Karnataka High Court Directs Income Tax Department To Issue A 'Nil Tax Deduction At Source' Certificate To Flipkart For Reimbursements Made To Walmart

The Karnataka High Courthas directed the Income Tax Department to issue a 'Nil Tax Deduction at Source' Certificate to Flipkart under Section 195(2) of the Income Tax Act, 1961, with respect to the reimbursements made by it to Walmart Inc. Walmart had seconded employees to Flipkart in terms of a Master Service Agreement. Holding that Flipkart was the employer of the said seconded employees, the Court ruled that the reimbursements made by Flipkart to Walmart, towards the salaries paid by Walmart to the said seconded employees, were not in the nature of Fees for Included Services, in terms of the Indo-U.S. DTAA; and hence, Flipkart cannot be directed to deduct Tax at Source. The Single Bench of Justice S. Sunil Dutt Yadav ruled that a heavy burden of adjudication cannot be placed upon an assessee before invoking the tentative determination under Section 195(2) of the Income Tax Act, if the assessee is of the view that the payment made by it is not chargeable under the Income Tax Act. Walmart Inc. and Flipkart Singapore entered into an Inter-Company Master Services Agreement for secondment of employees and provision of services. In terms of the said Master Service Agreement, either of the parties or its affiliates could use the seconded employees. In terms of the said Master Service Agreement, Walmart Inc. seconded four of its employees to the petitioner M/s. Flipkart Internet Private Limited (India). Walmart Inc. entered into a 'Global Assignment Arrangement' with the seconded employees, which provided that the seconded employees would work for the benefit of the petitioner Flipkart. The petitioner issued letters of appointment confirming the employment of the said seconded employees with the petitioner. Also, the said seconded employees were working in India on 'Employment VISA' wherein, the petitioner was declared to be their 'employer'. Walmart Inc. made payment of salaries to the said deputed expatriate employees for administrative convenience. Walmart Inc. raised invoices for the said payments made by it, and the petitioner made reimbursements to Walmart Inc. With respect to such payments/reimbursements made by the petitioner, the petitioner made an application under Section 195 (2) of the Income Tax Act, 1961 to allow the remittance of cost-to-cost reimbursements made by the petitioner without deduction of tax at source and requested the Income Tax Department to grant a 'Certificate of No Deduction of Tax at Source'. However, the said application made by the petitioner was rejected by the Deputy Commissioner of Income Tax (DCIT) and the petitioner was directed to deduct tax at source on the said reimbursements made by it. The DCIT held that there was no employer-employee relationship between M/s Flipkart Internet Private Limited (India) and the seconded employees. The DCIT ruled that the services rendered by the seconded employees were in the nature of technical services, both under the Income Tax Act and under the Indo-U.S. DTAA, and hence, the payment made by Flipkart to Walmart Inc. was in the nature of Fees for Technical Services/ Fees for Included Services, which is to be taxed on gross basis. Against this, the petitioner filed a writ petition before the Karnataka High Court. The petitioner Flipkart submitted before the Karnataka High Court that it is not required to deduct tax under Section 195 of Income Tax Act on the payments made by it, which were in the nature of reimbursements. The petitioner added that the 'withholding obligations' under Section 195 arise only when the 'sum paid' to the non-resident is 'chargeable to tax' under the Income Tax Act. The petitioner argued that since Walmart Inc. is a tax resident of U.S.A., the said transaction would be governed by the provisions of the Indo - U.S. DTAA, in view of Section 90(2) of the Income Tax Act. The petitioner averred that in view of Article 12 of the DTAA between India and U.S., the sums paid by it could not be regarded as Fees for Technical Services, and hence, there was no income that accrued to Walmart Inc. which was chargeable to tax in India. The petitioner added that as per Article 12 of the DTAA, only those payments which are made for rendering technical or consultancy services and for making technical knowledge or experience available to the recipient, are covered within the meaning of Fees for Included Services. Thus, the petitioner averred that any service that does not make any technology available to the person acquiring the service would not fall in the category of 'make available' and, hence, it would stand excluded from the provision of Article 12 of the DTAA. The revenue department submitted that Section 195(2) of the Income Tax Act provides for determination of the appropriate portion of the sum that is chargeable to tax and that it does not contemplate a 'Nil deduction of tax at source'. The revenue department added that...

Karnataka High Court Directs Income Tax Department To Issue A 'Nil Tax Deduction At Source' Certificate To Flipkart For Reimbursements Made To Walmart

Parina Katyal

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