India, being the centre point in the domain of IT and ITES activities, has witnessed major inflow of finance and human resource from around the world in the last decade or so.  The multinational companies are sending their employees, having expertise in the respective fields, to help the subsidiaries set-up their presence here in India. With the aggressive stand taken by the IT Department in the recent past, the secondment of employees, though it may seem to be very simple, can lead to serious tax implications both for the Indian Subsidiary Company and the Parent Overseas Company. However, the tax obligations of the seconded employee working for an Indian company should be determined upon various factors, like the residential status he acquires while working in India, place where services are being rendered, receipt of salary in India or abroad, to suggest some. The tax obligations of the Indian and Foreign employers may not end even if seconded employee has been subject to taxes in India for salary earned as a seconded employee.   The IT department contends that reimbursement of salary of foreign employees by Indian companies is, in fact, income of foreign company in the shape of Fees for Technical services earned from India or that presence of employees of overseas company would constitute Service PE in India. This is even if the foreign employee has paid his taxes on income earned by way of salary in India. Issues involved and prevalent law – In the most common scenario, the Overseas Parent Company second their employees to Indian Subsidiary Company. The overseas employer remains the legal employer of the seconded employees and the Indian subsidiary becomes the economic employer of the said employee.  The overseas employer remains the legal employer, so that employee does not have to suffer on account of social security schemes or other employment benefits, which depend upon the continuity of the employment with the said company or in the home country. However, the Indian company becomes the economic employer, which means that employee works under direct control and supervision of the Indian Subsidiary. The overseas company is not responsible for the work and performance of the employee. The risk and reward of the work done by the seconded employee would go to the Indian Company. The Indian Company has the right to demand the replacement of the employee and parent company also retains the right to replace or terminate the employee. However, for administrative convenience the seconded employee remains on the payroll of the overseas company. The parent overseas company pays salary to the seconded employee which is reimbursed on cost-to-cost basis by the Indian Subsidiary. Certain local benefits, such as accommodation, local conveyance, etc., are provided locally by the Indian Subsidiary to such seconded employee. Tax implications in such cases  – Now, in the above said case, even if employee is paying taxes on the income earned in India by way of salary, the following tax implications may arise:- Withholding tax obligations on the Indian Subsidiary in case of reimbursement of salary of seconded employee on the contention that reimbursement of salary to Overseas Company is actually, payment for Technical or Consultancy Services Contentions of the Revenue Department – Revenue has been contending on the following lines to establish that reimbursement of salary has to be treated as Fees for Technical Services:-

(i)		That reimbursement of salary by the Indian Subsidiary to the parent overseas company is actually payment for technical or managerial or consultancy services provided by the overseas parent company.
(ii)		That services performed by the seconded employee are actually performed on behalf of the parent company and not as an employee of the Indian Company.
(iii)		That the amount received by the parent company is, in fact, receipt of income and further, that payment of the salary is only application of the income on which employee is liable to tax as per his nature of income and residential status.
(iv)		That Indian subsidiary is not legal employer and, therefore, payment by the Indian company to overseas company could not be construed to be reimbursement of the salary.
(v)		That the parent company has the right of dismissal and further, in the absence of obligation of the Indian company to pay salary to the employee, it cannot be said to be an economic employer.
(vi)		That in the secondment arrangement, the right of the seconded employees to seek their salaries is against the parent overseas company and they cannot claim it as a right against the Indian Company.

Contentions of the Courts and the AAR – Though in few rulings the above stand of the revenue has found favour with the Courts and the AAR [such as in Verizon Data Services India(P.) Ltd., In re¹ (AAR – New Delhi), AT&S India (P.) Ltd., In re² (AAR – New Delhi), Target Corporation Indian (P.) Ltd., In re³ (AAR – New Delhi)], yet in most of the cases [like Abbey Business Services (India) (P.) Ltd. v. Dy. CIT⁴ (Bang. – Trib.), Dy. DIT v. Tekmark Global Solutions LLC⁵ (Mum. – Trib.), IDS Software Solutions India (P.) Ltd. v. ITO (International Taxation)⁶ (Bang. – Trib.)(URO), Cholamandalam MS General Insurance Co. Ltd., In re⁷ (AAR – New Delhi)], the Courts and the AAR have ruled that the said reimbursement of the salary on cost-to-cost basis is not chargeable to tax in India and cannot be termed as Fees for Technical Services on the following grounds:-

