Salary Reimbursement Not Taxable as FTS as Seconded Employees Worked Under Indian Employer’s Control

Honda R&D Company Limited Vs ACIT (ITAT Delhi)

The Income Tax Appellate Tribunal (ITAT), Delhi, allowed the appeals of a Japanese company and held that reimbursement of salary costs of seconded employees received from its Indian group company could not be treated as Fees for Technical Services (FTS). The dispute arose when the Assessing Officer treated ₹21.52 crore received by the assessee from Honda R&D (India) Pvt. Ltd. towards reimbursement of salary costs of seconded employees as FTS and made an addition accordingly. The Dispute Resolution Panel upheld the assessment, leading to the appeal before the Tribunal.

The assessee contended that the reimbursements were made strictly on a cost-to-cost basis without any markup. It relied on the Basic Secondment Agreement, under which the seconded employees worked solely for the Indian company, were under its exclusive control, supervision, and direction, and were subject to its employment policies. The Indian company had the authority to evaluate, promote, discipline, suspend, or terminate the employees and bore all risks and responsibilities relating to their work. The Indian company also determined and bore the salary costs, while certain salary components paid in Japan were reimbursed purely for administrative convenience. Salaries paid to the seconded employees were subjected to tax deduction at source in India.

The Revenue argued that the employees possessed specialized technical skills and that their services constituted technical services provided by the foreign company through seconded personnel. Reliance was placed on the Delhi High Court decision in Centrica India Offshore (P.) Ltd. to contend that the reimbursement should be taxed as FTS.

The Tribunal examined the terms of the Basic Secondment Agreement and noted that the seconded employees were released from the foreign company and integrated into the Indian company as its employees during the secondment period. They ceased providing services to the foreign company, worked exclusively for the Indian company, and had no authority to conduct business or conclude contracts on behalf of the foreign company in India. The Indian company bore the salary costs and assumed responsibility for the employees’ work.

The Tribunal found that an employer-employee relationship between the seconded employees and the Indian company was established during the period of secondment. It relied on earlier Tribunal decisions, including Advics Co. Ltd. and Toshiba Corporation, which had held that reimbursement of salary costs of seconded employees could not be characterized as FTS where the Indian entity was the real employer and salary payments were subject to tax deduction under Indian law.

The Tribunal distinguished the decision in Centrica India Offshore (P.) Ltd. on facts, observing that in the present case the seconded employees were specifically employed by the Indian company and the obligation to pay their remuneration rested with the Indian company. It held that payments made as salaries to employees are excluded from the definition of FTS under the India–Japan Double Taxation Avoidance Agreement. Since the reimbursements represented salary costs paid on a cost-to-cost basis and were not consideration for technical services, they could not be recharacterized as FTS.

Accordingly, the Tribunal directed deletion of the addition made by the Assessing Officer. Since the facts and agreements in the connected appeals were identical, the Tribunal applied the same reasoning and allowed all three appeals.

FULL TEXT OF THE ORDER OF ITAT DELHI

These three appeals by two different assessees are taken up together as the issues involved in these appeals are identical. For the sake of convenience, the appeals are decided in seriatim.

ITA No.548/Del/2025

2. This appeal by the assessee is directed against the assessment order passed under Section 147 read with Section 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 25^th December, 2024 for the assessment year 2018-19.

3. The solitary issue raised by the assessee in this appeal is against the addition made by the Assessing Officer in respect of reimbursement of salary of seconded employees, treating it as Fee for Technical Services (FTS).

4. Facts of the case in brief as emanating from the record are; the assessee company was established under the laws of Japan. The assessee is engaged in carrying out research and development of Honda products. The assessee provides services that include design, prototype fabrication and testing of automobile engines, development of new materials and electronics and interior and exterior design of automobiles. During the period relevant to the assessment year under appeal, the assessee received Rs.21,52,75,467/-from Honda R&D (India) Pvt. Ltd. towards reimbursement of salary costs of seconded employees on cost-to-cost basis (without any markup). The Assessing Officer, vide draft assessment order dated 23.03.2024, held that the reimbursement of salary cost of seconded employees is in the nature of Fee for Technical Services (hereinafter referred to as the ‘FTS’). The assessee filed objections before the DRP. The DRP, vide directions dated 26^th November, 2024, rejected objections of the assessee and upheld findings of the Assessing Officer. Consequently, the Assessing Officer, vide impugned assessment order, made addition of Rs.21,52,75,467/- on account of FTS.

