Opinion: Secondment of Employees - Would Ambiguity on Taxation Persist for Perpetuity?

(N C Hegde is partner, Zainab Bookwala is manager and Risha Gandhi is assistant manager at Deloitte Haskins & Sells LLP) Taxation of secondment arrangements in India seems to be a relentless debate from an income tax perspective since judicial rulings seem to leave more issues unanswered. Every new ruling, on specific facts of the case, seems to leave issues for further deliberation around structuring secondment arrangements in India. In today's world of business characterized by the need for global mobility, the phenomenon of foreign expats being seconded to the country where the parent company has investments is likely to be a common and inevitable feature, especially in cases of global corporations. However, secondment of the employees of a foreign entity to the Indian entity has led to various controversies in relation to the taxability and the existence of an alleged presence of the foreign entity in India qua its employees in India. The more ubiquitous purpose of seconding the expats to India is for providing assistance to the Indian group subsidiary during its initial setup phase or for the purpose of the ongoing training of the employees of the Indian subsidiary. In such a scenario, the revenue authorities generally allege the service permanent establishment ('PE') exposure under Article 5 of the Indian tax treaties. The service PE sub-article stipulates the threshold for the presence of employees of the foreign entity in India rendering certain services which if exceeded would trigger a service PE of the foreign entity in India. It may be noted that for triggering a service PE in India, the foreign entity ought to furnish services to another entity in India for a specified period or periods. In case of secondment, the economic employment of the employee of the foreign entity is typically transferred to the Indian entity and the Indian entity becomes the economic employer of the expat. Consequently, the seconded employee working for the Indian entity cannot be said to be providing any services to the Indian entity. However, in the past, the tax authorities have taken a view that the expats are employees of the foreign entity and not that of the Indian entity on certain grounds, essentially the lien on employment with the foreign entity. One ought to carefully analyse the secondment arrangement in order to conclude whether the foreign entity has any control over the expat so as to be considered as the employer of the expat. The Article 15 of the OECD Model Tax Convention 2014 has laid down certain key factors for determining the employer-employee relationship such as authority to instruct the individual, control and responsibility for the place of work, provision of tools and materials to the employee, right to select the individual to perform work and to terminate contractual agreements, right to impose disciplinary sanctions related to the work, determination of holidays and work schedules etc. Further, Klaus Vogel in his treatise on Double Taxation Conventions has explained the term 'employer' as someone to whom an employee is committed to supply his/her capacity to work and under whose directions the latter engages in his/her activities and whose instructions he/she is bound to obey. The determination of employer is dependent on the degree of personal and economic dependence of the employee towards the enterprises involved. Generally, in a secondment arrangement, the Indian entity could be considered as the de facto and de jure employer of the expat provided it satisfies the aforesaid enumerated conditions of qualification as the employer. Accordingly, if reporting, appraisal, supervision of the expat is with the Indian entity, responsibility for the payment of salary is also of the Indian entity and the expat is bound by the employment policies of the Indian entity, then one may conclude that in substance the expat is an employee of the Indian entity. However, the revenue authorities have time and again analysed the above scenario and held that on account of the presence of right of lien and continuation of legal employment with foreign entity for foreign social security purpose, the expat would in substance an employee of the foreign entity. It may be noted that the focus on the right of lien on employment with the foreign entity although influenced by the apex court decision in case of Morgan Stanley, practically in the scenario of global mobility, expats may always be inclined to retain their post-retirement benefits in their home country while performing employment chores in another country. The Delhi High Court in the ruling of Centrica India Offshore (P.) Ltd held that employees seconded by the overseas group entity to the Indian entity do not become employees of the Indian entity, but continue to remain employees of the group entity during their secondment period. Accordingly, presence of the employees of the foreign group entity in India constitutes its virtual extension/service PE of the foreign entity in India. Additionally, services provided by the seconded employees are 'technical or consultancy' in nature and also 'make available' knowhow to the taxpayer for future consumption. In light of the