HC quashes order on taxing Flipkart payment to Walmart for deputed staff

Court says assessing officer's stand on employer-employee relationship based on a wrong premise

In a second major ruling on seconded employees in recent times, the Karnataka High Court has 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.

Seconded employees refer to those sent on deputation for a stipulated period for the mutual benefit of the companies concerned.

The case relates to an inter-company master services agreement signed by Flipkart and Walmart for secondment of employees. These employees were working in India in the period relevant to assessment year 2020-21. Flipkart paid Walmart to reimburse these employees. Walmart in turn paid the employees their salaries for administrative convenience.

Flipkart sought a certificate of no deduction of tax at source from the Income-Tax Department. However, the department rejected the request, asking Flipkart to deduct tax at source. The assessing officer argued that Flipkart did not have an employer-employee relationship with the staff and that the sum paid was a fee for technical services (FTS).

However, the court ruled that the assessing officer's stand on employer-employee relationship was based on a wrong premise and was liable to be set aside.

The court ruled that the secondment agreement is an independent contract between employees and Flipkart--a point the assessing officer missed. The court directed the income tax department to grant Flipkart a certificate of nil tax deduction at source.

Sandeep Sehgal, partner tax at AKM, said the order reveals the arbitrary approach of the tax department in granting such certificates. "It is a settled position that withholding of tax would get triggered in this case only if the payment to be made to Walmart by Flipkart would have an income element. Since the payment was for cost-to-cost reimbursement of salaries of seconded employees, which was also not taxable as technical services," he said.

This ruling is the second major order on seconded employees in recent times. Last month, the Supreme Court had ruled that the salary of seconded employees deposited to an Indian company that is reimbursed to the overseas entities will be subject to service tax.