The Income Tax Appellate Tribunal, Bangalore, has clarified that mere reliance on judicial precedents is insufficient to determine tax liability in secondment arrangements. The Tribunal has directed a fresh assessment based on the actual terms of the agreements, emphasizing the need for factual scrutiny over abstract legal analogies.
Background & Facts
The Dispute
The appellant, M/s. ExxonMobil Services & Technology Private Limited, is an Indian entity engaged in administrative and transaction support services for its global group companies. During the assessment year 2016-17, it reimbursed ₹147,133,002 to ExxonMobil Asia-Pacific Pvt. Ltd. for salaries and allowances of 27 employees seconded from the group’s overseas entities. The Assessing Officer disallowed this reimbursement under Section 40(a)(i) of the Income Tax Act, 1961, on the ground that tax was not deducted at source under Section 195, treating the payment as fees for technical services.
Key Facts
- The appellant filed its original return on 29.11.2016 declaring income of ₹69,071,470
- Revised return filed on 19.03.2018 reduced total income to ₹54,743,010
- Notice under Section 143(2) was issued on 15.07.2018 for scrutiny assessment
- The Assessing Officer noted reimbursement of ₹147,133,002 to a foreign group entity without TDS
- The appellant claimed the payment was a cost-to-cost reimbursement for seconded employees
- The seconded employees were allegedly under the appellant’s direct control: duties, working hours, leave, performance review, and benefits (PF, gratuity, accommodation) were determined solely by the appellant
- The employees remained on the payroll of the foreign group entity for social security and retirement benefits
- The secondment was temporary, with employees expected to return to their original employers after assignment
- No tripartite secondment agreement was produced by the appellant despite repeated requests by the CIT(A)
Procedural History
- 12.12.2019: Assessment order passed under Section 143(3) disallowing ₹147,133,002 under Section 40(a)(i); total income assessed at ₹201,876,012
- 23.06.2025: Order of the National Faceless Appeal Centre (CIT(A)) dismissed the appellant’s appeal, upholding the disallowance
- 18.05.2021: Review petition filed by appellant before CIT(A) was dismissed
- 15.06.2026: Appeal heard before ITAT Bangalore
The Parties' Positions
For the Appellant
- Argued that the payment was a pure cost-to-cost reimbursement, not a payment for services
- Contended that the seconded employees were under the appellant’s operational control, making the appellant the de facto employer
- Relied on judicial precedents: Abbey Business Services, Flipkart, Boeing India, Goldman Sachs, TE Connectivity, Ernst & Young, and Serco India
- Asserted that the services rendered were internal support, not technical or managerial consultancy
- Claimed the make-available test under Article 12 of the India-Singapore DTAA was not satisfied
For the Respondent
- Maintained that the payment constituted fees for technical services under Section 9(1)(vii) and Article 12 of the DTAA
- Relied on Centrica India Offshore Pvt. Ltd. v. CIT (364 ITR 336) and IBM Corporation (ITA No. 1/Bang/2024)
- Argued that the employees were on the foreign group’s payroll, retained benefits with them, and returned after secondment
- Stated that the skills provided were foundational to setting up the Indian entity’s operations
- Highlighted the appellant’s failure to produce the secondment agreement as fatal to its case
Relief Sought
The appellant sought deletion of the disallowance of ₹147,133,002, reversal of the CIT(A)’s order, and restoration of the revised income of ₹54,743,010.
The Legal Issue
The central question was whether reimbursement of salaries and allowances paid to seconded employees by an Indian company to its foreign group entity constitutes fees for technical services under Section 9(1)(vii) of the Income Tax Act and Article 12 of the India-Singapore DTAA, thereby attracting tax deduction at source under Section 195 and disallowance under Section 40(a)(i), in the absence of a produced secondment agreement.
Arguments Presented
For the Appellant
The appellant relied on multiple High Court decisions, particularly Abbey Business Services and Flipkart, to argue that where the host entity exercises complete control over the seconded employee’s duties, working conditions, and performance, and the payment is purely cost-reimbursement without markup, it cannot be classified as fees for technical services. It emphasized that the Supreme Court in Northern Operating Systems recognized the importance of factual context over rigid labels. The appellant contended that the absence of a markup, the temporary nature of assignment, and the host’s exclusive control over daily operations negated the existence of a cross-border service arrangement.
For the Respondent
The Revenue relied on Centrica India to assert that when employees are paid by a foreign entity and reimbursed by an Indian entity, and their skills are integral to the Indian entity’s core operations, the transaction constitutes a cross-border provision of technical services. It argued that the make-available test was satisfied because the employees transferred know-how and internal systems that continued to benefit the Indian entity beyond their tenure. The failure to produce the tripartite agreement was treated as an adverse inference under Section 114 of the Evidence Act.
The Court's Analysis
The Tribunal acknowledged the conflicting precedents and the evolving nature of global employment structures. It noted that while Centrica India and IBM favored the Revenue, decisions in Abbey Business Services and Flipkart supported the assessee’s position. However, the Tribunal emphasized that judicial precedents are fact-specific and cannot be mechanically applied.
"Each precedent turns on its own facts and circumstances. Even before us, both parties have relied only on judicial decisions."
The Tribunal observed that neither the Assessing Officer nor the CIT(A) had examined the actual secondment agreements. The Revenue did not requisition them, and the appellant failed to produce them despite multiple opportunities. The absence of these documents rendered any legal conclusion speculative.
The Tribunal further noted that the Supreme Court in Northern Operating Systems had laid down a multi-factorial approach - including control, risk allocation, payroll responsibility, and duration - to determine the true employer. Without the agreement, it was impossible to apply this test meaningfully.
The Tribunal held that the issue could not be resolved on the basis of legal arguments alone. The factual matrix - particularly the terms of the secondment agreement, the nature of services rendered, and the financial flow - was essential to determine whether the transaction was a reimbursement or a service payment.
The Verdict
The appeal was partly allowed. The Tribunal set aside the orders of the CIT(A) and the Assessing Officer dated 23.06.2025 and 12.12.2019 respectively. The matter was restored to the file of the Assessing Officer for fresh adjudication. The appellant was directed to furnish all secondment agreements, employment letters, service descriptions, and disclosures made to tax authorities. The Assessing Officer was directed to examine the transaction afresh, apply the economic employer test, consider all relevant precedents including Northern Operating Systems, and provide a reasoned order after giving the appellant a full opportunity of hearing. The appeal was dismissed in respect of other grounds not pressed.
What This Means For Similar Cases
Documentation Is Non-Negotiable
- Practitioners must ensure that all secondment agreements are formally documented, signed by all three parties (host, seconder, employee), and preserved for audit
- Failure to produce agreements invites adverse inference and disallowance under Section 40(a)(i)
- Internal memos or emails cannot substitute formal agreements in tax proceedings
Economic Employer Test Requires Factual Proof
- Control over daily tasks alone is insufficient to establish employment
- The entity bearing payroll risk, social security obligations, and termination authority is the economic employer
- Reimbursement without markup is a strong indicator of cost-sharing, not service provision
- The make-available test under DTAA requires proof of transfer of technical knowledge that continues to benefit the recipient post-deployment
Precedents Are Contextual, Not Universal
- Relying solely on Abbey or Centrica without matching facts is legally risky
- Tribunals and courts are increasingly demanding granular factual analysis over blanket application of case law
- Tax planning for multinational groups must now integrate legal structure with documented operational reality
