^[1] (‘FIPL’/ ‘Assessee’), is worth noting. In the facts of the instant case, Walmart Inc., had seconded its employees to FIPL and had entered into a Global Assignment Arrangement (‘GAA’) with the seconded employees, which provided that the seconded employees would work for the benefit of FIPL. In lieu thereof, FIPL had reimbursed the salaries of the deputed expatriate employees to Walmart Inc., on a cost-to-cost basis. In this connection, FIPL had filed an application under Section 195 of the Income-tax Act, 1961 (‘IT Act’), before the Assessing Officer (‘AO’), seeking a nil withholding certificate in respect of the reimbursements made to Walmart Inc.

The AO, however, rejected the application preferred by FIPL and directed them to deduct tax at source at the applicable rates. The AO, in his Order, alleged that there was no employer-employee relationship between FIPL and deputed expatriate employees. Au contraire, the services rendered by the seconded employees were in the nature of fees for included services (‘FIS’), both under the provision of the IT Act as well as under the India-United States of America Double Taxation Avoidance Agreement (‘DTAA’) and was liable to withholding under Section 195 of the IT Act, at the applicable rates. The deduction of tax at source under Section 192 of the IT Act, does not result in double deduction nor does it obviate the need to withhold tax under Section 195 of the IT Act. Lastly, once it has been determined that payments made by FIPL to Walmart Inc., were in the nature of FIS, the same have to be taxed on gross basis and does not require determination of the income element present therein.

Aggrieved, FIPL challenged the Order rejecting their nil withholding application by way of a writ petition before the High Court of Karnataka. The Hon’ble High Court quashed the Order passed under Section 195 of the IT Act, and directed the AO to issue a ‘Nil’ withholding certificate under Section 195(2) of the IT Act. The key observations made by the Hon’ble High Court have been summarised hereunder:

i.    An application for obtaining a ‘Nil Deduction Certificate’, by the remitter has to be preferred under Section 195(2) of the IT Act, whereas similar applications by the recipient has to be preferred under Section 197 of the IT Act. Thus, the contention of the Revenue Department that for obtaining ‘Nil Deduction Certification’, FIPL should have filed an application under Section 197 of the IT Act, instead of Section 195(2), was not tenable.

ii.    The object of Sections 195(2) and 197 of the IT Act, are in the nature of safeguards for the assessee(s) and have to be invoked to avoid statutory and penal consequences of being treated as an ‘assessee in default’ in terms of Section 201 of the IT Act.

iii.   Payments made by FIPL to Walmart Inc., would not fall within the ambit of FIS as defined under Article 12(4) of the India-US DTAA as the mandatory pre-condition of ‘make-available’ has not been triggered.

iv.   The fact that the employees seconded have the ‘requisite experience, skill or training capable of completing the services contemplated in secondment’ by itself is insufficient to treat the payment as FIS, de-hors the satisfaction of ‘make available’.

v.     It is a settled position of law that treaty prevails over statute, in cases where the provisions of the DTAA are more beneficial for the assessee and therefore, reliance placed by the Revenue Department on the definition of FIS as contained in Explanation 2 in Section 9(1)(vii) of the IT Act, is not tenable.

vi.    Taxes under Section 195 of the IT Act, cannot be withheld on the gross receipts and the determination of the income embedded in payment made to non-resident is crucial as the expression used in Section 195 of the IT Act, is ‘Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest(not being interest referred to in Sections 194LB or 194LC) or Section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head ‘Salaries’) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force’. This view has also been affirmed by the Apex Court in the case of GE India Technology Centre (P) Ltd^[2].

vii.   Any conclusion on an interpretation of secondment, as contained in GAA, to determine the employer and determining the nature of payment by itself would have no conclusive bearing on whether the payment has been made is in lieu of technical services. The key factor that needs to be fulfilled for establishing FIS is ‘make available’, which has not been satisfied in the facts of the instant case.

viii.  Judgment rendered by the Delhi High Court in the case of Centrica India Offshore (P) Ltd. Commissioner of Income Tax (‘CIT’)^[3], has been rendered in the context of different set of facts and cannot come to aid of the Revenue Department as: (a) there is no service permanent establishment (‘PE’) in India; and (b) condition of ‘make-available’ has not been satisfied in the present case.

ix.   The file of the AO contains a note addressed to the CIT wherein approval for granting Nil withholding certificate had been sought. However, the CIT directed the AO to re-consider his stand, and pursuant thereto the AO rejected the application preferred by the assessee and refused to grant a Nil withholding certificate.

This is a welcome ruling for the taxpayers as the cost-to-cost reimbursement of salaries paid to expats have been excluded from the ambit of Section 195 of the IT Act. However, it must be borne in mind that contractual documents play a key factor in identifying the true nature of the secondment arrangement and therefore, the applicability of withholding provision will have to be determined on a case-to-case basis.

[1]  M/s Flipkart Internet Private Limited v. DCIT, Order dated June 24, 2022 in W.P. No. 3619/2021 (Karnataka High Court).

[2]  GE India Technology Centre Private Limited v. CIT, (2010) 10 SCC 29 (Supreme Court).

[3]  Centrica India Offshore (P) Ltd. v. CIT, (2014) 227 Taxmann 368 (Delhi High Court).