5. Shri Kamal Sawhney appearing on behalf of the assessee submits that it is not in dispute that the reimbursements of salary for seconded employees have been made on cost to cost basis without any mark up. He further referred to Basic Secondment Agreement dated 1/10/2016 (at pages 1 to 8 of the paper book) to contend that the seconded employees during the period of secondment were under absolute charge of the Indian company. The Indian company had all the rights to terminate/evaluate/promote/discipline /suspend the seconded employees. During the period of secondment, the assessee had no right to recall any seconded employee without the approval of the Indian company. Further, the assessee as per the terms and conditions of the agreement was not under obligation to replace any of the seconded employees in the event where the employment of the seconded employee is terminated by the Indian company for any reason. During the term of secondment, the Indian company bears the risk/responsibility in respect of the work performed by the seconded employee. The salary is paid by the Indian company to the seconded employee subject to deduction of tax at source as per Indian tax laws. He submitted that in the backdrop of these facts, the payments received by the assessee towards reimbursement of salary of these seconded employees cannot be termed as FTS.

6. The learned Counsel submits that the facts in case of the assessee are identical to the facts in the case of Advics Co.Ltd. Vs. ACIT – [2024] 165 com 716 (Delhi-Trib.). Further, referring to decision of the Tribunal rendered in the case of Toshiba Corporation vs DCIT reported as 181 taxmann.com 244 (Delhi-Trib.), the learned Counsel submits that reimbursement of salary paid to the employees cannot be treated as FTS. Thus, he prayed for deleting the addition and allowing appeal of the assessee.

7. Per contra, Shri M.S. Nethrapal, CIT-DR representing the Department vehemently supported the assessment order and prayed for dismissing appeal of the assessee. To buttress his submissions, the learned CIT-DR filed written submissions, the relevant extract of the same is reproduced hereunder:-

“1. The only issue in question is whether the addition of reimbursement of salary cost of seconded employee to the tune of Rs.21,527,5467/- is FTS or not. In order to differentiate between whether the seconded employees are delivering services on behalf of the foreign enterprises or they are delivering services for the salary paid by the Indian company, the question becomes the core contention.

2. One of the key tests to be satisfied is whether the services that are being provided are under the direct control of the foreign enterprises or the Indian enterprises. Some of the crucial factors to be considered are whether there is an employee-employer relationship, and some crucial factors are relevant to determine who the real employer is.

a. Lien on Employment: Do employees return to the overseas entity?

b. Social Security/Benefits: Does the overseas entity continue to pay social security/welfare benefits?

c. Salary Payment: Does the overseas entity disburse salary (even if reimbursed)?.

d. What is the nature of the services provided and the period for which they are provided?

Reference to page 61 of the paper book, wherein the contract of employment of Mr. Teruo Kihara is provided, clearly shows in sl.no.5 that the employees would be governed by the overall rules of Honda R&D Co. Ltd., Japan, and the rules and regulations framed, enforced, and applicable at Honda R&D (India) Pvt. Ltd. The same is repeated for all employees. This brings us to a crucial point: these employees have dual accountability to both the assessee and the Indian company.

Reference to pages 95 and 96 of the paper book, wherein the specialized technical skills offered by these foreign employees are clearly mentioned. So clearly these employees are deputed for certain specific technical skills that are not available with the Indian company. Now these employees were borrowed only for a limited period as per the contract of employment, and most of them worked on specific projects wherein specialized technical skills were needed to be provided. The fact remains that these employees were sent for providing highly technical services.

Hon’ble DRP has brought out these facts in detail in para 5.5.5 of the order that these highly specialized services offered by the assessee are indeed technical services provided by the foreign company to the Indian company.

The department relies on the detailed legal analysis provided in the DRP order. Again, reliance is placed on paragraphs 8.1 to 8.6 of the AO’s order, wherein the nature of services provided by the assessee is described. AO has also quoted many legal judgments that are in favor of the department in para 9 of the assessment order.

