Why Employee secondment matters for Global Capability Centres (GCC) & MNCs in India
Cross border secondment is commonly used by Global Capability Centres (GCC) & MNCs in India by their foreign holding companies:
- To train employees on technical skills
- To facilitate technology implementation
- To deploy employees for project execution
- To ensure applicability of global standards in their Indian group of Companies
Background of the Case
Ernst & Young U.S. L.L.P. (‘EY US’ hereinafter) is based in the United States of America and is a member of the Ernst & Young (EY) network
There are three EY entities which operate in India (EY India), they are as under:-
(i) EY GBS (India) Pvt Ltd.
(ii) EY Global Delivery Services India LLP (EYGDS) and;
(iii) Ernst & Young LLP.
EY US has sent some employees on secondment to EY India for imparting technical skills to its Indian employees. EY India has reimbursed the cost of those employees to EY US on cost to cost basis on account of secondment of employees.
Employment offered by the EY India entities is for a limited period of time of 2-3 years, and on completion of their tenure, the said employees were repatriated back to the EY US.
However, for the convenience purpose, these employees are receiving salaries from EY US in their US account. Further, such costs shall be reimbursed by EY India to EY US.
However, these employees shall be on the payroll of EY India. Further, TDS is also deducted by EY India as per Income Tax Act, 1961.
Issues before the Court
Issue A: Whether cost to cost reimbursement on account of secondment of employees constitutes as FTS as per the provisions of section 9(1)(vii) as well as under Article 12 of the India-USA Double Taxation Avoidance Agreement(DTAA)
Issue B: Whether the fees received by EY US from EY India fall within the Article 12(5)(e) of India-USA DTAA exclusion (i.e., qualify as 'professional services' under Article 15 India-USA DTAA), thereby exempting them from Indian tax
Ernst & Young stand
EY US has entered into a deputation agreement with EY India under which employees shall be seconded to EY India which states that during the deputation, employees shall become employees of EY India.
EY India has discharged their TDS obligation under Section 192 of the Act to pay taxes to the Indian Authorities, resulting in the issuance of the requisite TDS certificate to the employees
The amounts having already been taxed at the hands of their seconded employees employed in India, the same cannot be subject to double taxation again through the assessee company i.e., EY US
Conditions of ‘make available’ does not satisfy. Therefore the payments made by EY India to EY Us does not qualify for Fee for technical services under Article 12(4)(b) of the DTAA.
EY US has rendered services to the Indian establishments which were “professional services” within the meaning of Article 15(2) of the DTAA and therefore such payments are in fact covered under Article (12)(5)(e) and not taxable in India
Revenue Stand
Since the services rendered by the EY US to EY India entities was with regard to technical knowledge, experience, skill, know-how or the processes which come within the meaning of Article 12(4)(b) of the DTAA and therefore should be taxable as FTS under Article 12 of the DTAA.
Seconded employees shall be treated as Employees of EY US only as these employees continue to contribute to social security benefits in US through EY US. The seconded employees also cannot opt out from contributing to the social security benefits in USA
Further, EY India does not have right to terminate the contracts with Employees. That right still remains with EY US. After the expiry of 2-3 years, employees shall go back to US to work with EU US. Therefore, employer employee relationship between EY US & employees still exist.
Revenue has relied on the judgement of Centrica India Offshore (P) Limited v. CIT, 2014:DHC:2172-DB, wherein the Court has held that amounts reimbursed by Indian entities to an overseas company in terms of a secondment agreement amounted to FTS and are liable to tax in India
Delhi High Court ruling
Issue A: Payments made by EY India to EY US treated as ‘Fee for Technical Services’ under Article 12 of the DTAA.
Hon’ble Court held that conditions ‘make available’ clause of DTAA is being satisfied as per the agreement entered between EY India & EY US. Technical skills were imparted by Seconded employees to Indian employees to imbibe the culture of EY Group and implement its policies/standards on the EY India. Once the process and policies are imbibed / retained, there is no need for the secondee personnel to work again with the EY India entities, as the employees of the EY India entities can apply the same by themselves.
Further, EY India cannot terminate the employees as such authority is not available with it. Once the work in India is completed, employees shall go back to join EY US. There is no employer-employee relationship exists between EY India & sceconded employees.
EY US continue to be the ultimate employer of these employees.
With the fulfilment of conditions of ‘make available’ clause, payment made by EY India to EY shall be treated as ‘Fee for Technical Services’ under Article 12 of the DTAA.
Issue B: Professional Receipts
Hon’ble High Court has held that ITAT has not delineated the actual services provided by the EY US to its Indian clients or discussed whether such services could be included in the definition. It merely noted the qualifications of the employees of the EY US and held that they would come within the ambit of the definition of professional services provided under Article 15(2).
The merit and effect of the finding of fact by the AO that the services are in the nature of technical services and consultancy have neither been discussed nor distinguished by the ITAT.
The court declined to interpret Article 15(2) definitively & remanded back the matter to ITAT ITRAT for fresh consideration on this matter.
Key Legal Principles highlighted by the Court
- Make available clause- Where technical knowledge, experience, skill, know-how or processes are transferred in such a manner that the Indian personnel are able to perform the work independently thereafter, the & "make available" condition under the DTAA may be regarded as satisfied.
- Professional Service bifurcation- Article 15 does not provide blanket exemption to all types of services. Each individual services needs to be checked separately.
- Substance over Form: The key consideration is identifying the real employer of the seconded employees. If the employees continue their employment relationship with the foreign entity, remain covered under its social security and employee benefit schemes, and the foreign employer retains overall supervision and control, the overseas entity may still be regarded as the actual employer.
- No Tax Shield for Companies: Simply recovering the exact employee cost without adding any markup does not, by itself, provide a tax advantage or exemption to the companies involved.
Important Points for GCCs and MNCs to Keep in Mind after This Decision
1) Review your Deputation agreement
2) Evaluate who qualifies as the real employer based on the substance of the arrangement rather than the contractual description alone
3) Professional receipts line wise categorised mandatory to check applicability of Article 15 of DTAA
4) Transfer Pricing application on payments made to foreign related parties
www.vidhuduggalandco.com | vidhu@vidhuduggalandco.com | Profile
