Facts
Centrica India Offshore Private Limited (CIO), an Indian Company, is a wholly owned subsidiary of Centrica Plc, UK
Centrica Plc and its other overseas subsidiaries outsourced their back office support functions to third party vendors in India.
CIO was set up to provide a locally based interface between the overseas entities and the Indian service providers and received service charges at cost plus 15% under a service agreement with the overseas entities.
A secondment agreement was simultaneously entered into between CIO and the overseas entities under which employees of the overseas entities were seconded to Centrica India.
CIO was to bear all the costs of the monthly remuneration of the secondees which the overseas entity would recharge to CIO on a monthly basis.
Issues before the Authority for Advance Rulings
Whether the amount paid by CIO to the overseas entities under the secondment agreement is in the nature of income accrued to the overseas entities?
If yes, whether tax is liable to be deducted at source by CIO on such payments?
Observations and Ruling Authority for Advance Rulings
On payment being construed as income
There is no obligation on the applicant to pay the salaries of the seconded employees in terms of the agreement.
The right of the employee to claim salary is as against his employer, the overseas entity, and the obligation to pay the salary is that of the overseas entity. The seconded employee could not claim his salary from the applicant.
At the point of time when the applicant pays the amount to the overseas entity, the event of paying the salary has already taken place and the employee concerned has no title over that amount which is made over by CIO to the overseas entity.
The overseas entities, after they fulfill their obligations seek an equivalent amount from the applicant for the purpose of recouping the amount paid which they were under a legal obligation to pay - this cannot be held to be a case of diversion of income by overriding title.
The amount paid has to be treated as income in the hands of the overseas entities.
On the payment being construed as fees for technical services
The secondee employees are all rendering managerial services. Hence, the consideration paid by the applicant to the overseas entities for getting the services of these employees cannot be held to be fees for technical services as only technical or consultancy services within the purview of „fees for technical services‟ under the India-UK tax treaty.
On the overseas entities having a service PE in India
The employees continue to be the employees of the overseas entities and their employer continues to be the overseas entity concerned.
The employees are rendering services for their employer in India by working for a specified period for a subsidiary or associate enterprise of their employer.
This will give rise to a service PE within the meaning of Article 5 of the India-UK tax treaty.
On tax to be deducted at source
The payment by the applicant under the agreement would be income accruing to overseas entities in view of the existence of a service PE in India and tax is liable to be deducted at source from such payment.
Conclusion
Depending on the facts of the case, secondment of employees by an overseas entity to an Indian subsidiary may lead to creation of a service PE in India and consequent deduction of tax at source, if the overseas entity continues to be the „employer‟ of the seconded employee and is responsible for payment of salaries to the seconded employee.
Source : Centrica India Offshore (P) Ltd. (AAR No. 856 of 2010)
Centrica India Offshore Private Limited (CIO), an Indian Company, is a wholly owned subsidiary of Centrica Plc, UK
Centrica Plc and its other overseas subsidiaries outsourced their back office support functions to third party vendors in India.
CIO was set up to provide a locally based interface between the overseas entities and the Indian service providers and received service charges at cost plus 15% under a service agreement with the overseas entities.
A secondment agreement was simultaneously entered into between CIO and the overseas entities under which employees of the overseas entities were seconded to Centrica India.
CIO was to bear all the costs of the monthly remuneration of the secondees which the overseas entity would recharge to CIO on a monthly basis.
Issues before the Authority for Advance Rulings
Whether the amount paid by CIO to the overseas entities under the secondment agreement is in the nature of income accrued to the overseas entities?
If yes, whether tax is liable to be deducted at source by CIO on such payments?
Observations and Ruling Authority for Advance Rulings
On payment being construed as income
There is no obligation on the applicant to pay the salaries of the seconded employees in terms of the agreement.
The right of the employee to claim salary is as against his employer, the overseas entity, and the obligation to pay the salary is that of the overseas entity. The seconded employee could not claim his salary from the applicant.
At the point of time when the applicant pays the amount to the overseas entity, the event of paying the salary has already taken place and the employee concerned has no title over that amount which is made over by CIO to the overseas entity.
The overseas entities, after they fulfill their obligations seek an equivalent amount from the applicant for the purpose of recouping the amount paid which they were under a legal obligation to pay - this cannot be held to be a case of diversion of income by overriding title.
The amount paid has to be treated as income in the hands of the overseas entities.
On the payment being construed as fees for technical services
The secondee employees are all rendering managerial services. Hence, the consideration paid by the applicant to the overseas entities for getting the services of these employees cannot be held to be fees for technical services as only technical or consultancy services within the purview of „fees for technical services‟ under the India-UK tax treaty.
On the overseas entities having a service PE in India
The employees continue to be the employees of the overseas entities and their employer continues to be the overseas entity concerned.
The employees are rendering services for their employer in India by working for a specified period for a subsidiary or associate enterprise of their employer.
This will give rise to a service PE within the meaning of Article 5 of the India-UK tax treaty.
On tax to be deducted at source
The payment by the applicant under the agreement would be income accruing to overseas entities in view of the existence of a service PE in India and tax is liable to be deducted at source from such payment.
Conclusion
Depending on the facts of the case, secondment of employees by an overseas entity to an Indian subsidiary may lead to creation of a service PE in India and consequent deduction of tax at source, if the overseas entity continues to be the „employer‟ of the seconded employee and is responsible for payment of salaries to the seconded employee.
Source : Centrica India Offshore (P) Ltd. (AAR No. 856 of 2010)
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