India: Reimbursement Of Salaries Paid Under A Secondment Agreement Is Considered Fees For Technical Services And Attracts Tax In India

Last Updated: 3 April 2017
Article by SKP  

In a recent case1, the Bangalore Tribunal has ruled that payments made to a non-resident entity towards the cost of employees seconded by it to an Indian entity qualifies as Fees for Technical Services (FTS) and attracts tax in India. 

A secondment agreement is typically used when a person is deputed to another country for some duration and his salary is paid by the company where he is deputed to. The seconded employees work under the control and supervision of the other enterprise. However, he continues to be employed in the home country as his social security contribution is paid in his home country.

Brief facts of the case

  • The taxpayer was a tax resident of Switzerland. It entered into an 'Expatriate Remuneration Reimbursement Agreement' (secondment agreement) with 'BIAL', an entity based in India, for the secondment of skilled personnel
  • The seconded employees were working under the exclusive control and supervision of BIAL on a full-time basis
  • The secondment period varied from one year to several years
  • The seconded employees held high managerial positions and were designated as Chief Executive Officer (CEO) and Chief Compliance Officer (CCO)
  • The taxpayer was not responsible for any act or omission of the seconded employees. This responsibility was with BIAL
  • The seconded employees were receiving remuneration in foreign currency paid by the taxpayer, in addition to local currency remuneration paid by BIAL
  • The seconded employees did not have any right of continuous employment with the taxpayer after the termination of the secondment agreement
  • BAIL made payments to the taxpayer for the seconded employees after deducting taxes in India

Issue before the Tribunal

The issue before the Tribunal was whether BIAL and the seconded employees had an employer-employee relationship and therefore whether the payment made to the taxpayer under the secondment arrangement was a reimbursement of salary costs.

Taxpayer's contention

  • The seconded employees worked under the exclusive control and supervision of BIAL. Hence, there was an employer-employee relationship between the seconded employees and BIAL
  • The payments received from BIAL was a reimbursement of salary costs for seconded employees and accordingly, not taxable in India

Revenue's contention

  • The secondment agreement did not result in the creation of an employer-employee relationship between the seconded employees and BIAL
  • The payments made by BIAL were for the supply of skilled manpower and therefore, were in the nature of FTS

Observations of the Tribunal

  • As on the date of the secondment agreement, the seconded employees were employees of the taxpayer
  • The purpose of the secondment was to provide services of highly qualified and personnel with expertise
  • A similar issue was considered by the Tribunal in the case of Intel Corporation2, where on similar facts, the Tribunal had held that the secondment does not create an employer-employee relationship between the seconded employees and the entity accepting the secondment (BIAL)
  • The absence of the right of continuous employment with the taxpayer after the termination of the secondment agreement will not result in an employer-employee relationship between the seconded employees and BIAL
  • Even if the secondment period is long, it would not result in the termination of the employment relationship between the taxpayer and the seconded employees
  • Accordingly, the Tribunal held that the seconded employees continued to have an employer-employee relationship with the taxpayer
  • Furthermore, given the type of personnel seconded, the payment made by BIAL would be towards availing managerial services and would, therefore, qualify as FTS


1 Ms Flughafen Zurich AG vs Deputy Director of Income Tax [TS-96-ITAT-2017](Bang)

2 Intel Corporation Limited vs DDIT [ITA No. 1486/Bang/2013]

SKP's comments

The courts in India are consistently taking a view that a secondment agreement alone does not result in the creation of an employer-employee relationship between the Indian company and the seconded employees. This ruling also discusses other rulings pronounced in the recent past on this issue and concurs with the position taken in those rulings. This decision is also in line with the decision of the Delhi High Court in the case of Centrica1, against which, the Special Leave Petition filed by the taxpayer has been dismissed by the Supreme Court of India.

Under international tax jurisprudence, the concept of 'economic employer' has been commonly accepted where the entity engaging the seconded employee is considered the employer in the real sense (economic employer). However, Indian courts appear to be laying more emphasis on the 'legal employer' test.

When the seconded employees are considered employees of the non-resident enterprise, it could also give rise to Permanent Establishment (PE) exposure for the non-resident enterprise in India and the associated tax consequences could follow. However, this decision is silent on this matter.

Multinational enterprises should note the tax incidence in India in their existing and proposed secondment arrangements. Furthermore, from an Indian taxpayer's perspective, it is also important to ensure that the appropriate taxes are withheld on payments made under secondment arrangements.


1 Centrica India Offshore Private Limited vs DCIT [364 ITR 336](Del)

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.

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