Determining Reimbursement Or FTS For Secondment Of Employees: Toshiba Corporation v. DCIT

Brief Facts: 

Toshiba Corporation (“the Assessee”), a Japanese tax resident engaged in manufacturing and marketing communications systems, electronic components, heavy electrical equipment etc., received Rs. 10.76 crore in reimbursements for salaries paid in Japan to employees of its Indian subsidiaries (Toshiba India Pvt. Ltd., Toshiba JS Power Systems Pvt. Ltd., Toshiba Transmission and Distribution Systems India Pvt. Ltd., and Toshiba Software India Pvt. Ltd.). These payments were made on behalf of the Indian entities for administrative convenience, with reimbursements received without markup and after TDS compliance. To prove the employees were seconded but remained under the Indian entities' control and supervision, the Assessee submitted certain documents which included payroll agency agreements, sample employment contracts and appointment letters from Indian entities, Form 16s, and Form 15CA/15CB certificates from a chartered accountant verifying the remittances. The Assessing Officer held that the appointment letters and contracts indicated short-term, assignment-based secondment of employees to Indian entities at their request, with the assessee retaining ultimate lien, and the employees reverting post-temporary period under Indian control. On this basis, the AO treated salary reimbursements from Indian entities as fee for technical services (FTS). 

Issue for consideration: 

Whether the payments made by the Indian entities to the Assessee in respect of salaries paid to the seconded employees in Japan are in the nature of reimbursement of the salary for the services rendered in India or are in the nature of Fees for Technical Services?

Judgement: 

The Income Tax Appellate Tribunal (“ITAT”), placed reliance on the documents submitted by the Assessee, to ascertain the employee-employer relationship between the Indian entity and the seconded employees. The appointment letter of the seconded employees showed the payment of salaries by the Indian entity and further, the exercise of control and right to terminate services exercised by the Indian entity was highlighted by the ITAT. Form 16s issued by Indian companies to the seconded employees confirm salary payments were subject to TDS, with tax duly deducted at source by those employers. The ITAT further analysed the judgement of PCIT vs. Boeing India (P.) Ltd. and Article 12(4) of the Double Taxation Avoidance Agreement between India and Japan (“DTAA”). Article 12(4) of the DTAA excludes salary payments to employees from FTS, covering only non-employee payments. With salaries substantiated as reimbursed for India services (evidenced by Form 16s with TDS), reimbursements fell outside FTS scope. Thus, the ITAT ruled that the payment was not in the nature of FTS and rejected the assessment by the Department of Revenue. 

Our Thoughts: 

This judgement provides clarity on the tax treatment for seconded employees especially for group companies. This decision delivers significant relief for multinational enterprises seconding personnel, confirming pure reimbursements do not trigger FTS taxation when Indian entities retain substantive control, supervision, and termination rights as evidenced by contracts and payroll records. It aligns with PCIT vs. Boeing India¹, reinforcing that administrative conveniences do not trigger service fees if economic substance reflects employment costs. This judgement reinforces the need for requisite and clear documentation in terms of secondment to make clear the terms of employment and existence of control.

Footnote

1. (2023)457 ITR 84/146

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