The Delhi Bench of the Income Tax Appellate Tribunal has allowed three appeals in Honda R&D Company Limited, Japan v. ACIT, International Taxation and connected appeals involving Honda Motor Co. Ltd., Japan. The order, pronounced on 27 May 2026, dealt with a recurring international tax issue: whether cost-to-cost reimbursement of salary cost for seconded employees should be treated as Fees for Technical Services, or FTS, in India.
For assessment year 2018-19, Honda R&D Company Limited had received Rs. 21.53 crore from Honda R&D (India) Pvt. Ltd. towards salary cost of seconded employees. The Assessing Officer treated the reimbursement as FTS and made the addition. The Dispute Resolution Panel upheld the view. The Tribunal deleted the addition and allowed the appeals.
The Core Question
The issue was not whether the secondees were skilled. They plainly were. The sharper question was: during the period of secondment, were the employees working as employees of the Indian company, or was the Japanese entity using them to provide technical services to the Indian company?
That distinction matters because the FTS label cannot be applied merely because a foreign group company is involved or because the employees possess technical expertise. If the reimbursement is, in substance, salary cost borne for employees working under the Indian entity's control, the payment does not become consideration for a technical service merely by crossing borders.
Why The Tribunal Deleted The FTS Addition
The Tribunal focused on the Basic Secondment Agreement and the employment documents. The decisive facts showed that the seconded employees were integrated into the Indian company for the secondment period. They were to work solely for the Indian company, under its control, direction, and supervision, and in accordance with its rules, policies, and practices.
The Indian entity also had meaningful employer powers. It could evaluate, promote, discipline, suspend, or terminate the secondment. The Japanese entity could not recall a secondee without the Indian company's approval, and it was not obliged to replace a secondee if the Indian company terminated the arrangement. These are not cosmetic clauses. They go to the heart of who the real employer was.
The Tribunal also noted that salary was subject to Indian tax withholding. Form 16 and deduction of tax under section 192 supported the existence of an employer-employee relationship with the Indian company. Once the payment was shown to be salary-related, the Revenue's attempt to recharacterise the same stream as FTS became difficult to sustain.
Article 12(4) Of The India-Japan DTAA
The India-Japan DTAA was central to the conclusion. Article 12 deals with royalties and FTS. Article 12(4) excludes payments made to an employee of the person making the payment. That exclusion became important because the Tribunal accepted that the seconded employees were working as employees of the Indian company during the relevant period.
The domestic law also points in the same direction. Explanation 2 to section 9(1)(vii) excludes from FTS consideration that would be chargeable under the head "Salaries". The Tribunal's reasoning therefore rests on both treaty structure and the statutory salary carve-out.
Centrica And Northern Operating Systems Distinguished
The Revenue relied on Centrica India Offshore and on the Supreme Court's decision in Northern Operating Systems. The Tribunal did not treat those authorities as a universal rule that every secondment reimbursement is taxable as FTS.
The distinction is factual and legal. In Honda, the agreement and surrounding documents showed that the Indian company had exclusive control over the secondees during the secondment period and bore the risk and responsibility of their work. The Tribunal also drew support from later secondment decisions such as Advics Co. Ltd., Toshiba Corporation, Boeing India, Karl Storz, and Flipkart Internet.
On Northern Operating Systems, the important point is that it arose in a service tax context. It cannot be mechanically transplanted into income-tax treaty analysis without examining the applicable treaty language, the salary exclusion, and the actual employment relationship.
The AS Lex View
This ruling is useful, but it is not a free pass for every secondment model. The taxpayer won because the documentation and conduct supported the same story: the secondees were employees of the Indian company for the secondment period, the reimbursement was cost-to-cost, and salary tax compliance was handled in India.
In secondment litigation, labels are weak evidence. The agreement may say "secondment", but the tax result will follow control, supervision, risk, payroll mechanics, HR authority, and actual conduct. Where the overseas entity retains control, earns a mark-up, provides the personnel as a service, or keeps the secondees answerable to itself in substance, the FTS risk remains alive.
Practical Takeaways
- Control must sit with the Indian entity. The Indian company should have day-to-day control, supervision, work allocation, and HR authority over the secondees.
- Cost-to-cost reimbursement matters. A clean reimbursement with no mark-up is far easier to defend than a service-fee model.
- Salary compliance is evidence. TDS under section 192, Form 16, and payroll records help prove the employer-employee character of the arrangement.
- Article 12 must be read carefully. Treaty exclusions for employee payments can be decisive where the facts support real employment.
- Secondment files should be litigation-ready. Agreements, assignment letters, reimbursement schedules, salary workings, TDS records, and HR-control evidence should tell one consistent story.
Bottom Line
Honda R&D strengthens the taxpayer argument that genuine salary reimbursements for seconded employees should not be taxed as FTS. But the strength of that argument depends on proof. If the Indian entity is the real employer and the foreign entity merely receives reimbursement of salary cost, the FTS addition should not stand. If the documentation says one thing and operational control says another, the Revenue will still have room to attack.
Sources: ITAT Delhi order in Honda R&D Company Limited, Japan v. ACIT, International Taxation, ITA No. 548/Del/2025 and connected ITA Nos. 912/Del/2025 and 913/Del/2025, order dated 27 May 2026; Taxmann case note [2026] 186 taxmann.com 1061; professional case-law note shared for reference.