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Important Ruling On The Cross-Border Secondment Of Employees

India

In the case of Verizon Data Services India Pvt Ltd ("Verizon India" or "Applicant"), the Authority for Advance Rulings (AAR) has ruled that the cross-charge of salary cost under secondment arrangements represents 'fees for included services', thereby warranting a withholding of tax. Taxand India summarises the facts of the case and the ruling of the AAR.

Facts of the Case
The Applicant, a wholly-owned subsidiary of Verizon Data Services LLC, US ("Verizon US"), was engaged in the business of software development and maintenance for the telecom industry and certain information technology enabled services.
To optimise efficiency and productivity in the system, Verizon US seconded experts from the US to Verizon India. Verizon India entered into a secondment agreement with Verizon US for secondment of 3 employees into India. Such employees were seconded by GTE Overseas Corporation, US ("GTE-OC"), an affiliate group company of Verizon US.

Contentions of the Applicant
The Applicant was of the view that tax was not required to be withheld from payments made to GTE-OC.

Contentions of the Revenue
The Revenue contended that the entire arrangement was disguised as secondment arrangement which lacked commercial substance. Reliance was placed heavily on the fact that GTE-OC continues to be the employer as it retained the right to replace or terminate the employment of seconded employees.

Questions put before the AAR
The key issues raised were:

  • Whether Verizon India would be liable to withhold tax under section 195 of the Act on the amounts (representing salary and other benefits paid to the seconded employees) reimbursed by Verizon India to GTE-OC?
  • Is there a Permanent Establishment of GTE-OC under the India-US Tax Treaty?
  • The AAR, in line with its earlier ruling in the case of AT&S, reaffirmed its position by holding that the Indian entity is required to withhold tax at source at the time of making reimbursement of salary to its overseas group entity under a cross border secondment arrangement, since the payment made by the Indian entity would qualify as FTS / FIS under the Act / Treaty.

Ruling of the AAR
With regards to the employer-employee relationship it was found that the seconded employees were employees of GTE-OC owing to a number of reasons.

It was ruled that on reimbursement of salary by the Applicant to GTE-OC, tax was required to be withheld as FIS at rate of 20% under India-US Tax Treaty

Taxand's Take


The AAR decided against the ruling of the Applicant by holding that such seconded employees should continue to be employees of the overseas entity.

The AAR has not lingered on certain crucial aspects which would be significant in deciding whether the withholding tax requirement arises on reimbursement of salary under a cross border secondment arrangement.

Read the full newsletter on Cross-Border Secondment Of Employees from Taxand India here

Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010
E. mukesh.butani@bmrlegal.in

Taxand's Take Author