Payments to expats working in local arms of MNCs not liable for service tax, says AAR

The Authority for Advance Ruling (AAR) has said that payments done by foreign parents to expats who work in India for local arms of multinationals won't be attracting service tax from now on. This decision is expected to bring some relief to MNCs who have been served with notices in similar cases.

"There shall be no liability to pay service tax on the salary and the allowances payable by the applicant to the employee in terms of the dual employment agreement and such salary will not be eligible to levy the service tax as per the provisions of the Finance Act," the ruling states.

This followed a plea submitted by North American Coal Corp. India, which is the local subsidiary of US-based North American Coal Corp. The plea was seeking a ruling on the application of service tax on social security benefits that the parent company gives to an employee working in India on contractual basis.

In some recent instances, tax authorities have issued notices to MNCs where an expat employee who has received payments from the parent in his home country. They argue that salaries paid for work in India and transferred to foreign accounts by the parent company which then get reimbursed to it by the Indian subsidiary make it akin to supply of manpower and therefore should be taxable.

"Service tax authorities have been taking a view that where an employee of a group company is deputed to work in an associate company for a specified period/assignment, the transaction amounts to creating a service provider-service recipient relationship between the two companies," Saloni Roy, senior director, Deloitte India, told ET.

Even though rulings by the AAR are specific to different cases, they would still have an effect on the tax assessment of other firms facing similar circumstances. AAR, which is a quasi-judicial body, is set up to guide companies on potential tax liabilities that they may face, and give opinions regarding these liabilities.

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