The Delhi ITAT in Toshiba Energy System & Solutions Corporation v. DCIT (International Taxation) held that reimbursement of salaries paid to seconded employees on a cost-to-cost basis without markup is not taxable as Fees for Technical Services under Section 9(1)(vii) of the Income-tax Act or Article 12(4) of the India-Japan DTAA. Relying on PCIT v. Boeing India (P) Ltd. and Flipkart Internet, the Tribunal ruled that payments in the nature of salary cannot be recharacterized as FTS, and distinguished the Supreme Court ruling in Northern Operating as being confined to the service tax regime.

The Income Tax Appellate Tribunal held that reimbursements received by Toshiba Energy System & Solutions Corporation, a Japanese company, from its Indian group entities towards salaries of seconded employees, paid strictly on a cost-to-cost basis without any markup, are not taxable as Fees for Technical Services (FTS).

The Tribunal examined the scope of Article 12(4) of the India–Japan DTAA, which expressly excludes payments to employees from the definition of FTS, and noted that Explanation 2 to Section 9(1)(vii) similarly excludes consideration taxable under the head “Salaries”.

Placing reliance on the jurisdictional High Court judgments in PCIT v. Boeing India (P) Ltd. and Flipkart Internet Pvt. Ltd. v. ACIT, the ITAT reiterated that salary-like payments cannot be recharacterized as FTS merely because they arise in a cross-border secondment arrangement.

The Tribunal distinguished the Revenue’s reliance on the Supreme Court ruling in Northern Operating Systems Pvt. Ltd. v. CCE, holding that the said judgment was rendered in the context of service tax on manpower supply, and could not be mechanically applied in income-tax proceedings where the “make available” test under the DTAA and the statutory salary exclusion are determinative.

Accordingly, the ITAT held that reimbursement of salary costs received by the assessee from its Indian group entities could not be taxed as FTS, and allowed the assessee’s appeal for Assessment Year 2020-21, in favour of the assessee.