3. The first question is what is “Fee for Technical Services” under the India -Japan DTAA

4. The term ‘fees for technical services’ as used in this article means payments of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in article 14, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel.

Now the last one, “including the provisions of services of technical or other personnel” is crucial and India-UK DTAA also has the same provisions and in the case Centrica India Offshore (P.) Ltd. vs. Commissioner of Income-tax -1 [2014] 44 taxmann.com 300 (Delhi)/[2014] 224 Taxman 122 (Delhi)/[2014] 364 ITR 336 (Delhi)/[2014] 270 CTR 1 (Delhi) [25-04-2014], para 30 points to this last wordings that it actually covers the services given by the seconded employees. The relevant paras are extracted below:

30. The India-UK DTAA defines ‘fees for technical services’ as “payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel)”. In this case, the overseas entities have, through the seconded employees, undoubtedly provided ‘technical services to CIOP, especially since that expression expressly includes the provision of the services of personnel. The seconded employees, who work, so to say, for CIOP are provided by the overseas entities and the work conducted by them thus, i.e. assistance in conducting the business of CIOP of quality control and management is through the overseas entities. The nature of the services cast as “business support services” by CIOP – as also clearly within the bold “technical or consultancy. These services envisage the provision of quality service by vendors to the overseas entities, which CIOP, and the secondees, are to oversee. This requires the secondees to draw from their technical knowledge, and falls within the scope of the term. This reading of ‘technical services does not limit itself only to technological services, but rather, extends to know-how, techniques and technical knowledge. This is supported by clause 4 of Article 12 itself, which lists these various sub-categories. Indeed, the term ‘technical has not been defined in the DTAA, and must be accorded its broader dictionary meaning, unless limited by the parties to the instrument. The AAR in Intertek Testing Services India (P.) Ltd. In re (2008) 307 ITR 418/175 Тaxmaп 375 (AAR), considered this question in detail, and rightly beld that “What is meant by the expression ‘technical? Should it be confined only to technology relating to engineering manufacturing or other applied sciences? We do not think so. The expression ‘technical” ought not to be construed in a narrow sense.”

This reading was supported by the Supreme Court, in the context of Section 9(1)(iv) of the Act in Continental Construction Ltd. v. CIT [1992] 195 ITR 81/60 Тaxman 429. Further, the Court notes that the distinction to be drawn by CIOP between the provision of services by the overseas entities themselves and the ‘mere’ secondment of employees does not make a difference, since the services provided the overseas entities is the provision of technical services through the secondees – an instance envisaged under Article 13 itself.

4. The assessee has also not provided any detailed reconciliation of the TDS deducted, salaries declared and the reimbursement considered. Whether the reimbursement is actually included in the salary is still not known and the same reconciliation is not done. In this view it is very difficult to accept the view that the reimbursements does not have any income element. The reimbursements are rightly taxed as FTS and Hon’ble bench is kindly requested to uphold the orders of the AO.”

8. We have heard the submissions made by rival sides and have examined the orders of the authorities below. The question for consideration in the present appeal is – “Whether reimbursement of salary cost of seconded employees received by the assessee from its Indian group company is in the nature of FTS?” Before proceeding further, it would be relevant to refer to terms and conditions of the Basic Secondment Agreement placed on record. The said agreement is executed between the assessee (referred to as ‘HG’) and Honda R&D (India) Pvt.Ltd. (referred to as the ‘Company’) in the agreement. The relevant excerpts of recitals, definitions and terms from the agreement are reproduced herein under:

“Recitals:

A. Employee (as hereinafter defined) possessing specific skill set/ having requisite qualifications or experience, and HG has accepted the request of the Company provided that the Company and Seconded Employee will enter into an employment agreement during the term of the secondment. HG has agreed that the Seconded Employee shall be released from their work at HG and shall be integrated as employee of the Company for the period of secondment. Further, such seconded employee shall work solely for the Company as its employee at the assigned destination/place and under the sole control direction and supervision of the Company and in accordance with all rules, regulations policies, guidelines and other practices as applicable to the employees of the Company.

