Secondment of employees – ongoing debate on taxability
In a secondment arrangement, an employee of an overseas company is deputed for a specified period to an Indian company, where he works for the Indian company. Such arrangements are generally entered between group companies and the main purpose is to utilize the personnel talent available in any other company in order to set up, expand, and grow the Indian businesses. During the period of secondment, the employee works on the projects of the Indian company and the duties and responsibilities of the seconded employees are generally defined by the Indian company. As the services are provided by the employees to an Indian Company, the salary earned by the employee is taxed in India and Indian host employer remits the withholding tax on such salary as well.
In a secondment arrangement, many a times from administrative convenience and uninterrupted availability of social security benefits to employees in an overseas country (i.e. home country), the overseas company pays the salary of the seconded employee and Indian company subsequently reimburses the cost to the overseas company.
The real dispute in this context/ arrangement concerns the taxability of reimbursement of the salary by the Indian company to its overseas company. The assessee generally contends that the payment to the overseas company as reimbursement of salary costs would not liable to tax in India in the absence of any income element without any element of markup. Whereas the tax department has been alleging that the payment is for services rendered by the overseas entity through its employee and hence, taxable as Fees for Technical services (FTS). Multiple contrary rulings of various courts have reviewed employment and secondment agreements and concluded on the taxability of these payments.
Judicial Precedents
The most relied upon decision by the tax department is the Delhi High Court decision which was affirmed by Supreme Court in the case of Centrica India Offshore (P.) Ltd1, which held that the reimbursement made by an Indian entity to the overseas entities was taxable in India as FTS/ Fees for Included Services (FIS). In this case, the High Court reviewed the secondment arrangement and the relevant agreements and observed as follows:
- The duties and responsibilities of the employees were under the control of the Indian entity and the overseas entities were not even responsible, if there were any errors or omissions on the part of the employees. Also, the services were provided to the Indian entity, and the benefit or output on such services were also transferred to the Indian entity.
- These employees retained their entitlement to participate in the overseas entity’s retirement and social security plans. As per the secondment agreement, the Indian entity could not terminate the employment of the employee and could only terminate the secondment arrangement. The employees continued to exercise lien on the employment with the overseas employer.
- Given the above observations, the High Court concluded that the in-effect payment by the Indian entity to the overseas entity was for the services utilized of the employees of the overseas entity and was not merely a reimbursement and concluded that the payment by the Indian entity to the overseas entity was taxable in India as FTS/FIS.
In a Supreme Court decision2, in the context of service tax law, the Apex court held that such transactions would be considered as service under the head ‘manpower recruitment and supply service and thus, service tax/ GST would apply on the same. This has further aggravated the dispute further and the moot issue resulting in the taxability dispute is who is the employer of the seconded employee. The Apex Court interpreted the concept of a secondment agreement taking note of the contemporary business practice and held that the traditional control test to determine who the employer is not the sole test to be applied. The facts noted by the Supreme Court were as follows:
- The overseas entity seconded these employees in relation to its own business and the services, roles, and responsibilities of such employees were controlled by the Indian entity. They were on the payroll of the overseas entity for the continuity of their social security benefits and the Indian entity could only terminate the secondment arrangement.
Given these observations, it was concluded by the Apex court that the assessee was a service recipient of the overseas group company concerned, which can be said to have provided manpower supply service eligible to service tax.
While the decision was in the context of Service tax law, it has been pronounced by the Supreme Court and hence, is the law of the land. Now the question still arises that if a payment is characterized as payment for service under one statutory law, could it be distinguished and held to be reimbursement in the Income tax law?
However, the story goes both ways and there are rulings by various courts contrary to the above ruling, basis the facts and circumstances of each case.
Further, another interesting aspect to be considered here is that, even if it is considered as service, can an assessee contend that the said services would not be considered as FTS/FIS as per the provisions of the Income Tax Act,1961 (ITA) or the respective Double Taxation Avoidance Agreement(DTAA)? Similar view has been held by the Karnataka High Court, in the case of Flipkart Internet (P.) Ltd.3, that the salary reimbursed by the Indian Entity to the Overseas entity was not FIS as the services did not satisfy the ‘make available’ condition in the DTAA. Thus, while the payment was characterized as a service payment, the assessee could still avail of the beneficial provisions of the tax treaty regarding ‘make available’.
So, it may be inferred that even if it is considered as service payment under the service tax/GST law, the applicability of Income Tax provisions would depend on facts and circumstances of each case.
Similar findings have been made in the case of BOEING India (P.) Ltd.4 and M/s. Google LLC vs. JCIT (OSD) (IT)/DCIT (IT)5.
Our Comments
Concluding the discussion, it can be observed that the issue of taxability of the secondment arrangement is a litigative issue and will depend on the facts and circumstances of each case. The agreements and terms of the secondment would define who can be held as liable to tax for the said transaction. A recent Karnataka High Court6 ruling passed in favor of assessee is again appealed to the Supreme Court by the revenue. It would be interesting to see what the Court holds.
1. Centrica India Offshore (P.) Ltd vs CIT [2014] 364 ITR 336 (Delhi)
2. C.C.,C.E. & S.T. Bangalore v. Northern Operating Systems (P.) Ltd. [2022] 138 taxmann.com 359 (SC)
3. Flipkart Internet (P.) Ltd. Vs. DCIT [2022] 139 taxmann.com 595 (Karnataka)
4. [2020] 121 taxmann.com 276 (Delhi - Trib.)
5. IT(IT)A No. 167/Bang/2021
6. [2020] 122 taxmann.com 174 (Karnataka)