Post the economic reforms of 1991, the Indian economy was opened up to integrate with the global market, which involved cross border movement of technology, personnel, capital, equipment etc. The taxation of such cross border movement has since then, been a grey area and has come up for adjudication before the Indian courts many a times. However, all such areas of concerns even after judicial consideration of so many years are still a matter of debate and have not yet attained certainty.
Amongst others, the issue of taxation of cross border deputation of employees in today's environment is most lustrous and critical. Any kind of error or ignorance in the same may result in huge tax consequences on foreign corporate and Indian arm thereof. The quantum of tax consequence in such a case may even go upto levy of India taxes on global profits of such foreign corporate with applicable penalties under Indian domestic tax legislation.
Traditionally, in order to be cost effective, for the purpose of back office operations of a multi-national group such as accounting, invoicing, payroll management etc., foreign corporates used to incept there Indian arms to take care of such functions. Gradually, multi-national corporates, in order to be cost effective in other domains of operations, such as labour, productions etc. and to spread business wings in Indian markets started opening up long term business set ups, shops, manufacturing units etc. in India.
For the purpose of standardizing the operations of Indian arms in accordance with the multi-national group's global standards and policies, certain employees from foreign corporate used to be deputed to Indian arms to work with top management of Indian arm in India for a limited time period. In such deputation, foreign expats work under the control and supervision of Indian arm, get remuneration from such Indian arm, but continue to retain their lien on employment with original foreign employer. For administrative and logistical reasons, payment of remuneration to such foreign employee is made by foreign corporate, which, in turn, is reimbursed to them by the Indian arm.
2. Indian Revenue Authorities' view
In the aforesaid fact scenario, the Indian Revenue Authorities seek to tax the above arrangement in following manners:
- Foreign corporate (to which the employee belongs) was providing services to Indian arm vide deputation of their employee to India. Accordingly, such foreign corporate was providing technical services to Indian arm and payment of reimbursement made by Indian arm to such foreign corporate is, in fact, fees for included/ technical services, which is liable or tax in India;
- Presence of employee of a foreign corporate in India is for the business purposes of such foreign corporate, i.e., providing services to Indian arm. Accordingly, the same constitutes service PE ('Permanent Establishment') of foreign corporate in India, which exposes global profits of foreign corporate to Indian taxes.
3. Legal position
In view of the above, it is important to analyse the applicable legal position in this regard under International tax Treaties (since Treaties provide a more beneficial treatment as compared to domestic tax laws) and validity of Indian Revenue Authorities' above contention for taxing the foreign multi-national corporate in India.
Generally, service PE is formed in India, if the services provided by deputed employees do not constitute 'fees for included services', i.e., legally, such services fall outside the ambit of definition of the term 'fees for included services', as defined in the Treaty.
On the other hand, as per the Indian Treaties, services falling in the definition of the term 'fees for included services' are not taxable as such, if the same are provided vide a business presence or a permanent establishment in India. In such circumstances, the same are taxable in the same way as the revenues arising from a permanent establishment are taxed in India.
It is pertinent to note here that, under the Treaties, while, 'fees for included services' are taxed on gross basis of taxation; the revenues arising from a permanent establishment are taxed on net basis of taxation.
4. Judicial precedents on the issue
It is important to highlight the observations of the Supreme Court in the case of Morgan Stanley: 162 Taxman 165 in the context of formation of a Service PE in the case of cross border secondment/ deputation of employees, wherein, it was held that a service PE can emerge only on satisfaction of both the following conditions:
- where the activities of the multinational enterprise entails it being responsible for the work of deputationists in India, and
- the employees continue to be on the payroll of the multinational enterprise or they continue to have lien on their jobs with the multinational enterprise.
The legal position which emerges from the above Supreme Court decision is that a service PE cannot be formed if any of the following circumstance is present:
- The employees are working under the control and supervision of Indian company; or
- The employees are on the payroll of the Indian company and do not retain their lien on employment with foreign corporate.