B. The cost which are incurred in connection with the employment of Seconded Employee during the term of the secondment (herein collectively referred to as the “Salary”), should be borne by the Company under the terms and conditions set forth in this Agreement, and the Company take risks/responsibility in respect of the work performed by Seconded Employee.

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Article 1 Definition

1.1 “Secondment” means release of an employee during the period of secondment from HG to the Company, whereby the Seconded Employee shall work in employment with the Company under the terms and conditions set out in the employment agreement with the Company.

1.2 “Seconded Employee” means an employee, who on request of the Company, is deputed from HG to the Company in order to devote entire working time to the business and affairs of the Company and cease from providing any services for the benefits of HG. The Seconded Employee has no authority to conduct any business in India on behalf of HG and neither have any authority to conclude/negotiate contracts in India on behalf of HG.

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1.3 The Company shall designate eligible employee as Seconded Employee to be sent to the Company and notify HG in writing or by e-mail of the name of each such Seconded Employee. The Company shall determine the amount of Salary of such Seconded Employee based on the Company’s policy and standard and bear the Salary in accordance with Article 3.1 hereof and take risks (including financial risks) and sole responsibility in respect of the work performed by Seconded Employee during the secondment period.

Article 2 Term of Secondment

2.1 The Company shall determine the term of the secondment of each Seconded Employee. The Parties shall conclude Memorandum of Understanding individually to identify the term of Seconded Employee (hereinafter referred to as the “Memorandum of Understanding”).

2.2 The Company shall have the right to terminate the secondment of any Seconded Employee at any time.

2.3 The Company shall have right to terminate the secondment of the Seconded Employee in the circumstances mentioned in the Exhibit with or without notice and period thereof.

2.4 During the period of secondment, HG shall not have a right to recall any Seconded Employee without the approval of the Company. HG will also not be under any obligation to replace any of the Seconded Employee in the event where employment of any Seconded Employee is terminated with the Company for any reason.”

9. From plain reading of the ‘Recitals’ and ‘definitions’ in the agreement it is emerges that:

– The assessee shall release the seconded employee from its work for the period of secondment;

– the seconded employee of the assessee shall solely work for the Indian
Company during the period of secondment;

– during the period of secondment, the seconded employee shall work under the sole control, direction and supervision of the Indian company and under the Rules, regulations, policies, guidelines and other practices as are applicable to the other employes of the Indian company;

– the cost (salary) of employment of seconded employes shall be borne by the Indian company;

– the Indian company shall bear the risk and responsibility of seconded employees during the period of secondment;

– the seconded employee during the period of secondment shall ceases to provide any services to the assessee and shall work only for the Indian company;

– the seconded employee shall have no authority to conclude/negotiate contracts in India on behalf of the assessee;

– the Indian company shall have right to evaluate/promote/discipline /suspend/terminate the seconded employee at any point of time in accordance with the applicable policies, without seeking permission from the assessee;

– the Indian company shall determine the salary of the seconded employee based on its policy and standards;

– some of the salary items shall be paid by the assessee in Japan on behalf of the Indian company for administrative convenience, which shall be fully reimbursed on cost to cost basis by the Indian company to the assessee in Japanese Yen.

10. The assessee has also placed on record a letter of ‘Contract of Employment’ between Indian Company and the seconded employee. One such sample contract letter is placed at page 65 of the paper book. The same is extracted herein under:

The said letter is also accompanied by details of Annual Salary and Perquisites payable in India to the seconded employee. Similar contract letters for other seconded employees are also available on record. A perusal of the said letter shows that the Salary payable is subject to provisions of Income Tax liabilities in India. It is an undisputed fact that the salary paid by the Indian company to the seconded employees is subject to TDS provisions under the Income-tax Act.

Thus, from examination of the Agreement (supra) and Contract Letter, employer – employee relation between seconded employees and the Indian Company is established beyond doubt, during the period of secondment.

