Reimbursement of salary costs in respect of seconded employees, where the Indian entity exercises sole control and supervision and the payment is made on a cost-to-cost basis without markup, does not qualify as 'Fee for Technical Services' under the Income-tax Act or DTAA provisions.

ORDER

PER VIKAS AWASTHY, JM:

These three appeals by two different assessees are taken up together as the issues involved in these appeals are identical. For the sake of convenience, the appeals are decided in seriatim.

ITA No.548/Del/2025

2. This appeal by the assessee is directed against the assessment order passed under Section 147 read with Section 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 25th December, 2024 for the assessment year 2018-19.

3. The solitary issue raised by the assessee in this appeal is against the addition made by the Assessing Officer in respect of reimbursement of salary of seconded employees, treating it as Fee for Technical Services (FTS).

4. Facts of the case in brief as emanating from the record are; the assessee company was established under the laws of Japan. The assessee is engaged in carrying out research and development of Honda products. The assessee provides services that include design, prototype fabrication and testing of automobile engines, development of new materials and electronics and interior and exterior design of automobiles. During the period relevant to the assessment year under appeal, the assessee received Rs.21,52,75,467/- from Honda R&D (India) Pvt. Ltd. towards reimbursement of salary costs of seconded employees on cost-to-cost basis (without any markup). The Assessing Officer, vide draft assessment order dated 23.03.2024, held that the reimbursement of salary cost of seconded employees is in the nature of Fee for Technical Services (hereinafter referred to as the ‘FTS’). The assessee filed objections before the DRP. The DRP, vide directions dated 26th November, 2024, rejected objections of the assessee and upheld findings of the Assessing Officer. Consequently, the Assessing Officer, vide impugned assessment order, made addition of Rs.21,52,75,467/- on account of FTS.

5. Shri Kamal Sawhney appearing on behalf of the assessee submits that it is not in dispute that the reimbursements of salary for seconded employees have been made on cost to cost basis without any mark up. He further referred to Basic Secondment Agreement dated 1/10/2016 (at pages 1 to 8 of the paper book) to contend that the seconded employees during the period of secondment were under absolute charge of the Indian company. The Indian company had all the rights to terminate/evaluate/promote/discipline /suspend the seconded employees. During the period of secondment, the assessee had no right to recall any seconded employee without the approval of the Indian company. Further, the assessee as per the terms and conditions of the agreement was not under obligation to replace any of the seconded employees in the event where the employment of the seconded employee is terminated by the Indian company for any reason. During the term of secondment, the Indian company bears the risk/responsibility in respect of the work performed by the seconded employee. The salary is paid by the Indian company to the seconded employee subject to deduction of tax at source as per Indian tax laws. He submitted that in the backdrop of these facts, the payments received by the assessee towards reimbursement of salary of these seconded employees cannot be termed as FTS.

6. The learned Counsel submits that the facts in case of the assessee are identical to the facts in the case of Advics Co.Lt