Cost-to-cost reimbursement received from Indian affiliates towards seconded employees by a US entity is taxable as FTS or FIS – Delhi High Court

In brief

The Delhi High Court¹ set aside the order of the Income-tax Appellate Tribunal (Tribunal) and held that cost-to-cost reimbursement received by a US-based entity from its Indian affiliates towards seconded employees is taxable as fees for technical services (FTS) or fees for included services (FIS). The court did so under section 9(1)(vii) of the Income-tax Act, 1961 (the Act) read with Article 12 of the India-US Double Taxation Avoidance Agreement (DTAA). 

The court held that the seconded employees continue to be employees of the US-based entity and satisfy the ‘make available’ test under Article 12(4)(b) of the India-US DTAA i.e., the secondee personnel were deputed to India to imbibe the culture of the group, provide training and implement the group’s policies, processes, and quality standards within the Indian entities. The secondees thus transferred techniques and skills required for the operation of the Indian business. 

Moreover, on the question of taxability of certain professional receipts under Article 12(5)(e) read with Article 15 of the India-US DTAA, the matter was remanded to the Tribunal for fresh adjudication.