Taxation of Seconded Employees


Secondment of employees, as a concept, has evolved in the era of global commercial mobility.

Secondment is where an employee of one organization is working for one or more other organization(s), basis a mutual understanding between the organizations.

Considering the growing popularity of this concept in India, owing to the advent of the multi-national organization in the country, this article has been drawn up to conceptualize and try and find answer to queries pertaining to the taxation aspects related to the employees seconded in India from outside India.

What does the Income Tax Act say?

As per Section 9(1)(ii) of the Income Tax Act, 1961, salary income is deemed to accrue or arise in India if it is earned in India. For this purpose, salary paid towards services rendered in India as well as salary paid towards rest period/leave period preceded and succeeded by services rendered in India which forms part of the service contract of employment, are considered as salary earned in India;

Thus, the Income Tax Act brings to tax the entire salary income which pertains to the services rendered in India. However, these provisions will be applicable only if the secondee becomes an employee of the enterprise in India.

What do Double Taxation Avoidance Agreements (DTAAs) say?

In the DTAAs, provisions in respect of remuneration paid to the seconded employees are provided under the Article 'Dependent Personal Services'. However, these provisions will also be applicable only if the secondee becomes an employee of the enterprise in India.

Clause 1 of aforesaid article provides that salaries, wages and other similar remuneration derived by a resident of a foreign country in respect of employment in India shall be taxable only in that foreign country unless the employment is exercised in India. This provision is in line with the provisions of Section 9(1)(ii) of the Income Tax Act, 1961 referred above which brings to tax the entire salary income which pertains to the services rendered in India. Thus, if a Non-Resident individual exercises any employment in India, the salary income earned by him in India will be liable to tax both in India as well as the country of his residence.

However, Clause 2 of aforesaid article exempts the remuneration earned by the seconded employees if all the following conditions are satisfied cumulatively -

a) he is present in India for a total period of not more than 183 days during the relevant fiscal year;
b) the remuneration is paid by, or on behalf of, the employer who is not resident of India; and
c) the remuneration is not deductible in computing the profits of an enterprise chargeable to tax in India.

Thus, the remuneration earned by the employees seconded from a foreign country to India will not be liable to tax in India if the seconded employee is present in India for not more than 183 days in total during that fiscal year provided the remuneration is borne by the enterprise in foreign country which has seconded the employee to India & the enterprise in India does not claim any deduction in respect of such remuneration while computing its profits chargeable to tax in India.

It is apparent that above provision is beneficial to the enterprise in foreign country which sends its employees to India to do the work of such foreign enterprise for a duration of 183 days or less. In such case, the cost of remuneration will be borne by the enterprise in foreign country & the enterprise in India (which normally is a group entity operating in India) need not claim any deduction in respect of such remuneration. In case such remuneration is first paid by the Indian enterprise, then it can get it reimbursed from the enterprise in foreign country on whose behalf the seconded employee was working in India.

However, the above benefit would not be available in those cases where the seconded employee is rendering his services in relation to business operations of the enterprise in India. In such cases, it is obvious that the cost of remuneration will have to be borne by the enterprise in India. Therefore, the cost of remuneration being borne by enterprise resident in India & claimed as deductible expenditure in computing its profits chargeable to tax in India, the remuneration will be liable to tax in the hands of the seconded employee.

In case, the seconded employee is present in India for 183 days or more, he will become resident in India & accordingly, all the provisions relating to the resident employees will be applicable in such case. In India, similar provisions are in Section10(6) of the Income Tax Act which is reproduced below:

Section-10 of Income Tax Act, 1961:

(6): in the case of an individual who is not a citizen of India, the remuneration received by him as an employee of a foreign enterprise for services rendered by him during his stay in India, provided the following conditions are fulfilled -

(a) the foreign enterprise is not engaged in any trade or business in India;
(b) his stay in India does not exceed in the aggregate a period of ninety days in such previous year and
(c) such remuneration is not liable to be deducted from the income of the employer chargeable under this Act;

As stated earlier, above provisions will be applicable only if the secondee becomes an employee of the enterprise in India. In case the secondee does not become an employee of the enterprise in India, the costs paid by the enterprise in India to the overseas entities towards the services rendered by the seconded employees will be in the nature of fees for technical services & profits attributable to a service PE depending on the facts of the case. This is discussed in the celebrated case of Centrica India Offshore (P.) Ltd. and Mark & Spencer Reliance India Pvt. Ltd.

Judicial View

The Hon'ble High Court of Delhi in its landmark judgment in the case of Centrica India Offshore (P.) Ltd. v. CIT [2014] 44 taxmann.com 300 (Delhi) has held that where in terms of 'secondment agreement' entered into by assessee with overseas companies, employees of those companies used their technical knowledge and skills while assisting assessee in conducting its business of quality control and management, amounts reimbursed by assessee to overseas companies towards salaries of seconded employees amounted to 'fee for technical services' liable to tax in India.

The facts & decision of the above case have been discussed in detail below-

Facts of the case

• The assessee, was a wholly owned subsidiary of Centrica Plc., a company incorporated in the United Kingdom ('UK'). 'BSTL' and 'DEML' were also subsidiaries of Centrica Plc. These overseas concerns were in the business of supplying gas and electricity to consumers across the UK and Canada.

