Tribunal waives withholding tax on cross-charged salary costs
The Bangalore Tribunal, in a recent statement, has ruled that the remittance by an Indian company, of salary costs cross-charged by its foreign parent in respect of employees working in India, would not be subject to withholding tax.
Of late, Indian companies have come under the scanner of tax authorities for not withholding taxes in respect of payments to overseas companies of cross charge under secondment agreement.
Normally the parent company or overseas company deputes people to India and pays salary on behalf of the Indian company and cross charge the salary paid to Indian company. Though the salary paid is by the foreign company appropriate taxes are withheld as the Indian company is an employer and supervise the work of expats deputed. The Indian company would have to remit the amount cross-charged to overseas company or parent company and the companies were taking a position that no tax is required to be withheld at the time of remittances to overseas company as the same represents salary paid and appropriate tax has been deducted.
“However; the tax authorities were relying upon a decision of the Advance Authority for Ruling in an earlier case and contending that such payments constitute fee for technical services and hence subjected the payment to withholding tax under the Act at the time of remittances,” an industry source noted.
In the present case, the US company had deputed an employee to its Indian subsidiary under a secondment arrangement and this employee was appointed as the managing director (MD) of the Indian subsidiary, by the Board of Directors in accordance with the Articles of Association of the company. The MD worked under the direction, supervision and control of the Indian company. The Bangalore Tribunal held that though the expat is deputed by US company and salary is paid by the US company, the Indian company would be considered to be the economic employer of the employee seconded.
The Tribunal observed that the secondment agreement is in the nature of employment agreement between the Indian company and the seconded employee and hence cross charge of cost does not represent Fees for Technical services under the Act.
Further the Tribunal rules that since the salaries paid to employees were subjected to tax and the employer is an Indian company, no tax needs to be deducted at the time of remittance on cross charge of cost by Indian company to parent company.
K R Sekar, partner, Deloitte noted, “This decision comes as a breather to all those Indian companies with huge expatriate population, who can now consider remitting the secondment charges without any withholding tax and this ruling would provide substantial relief where taxes had to be borne by the Indian companies”.