Its Important to Document Terms of Secondment for Tax Purpose

With the growing culture of MNCs operating in and out of India, secondment of people has become a familiar term these days. The term is generally associated with international mobility of human resources and has gained importance from the tax viewpoint, especially after the Supreme Courts judgment in the case of Morgan Stanley and Co Inc (292 ITR 416,162 Taxman 165).There are several tax issues that often arise not only for the individual who is seconded but equally for both the overseas as well as the Indian entity concerned. It is important to document the terms of secondment of an employee from an overseas group entity to its Indian entity. Among other things, the document should capture the roles and responsibilities of the employee in relation to the Indian and overseas entities, the terms of remuneration, as well as clearly define the reporting lines, etc.The significance of proper documentation of secondment arrangement can be emphasised when one considers the judgments pronounced in recent times on the issue, where such agreements and their content became vital evidence and tools for understanding the facts and circumstances of a particular assignees mobility and its related tax consequences. To begin with, the focus should be on proper documentation of the Rs.3  (roles, responsibilities and reporting lines). International mobility of individuals between group entities could create an exposure of permanent establishment (PE) for the overseas entity in India. The Supreme Court in the case of Morgan Stanley (supra) has observed that if the activities of an MNC enterprise entails it being responsible for the work of the employees deputed and such employees continue to be on the payroll of the MNC enterprise or they continue to have a lien on their jobs with the MNC enterprise, in that case, a service PE can be created for the overseas entity in India. Hence, a clear demarcation of the Rs.3  of the seconded individual is important to determine whether during the period of secondment, that individual was working for the Indian entity or for the overseas entity. As regards the payroll, many a times, it is seen that the seconded employee may prefer to continue on the payroll of the overseas entity while on secondment, for such reasons as continuity of social security benefits in the home country. Normally, it is observed that the remuneration in such case gets recharged to the Indian entity. Here, the need for proper documentation arises, so as to determine whether the recharge of cost by the overseas entity is by way of service charge, for providing services through the seconded employee, or as salary cost paid on behalf of the Indian entity, so as to make the Indian entity the economic employer of the employee. The documentation in this regard is very decisive, as it determines whether such recharge of cost then takes the independent character of fees of technical services for the overseas entity and thus becomes taxable in India. This is what was held recently by the Indian Authority for Advance Rulings in the case of Verizon Data Services India Private Limited (TS-236-AAR-2011 ).As far as taxability of the individual is concerned, the law is very clear that if the individual is rendering services in India, then the employee would be subject to tax in India. However, the question arises as to who is the employer of such an individual during the period of secondment is it the overseas entity or the India entity, who is responsible for the employer-related compliances in India for such individual The answer lies in the documentation, which would define and support the secondment arrangement itself. One other aspect that needs to be considered is the Indian social security regulations i.e, applicability of Indian provident fund (PF) to such individuals in India. These foreign nationals are considered as international workers under the Indian PF regulations, if they work for an establishment to which the PF regulations are applicable. Here again, the secondment documents would be decisive in determining whether the individual is working for the Indian entity or working on behalf of the overseas entity. The applicability of PF regulations would be determined accordingly. Last but not the least, one must remember that while adequate documentation of the secondment arrangement can surely provide an adequate defence, it may not eliminate tax litigation.



Economic Times, New Delhi, 23-08-2011