above findings, it was taxed as 'Fees for Technical/Included Services' under the tax treaty. In this case, though the secondees were working under the control and supervision of the Indian entity, there was a right of lien with the seconded employees over their employment with the foreign entity. Further, while employees were seconded on the payroll of the Indian entity, they continued their employment with the foreign entity for social security purpose and the foreign entity disbursed the salary of these secondees from the foreign bank account which was later reimbursed by the Indian entity. Apart from the right of lien and disbursement of salaries of expats, moreover, the seconded employees had a right to recover their salary from foreign entity and not from the Indian entity. Based on all the aforesaid factors, the High Court upheld that the foreign entities had a service PE in India. A special leave petition (SLP) was filed by the taxpayer before the Supreme Court against the said High Court order which was dismissed by the Supreme Court. It may be noted that although the dismissal of the SLP by the Supreme Court bears negative inference on the merits of case, such dismissal may not be equated as a ruling of the Supreme Court in this regard. The latest ruling of the Mumbai Tribunal in the case of Morgan Stanley International has analysed the aforesaid secondment arrangement in detail and has held that if deputed employees continue to be on payroll of the overseas entity or continue to have their lien over their job with overseas entity and are rendering their services in India, service PE will emerge. Further, the tribunal also discussed about the computation of business income of the PE under Article 7, wherein it was held that the salary paid by the taxpayer to the seconded employees would amount to cost of the taxpayer, which ought to be allowed as deduction while computing the business profits of the PE in India. Interestingly, a divergent view has been taken by the Delhi High Court in the case of E-Funds IT Solution wherein it has been held that the seconded expats are working under the control and supervision of e-Fund India and as a result, there would be no service PE on account of the presence of seconded expats in India. The High Court did not discuss about the right of lien or continuation of employment with foreign entity for social security purpose but based its views on the substantive facts such as the control and supervision of the expats during their stay in India. Further, in case of HCL Infosystems Ltd, the Delhi High Court held that the reimbursement of salary and related employment cost of the deputed technical personnel was on a cost-to-cost basis and did not involve any element of profit. During the deputation period, the services of the technicians deputed to India were fully at the discretion of the Indian company. The tribunal had observed that under the arrangement, the command and control over the technicians remain with the Indian company and the payment was rightly treated as salary borne by the Indian company. On this basis, according to the High Court, the Indian company was justified in not deducting any tax at source from the reimbursement of salary costs to the foreign company. Based on the above, one may observe that there are divergent views on the issue of secondment of expats to the Indian entity and it may be possible that the same court may adopt two different views on the same subject matter, being a matter of interpretation and also a factually-driven issue. Apart from the corporate tax issues, the secondment arrangements have received some flak from the service tax authorities as well who has tried to bring the said arrangement under the reach of manpower supply services. However, the recent Allahabad High Court in case of Computer Sciences Corporation India Pvt Ltd has held that service tax shall not be applicable in cases of secondment of staff by the group company to its Indian company. The rationale behind the said judgment was that manpower supply services should be provided by a manpower recruitment or supply agency, and moreover, such a service has to be in relation to the supply of manpower. The High Court ruled that there would be no service tax implications under the secondment arrangement. The Gujarat High Court in the case of Arvind Mills Ltd has also confirmed the non-applicability of service tax in secondment arrangements. It can be seen that there are various judicial decisions on the subject matter, but most decisions spark off debate than resolve issues. Currently, till certain issues on secondment, as discussed above, are settled by the Supreme Court or through some amendment to the tax laws, secondment arrangements ought to be structured carefully to mitigate unwarranted tax exposures in India. At a time when India is looking at being the preferred investment destination, unnecessary tax disputes on a key area of secondment would have been best avoided. Disclaimer: The opinions expressed within this article are the personal opinions of the author. 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Opinion: Secondment of Employees - Would Ambiguity on Taxation Persist for Perpetuity?

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