Recent Delhi ITAT Ruling on Taxability of Salary Reimbursements in Employee Secondment Arrangements

First, What Was the Dispute?

Honda R&D Company Ltd., Japan had seconded a number of employees to its Indian affiliate.

Under the arrangement, the employees worked in India and carried out their responsibilities under the direction and supervision of the Indian company.

Some components of their salaries were initially paid in Japan. The Indian entity then reimbursed those costs to the Japanese company on a cost-to-cost basis, without any markup.

For the year under review, these reimbursements amounted to approximately ₹21.5 crore.

The tax department took the view that the payments were not simple salary reimbursements. Instead, it argued that Honda Japan was providing technical personnel and expertise to the Indian entity and should therefore be treated as rendering technical services.

If that argument succeeded, the entire amount could become taxable in India as FTS.

Why Did the Department Treat It as FTS?

The Revenue focused on the nature of the employees being sent to India.

According to the department:

• The employees possessed specialised technical knowledge.
• They were working on technical assignments.
• Their expertise benefited the Indian business.
• Honda Japan continued to have a relationship with those employees.

Based on these factors, the department argued that Honda Japan was effectively providing technical services through its personnel.

The department also relied on earlier court decisions, particularly the well-known Centrica ruling, where payments relating to seconded employees had been treated as taxable.

In simple terms, the department's position was:

Honda Japan supplied skilled personnel. Therefore, the reimbursement should be treated as payment for technical services.

The Question That Decided the Case

The Tribunal approached the issue differently.

Rather than focusing on where the salaries were initially paid or how the money moved between the companies, it focused on a more fundamental question:

Who was the real employer during the secondment period?

To answer that question, the Tribunal examined the actual working arrangement.

It found that:

• The Indian company controlled and supervised the employees' day-to-day work.
• The employees worked under the Indian company's policies and procedures.
• The Indian company was responsible for their performance and output.
• The employees were integrated into the Indian business.
• Salary paid in India was subject to Indian tax withholding.

Taken together, these factors showed that the employees were effectively working for the Indian entity during the secondment period.

Why the Tribunal Rejected the FTS Argument

The Tribunal's reasoning was straightforward.

There is a difference between a foreign company providing technical services to an Indian company and employees becoming part of the Indian company's workforce.

In Honda's case, the second situation applied.

The employees were not delivering services to the Indian company on behalf of Honda Japan. Instead, they were working under the control and supervision of the Indian company itself.

The reimbursement merely compensated Honda Japan for salary costs it had initially paid.

There was no markup.

There was no separate service fee.

There was no evidence that the payment was consideration for technical services.

As a result, the Tribunal held that the reimbursement could not automatically be treated as FTS.

The Treaty Point That Helped Honda

The India-Japan tax treaty also played an important role.

The treaty's definition of FTS excludes payments made in an employer-employee relationship.

Once the Tribunal concluded that the employees were effectively working for the Indian company during the secondment period, the reimbursement mechanism could not change the nature of those payments.

The reality of the employment relationship mattered more than the route through which the salary costs were paid and recovered.

Why Centrica Did Not Decide the Outcome

The Revenue relied heavily on the Centrica decision.

However, the Tribunal noted that secondment cases are highly dependent on facts.

In Honda's case, the Indian entity exercised significant control over the employees and assumed responsibility for their work.

Because of those facts, the Tribunal concluded that Centrica could not be applied automatically.

The outcome depended on the actual relationship between the employees, the Indian company, and the overseas entity.

What This Means in Practice

For multinational companies operating in India, the ruling highlights a few important lessons.

Control matters more than labels.

Simply calling an arrangement a secondment does not determine its tax treatment. What matters is who actually manages and directs the employees.

Documentation is critical.

Secondment agreements should clearly set out who supervises the employees, who evaluates their performance, and who bears responsibility for their work.

Cost-to-cost reimbursements remain important.

The absence of a markup helped support Honda's position that the payments were reimbursements rather than fees for services.

Each case depends on its facts.

The tax authorities often rely on earlier decisions involving secondment structures. This ruling shows that outcomes can differ depending on how the arrangement operates in practice.

Further Reading

Employee secondments involve more than tax considerations. Organisations must also navigate India's visa and immigration requirements for inbound assignees.