Secondment of employees to India – Recent jurisprudence on controversies

published on 8 September 2022 | reading time approx. 3 minutes

In the era of globalisation, Multinational Companies (‘MNC’s) attempt to mobilise additional manpower available within the group and relocate / depute them within / outside the organisation in order to leverage talent and achieve maximum efficiency. Such a temporary arrangement of relocation of employee to other country for a specified period and to work for the benefit of such relocated company is commonly termed as ‘secondment’.

In a typical secondment arrangement, Company A (say, from Germany) relocates / deputes some of its employees to Company B (in India) for a specified period to work under Company B’s direction, supervision and control. For administrative convenience, payroll may be maintained by Company A to process salary payments for such employees deputed to India. In turn, Company A would cross charge the salary for such deputed employees to Company B. Company B would reimburse such salary cross charge to Company A. There could be some variations as well to these operational modalities, where employee may be shifted to payroll of Company B or there may be a dual payroll arrangement, whereby both Company A and Company B would make partial salary payments to the seconded employee or there may be some other changes to the structure of arrangement.

Such secondment arrangements have multiple facets from direct tax, indirect tax, transfer pricing, corporate and regulatory laws perspective that need to be considered, while determining the operational modalities. The implications are relevant for Company A, Company B and the seconded employee. As such, any such secondment arrangement needs careful consideration of all such facets before the same is implemented.

Some of the common direct tax issues associated with employee secondment arrangements are as below:

Tax implications on amount received by Company A from Company B towards reimbursement of salary cross charged in respect of seconded employees;
Permanent Establishment implications for Company A in India;
Applicability of withholding tax compliances to Company A or Company B in respect of salary paid to the seconded employee;
Availability of tax exemption on account of short duration of stay in India of the seconded employee in any year.

While there are multiple tax issues noted above that need to be addressed in any employee secondment arrangement, the moot question revolves around determining the real and economic employer. If Company A is continued to be considered as real and economic employer of the seconded employee, then the work undertaken by the seconded employees for Company B would be considered as services rendered by Company A to Company B. This would trigger issues regarding taxability of amount received by Company A from Company B towards reimbursement of salary cross charged in respect of such seconded employees. Services rendered by Company A to Company B through its employees located in India could also trigger Permanent Establishment exposure for Company A in India. Further, constitution of Permanent Establishment of Company A in India could lead to denial of short stay exemption for employees visiting India for short durations. Thus, there could be a chain of interlinked issues that may get triggered, if secondment arrangement is not properly planned.

The above issues have been a matter of considerable judicial debate in India. One of the pioneer judgements, in which taxability of secondment arrangement was discussed is Morgan Stanley [2007] 162 Taxman 165 (SC). In the said ruling, Supreme Court of India had ruled that the employee of Company A would not become an employee of Company B in following scenario:

Company A retains control over the seconded employees’ terms and employment;
Company A continues to be responsible for the work of seconded employees; and
Seconded employees continue to be on the payroll of the Company A or seconded employees continue to have lien on their jobs with the Company A (while on payroll of the Company B)

Consequently, permanent establishment of Company A was upheld by Supreme Court of India in the above ruling on the basis that its employees had rendered services to Company B, while in India.

Recently, Supreme Court of India had again dwelled upon the real and economic employer issue in the case Northern Operating Systems Private Limited [2022-TIOL-48-SC-ST-LB]. While deciding upon the service tax applicability on cross charge by Company A, Supreme Court ruled that Company A was the real employer in substance of the seconded employees, in view of following operational modalities:

Seconded employees were on the payroll of Company A;
Seconded employees had to be repatriated in accordance with global repatriation policy of Company A, on cessation of the secondment period;
Termination rights in relation to employment were with Company A;
Company B only had right to reject the secondment.

Accordingly, Supreme Court held that the secondment arrangement was contract for service and thus, liable to Service Tax in India.

While the aforesaid decision was rendered in the context of Service Tax and Income Tax implications were not discussed in the said decision, given that Supreme Court has made certain specific observations about operational modalities that may trigger tax issues, the tax authorities could apply the conditions laid down in aforesaid decisions strictly that may trigger tax liabilities in the secondment arrangement, involving mere reimbursement of salary of seconded employees by Company B to Company A.

