Karnataka High Court Rules - No TDS on reimbursement of seconded employees’ salary and directs Revenue to issue Nil TDS certificate

Secondment of employees of foreign entity to Indian subsidiaries has been followed consistently as a general practise to support the Indian operations of the multinational enterprises. The taxability of secondment arrangements and corresponding payments have been subject to judicious examination under direct and indirect tax law over the past many years.

Recently, Hon’ble Karnataka High Court (‘HC’) has analysed the concept in detail and delivered a judgment on 24 June 2022 in the case of M/s Flipkart Internet Private Limited (‘the Petitioner’). The ruling has been pronounced in respect of a writ petition filed by the Petitioner against the order passed by the Assessing Officer rejecting the application for ‘Nil TDS certificate’ wherein Hon’ble HC has held that there is no requirement to deduct TDS on reimbursement of seconded employees’ salary.

Hon’ble HC has critically analysed the facts of the case and while distinguishing from the contentions placed by the Revenue, has held the following:

1.         The Petitioner’s recourse to section 195(2) of the Act is perfectly in consonance with the object of section 195 as the said provision deals with an application made by the payer as against the application under section 197 of the Act which is made by the recipient of an income.

2.         The payment in regard to the secondment arrangement made by the Petitioner cannot be regarded as FIS under Article 12 of India - USA DTAA since Article 12(4)(b) requires rendering of technical or consultancy services and at the same time, such technical knowledge must be made available to the service recipient, which in the present case has not been fulfilled.

3.         Withholding obligation under section 195(1) arises only if the payment is chargeable to tax in the hands of non-resident recipient, thus TDS is not to be applied on the gross remittance.

4.         The Petitioner is the employer of the seconded employees in substance.

5.         Rejection order issued under section 195(2) has been set aside and Revenue has been directed to issue ‘Nil TDS’ certificate.

In the newsflash, we have summarised the facts of the case, contentions placed by the Petitioner and the Revenue and the observations of the Hon’ble HC along with the key takeaways from the ruling. Hope you would find the same useful.

 

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