The Authority for Advanced Rulings (AAR) in Mumbai has held in that reimbursements made to a foreign company by an Indian company for obligatory payments made to expatriate personnel on behalf of the Indian company, would not be taxable as fees for technical services (“FTS”). The AAR held that there was an employer - employee relationship between the Applicant, CTBT Pvt. Ltd., and the expatriate personnel, as a result of the full operation control the company exercised over them. Payments made in pursuance of this relationship amounted to reimbursements and not FTS. The facts of the case distinguish it from those in Centrica Offshore v CIT and Flughafen Zurich v DDIT. In both cases, the entire remuneration was made by the foreign company, and thereafter reimbursed by the Indian company
In CTBT's case, the reimbursed amount was a small fraction of the salary of the foreign personnel and were mandatorily paid into their accounts, and no other payments took place outside India. The AAR found that this does not create a 'useful purpose' even if the company intended to camouflage payments as reimbursements, as a substantive part of the salary had been paid and taxed in India. This test is used to substantiate portions of payments made to foreign personnel as companies generally do not benefit from cloaking the purpose of such payments. The administrative fee paid to the foreign company for the disbursement of the amounts constituted FTS, which the Applicant had disclosed as taxable under the Income Tax Act, 1961.