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ITAT: Pay reimbursement not income for Google US

Mumbai, Feb 27, 2023

Google US has won a favourable order from the Bengaluru bench of the Income Tax Appellate Tribunal (ITAT) in a recent case where it had been reimbursed by Google India for salary costs. The salaries were for employees deputed here under a secondment arrangement.

Tax authorities had sought to treat such salary reimbursement of Rs 20.6 crore and Rs 39.5 crore, respectively, for two financial years (which were covered by the tax dispute) as 'Income from included services' in the hands of Google US under the India-US tax treaty. This would, in turn, result in withholding obligations for Google India. However, owing to clear-cut details in the secondment agreement, the ITAT bench held that such reimbursement cannot be treated as income of the US company.

Tax experts explained foreign companies often second (depute) key employees to their Indian affiliate. For the sake of administrative convenience, the foreign employer pays salary to the deputed employees in their overseas bank accounts. In turn, the Indian company reimburses the salary cost to the foreign company. Litigation arises when Indian tax authorities seek to treat the reimbursement as income of the foreign company. "It is vital to have clear-cut secondment agreements, details of which should be specified in the assignment letters issued to employees," said a tax expert.

In this case, the assignment letters to the employees who were seconded to India clearly showed the expats were working under the supervision of Google India. Google US was not responsible for the work undertaken by the seconded employees.

The sample letter said, "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...You will be subject to the day-to-day management and control of Prasad Ram of Google India." The US company also did not have any right to unilaterally recall any employee that had been seconded. The letter also specified that there was no guarantee of employment with Google US on return to America.

The tribunal bench noted tax had been duly withheld against salary income by Google India and deposited with Indian treasury.

[The Times of India]

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