• The overseas entities outsourced their back office support functions for instance, debt collections/consumers' billings/monthly jobs to third party vendors in India. To ensure that the Indian vendors comply with quality guidelines, assessee was established in India to act as service provider to those overseas entities.

• To seek support during initial year of its operation, assessee sought some employees on 'secondment' from the overseas entities. For this purpose, it entered into an agreement with the overseas entities in which the latter seconded some employees for fixed tenure. In terms of the secondment agreement, the employees so seconded worked under assessee's direct control and supervision.

• The seconded employees continued to remain on the payroll of the overseas entities who used to pay and disburse the salaries. The assessee reimbursed such salary costs to the overseas employers.

• The assessee filed an application seeking advance ruling on question as to whether tax was liable to be deducted at source under section 195 in respect of reimbursements made to overseas entities, of the actual costs of expenses incurred under secondment agreement.

• The AAR held that reimbursement of salary cost paid/payable by the assessee to overseas entities under the terms of Secondment agreement was in the nature of income accrued to the overseas entities; and, therefore, tax was liable to be deducted at source under section 195 on amount paid/payable by assessee to overseas entities under the secondment agreement.

• Aggrieved by the above decision of the AAR, the assessee filed an appeal before the Hon'ble High Court of Delhi.

Decision of Hon'ble High Court of Delhi:

1. The issue under consideration is whether the secondment of employees by the overseas entities, falls within Article 12 of the India-Canada and Article 13 of the India-UK DTAAs, which embody the concept of a service permanent establishment (a 'service PE'). In terms of those articles, the Court must determine whether the overseas entities rendered 'technical services' under Article 13 of the India-UK DTAA and 'included services' under Article 12 of the India-Canada DTAA. In essence, the inquiry is whether any tax liability of the overseas entity arises for the provision of services to assessee in India, such that the trigger in the DTAAs comes into play. Since the question of technical services has been considered by the DTAA, this takes precedence over the taxing regime under section 9.

2. In this case, the overseas entities have, through the seconded employees, undoubtedly provided 'technical' services to assessee, especially since that expression expressly includes the provision of the services of personnel. The seconded employees, who work for assessee are provided by the overseas entities and the work conducted by them thus, i.e. assistance in conducting the business of assessee of quality control and management is through the overseas entities.

3. The nature of the services - cast as 'business support services' by assessee - as also clearly within the hold 'technical or consultancy'. These services envisage the provision of quality service by vendors to the overseas entities, which assessee, and the secondees, are to oversee.

4. The term 'technical' services do not limit itself only to technological services, but rather, extends to know how, techniques and technical knowledge. This is supported by clause 4 of Article 12 itself, which lists these various sub-categories. Indeed, the term 'technical' has not been defined in the DTAA, and must be accorded its broader dictionary meaning, unless limited by the parties to the instrument.

5. In terms of India-Canada DTAA, the mere rendition of service is not an 'included service' that triggers tax liability. Instead, the enterprise must 'make available' the skill behind that service to the other party, i.e., the Indian recipient. The definition, as it appears, is more restricted than in the India-UK DTAA. The question is whether the higher threshold, is met in this case. The service provided by the secondees is to be viewed in the context in which their secondment or deputation was necessitated. The overseas entities required the Indian subsidiary, assessee, to ensure quality control and management of their vendors of outsourced activity.

6. For this activity to be carried out, assessee required personnel with the necessary technical knowledge and expertise in the field, and thus, the secondment agreement was signed since assessee - as a newly formed company - did not have the necessary human resource. The secondees are not only providing services to assessee, but rather tiding assessee through the initial period and ensuring that going forward, the skill set of assessee's other employees is built and these services may be continued by them without assistance.

7. In essence, the secondees are imparting their technical expertise and know-how onto the other regular employees of assessee. Indeed, it is admitted by assessee that the reason forthe secondment agreement was to provide support for the initial years of operation, till the necessary skill-set is acquired by the resident employee group. The activity of the secondees is thus to transfer their technical ability to ensure quality control vis-à-vis the Indian vendors, or in other words, 'make available' their know-how of the field to assessee for future consumption.

8. The secondment, if viewed from this angle, actually leads to a benefit that transmits the knowledge possessed by the secondees to the regular employees. Indeed, any other reading would unduly restrict the Article 12 of the DTAA, which contemplates not only a formal transfer of intellectual property, but also other techniques and skills ('soft' intellectual property, if it can be called as such) required for the operation of a business. The skills and knowledge required to ensure that the task entrusted to assessee - quality control - is carried on diligently certainly falls within the broad ambit of Article 12 of India-Canada DTAA.

9. The assessee has advanced several arguments to negate any liability to deduct income tax under section 195. As per the assessee:

1) there is no service PE, since assessee is the economic employer, whilst the overseas entities are only the legal employers,
2) the payment made by assessee to the overseas entities is only by way of reimbursement, which does not form part of the income of those entities, and in any case,
3) that payment is not the income of the overseas entities on account of the doctrine of 'diversion of income by overriding title'.

