Ruling clarifies obligations for seconded employees

In a recent judgment passed by the Authority for Advance Rulings (AAR) in the matter of Cholamandalam MS General Insurance Company, it was held that if a foreign company – in this case, Hyundai Marine & Fire Insurance Company Korea (HMFICL) – seconds a technician to a company in India and receives from the Indian company a substantial part of the salary and benefits for the seconded employee, such reimbursement cannot be construed as a “fee for technical services” as defined in explanation 2 to section 9(1) (vii) of the Income Tax Act, 1961 (ITA), or in article 13.4 of the double taxation avoidance agreement (DTAA) between India and South Korea.

The applicant in the present case, Cholamandalam, seconded an employee of a Korean company, HMFICL. The employee had foreign language skills and familiarity with insurance business practices that would be of use to Cholamandalam in the expansion of its business activities.

In order to gain access to the skills of the employee, Cholamandalam entered into a secondment agreement with HMFICL, which was effective for a period of two years.

Sumes Dewan is a partner and Shradha Puri is a senior associate at KR Chawla & Co Advocates & Legal Consultants. The firm is headquartered in New Delhi and has offices in Chennai, Bangalore and San Francisco, as well as a representative office in Singapore.