A subsidiary of a foreign firm that hires employees on a secondment from the parent company will not have to pay tax on the salary reimbursement of the employee, according to a recent ruling by an Income-tax Appellate Tribunal in Bangalore.

Secondment is the transfer of an employee for a temporary assignment elsewhere.

The tribunals ruling last week came on an appeal by software development firm IDS Software Solutions (India) Pvt. Ltd, or Idsi, a subsidiary of the US-based IDS Inc.

Idsi had entered into a secondment agreement with its parent firm, following which it hired an employee from the US firm. The seconded employee was appointed managing director of the Indian subsidiary. As per the agreement, Idsi was to reimburse the salary, bonus and other expenses incurred by the employee to the US firm.

But the income-tax authorities imposed a tax on the remittance from the subsidiary to the parent firm.

The assessing officer held that the remittance was reimbursement of fees for technical services and not a salary because there was no employer-employee relationship between Idsi and the seconded employee. Companies in India dont have to pay tax on reimbursement of salaries but royalty and fees for technical services are taxable.

Idsi contended that a reimbursement to its US parent should not be taxed as the company had already paid the tax in India. Idsi moved the tribunal after its appeal was dismissed by the Commissioner of Income-tax (Appeals).

In its order, the tribunal held that Idsi had already deducted tax from remuneration paid to the employee.

It also said that Idsi was the economic employer since the services were rendered by the seconded employee to Idsi and whose salary was borne by IDSI.

This is an important ruling for foreign companies which have subsidiaries in India and which send employees on secondment agreements, said Vikas Vasal, executive director with consultant KPMG India Pvt. Ltd. It has always been a matter of debate whether reimbursement should be treated as reimbursement of salary or fees for technical services. The ruling has made it clear now.
The ruling fortifies the concept of an economic employer... This ruling has reiterated that in the case of foreign companies deputation, if the employee is under the supervision of the Indian entity even if the salary is paid by the overseas company and reimbursed later on, the Indian company is considered to be the employer, said Divya Baweja, partner with consulting firm BMR Advisors.