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By Pratha Khanna


This article aims to explore the nature of secondment transactions and the applicability of the same in the current tax laws existing in the Indian context. The taxability of these transactions has been explored through various case laws and the most recent landmark ruling of Northern Operating Systems. The article lastly deduces the implications of the said judgment in upcoming cases and how the same may be perceived by companies in the Indian market.

A secondment agreement is one wherein the employees of a foreign company are sent to the Indian company listed under the group entities wherein such employees are to be held liable against the Indian company itself. To further elaborate, these employees in essence, work under the direct control of the Indian company and are paid salaries by the same company under which they are employed. In such a scenario, the Indian company reimburses this cost incurred by them through payment of salary to the seconded employees to the foreign company. It is pertinent to note that the term of secondment may be restricted to a specific timeline wherein after the conclusion of the same, the seconded employees are sent back to their home country resuming their employee status with the foreign company. This employment arrangement is usually entered into for supplying manpower and technical know-how from one company to another which is a need of the hour especially in such a globalized economy where transfer of skill sets can prove beneficial for any company. These agreements can be a contract for service, a contract of service and a dual employment arrangement. Having understood the nature of this arrangement, it is further of importance to understand the taxability of the same under the Direct and Indirect Tax Laws.

Service as defined under the Finance Act of 1994 through the insertion of Section 65B specifically defines a service as that of an activity carried out for consideration. However, this excludes from the definition, an employee undertaking service for his employer. Thereby it can be said that the employment arrangement under a secondment agreement would also be exempted from service tax applicability as it would thus not be denoted as a service. This aspect has been discussed in various case laws over the years wherein a deliberation is made on these parameters of a secondment agreement. For instance, in the case of Commissioner of Central Excise v. M/s Computer Science Corporation India Pvt. Ltd., it was held by the Allahabad High Court that the element of taxability cannot arise in the said arrangement until each and every critical element of Section 65B are fulfilled. Further, under the Income Tax Act, 1961, Section 9 (1) specifically mentions income that may deemed to be accrued or arisen in India which is also further discussed in the case of Director Income Tax v. M/S Morgan Stanley & Co. Inc, wherein it is stated that as long as the lien of a certain employment is held by the foreign company, till that extent, the same cannot be taxed. The taxability of secondment agreements was finally settled in the case of CCE&ST vs. Northern Operating Systems Pvt. Ltd, wherein the apex court confirmed the position under the taxation laws.

The court finally opined in this case, that in an event wherein the Indian company is treated as an employer, the reimbursement would take place. However, wherein the employer is an overseas entity, the service would be liable to be taxed. The apex court refrained from giving a specific parametric setting wherein the employee- employer arrangement would be liable for taxation and instead left it to be decided on a case-to-case basis. By doing so, in an attempt to lay down definitive findings, the court moved away to a more substantive approach by giving the substance of the agreement more weightage as opposed to its form. The court in this specific factual matrix observed that after the cessation of the term of secondment, the employees are entitled to certain benefits and incentives all laid down within the global policy of the overseas entity in terms of foreign currency. Finally, the court stated that in the present scenario, the secondment is a simple means of providing manpower supply to the Indian company and the same can be liable to tax and thereby, as the transferring of manpower can be termed as a taxable service.

The implications of this judgment are manifold wherein, this could negatively impact the Indian entities partaking secondment arrangements as necessary activities for the growth and development of the company as a whole. Moreover, this judgment in turn provides to say that secondment transactions would also be taxable under the GST regime and would further, make the issue of FTS (“Fee for Technical Services”) more evident in terms of International Taxation. The court has also not provided much certainty in terms of the specific clauses of an arrangement or an agreement on the basis of which the charge of tax would arise upon an entity thereby causing more confusion and chaos within the corporate sphere. This judgment clearly paves way for revenue to push towards taxing more such secondment arrangements by bringing them under the ambit of the employer-employee diaspora and would further alleviate the number of contentions raised before the Income Tax Tribunals as well as the Courts of the country. In conclusion, this case opens a Pandora’s box in terms of which agreements would evoke taxability and the ones that would not specifically lay focus on the nature and the substance of the agreements entered into between two companies.

About the Author

Pratha Khanna is a fourth-year law student of Jindal Global Law School and a Columnist at the Finance and Economics Cluster of Nickeled and Dimed at Centre for New Economics Studies.

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