Dear Friends in continuation to my last article
When an employee is seconded to a company or a group company into India, he may be construed to have two employers; first the legal employer i.e. the company in the home country of the employee and the real and economic employer i.e. a company in India. In such type of arrangements, the company in India reimburse the salary costs to the legal employer of the expatriate.
There are no clear guidelines under the Act that how to differentiate between a secondment arrangement or a service agreement. The revenue authorities in such cases raises two observations notwithstanding others regarding such type of arrangement when Indian company makes an application to the Assessing officer under section 195 for making the payment of reimbursement of the salary costs.;
First, that the amount or reimbursement cannot be treated as for payment of salary as there exists no employer-employee relationship.
Secondly, the payment is ‘fee for technical services’ within the meaning of section 9 of the income tax Act
The Apex court in the case of Ram prasad v CIT has held that for ascertaining whether a person is a servant, a rough and ready test is whether under the terms of the employment, the employer exercises supervisory control in respect of work entrusted to him. In another case of Dharmangadha Commercial works v state of Saurarashtra their lordships of the honourable supreme court observed that the correct method of approach for determination of employer employee relationship is to consider whether having regard to the nature of work, there was due control or supervision by the employer
Important points – while drafting secondment agreement
It gives a rise to a litigation. Hence while deciding the terms of the ‘secondment agreement”’ or drafting some clauses of the secondment agreement the following points shall be considered;
- The seconded employee will act in “accordance with the instructions and directions of Indian company i.e. the economic employer of the expatriate.
- The seconded employee will be subject to the supervision and control of the Indian company while performing his duties.
- The seconded employee or expatriate is reportable and responsible to the Indian company and oblige to devote his time skill and attention exclusively to the Indian company.
- The effective economic employer i.e. the employer of the host country of the expatriate will bear the risk and responsibilities associated with the work. To fortify there must be a specific clause for indemnifying the expatriate in case of fastening of any monetary liability while performing the task in the scope of assignment.
- The effective economic employer i.e. the employer of host country of an expatriate will reimburse the salary cost of the expatriate paid by the employer of home country i.e. his legal employer. In such reimbursement, some markup can be made for processing costs for payrolls etc.
In bound expatriates-employee of company
In Ram Prashad v. CIT the question for the consideration for the Apex court was “whether the managing director of the company who received monthly remuneration as also a percentage of gross profit for his services, could be considered as the servant of the company so that the amount received by him can be considered as salary or whether it would be a business income in his hands. The supreme court has laid down the following prepositions;
- For ascertaining whether a person is a servant a rough and ready test is whether under the terms of the employment, the employer exercises the supervisory control in respect of the work entrusted to him.
- A Managing director may have a dual capacity -a managing director as well as an employee. In the capacity of MD, he may be regarded as having not only the capacity as persona of a director but also has the persona of an employee.
- The nature of the employment can be ascertained by observing the article of association of the company or going through the terms of the employment as per agreement.
- The control which the company exercise over the managing director need not necessarily be one which tells him what to do from day to day, , nor is it necessary that the company’s supervision over him should be continuous exercise of the power to oversee or superintend the word to be done. The control and the supervision is exercised and is exercisable in terms of article of association by the board of directors or by the company in general meeting.
- If the power of the managing director has to be exercised within the terms and limitation prescribed thereunder, and subject to the control and supervision of the directors, he would be considered as the servant of the company.
In bound expatriates- tax treatment of social security contributions
Expatriates and their employer in the home country are bound under the law of the land to make contributions to some social security schemes/ plans. In Gallotti Raoul v ACIT Mumbai tribunal held that considering specific facts of the case social security contributions made outside India by the expatriates are diversion of income at source by overriding title and is not an application of income.
Such social security contributions are to be deducted from the salary for determining the taxable income in India. The expatriate should maintain all the documents to substantiate a claim of deduction for such contributions. The claim of such deduction will depend upon the terms and conditions of such overseas social security plans.
Hon’ble supreme court in the case of CIT V L.W.Russel observed that , if it can be established that employer’s contribution to such social security scheme do not confer any immediate benefit to the expatriate in the year of contribution, then a view can be expressed that the said contributions are not taxable in the hands of expatriate, as not income is accrued to expatriate in the year of contribution.
Based on various judicial pronouncements, the following points shall be considered while deciding the taxability of social security contributions;
- Whether such contributions are mandatory under some statutory obligations or made by the employer voluntarily.
- Whether such contributions are diversion of income by overriding title or an application of income.
- Whether the vesting of benefit because of contribution occurs in the year of contribution to expatriate or it occurs or happening of certain unforeseen future event.