(i)		That agreement between the Indian Company and overseas parent company is an agreement for secondment of staff and not agreement for rendering of services by the parent overseas company, hence, the reimbursement of salary on cost-to-cost basis cannot be regarded as Fees for Technical services.
(ii)		That the Indian Subsidiary company exercising the rights to hire or accept secondees, right to control, supervise, instruct and terminate secondees from secondment along with being liable on its own account for their performance is real and economic employer of the secondees as against the foreign company which is only a legal employer.
(iii)		That in this context, substance should prevail over the form, i.e., employer should be the person who is having the rights on the work produced and bearing the relative responsibility and the risks.
(iv)		That parent company opts to remain legal employer to protect their interest relating to benefit of pension contributions, social security and other benefits under laws of the home country.
(v)		That overseas parent company does not render any service to the Indian enterprise and is only paying salary to the seconded employee for administrative convenience. The amount reimbursed by the Indian company on cost-to-cost basis would only be reimbursement of salary and, therefore, no sum is chargeable to tax in India which requires deduction of tax at source.
(vi)		Since seconded employee works under direct control, supervision and instructions of the Indian Company and does not render any service on behalf of parent overseas company, the secondment would not tantamount to rendering any technical, professional or consultancy service.

Revenue has to prove that the arrangement has been disguised as a secondment arrangement – Hence, it is clear from the above discussion that if revenue is able to prove that seconded employee, in actual, is working under the direct supervision of the parent overseas company and is providing technical or managerial services to the Indian subsidiary and the arrangement has been disguised as a secondment arrangement, then it may lead to withholding tax obligations on the Indian Subsidiary. However, if it is a genuine case of secondment of employees and intention of the parties is clear from the arrangement, then mere reimbursement on cost-to-cost basis would not tantamount to fees for technical services, as in such a case the Indian Subsidiary becomes the economic employer of the seconded employee, though he is drawing salary from parent overseas company for administrative convenience. The concept of ‘economic employer’ as per OECD Model Convention  – As per OECD Model Convention also concept of economic employer has to be taken care of in cross-border secondment of employees and substance over form has to be seen to determine as to who is the real employer of the seconded employee. The Concept of ‘make available’ – In certain DTAA’s there is concept of ‘make available’ of technical services, i.e., obligation to withhold tax under the Indian Income Tax Act on recipient of the service would arise only if the receiver of the service is able to use the service itself in future, without the help of service provider, once the services have been rendered by the service provider. It has been held by the Hon’ble Bangalore Tribunal in the case of Abbey Business Services (India) (P.) Ltd. (supra) that the reimbursement of salary cannot be termed as Fees for Technical services, if the same does not pass the test of ‘make available’ concept. The Hon’ble Tribunal relied upon the judgment of the Hon’ble Karnataka High Court in case of De Beers India Minerals (P.) Ltd. v. CIT⁸ for coming to this conclusion Constitution of Service PE in India due to presence of employees in India – In the case of ­ Centrica India Offshore (P.) Ltd., In re (AAR – New Delhi)⁹, the revenue successfully contended that presence of the employees of the foreign company for rendering services for their overseas employer in India by working for specified period would create a Service PE and, hence, parent overseas company would become liable for taxes in India for amount received as reimbursement of salary under the head ‘business income.’ However, the courts have held that in case of secondment agreement the Indian Company is the real and economic employer and services are rendered by employee directly to the Indian company and not on behalf of foreign company and, hence, presence of employee in Indian would not lead to Service PE in India (like in Tekmark Global Solutions LLC case (supra)).  To Conclude – It is necessary that intention of the parties involved should be clear while engaging in the secondment agreement as to control, supervision, risk and responsibility, right to termination, etc. Only then risks of services being regarded as technical services or Service PE would be mitigated. If the foreign employee severs the relation with the parent overseas company and becomes full time employee of Indian Subsidiary, then there is no risk of parent company being regarded as a Service PE in India or providing technical services through employee to Indian company. However, due to protection of the interests of the employee in home country relating to social security, etc., secondment arrangements are entered into. Hence, such agreements should be supported by requisite documentation, so that actual purpose is clear and is not doubtful. Source : taxman.com