In all the classic cases of secondment, employees work under the control and supervision of the Indian company, which implies that, there is no event for forming a service PE in India by a foreign corporate in case of cross border secondment/ deputation of employees.
The Delhi High Court in the case of Centrica India Offshore (P.) Ltd.: 44 taxmann.com 300, held that, where in terms of 'secondment agreement' entered into by Indian company with foreign corporate, employees of foreign corporate used their technical knowledge and skills for assisting Indian companies in conducting its business of quality control and management in accordance with global standards of the group, amounts reimbursed by Indian company to foreign corporate towards salaries of seconded employees amounted to 'fee for technical services' after satisfaction of 'make available' clause enshrined in the Treaty and was liable for tax in India.
The Special Leave Petition filed by the taxpayer against the above decision of the High Court has been rejected by the Supreme Court in Centrica India Offshore (P.) Ltd.: 51 taxmann.com 386 at admission stage itself without getting into the merits of the matter.
It is pertinent to point out here that the Delhi High Court while pronouncing its decision in the case of Centrica (above) had not considered its earlier decision in the case of HCL Infosystem Limited: 144 Taxman 492, wherein, on similar facts, the matter was decided in favour of the taxpayer, since the definition of 'fees for technical services' under domestic tax laws of India, specifically excludes salaries from their ambit. Even otherwise, the interpretation of term 'fee for technical services' and the 'make available' clause enshrined in the Treaty is not convincing.
In any case, in my view, the services of quality control and management constitute managerial services in nature, which can be taxed only under Article 5 read with Article 7 of the Indo-UK or Indo-Canada Treaties (relevant Treaties under consideration in Centrica case). The same, under no circumstances, can be taxed as 'fees for technical services' under the said Treaties.
Recently, the Mumbai Bench of the Tribunal in the case of Morgan Stanley International Incorporated vs DDIT: 53 taxmann.com 457, after discussing the above decision of Delhi High Court in the case of Centrica, held that, deputed employees, if continues to be on pay rolls of overseas entities or they continue to have their lien on jobs with overseas entities and simultaneously, are rendering their services in India, service PE will emerge.
The Mumbai Tribunal in the above decision also made it clear that, in such a case, where overseas deputing entity forms a service PE in India, there would be no taxability under the term 'fees for included/ technical services'.
5. My view – conclusion
In my view, in case of cross border deputation/ secondment of employees, the true and correct interpretation of the interplay of Service PE provisions (Article 5 of DTAA) and the term 'fees for included/ technical services' (Article 12 of DTAA) is yet to emerge. Article 5 and Article 12 of DTAA are mutually exclusive, since service PE cannot be formed if services qualify as 'fees for included/ technical services'. On the other hand, Article 12 of DTAA dealing with taxability of the term 'fees for included/ technical services' provides that the said Article is inapplicable if the overseas entity is providing the services under consideration through a PE in India.
No Service PE
In cases of cross border deputation of employees, considering the observations of the Supreme Court in the case of Morgan Stanley (discussed above), in my view, service PE would not be formed in India as long as employees are working under the control and supervision of the Indian company, even though such employees retain lien on their foreign employment during Indian deputation.
No FTS/ FIS
Further, there is no case for taxability of 'fees for included services' in matters of cross border deputation of employees, since, such services constitute managerial services, which are not a subject matter of taxation under Article 12 of the Treaty dealing with taxability of the term 'fees for included services'. Secondly, even otherwise, there is no make-available of technical knowledge, know-how, skills etc. in such cases.
Debate in judicial decisions
Even if as per Centrica and Morgan Stanley (Mumbai Tribunal decision), it is assumed that the services under consideration qualify as 'fees for included services'; then, in that case, in my view, there is no case for formation of a service PE, since service PE provisions specifically exclude services falling in the ambit of term 'fees for included services' (defined in Article 12 of the Treaty).
The issue under consideration is still evolving and more development and clarity on the same is expected from Indian courts in due course of time.
The above are personal views of the writer and do not represent the views of the firm.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.