TDS OBLIGATION ON REIMBURSEMENT OF SALARY IN CASE OF SECONDMENT ARRANGEMENT OF FOREIGN EMPLOYEES

             1.  INTRODUCTION

In this era of rapid globalization, the multinational companies have been establishing their business all over the world. India, being one of the most potential market, has witnessed massive investments from the foreign companies. With increased investment inflows, our country has also seen immense inflow of experts from the various overseas companies . The human resource of any company is its back bone.It is the expertise of their employees which has enabled the overseas companies expand their corporations the world over . The multinational companies are sending their employees, having expertise in the respective fields, to help the subsidiaries set up and run their business more efficiently.

 With the taxmen in India becoming more and more aggressive in their approach, the concept of secondment has also brought with itself various tax disputes. Even if the foreign employee has paid his taxes for income earned by way of salary in India , the Indian tax authorities are going one step further in contending that reimbursement of salary of foreign employees by Indian companies is in fact income of foreign company in shape of Fees for Technical services earned from India or that presence of employees of overseas company would constitute Service PE in India.

 The secondment of employees , though may seem to be very simple , can lead to serious tax implications both for the Indian Subsidiary Company and the Parent Overseas Company. The tax obligations of the seconded employee working for Indian company would depend 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 etc. However the tax obligations of the Indian and Foreign employer may not end even if seconded employee has been subject to taxes in India for salary earned as seconded employee.

2.     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 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 said company or in home country. However the Indian company becomes the economic employer which means that employee works under direct control,direction and supervision of the Indian Subsidiary .The overseas company does not become 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. is provided locally by the Indian Subsidiary to such seconded employee.

 Now in the abovesaid case, even if employee is paying taxes on the Income earned in India by way of salary , the following tax implications may arise:-

2.1   Withholding tax obligations on Indian Subsidiary in case of reimbursement of salary    of seconded employee on the contention that reimbursement of salary to Overseas Company is ,in actual, payment for Technical or Consultancy Services.

2.1.1 Revenue has been contending on 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 employee of the Indian Company.

(iii)              That the amount received by the parent company is in fact receipt of income and further 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 of the employee is not legal employer and therefore payment by 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 absence of obligation of 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 right against Indian Company.

2.1.2  Though in few rulings , the above stand of the revenue has found favour with the Courts and AAR (such as Virizon Data Services India(AAR)¹ ,AT&S India (P) Ltd.(AAR)², Target Corporation Indian (P) Ltd.(AAR)³) , however in most of the cases (like Abbey Business Services (India) Pvt. Ltd.(Bang-Trib)⁴, Tekmark Global Solutions LLC (Mum-Trib)⁵,IDS Software solutions India(P) Ltd. (Bang Trib)⁶ ,Cholamandalam (AAR)⁷), the Courts and 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 costs to cost basis cannot be regarded as Fees for Technical services.

(ii)     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)             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 home country.

(v)     That overseas parent company does not render any service to 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.

2.1.3  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 providing technical or managerial services to the Indian subsidiary and the arrangement has been disguised as secondment arrangement, then it may lead to tax withholding 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.

2.1.4  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.

2.1.5  Concept of 'make available' :- In certain DTAA's there is concept of 'make   available' of technical services i.e. obligation to withhold tax under 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) Pvt. Ltd⁴. that the reimbursement of salary cannot be termed as Fees for Technical services if the same do not pass the test of 'make available' concept. The Hon'ble Tribunal relied upon the judgement of Hon'ble Karnataka High Court in case of De Beers India Mineral Ltd ⁸. for coming to this conclusion.

2.2  Constitution of Service PE in India due to presence of employees in India:

In the case of ­­Centrica India Offshore (P) Ltd. (AAR)⁹, the revenue has 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 in this case again the courts have held that in case of secondment agreement the Indian Company is real and economic employer and services are rendered by employee directly to 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 (Mum-Trib)⁵

3.     CONCLUSION

Hence 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 parent overseas company and becomes full time employee of Indian Subsidiary then there is no risk of parent company being regarded as Service PE in India or providing technical services through employee to Indian company. However due to protection of interests of employee in home country relating to social security etc. secondment arrangements are entered into.  Hence such agreements have to be entered into supported by requisite documentation so that actual purpose is clear and not doubtful.

Case Laws referred:-

1.      Virizon Data Services India (2011) 337 ITR 192 (AAR)
2.      AT&S India (P) Ltd. (2006) 287 ITR 421(AAR)
3.      Target Corporation Indian (P) Ltd. (2012) 348 ITR 61 (AAR)
4.      Abbey Business Services (India) Pvt. Ltd.(2012) 23 taxmann.com 346(Bang-Trib)
5.      Tekmark Global Solutions LLC(2010) 131 TTJ 173 (Mum-Trib)
6.      IDS Software solutions India(P) Ltd.(2009) 122 TTJ 410 (Bang Trib)
7.      Cholamandalam MS General Insurance Co. Ltd. (2009) 178 Taxmann 100 (AAR)
8.      De Beers India Mineral Ltd. [2012] 21 Taxmann .com 214(Kar.)
9.      Centrica India Offshore (P) Ltd.(2012) 206 Taxmann 545 (AAR)

CA.ARUN GUPTA
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Email: arunaru@yahoo.com