10. To determine the existence of a service PE, assessee argues that the Court must look towards the substance of the employment relationship and not the form. This is correct. In the present case, the seconded employees are to be integrated into assessee, for the agreed period and are subject to its supervision and control. The rules, regulations, policies and other practices of assessee for its employees were applicable to these employees too. The seconded employee's duties and functions were dictated by the instructions and directions of the assessee.

11. The overseas entities were not responsible for any errors or omissions of such seconded employees or for their work. Assessee bore all risks in relation to the work of seconded employees, and reaped the benefit from the output. Assessee also bore the cost of monthly remuneration and reimbursement of cost to seconded employees. However, crucially, these seconded employees retained their entitlement to participate in the overseas entities' retirement and social security plans and other benefits in terms of its applicable policies and the salary was properly payable by the overseas entities, which claimed the money from assessee. There was no purported employment relationship between assessee and the secondees.

12. The mere fact that assessee and the secondment agreement, phrases the payment made from assessee to the overseas entity as 'reimbursement' cannot be determinative. Neither is the fact that the overseas does not charge a mark-up over and above the costs of maintaining the secondee relevant in itself, since the absence to mark-up (subject to an independent transfer pricing exercise) cannot negate the nature of the transaction. It would lead to an absurd conclusion if, all else constant, the fact that no payment is demanded negates accrual of income to the overseas entity. Instead, the various factors concerning the determination of the real employment link continue to operate and the consequent finding that provision of employees to assessee was provision of services to assessee by the overseas entities triggers the DTAAs.

13. The nomenclature or lesser-than-expected amount charged for such services cannot change the nature of the services. Indeed, once it is established, as in this case, that there was a provision of services, the payment made may indeed be payment for services - which may be deducted in accordance with law - or reimbursement for costs incurred. This, however, cannot be used to claim that the entire amount is in the nature of reimbursement, for which the tax liability is not triggered in the first place. This would mean that in any circumstances as where services are provided between related parties, the demand of only as much money as has been spent in providing the service would remove the tax liability altogether. This is clearly an incorrect reasoning that conflates liability to tax with subsequent deductions that may be claimed.

14. The final issue concerns the 'diversion of income by overriding title'. Here, assessee argues that the payment made to the overseas entity is not income that accrues to the overseas entity, but rather, money that it is obligated to pass on to the secondees. In other words, this money is overridden by the obligation to pay the secondees, and thus, is not 'income'. This is insubstantial for two reasons. One, in view of the above findings that: (a) the payment is not in the nature of reimbursement, but rather, payment for services rendered, (b) the employment relationship between the overseas entities and assessee - from which the former's independent obligation to pay the secondees arises continues to hold, no obligation to use money arising from the payment by assessee to pay the secondees arises. The overseas entities; obligation to pay the secondees arises under a separate agreement, based on independent conditions, in relation to assessee's obligation to pay the overseas entity. Assuming the agreement between assessee and the overseas entity envisaged a certain payment for provision of services (and not styled as reimbursement).

15. Surely no argument could be made that such payment is affected by the doctrine of diversion of income by overriding title. If that be the case, then, as held above, the fact that the payment under the secondment agreement is styled as reimbursement and limited on facts to that, without any additional charge for the service, cannot be hit by that doctrine either. The money paid by assessee to the overseas entity accrues to the overseas entity, which may or may not apply it for payment to the secondees, based on its contractual relationship with them. This, at the very least, is independent of the relationship and payment between
assessee and the overseas entity.

16. Accordingly, for the above reasons, the High Court upheld the ruling of the AAR that reimbursement of salary cost paid/payable by the assessee to overseas entities under the terms of Secondment agreement was in the nature of income accrued to the overseas entities; and, therefore, tax was liable to be deducted at source under section 195 on amount paid/payable by assessee to overseas entities under the secondment agreement.

Centrica India Offshore (P.) Ltd. filed Special Leave (SLP) Petition before the Supreme Court against the above order of the High Court. However, the Supreme Court dismissed the SLP. It needs to be noted that, the above decision in the case of Centrica India Offshore (P.) Ltd applies only in those cases where the seconded employees make available technical knowledge to the enterprise in India while rendering the services in India. On the other hand, in the case M/s. Mark & Spencer Reliance India Pvt. Ltd. [2013] 38 taxmann.com 190 (Mumbai - Trib.) by the Bombay Tribunal & TS-178-HC- 2017(Bombay) by Bombay High Court it was held that there was no make available of technical knowledge in case of secondment contracts based on the facts of that case.

Thus, in case, where the seconded employees do not make available technical knowledge to the enterprise in India, the costs paid to the overseas entities would not be considered as fees for technical services. In such cases, it needs to be seen whether the rendition of service by the seconded employees results in existence of a Service PE in India which would be the case where the seconded employees perform substantial work in India. As regards attribution of profits to the PE, where the transactions between the Indian enterprise & the overseas entity are held to be at arm's length, nothing would be attributable to the PE, provided that an associated enterprise is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise.

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CA Varsha Nanwani 
on 06 March 2019
Published in Income Tax
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