AAR rules on secondment arrangement's tax implications

recent ruling of the Authority for Advance Rulings (AAR) in the case of Centrica India Offshore Pvt. Ltd. (Taxpayer) on the issue of taxability of payments made to overseas group companies under a Secondment arrangement. The AAR held that the personnel seconded to the Taxpayer, a group company in India, did not become its employees in the absence of an obligation undertaken by the Taxpayer to pay employment costs of such personnel. This was held despite the fact that the Taxpayer exercised control and supervision and was also responsible for the work of the personnel. Further, presence of such personnel in India, rendering managerial services to the Taxpayer on behalf of the overseas entities, created a service permanent establishment (Service PE) of the overseas entities under the India-UK Double Taxation Avoidance Agreement and India-Canada Double Taxation Avoidance Agreement. Accordingly, the payments made by the Taxpayer to the overseas group entities towards the services of the personnel were taxable in India.

­­Secondment of personnel by a foreign company to its Indian affiliate is a common practice among multinational groups. The tax consequences of such arrangements have been a subject matter of dispute with the Indian Tax Authorities. While many decisions in the past have accepted that there should be no withholding on payments made to the foreign company towards such reimbursement payments, this ruling appears to have taken a difference view. In an earlier occasion also, the AAR had vive an unfavorable decision based on peculiar facts of the case as interpreted by AAR. Determination of who is the employer of seconded employees is a vexed issue and various courts have considered different facros to ascertain the same. The present ruling seems to take an unfavorable view based primarily on the fact that legal obligation of paying remuneration is a decisive test. Multination groups with similar Secondment arrangements may need to consider the impact of this ruling on their arrangements.