The case pertains to the agreement between the Yum Restaurants (Asia), the assessee and its Indian counterpart, where Vinod Mehboobani was deputed to India as the vice president (VP).
The assessing officer held that technical services were being provided by the VP on behalf of the assessee company, hence the salary reimbursement was actually ‘Fee for Technical Services’ (FTS).
However, the Income Tax
Appellate Tribunal (ITAT), Delhi, held that the VP took part in the day-to-day functioning of the Indian counterpart, attended board meetings, signed its financial statements and was under the direct control of Yum Restaurants India. Besides, he did not ‘make available’ any technology, knowledge or skill.
During the period under consideration, salary was paid by the assessee in Singapore and was reimbursed by Indian counterpart on a cost-to-cost basis. Therefore, the ITAT held that the VP was an employee of the Indian concern and not of the assessee-company.
Besides, the VP had paid tax on his salary in India and taxing it as FTS would lead to double taxation, the bench noted. India and Singapore have a double taxation avoidance agreement (DTAA).
Yum Restaurants (Asia), the assessee, is a company incorporated in Singapore and is engaged in the business of franchising KFC, Pizza Hut
and Taco Bell
The assessing officer had also alleged the existence of a service/ dependent agent permanent establishment (DAPE) of the assessee in India and sought attribution of business income to the PE on account of marketing activities carried out by the Indian counterpart.
However ITAT held that the assessee did not have service PE in India. It pointed out the deduction of the salary cost would result in nil income and there would be no income attribution to the PE.
Neha Malhotra, Director, Nangia Andersen LLP said, “Judgements like these instil the faith of taxpayers in the Indian judiciary that a benefit enshrined under the tax treaty shall not be denied where the taxpayer deserves it."
"The ruling makes it clear that in the absence of a separate service agreement and lien on employment of the secondee employee, secondment of an employee shall not constitute service PE," she said.
The term 'secondment' describes a situation where an employee is assigned on a temporary basis to work for another, host organisation, or a different part of their employer's organisation. On expiry of the secondment term, the employee (the 'secondee') will return to its original employer.
Malhotra added that the ruling rightly considered the activities of the secondee employee to hold whether the same shall constitute service PE in india.
“Since the role of the secondee employee in the day-to-day functioning demonstrated that he was undertaking stewardship activities and the foreign entity had simply acted as a conduit to pay salary to him in Singapore (since his family was situated there) it was established beyond doubt that the seconded employee was an employee of the Indian entity, working under the supervision & control of the Indian entity, and was not rendering services to the Indian entity on behalf of the foreign entity,” she added.