No service tax on payments to expats working in local arms of MNCs: AAR

Authority for Advance Ruling (AAR) has notably said that Payments to expats working in India for local arms of multinationals by the foreign parent won't attract service tax. The decision is important as it brings some relief to MNCs that have been served with notices in similar cases.  This followed a plea by North American Coal Corp. India, the local subsidiary of US-based North American Coal Corp. It sought a ruling on the application of service tax on social security benefits given by the parent to an employee working in India on contract.  Authority for Advance Ruling said '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.’

Recently, the tax authority was issuing notices to MNCs in a number of cases where an expat employee received payments from the parent in his home country. Their contention is that the practice of paying salaries for work in India that are then transferred to foreign accounts by the parent company and reimbursed to it by the Indian subsidiary make it akin to supply of manpower and therefore taxable.

Although rulings by the AAR are case specific, they have an effect on tax assessment of other firms under similar circumstances. AAR is a quasi-judicial body, set up to give opinions and guide companies on potential tax liabilities. The Advance Ruling Authority is a good indication as to how this situation should be taken.