How Secondment employees creates PE

In a recent case, the Mumbai Tribunal held that where the taxpayer has seconded its personnel to work under the direct control and supervision of the Indian company and was not providing any other service to the Indian company, it did not create a permanent establishment (PE) in India under article 5 of the India-USA double taxation avoidance agreement (“tax treaty”).

Facts of Case

• The taxpayer, a tax resident of the United States, entered into an agreement with an Indian company for the secondment of its personnel to the Indian company.

• As per said agreement, the seconded personnel would work under the direct control and supervision of the Indian company. The personnel would remain on the payroll of the taxpayer during the period of secondment.

• The Indian company was allowed to send the personnel back to the taxpayer if it was not satisfied with the work or efficiency of the personnel.

Arguments Put Forward by Taxpayer

• The taxpayer contended that only the personnel were seconded to the Indian company and no services were provided. Therefore, a service PE was not created under the provisions of the tax treaty.

• The amount received from the Indian company was the reimbursement of the salary cost incurred by the taxpayer in respect of the seconded personnel.

• Therefore, the same was not taxable in India since it did not have a PE in India.

Assessing Office’s Decision

The Assessing Officer held that the taxpayer rendered services to the Indian company through its seconded personnel and, thus, it had created a PE in India as per provisions of the tax treaty.

Commissioner of Income-tax (Appeals) [CIT(A)] Decision

The CIT (A) held that it was clear from the agreement that the taxpayer merely seconded its personnel and no services were provided to the Indian company. Accordingly, in the absence of a PE for the taxpayer in India, the consideration received by the taxpayer from the Indian Company was not taxable as per the provisions of the tax treaty.

Tribunal’s Ruling

• The Tribunal observed that the taxpayer only seconded its personnel to the Indian company, which will supervise and control such personnel. From the agreement entered into by the taxpayer with the Indian company, it is clear that such personnel were not provided to render any technical services to the Indian company.

• The seconded personnel were, for all practical purposes, employees of the Indian company and they carried out work allotted to them by the Indian company. The taxpayer was not exercising any control over the activities or the work to be performed by such personnel. Further, the Indian company had a right to remove the personnel from the premises.

• The amount received by the taxpayer from the Indian company was reimbursement of the cost incurred by the taxpayer in respect of such personnel. When the services rendered by the personnel were independent of and not under the control of the taxpayer, the seconded personnel cannot constitute a PE of the taxpayer in India.

• Accordingly, the Tribunal held that a Service PE was not created under the provisions of the tax treaty. Hence, the amount received by the taxpayer was not taxable in India.

• Further, the Tribunal observed that even if it is assumed that there is a PE in India, there is no profit accruing from the activities in India as the taxpayer was paid only the actual salary paid by them in advance to the seconded personnel. The Tribunal also relied on some judicial precedents wherein it was held that income did not arise in the reimbursement of expenditure.

TaxbyManish Note

It is pertinent to note that the Supreme Court in another landmark case3 held that in the case where the foreign company is responsible for the work done by the seconded personnel and the seconded personnel either continue to be on the payroll of the foreign company or has a lien on the employment with the foreign company, a Service PE of the foreign company can emerge in India.

This ruling has followed the principle laid down by the Supreme Court ruling that since the taxpayer was not responsible for the work of the seconded personnel, who worked under the direct supervision and control of the Indian company, it did not create a Service PE of the taxpayer company in India.