11. In the case of Advics Co. Ltd. (supra), in similar set of facts where the reimbursement of salary of seconded employees by the Indian AE to the Japanese company was held to be Fee for Technical Services by the Assessing Officer, the Tribunal held that the reimbursement of salary costs in respect of seconded employees cannot be held as FTS. The ld CIT-DR has placed reliance on the decision rendered in the case of Centrica India Offshore (P) Ltd. Vs. CIT – [2014] 44 taxmann.com 300 (Delhi). The Co­ordinate Bench in the case of Advics Co.Ltd. (supra), after threadbare comparison of facts in both the cases has distinguished the decision rendered in the case of Centrica India Offshore (P) Ltd. (supra). The relevant findings of the Tribunal in the case Advices Co. Ltd. are reproduced herein below:

“12. So far as the applicability of the jurisdictional Hon’ble Delhi High Court’s decision in the case of Centrica India Offshore (P.) Ltd. (supra), in our considered view, the same would not apply to the assessee’s case due to following reasons which are well substantiated by reference to the relevant clause(s) of TTA and MOU:

The primary difference in the case of assessee and facts in the case of Centrica India Offshore (P) Ltd. (supra) is, that the seconded employees were not specifically taken into employment by the Indian company and the Indian company was merely reimbursing salary paid by the foreign company. Whereas, in the instant case, the seconded employees were taken into employment by the Indian company and the obligation to pay salaries/remuneration to the seconded employees is primarily that of the Indian company. Thus, the decision rendered in the case of Centrica India Offshore (P) Ltd. is distinguishable on facts.

12. In the case of Toshiba Corporation (supra), the Coordinate Bench, after placing reliance on the decision rendered in the case of PCIT Vs. Boeing India (P) Ltd. – 146 taxmann.com 131 (Delhi), held as under:-

“9. The Hon’ble Delhi High Court in the case of PCIT vs. Boeing India (P.) Ltd. (supra) has held that where the reimbursements are in the nature of salary the same could not be treated as FTS. The Hon’ble High Court placed reliance on the decision rendered in the case of CIT vs. Karl Storz Endoscopy India (P) Ltd in IT Appeal No.13 of 2008 decided on 13­9-2010 wherein after analysing facts of the case the Hon’ble High Court held:

“10. The foreign company had deputed one of its employees to look after the affairs of the Indian Company. The salary payable to this employee was to be borne by the foreign company. The Indian company was to reimburse this salary at cost, i.e. without any mark-up. Thus, it was merely the question of payment of salary to Mr. Peter Laser. There is no question of any technical fees being paid to the foreign company. Assuming for the sake of argument that it was in the nature of technical fees paid to the foreign company; then, as rightly pointed out by the learned counsel, Article 12.4 was applicable and not Article 13.4 as contended by the learned DR. Even if Article 12.4 was applicable, the said Article specifically excludes payments mentioned in Article 15. Article 15 states that salaries, wages and other similar remuneration derived by a resident of a Contracting State (Germany) in respect of an employment shall be taxable in the other Contracting State (Indian) only if the employment is exercised there. In other words, salaries paid to such personnel like Mr. Laser are taxable in India and they cannot be considered to be fees for technical services. Further, even as per Section 9 of the Act, the payment cannot be treated as fees for technical service. Explanation 2 to Section 9(1)(vii) gives the meaning of the expression “fees for technical services” as per which, inter alia, any consideration which would be income of the recipient chargeable under the head “salaries”, then such payment will not be considered as fees for technical services. Thus, even as per the provisions of the Act, the payment in question cannot be treated as fees for technical services. Moreover, since it is paid as salary to Mr. Laser, tax has been deducted under section 192 of the Act.”

10. If we look at the India – Japan DTAA similar provisions are contained in Article 12 that deals with Royalty and FTS. FTS is defined in Article 12(4). The same reads as under:

“(4) The term ‘fees for technical services’ as used in this article means payments of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred in Article 14”

Once it is established that the payments are made as salary to the employees for the services rendered in India, such payments are outside the preview of FTS. The assessee in the instant case has been able to substantiate that the payments made by Indian entities to the assessee are qua reimbursements of salary paid in Japan to the seconded employees for the services rendered in India by them. As is evident from FORM 16 available on record, tax under the Act has also been deducted on payment of salaries.

11. The Hon’ble Delhi High Court in the case of Flipkart Internet (p) Ltd. (supra) while considering similar issue also examined the decision rendered in the case of Northern Operating Systems (P) Ltd (supra). The Hon’ble High Court held:

“(vii) The petitioner issues the appointment letter, the employee reports to the petitioner, the petitioner has the power to terminate the services of the employee. For the purpose of a limited finding under section 195 on the basis of the available material, it could be concluded that the petitioner is the employer.

