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2020-04-15
Multinational companies often depute their employees overseas to perform certain assigned activities, to provide technical assistance, or provide skill-development opportunities to employees etc. Reimbursement of salary costs of such ‘Seconded Employees’, unless carefully structured, can result in serious tax implications, both for the Indian subsidiary and the overseas company.
In this regard, Dharan V. Gandhi ( Advocate) in Part 1 of this 3 parts article series, deals with the tax implications in respect of payment made by Indian companies to their overseas counterpart for secondment of employees, more particularly employees deputed at senior positions. In Part 2, the author shall evaluate the angle of reimbursement vis-a-vis FTS and Part 3 deals with the angle of the secondment transaction vis-a-vis constitution of a Permanent Establishment
“Secondment of employees and tax litigation – A perpetual battle" – Part 1
The issue surrounding secondment/ deputation of employees has been swaddled with controversy. Department and the assessees have constantly tussled over this issue over the past many years leading to protracted litigation. In this article, I have endeavoured to deal with the tax implications in respect of payment made by Indian companies to their overseas counterpart for secondment of employees, more particularly employees deputed at senior positions.
Let us first understand the basic facts surrounding this issue. Many multinational companies (‘MNCs’) have spread their businesses worldwide. In order to give the initial push and help set up the operations, maintain the requisite standards and secrecy and provide technological inputs, they generally depute their human resource to their group companies in other countries. The general modus operandi in this regard is as under:
i. The seconded/ deputed employees (‘secondees’) are on the payroll of the foreign entity and remain to be so.
ii. Secondees are deputed to group entity in India. They are mainly assigned top managerial positions and they do managerial and technical work.
iii. Secondees work under the direct control or supervision of Indian company. Further, such assignment is normally for a long period of time.
iv. Secondees continue to receive their remuneration including social security benefits from the foreign company, which is offered to tax by such secondees in India.
v. Indian company reimburses the salary cost to the foreign entity without any mark up.
vi. Once the term of secondment is over, the secondees return back to the foreign country.
The Indian entity and the foreign company maintains that such payment made by Indian entity to the foreign company is not taxable in the hands of the foreign entity as the amount paid is mere reimbursement of expenses. Resultantly, it does not constitute income in the hands of the foreign company. Whereas, the income tax department feels that such payment is in the nature of ‘Fees for technical services’ (‘FTS/ FIS’) and therefore, the foreign company has to pay tax on the same and the Indian entity has to deduct tax on such payment.
Let us test some of the propositions in this regard as under:
i. Whether the Indian company is the real employer of the secondees and therefore, no income arises to the foreign company?
ii. Whether no services are rendered by the foreign company and therefore, no income arises to the foreign company?
iii. Since the employee’s salary is taxed in India, the foreign company need not be called upon once again to pay tax on such income?
iv. Whether payments are mere reimbursement of expenses and no tax can be levied on such payments?
v. Whether such payments are in the nature of FTS? If yes, does it satisfy the condition of ‘make available’ clause?
vi. Whether any permanent establishment (‘PE’) is constituted in India by the secondees?
vii. If a PE is constituted, then how to compute income?
viii. Whether any transfer pricing adjustments are required in this regard?
The discussion in the ensuing part of the Article is with a basic caveat that applicability of each proposition will depend upon the facts of the case, terms of the secondment agreement and provisions of Double Taxation Avoidance Agreement (‘DTAA’).
Substance over form – Indian company is the real employer
Time and again our Courts have held that one has to prefer substance over form. If a secondment transaction is considered from this standpoint, it becomes clear that though on paper, the employer of the secondee is the foreign company but the secondee is working for the Indian company, he is reportable to the Indian entity and is under the direct control and supervision of Indian company. Further, even his salary is borne and paid by the Indian company. Also, secondment agreement generally contains a clause that the foreign company shall not be liable for the work of the secondee. In such a case, one has to consider the Indian company as the employer of the secondee by ignoring the foreign company. If this view is endorsed, then one may conclude that no services are rendered by the foreign company and that tax has to be deducted on the payments made to the secondees u/s 192 of the Income-tax Act, 1961 (‘Act’).
This view has been taken in the following cases:
i. [TS-5043-ITAT-2009(Bangalore)-O]
ii. [TS-6745-ITAT-2012(BANGALORE)-O].
iii. [TS-6605-ITAT-2014(BANGALORE)-O]
iv. [TS-5164-ITAT-2010(Mumbai)-O]
This argument has been specifically rejected by the Apex Court in case of [TS-5020-SC-2007-O] and by the Delhi High Court in case of - [TS-237-HC-2014(DEL)-O]. This is basically on the ground that the employees are entitled to social security benefits of the foreign company and that on completion of secondment, the employee has to return back to the home company. Thus, such secondees have a lien on their employment with the foreign company. Further, number of other judgments have taken this stand as under:
iii. [TS-6082-ITAT-2015(Bangalore)-O]
iv. [TS-6588-ITAT-2017(Bangalore)-O]
v. [TS-6722-ITAT-2016(Bangalore)-O]
vi. [TS-6326-ITAT-2019(Chennai)-O]
One may take that this argument is now concluded against the assessee. Though, based on the factual peculiarities, one may always argue that the Indian company is the real employer of the employee, in case where the employee is also employed by the Indian Company and where such employee is entitled to social security benefits of India –See - [TS-6710-ITAT-2019(Pune)-O].
No services rendered by the foreign company
The next proposition which streams from the above argument is that the foreign company does not render any service. Mere deputing employees will not amount to any ‘service’ and for rendering ‘services’, some ‘work’ must be done by the foreign company. Further, even the secondees don’t render services on behalf of the foreign company. This view has been taken in the following cases:
i. [TS-6745-ITAT-2012(BANGALORE)-O].
ii. [TS-418-ITAT-2013(MUM)-O].
However, this argument is again rejected by the judgment in case of DIT vs. Morgan Stanley & Co Inc (supra) and Centrica India Offshore Pvt Ltd v. CIT (supra).
Thus, it may be taken that the foreign company renders services which may be either services for provision of personnel or services which the personnel provide. Again based on the factual peculiarities, one can take a diverse stand.
Employee’s salary being taxed in India, once again the foreign company cannot be taxed
An argument may be made that secondee’s salary is taxed in India as per the provision of section 9(1)(ii) of the Act. Again taxing the foreign company would result in double taxation. Though in first blush, the argument appears to be attractive, but the same contains some flaws.
Employee is a person different from a foreign company. If an income is taxable in the hands of the foreign company then the same cannot be ignored only on the ground that the employee is taxed on the same amount which is received from such company. Such a company has to pay tax on the income it has received and it can claim deduction of expenses incurred including salaries, if permissible under the Act.
Once, we narrow down to the aspect that secondees are employees of the foreign company and services are provided by the foreign company, the next step will be to understand the tax consequences of the same.
The same will be discussed in the subsequent articles Part 2.
