In a major relief to e-com giant Flipkart, the Karnataka High Court has delivered a second major ruling on seconded employees in recent times, and set aside an order of the Income Tax Department that called upon Flipkart Internet to withhold tax on the payments it made to Walmart as remuneration to the staff it hired from the US major.
The petitioner, Flipkart Internet Private Limited is engaged in the business of providing Information Technology Solutions and Support Services for e-commerce industry. As per a Master Agreement, ‘Walmart Inc.’ had seconded four employees to the petitioner and had entered into a ‘Global Assignment Arrangement’ with the seconded employees, which provided that the seconded employees would work for the benefit of the petitioner. The payment of salaries to the deputed expatriate employees were stated to have been made by ‘Walmart Inc.’ for administrative convenience and the petitioner had made reimbursements to ‘Walmart Inc.’ With respect to such payments, the petitioner had sought for granting of Certificate under Section 195 of the I.T. Act. However, the same was rejected by the department.
Justice S. Sunil Dutt Yadav observed that it is not a mere rendering of technical or consultancy services, but the requirement of make available in terms of Article 12(4)(b) requires to be fulfilled.
“The ‘FIS’ in terms of the ‘DTAA’ would not include any payment towards provision of mere rendering of service and there must be a sine qua non of ‘make available.’ Further, the payment must be one chargeable under the provisions of I.T. Act,” the Court said.
The Court further observed that it is not a case where the petitioner is merely acting as a back office for providing support service to the overseas entity, whereby the overseas entity could be treated as an employer.
Quashing the order, the Court held that “the finding as regards deduction of tax at source under Section 195 of the I.T. Act is tentative insofar as the Revenue is concerned. Even if the Revenue orders that there was no obligation to make deduction under Section 195, the question of liability of the recipient still remains to be decided subsequently. Accordingly, the question of prejudice to the Revenue at the stage of Section 195 order is unavailable to it. Curiously, the file contains a note by the same DCIT who has eventually passed the impugned order, which note dated 10.03.2020 addressed to the C.I.T. seeks for granting approval for granting deduction of TDS at the rate of zero per cent on cost-to-cost reimbursement. However, the opinion was directed to be reconsidered as per the endorsement found in the file and eventually an order was passed by DCIT contrary to the earlier view and has rejected the application.”
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