(viii) The Revenue has relied upon the judgment of the Apex Court in C.C., C.E. & S.T. v. Northern Operating Systems (P.) Ltd. [2022] 138 com 359 where the Apex Court has interpreted the concept of a secondment agreement taking note of the contemporary business practice and has indicated that the traditional control test to indicate who the employer is may not be the sole test to be applied. The Apex Court while construing a contract whereby employees were seconded to the assessee by foreign group of Companies, had upheld the demand for service tax holding that in a secondment arrangement, a secondee would continue to be employed by the original employer.

(ix) The Apex Court in the particular facts of the case had held that the Overseas Co., had a pool of highly skilled employees and having regard to their expertise were seconded to the assessee and upon cessation of the term of secondment would return to their overseas employees, while returning such finding on facts, the assessee was held liable to pay service tax for the period as mentioned in the show cause notice.

(x) It needs to be noted that the judgment rendered was in the context of service tax and the only question for determination was as to whether supply of manpower was covered under the taxable service and was to be treated as a service provided by a Foreign Company to an Indian Company. But in the present case, the legal requirement requires a finding to be recorded to treat a service as ‘FIS’ which is “make available” to the Indian Company.”

The Hon’ble High Court finally concluded that the Assessing Officer has wrongly held reimbursement of salary as FTS.

12. In the light of facts of the case and the decisions discussed above we hold that the Revenue has misread the Contract of appointment/Letter of appointment. The assessee has been able to establish employee-employer relationship between the seconded employees and the Indian entities. Where the payments are made to employees as salaries, such payments cannot be recharacterized as FTS.”

13. The ld. DR referring to Clause 5 of the Contact of Employment (supra) has argued that the seconded employees are governed by the rules and regulations of the assessee. Further, the ld. DR referring to the observations of the DRP submitted that the employees are on ‘deputation’ with Indian company. It is pertinent to mention here that as per recitals of the Basic Secondment Agreement the relevant provisions of which have been extracted above in extenso, it is explicit that during the period of secondment, the seconded employees shall be placed under the sole control, direction and supervision of the Indian company and shall be subject to all rules, regulations, policies, guidelines and other practices as applicable to the employees of the Indian company. The definition of ‘secondment’ in the agreement reiterates and reinforces this position. The terms of Basic Secondment Agreement leave no doubt that the employment policy, terms, regulations and guidelines and other practices as applicable to the employees of the Indian company shall apply to the seconded employees during the period of their secondment. The salary of the seconded employees shall be decided and paid by the Indian company. It is only the limited element of salary paid by the assessee to the seconded employee in Japan as per Memorandum of Understanding, that is reimbursed by the Indian company to the assessee on cost-to-cost basis. Nothing bears from the agreement or any other document on record that the payment received by the assessee from its Indian AE is in the nature of FTS.

14. Considering entire facts of the case and in light of the decisions discussed above, we find merit in submissions of the assessee. Hence, the addition made by the Assessing Officer holding reimbursement of salary of seconded employees as FTS is directed to be deleted. The impugned order is set aside and appeal of the assessee is allowed.

ITA No. 912/Del/2025 (AY 2018-19) &
ITA No. 913/Del/2025 (AY 2022-23)

15. Both the sides are unanimous in stating that the facts in these appeals and also the agreement are identical to the facts and agreement in ITA No.548/Del/2025 (supra). Hence, the submissions already made in the aforesaid appeal would hold good for these appeals as well.

16. Considering the submissions made by the rival sides and after perusing the impugned orders for the respective appeals, we find that the issue and the facts are pari materia to that of ITA No.548/Del/2025. Therefore, the findings given by us while deciding the said appeal of the assessee would mutatis mutandis apply to the present appeals as well.

17. In the result, both the appeals of the assessee are allowed for parity of reasons.

18. To sum up, the appeals of the assessees in ITA No.548/Del/2025, 912/Del/2025 and 913/Del/2025 are allowed.

Order pronounced in the open Court on Wednesday the 27^th day of May, 2026.