Case Note & Summary
The petition impugned the order of the Deputy Commissioner of Income Tax (International Taxation) rejecting the application for a Nil TDS certificate under Section 195(2) of the Income Tax Act, 1961. The petitioner, Flipkart Internet Private Limited, engaged in IT solutions and support for e-commerce, had entered into a Master Services Agreement with Walmart Inc., USA, for secondment of employees. Under the agreement, Walmart Inc. seconded four employees to the petitioner and paid their salaries for administrative convenience, which the petitioner proposed to reimburse on a cost-to-cost basis without any mark-up. The petitioner applied for a Nil deduction certificate, contending that the reimbursement payments were not chargeable to tax in India as they were pure reimbursement of salary and did not constitute income, and further, under Article 12 of the India-US DTAA, such payments did not qualify as Fee for Technical Services (FTS) or Fee for Included Services (FIS) because the services did not 'make available' technical knowledge. Reliance was placed on the Supreme Court's decision in GE India Technology Centre, which held that withholding tax under Section 195 arises only if the sum paid is chargeable to tax. The petitioner also argued it was the real employer of the secondees, exercising control and bearing employer obligations like provident fund contributions, and that the employees were on employment visas with the petitioner as sponsor. The respondents maintained that Section 195(2) only determines the portion of sum chargeable and does not contemplate a Nil certificate; the secondees provided senior managerial and consultancy services that were technical in nature, falling under Section 9 of the Act as well as FTS/FIS under the DTAA; the mere deduction of tax under Section 192 on salaries did not obviate the obligation under Section 195; and the amount was to be taxed on a gross basis without examining embedded income. The respondents distinguished the petitioner's case from Centrica India Offshore, though the petitioner argued the facts were materially different as it was a well-established entity prior to the association with Walmart Inc. The court heard extensive arguments and reserved the matter, but the text of the analysis and conclusion is not available in the provided judgment extract.
Issue of Consideration
Whether the payment of cost-to-cost reimbursement of salaries of seconded employees by Flipkart to Walmart Inc. is subject to withholding tax under Section 195 of the Income Tax Act, 1961; whether such payments constitute Fee for Technical Services/Included Services under the India-US Double Taxation Avoidance Agreement and the Income Tax Act; whether the application under Section 195(2) for a Nil TDS certificate is maintainable.
Law Points
- Tax deduction at source under Section 195
- chargeability of reimbursement payments
- Fee for Technical Services (FTS) and Fee for Included Services (FIS) under DTAA
- employer-employee relationship in secondment
- gross vs. income basis for deduction
- overriding effect of DTAA under Section 90(2)
- maintainability of Nil deduction certificate under Section 195(2)
Case Details
2022 LawText (KAR) (06) 26
WRIT PETITION NO.3619/2021 (T-IT)
Tarun Gulati, Kishore Kunal, Parth, Ankita Prakash, Pradeep Nayak, K.V. Aravind
M/S. Flipkart Internet Private Limited
The Deputy Commissioner of Income Tax (International Taxation), Circle-1(1), The Commissioner of Income Tax-1 (International Taxation), The Joint Commissioner of Income Tax-1, Central Board of Direct Taxes
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Nature of Litigation
Writ petition under Article 226 of the Constitution of India challenging the rejection of an application for a Nil TDS Certificate under Section 195(2) of the Income Tax Act for payments made to a non-resident entity for reimbursement of seconded employee salaries.
Remedy Sought
The petitioner sought to quash the order dated 01.05.2020 passed by the first respondent and a writ of mandamus directing the issuance of a Nil Tax Deduction at Source Certificate under Section 195(2).
Filing Reason
The petitioner applied for a Nil TDS Certificate intending to remit payments to Walmart Inc., USA, for cost-to-cost reimbursement of salaries of seconded employees, asserting that such payments were not chargeable to tax in India.
Previous Decisions
The Deputy Commissioner of Income Tax (International Taxation), Circle-1(1) rejected the application on 01.05.2020, holding that there was no employer-employee relationship, the services were in the nature of technical services, and tax was to be deducted on a gross basis without examining embedded income.
