MUMBAI: In a recent case in which Google India had reimbursed it for salary costs, the Bengaluru bench of the Income Tax Appellate Tribunal (ITAT) gave Google US a favorable ruling. The salaries were paid to employees who were sent here on secondment.
Under the India-US tax treaty, tax authorities wanted to treat salary reimbursements of Rs 20.6 crore and Rs 39.5 crore for two financial years that were the subject of the dispute as "Income from included services" for Google US. Google India would then be exempt from obligations as a result. However, the ITAT bench decided that this reimbursement cannot be considered the US company's income due to specifics in the secondment agreement that are clear.
According to tax experts, foreign businesses frequently second (deputize) key employees to their Indian subsidiary. The salary is deposited into the deputed employees' overseas bank accounts by the foreign employer for administrative convenience. The foreign company receives reimbursement for the Indian company's salary costs. When Indian tax authorities attempt to treat the reimbursement as the foreign company's income, litigation ensues. A tax expert stated, "It is essential to have clear-cut secondment agreements, and the specifics of these agreements should be specified in the assignment letters that are issued to employees."
In this instance, the assignment letters sent to the seconded employees in India made it abundantly clear that Google India was in charge of the expats' work. The work performed by the employees who were on secondment was not the responsibility of Google US.
"You will be subject to the day-to-day management and control of Prasad Ram of Google India," the sample letter stated. "During the period of your secondment, you will comply with the direction and control of Google India, including Google India's rules, procedures, working practices, and policies." Additionally, the US company could not unilaterally recall any seconded employees. Additionally, the letter stated that there was no assurance of employment with Google US upon return to the United States.
The tribunal bench noted that Google India properly withheld tax from salary income and deposited it with the Indian treasury.