Recently, there has been another ruling in this context pronounced by High Court of Karnataka in the case of Flipkart Internet Private Limited [TS-503-HC-2022(KAR.)], wherein certain important factors were considered in relation to employer – employee relationship in secondment arrangements.

Brief Facts of the case are as follows:

Walmart Inc. had seconded four employees to Flipkart India to work for the benefit of Flipkart India. Walmart Inc. had also paid salaries of such seconded employees, which were later reimbursed by Flipkart India. Flipkart India had complied with withholding tax obligations on such salary payments in India. Flipkart India had applied to tax officer for grant of NIL withholding tax certificate to make payments to Walmart Inc. in relation to reimbursement of salary on cost to cost basis.

Tax officer held that there was no employee – employer relationship between Flipkart India and seconded employees. Tax officer also observed that services rendered by Walmart Inc. through seconded employees were in nature of technical services. Accordingly, tax officer denied NIL withholding tax certificate. Flipkart India was directed to withhold tax at applicable rate on the gross amount reimbursed to Walmart Inc.

Against the impugned order, Flipkart India filed a Writ Petition before High Court of Karnataka.

Key highlights of the high court of Karnataka Ruling:

High Court held that the proceedings for NIL withholding tax certificate were tentative in nature and tax authorities could have decided taxability of recipient (Company B) at a later stage. High Court also observed that the relevant DTAA in the facts before it had a restrictive definition of the term fees for technical services.
Though the above factors formed basis for the judgment of High Court that NIL withholding tax order should be issued, analysis provided by High Court on employer – employee relationship would be of relevance. It has given significance to the relationship between Flipkart India (Company B) and the seconded employees and listed below factors to consider Flipkart India as the employer of seconded employees would be relevant:
- Flipkart issues the appointment letter,
- Flipkart India has the power to terminate the services of employees and
- Flipkart India had established an online market place for consumer goods and is not merely acting as back support for providing support services to Walmart Inc.

Further, High Court also observed that following factors should not affect the employer – employee relationship between Flipkart India (Company B) and the seconded employees:
- Authority with Walmart Inc. to decide on the employee’s continuance with Walmart Inc. post the period of secondment, being service condition post the period of secondment;
- Payment of salary by Walmart Inc. to seconded employees;
- Walmart Inc. raised the invoice on Flipkart India after incurring secondment costs;
- Equity eligibility of the seconded employees continues to be tied with Walmart Inc., being a pre-existing benefit
The above points should provide some guiding factors in secondment arrangements. However, they may not be applied directly, since High Court had not specifically discussed these factors in light of specific observations of Supreme Court in respect of some of these factors and these observations were stated to be for limited purpose of tentative proceedings regarding withholding tax certificate. As such, these factors would need to be considered wholistically in light of observations in different judgments.

In addition to direct tax issues elaborated above, certain issues from indirect tax and regulatory perspective would also be important to address in such secondment arrangements. From GST perspective, by following the aforesaid ruling of Hon’ble Supreme Court in case of Northern Operating, the authorities may allege that GST is applicable on reimbursement of salary of seconded employee by Company B to Company A under reverse charge mechanism and may lead to disputes.

Further, Immigration (appropriate visa), social security and other regulatory aspects would also need consideration in such secondment arrangements.

Conclusion

There are various tax and regulatory challenges that can arise in a typical secondment arrangement and one issue may lead to chain reaction for other issues to crop up. The recent judgements have discussed some important aspects about operational modalities of secondment arrangement that could have a bearing on tax consequences of a secondment arrangement.

Karnataka High Court judgment in the case of Flipkart India has laid down certain important factors supporting the argument that Company B should be considered as employer of seconded employees. At the same time, it has also laid down certain factors, which should not impact the employer – employee relationship between Company B and the seconded employees. However, since it has not discussed these specific factors in light of observations of Supreme Court on some of these factors and observations of High Court were limited in context of tentative withholding tax proceedings, due precaution would need to be taken, while applying guiding factors from this judgment.

Thus, while finalizing the agreements and other documents for such secondment arrangement, a wholistic review from various tax and regulatory aspects should be undertaken to understand and mitigate the risks.