Issues
Whether an application under Section 195(2) of the Income Tax Act for a Nil TDS certificate is maintainable.
Whether the reimbursement of salaries of seconded employees constitutes Fee for Technical Services/Included Services under Section 9 of the Income Tax Act and Article 12 of the India-US DTAA.
Whether the deduction under Section 195 must be on the gross payment or only on the income element embedded therein.
Whether the secondment arrangement creates an employer-employee relationship between the Indian entity and the secondees, and the effect on taxability.
Applicability and distinction of the Supreme Court judgment in Centrica India Offshore (P.) Ltd. v. CIT.
Submissions/Arguments
Payments are pure reimbursement of actual salary costs with no mark-up and not income chargeable to tax; thus no withholding obligation under Section 195.
Under Article 12 of the DTAA, payments do not qualify as Fee for Technical Services because they do not 'make available' technical knowledge, and the memorandum of understanding clarifies this.
The application under Section 195(2) for a nil deduction certificate is maintainable as per the Supreme Court's ruling in GE India Technology Centre.
The Indian entity is the real employer of the secondees; it exercises control, issues appointment letters, contributes to provident fund, and the employees hold employment visas sponsored by the Indian entity.
DTAA provisions override domestic law to the extent they are more beneficial; salary payments fall under Article 16 and not under FIS.
The decision in Centrica India Offshore is distinguishable because the Indian entity here was a well-established business before the association with the foreign company.
Section 195(2) does not contemplate a nil deduction certificate; it only determines the portion of sum chargeable.
The seconded employees provided senior managerial and consultancy services, which are technical services under both the Act and the DTAA, and hence the payments constitute FTS/FIS.
Tax is to be deducted on the gross amount without examining the income element; deduction under Section 192 does not substitute the obligation under Section 195.
The agreement being between related parties, the character of payment remains unaffected even if made on a cost-to-cost basis.
Judgment Excerpts
The petitioner has called in question the validity of the order dated 01.05.2020 passed by the first respondent at Annexure-'A' whereby the application for 'Nil TDS Certificate' has been rejected and the petitioner has been directed to deduct tax at source at the applicable rate.
1. There is no employer-employee relationship between M/s Flipkart Internet Private limited India and secondees seconded by assessee. 2. The services rendered/provided by the seconded employees are in the nature of technical services, both under IT Act and under DTAA as well. 3. Deduction u/s 192 does not result in double deduction nor does it obviate the need to deduct u/s 195. 4. Once the income is in the nature of FTS/FIS, it is to be taxed on gross basis; there is no need to examine whether or not income element is embedded in the said payment.
The 'withholding obligations' under Section 195 arise only when the 'sum paid' to the non-resident is 'chargeable to tax' under the Act. Reliance is placed on the judgment in the case of GE India Technology Centre Private Limited v. Commissioner of Income Tax and Another (2010) 10 SCC 29.
Section 195(2) of the I.T. Act provides for determination of appropriate portion of sum chargeable and does not contemplate 'Nil deduction of tax at source' and accordingly, Section 195(2) is not applicable.
Procedural History
The petitioner filed an application under Section 195(2) of the Income Tax Act on 15.01.2020 seeking a Nil TDS Certificate for cost-to-cost reimbursement of salaries of seconded employees to Walmart Inc., USA. The Deputy Commissioner of Income Tax (International Taxation), Circle-1(1) rejected the application on 01.05.2020, directing the petitioner to deduct tax at source on the payments. Aggrieved, the petitioner filed Writ Petition No.3619/2021 under Article 226 of the Constitution before the High Court of Karnataka. The writ petition was heard and reserved for orders on 16.06.2022, and the judgment was pronounced on 24.06.2022.
Acts & Sections
- Income Tax Act, 1961: 195, 195(2), 9, 90(2), 192
- Double Taxation Avoidance Agreement between India and United States: Article 12, Article 16
- Constitution of India: Article 226
