For Private circulation only India Tax

Business Tax Alert Stay Updated. Always

Volume: BTX/January/2014 2 January, 2014 In this issue: Summary Facts Issues before the Uttarakhand High Court Observations and Rulings of the Uttarakhand High Court Conclusion

Salary reimbursement to foreign crew not FTS; No section 40(a)(iii) disallowance due to short stay exemption: Uttarakhand HC

Summary In a recent ruling, Uttarakhand High Court (HC) has held that reimbursement of salary to the service providers are not in the nature of Fees for Technical Services (FTS). HC also held that though the income was salary it could not be regarded as salary chargeable under this Act in view of provisions of Section 10(6)(viii) of the Income-tax Act, 1961 (Act) and hence no taxes are required to be deducted while making remittance of the same

Facts The Taxpayer, Dolphin Drilling Ltd., had entered into a contract with Alfa crew, pursuant to which it provided crew services to the Tax Payer. Crews were deputed to the Taxpayer and were working under control and supervision of the Taxpayer. Under the contract, Alfa crew was entitled to receive from the Taxpayer (i) a fixed fee; (ii) salary payable to the crew; and (iii) handling charge at 5 percent of such salary. The Taxpayer had withheld appropriate taxes on payment of fixed fee and handling charges. However, no taxes were withheld on payment of reimbursement of salaries payable to crew members. The Assessing Officer (AO) disallowed payment made for reimbursement of salaries under section 40(a)(i) of the Act holding that the payment made by the Taxpayer was in the nature of FTS and required taxes were not being withheld by the Taxpayer. The Taxpayer preferred an appeal before the Commissioner of Income-tax (Appeals) [CIT(A)] who confirmed the action of the AO. On further appeal, the Income Tax Appellate Tribunal (ITAT) by reversing the decision of CIT(A) held that

the payments by way of reimbursement of salaries of crew employed by the Taxpayer were not in the nature of FTS but were remittances on account of salaries. Further, since such income was exempt in accordance with provisions of section 10(6)(viii) of the Act in the hands of the recipient of salary on account of short stay exemption, it was not chargeable to tax under the head Salaries and hence no taxes were required to be deducted from such remittances. The Revenue, being aggrieved by the decision of ITAT, preferred an appeal before the HC.

Issues before the Uttarakhand High Court Whether reimbursement of salaries is in the nature of FTS and subject to levy of tax withholding in accordance with provisions of Section 195 of the Act? Whether having not deducted tax at source on payment of salary, whether payment made will be subject applicability of provisions of section 40(a)(i) / 40(a)(iii) of the Act?

Observations and Ruling of the Uttarakhand High Court ITAT has recorded a finding that the payment was in nature of salary and not payment on account of technical services. The facts upon which the ITAT has arrived at this conclusion were not disputed in the present appeal and hence payment cannot be categorized as technical fees. As stay of employees in India did not exceed threshold limit of 90 days, salaries received by employees are not chargeable to tax in India in view of provisions of section 10(6)(viii) of the Act. Since salary paid by the Taxpayer is not chargeable under the head Salaries in view of provisions of section 192 read with Section 10(6)(viii) of the Act; provisions of section 40(a)(iii) of the Act does not apply to the Taxpayer. The Revenue erred in applying the provisions of section 40(a)(i) of the Act which provides for disallowance on account of non-deduction of tax at source from payment in nature of Royalty or Fees for technical services.

Conclusion Based on the factual matrix the HC did not believe that there was need to interfere with the finding of the ITAT on the categorization of payment made by the Taxpayer. The decision of the HC is one of the first to rule that the reimbursement of an amount towards salaries would not be technical services.
Source: DIT v. Dolphin Drilling Ltd. in ITA No. 38 of 2009

Do you know about Dbriefs?

Dbriefs are live webcasts that gives valuable insights on important developments affecting your business. To Register, visit www.deloitte.com/ap/dbriefs

Contacts
Mumbai Indiabulls Finance Centre Tower 3, 27th-32nd Floor, Senapati Bapat Marg, Elphinstone Road (W), Mumbai 400013 Tel: + 91 (022) 6185 4100 Fax: + 91 (022) 6185 4101 Chennai No.52, Venkatanarayana Road, 7th Floor, ASV N Ramana Tower, T-Nagar, Chennai 600 017 Tel: +91 (044) 6688 5000 Fax: +91 (044) 6688 5019 Bangalore Deloitte Centre, Anchorage II,100/2, Richmond Road, Bangalore 560 025 Tel: +91 (080) 6627 6000 Fax: +91 (080) 6627 6409 Delhi/Gurgaon Building 10, Tower B, 7th Floor, DLF Cyber City, Gurgaon 122 002 Tel: +91 (0124) 679 2000 Fax: + 91 (0124) 679 2012

Kolkata Bengal Intelligent Park Building, Alpha, 1st floor, Plot No A2, M2 & N2, Block EP & GP Sector V, Salt Lake Electronics Complex, Kolkata - 700 091 Tel: + 91 (033) 6612 1000 Fax: + 91 (033) 6612 1001 Vadodara Chandralok, 31, Nutan Bharat Society, Alkapuri, Vadodara 390 007 Tel: + 91 (0265) 233 3776 Fax: +91 (0265) 233 9729

Ahmedabad Heritage 3rd Floor, Near Gujarat Vidyapith, Off Ashram Road, Ahmedabad 380 014 Tel: + 91 (079) 2758 2542 Fax: + 91 (079) 2758 2551

Hyderabad 1-8-384 & 385, 3rd Floor, Gowra Grand S.P.Road, Begumpet, Secunderabad 500 003 Tel: +91 (040) 4031 2600 Fax:+91 (040) 4031 2714

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. This material and the information contained herein prepared by Deloitte Touche Tohmatsu India Private Limited (DTTIPL) is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s). This material contains information sourced from third party sources. DTTIPL is not responsible for any loss whatsoever caused due to reliance placed on information sourced from such external sites.None of DTTIPL, Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the Deloitte Network) is, by means of this material, rendering professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this material. 2014 Deloitte Touche Tohmatsu India Private Limited. Member of Deloitte Touche Tohmatsu Limited Home | Add Deloitte as safe sender

To no longer receive emails about this topic please send a return email to the sender with the word Unsubscribe in the subject line