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Secondment of expatriates is essential for multinational businesses with cross-border subsidiaries relying on the talent and technical know-how of their headquarters in setting up operations. Usually, an employee of a department, branch or organisation is assigned to work in another for a specific period, either domestically or internationally, in order to help the host organisation overcome a shortfall of expertise. Secondments enable organisations to diversify their teams¡¯ skill sets while allowing secondees to accelerate their professional development.

However, such arrangements may raise income tax and goods and services tax (GST) hurdles. Indian tax authorities often consider secondment from overseas companies to their subsidiaries to be a provision of services. Typically, the salary or a part of it is paid in the home country by the overseas entity to safeguard the secondee¡¯s social security contributions. Reimbursement of such amounts by the Indian host entity can be seen as consideration paid by it for services received, which the authorities treat as taxable.

Under the Income Tax Act, 1961, and bilateral double taxation avoidance agreements, providing services through secondment may create a permanent establishment (PE) of the foreign entity in India. It will be viewed as having a fixed economic presence in India, incurring tax liability on the income attributable to such presence. The Supreme Court in held that where the secondee has a lien over their employment with the overseas entity and continues to be on its payroll, it can be seen as a service PE, except for stewardship activities to monitor operations outsourced to India.

Since the Indian entity is usually entitled to terminate the secondment but not the subsisting employment with the overseas entity, courts tend to regard the overseas entity as the ultimate employer. This is despite the Indian entity supervising and bearing the liability for the secondee¡¯s work and their remuneration. In their view, labelling the payments as reimbursements without a mark-up does not change the nature of the services provided.

However, some courts have emphasised the relationship between the Indian entity and the secondee during the secondment. Issuing an appointment letter, retaining the power to terminate the secondment, maintaining control and supervision over the secondee and having local policies govern the secondees¡¯ employment with the Indian entity. Discharge of the secondee¡¯s lien over employment with the overseas entity and deduction of tax at source by the Indian entity on salaries also help establish employment in India.

Under the GST regime, cross-border supply of a service is usually considered taxable. However, the salary paid during the course of employment is exempt. The Supreme Court in held that the skills and expertise a secondee contributed to the Indian firm should be considered as a service rendered by the overseas entity. As a result, the Indian entity¡¯s reimbursements were liable to be taxed. The control test was held to not be necessarily determinative given that the overseas entity deployed the secondees and paid their salaries. The terms of employment were as per its policies even during the secondment and the secondees returned to the overseas entity post secondment.

Because of the increased scrutiny following the NOS judgment, the Central Board of Indirect Taxes and Customs, through a 2023 circular, clarified that the NOS should not be applied mechanically and instead be based on the facts in each case, including contractual terms. Courts have also granted interim relief to taxpayers facing show cause notices demanding payment of GST and penalties.

Although the law on taxation of secondments is evolving, the aforesaid factors necessitate that the arrangements are carefully structured to ensure that the secondee is treated as the host entity¡¯s employee. The elements of the Indian entity¡¯s complete control over a secondee and their duties, as well as the overseas entity¡¯s discharge of the lien over employment with it, are key to establishing employment with the Indian entity.

Integrating the secondee into the host entity¡¯s operations, with the host entity directly paying the secondee¡¯s salary as far as practicable, may help to prevent the overseas entity from being seen as a supplier of manpower or technical services.

Agrima Awasthi is counsel, and Shivanshu Sharma and Diksha Singh are associates at Wadhwa Law Offices.