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India: Ruling on seconded employees creating Service PE in India

Rajendra Nayak
Aastha Jain
Recently, the Delhi High Court (HC) ruled on the tax implications arising from the secondment of employees to India in a case involving Centrica India Offshore Private Limited (Taxpayer). Taxpayer is a company incorporated in India and is a subsidiary of a UK Company (UK Parent). UK Parent has two other subsidiaries in UK and Canada (collectively the Group Entities) engaged in the business of supplying gas and electricity to consumers across the UK/Canada.

Group Entities outsourced their back office support functions to third party service providers (Vendors) in India. Group Entities engaged the Taxpayer under a service agreement (SA) to act as their local interface with Vendors and to ensure that Vendors complied with the quality guidelines. Further, under a secondment agreement, Group Entities seconded some employees (assignees) to assist the Taxpayer in fulfilling its role under the SA. The salary of the assignees was disbursed overseas by Group Entities and thereafter recovered from the Taxpayer. HC adjudicated on the issue of taxability of payments made by the Taxpayer to Group Entities.

The HC adopted a substance over form approach and held that Assignees continued to remain employees of Group Entities during the secondment period for the following reasons:

  • Taxpayer was not formally obliged to pay salary to Assignees. Further, Assignees could recover their salary only from Group Entities.
  • Taxpayer had no right to terminate legal employment of Assignees with the Group Entities.
  • Employment with Group Entities was permanent. Assignees were not 'released' from it and they were to return to the Group Entities after completion of the secondment.
  • The Assignees participated in retirement and social security plans of Group Entities.
  • Legal employment with Group Entities could not be disregarded as they were not conduits and the relationship was not a false facade.

Accordingly, payments made by the Taxpayer were for services rendered by the Group Entities through Assignees and it qualified as fees for technical services (FTS) under the India-UK treaty. Further, as the Assignees were imparting their technical expertise and 'making available' know-how to Taxpayer's employees for future consumption, payments qualified as 'fees for included services' under the India-Canada treaty. The HC accorded that the 'make available' condition in the UK treaty is distinct from the rest of the FTS provisions and need not be satisfied. Furthermore, the HC relied on the Indian Supreme Court's decision in the case of Morgan Stanley and held that Assignees constituted a Service PE for Group Entities in India.

In line with other decisions of Indian Courts, this decision endorses a substance over form approach for determination of employer, though HC has overlooked some established principles in favour of certain factors of employment. Further, HC's interpretation of the 'make available' clause under the UK treaty as well as its conclusion on Service PE could be prone to an alternative view. While the views adopted by the HC are debatable, litigation on account of it cannot be ruled out.

Rajendra Nayak ( and Aastha Jain (
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