From now, Indian companies hiring employees from foreign companies have to pay tax on the compensation paid to the foreign entity, following a ruling by the Authority for Advance Ruling (AAR), in the case of AT&S India.

AAR, which interpreted such payments as fees for technical (FTS) which are taxable in India, dismissed AT&S contention that such payments were in the nature of reimbursements of cost that do not fall under the classification of FTS.

In this case, AT&S Austria has sent in its employees to its Indian subsidiary AT&S India for carrying out work in India. According to the agreement between the two companies, the Indian company would reimburse partial cost of the salary of the employees sent by the Austrian company.

AAR held that such reimbursements are FTS and hence tax can be deducted in India, while making payment to the foreign company. The Indian company had two agreements with the foreign company, one for foreign collaboration and the other for secondment of employees.

Under the second agreement, the foreign company was assigning employees to the Indian company for operational purpose. Part of employees salary was paid by the Indian company, while the other part was paid by the Austrian company. At the same time, the Austrian company retained the right to replace any employee as and when it wishes.

It was also clear in the agreement that the Indian company would not pay any amount other than the cost of the salary of the employees to AT&S Austria.

Putting together all these facts, AAR concluded that the employees actually belong to the foreign company and hence the payments made by the Indian subsidiary to AT&S Austria is, in fact, FTS.

AAR examined the definition provided under the Indian Income Tax Act before arriving at its conclusion. The I-T Act covered considerations for rendering managerial, technical or constancy services except when the consideration is the income of the recipient chargeable under the head salaries. The treaty between the two countries, too, makes exception to such payments in the form of salaries.

However, AAR held that the core issue was not salaries to employees which has already suffered tax, but the compensation AT&S Austria was entitled to receive. In this case, AAR pointed out that the recipient was AT&S Austria and not the employees.

Further, compensation was not chargeable under the classification of salaries by the Austrian revenue. On these grounds, AAR ruled that payments were covered under the head, FTS.