Lakshmi Kumaran & Sridharan AttorneysAn ISO 9001 / 27001 certified law firm

Tax issues surrounding human capital movement

By Ashish Karundia

Globalisation has led Multinational Companies (MNCs) to increase cross border secondment of technical, managerial and other employees to their subsidiaries located in low cost jurisdictions such as India. The rationale behind seconding such employees is sometimes to help the subsidiaries avail the benefit of skill and expertise of the seconded employees in respective fields and sometimes to exercise control. Such secondments on one hand facilitate efficient business functioning and may, at times, trigger tax liability for overseas MNC's as well as for Indian subsidiary. The MNC's therefore, need to be aware of such areas [infra] and accordingly carefully structure such assignments. The present write-up highlights tax issues that generally crop up whenever any employee is seconded to India.

Permanent Establishment ('PE')

Transfer pricing law of the home country would generally warrant a cross charge of the salary to be received by the entity seconding its employees. Tax scrutiny triggers on payment of such cross charge by the Indian subsidiary. On various occasions, Indian courts have held a permanent establishment of a foreign enterprise to have resulted because of presence of its employees in India.  Presence of PE can result in applicability of tax @40% on the income attributable to the PE, the quantification of which is again a subjective exercise.

Service PE: In the context of Indian tax treaties containing Service PE clause, the secondment of employees for assisting the Indian group entity have been held to constitute Service PE especially where the employees have contractual right of claiming remuneration from home country entity and also maintain lien on their employment with that entity [see end note 1]. The exception is where the services rendered constitute ‘technical services’ (infra) which itself may be taxable in India as source country both under its domestic law and treaty.

Direct payment of employment compensation by Indian entity disentitles the employee from potential claim of ‘short stay exemption’ with respect to Indian Income tax and hence, balancing the employee personal taxation with the corporate tax exposure becomes a sensitive issue.

Fixed Place PE: Many Indian treaties do not contain Service PE clause and in such cases the PE exposure can only arise if the stay of employees is prolonged and other tests of a fixed place PE are satisfied.  With respect to tests of a Fixed Place PE (viz. Disposal Test, Functionality Test and Permanence Test) due care needs to be deployed while structuring the arrangement as in some cases the courts have held Disposal test to have been met where employees of foreign enterprise have unrestricted access to premises of subsidiary [see end note 2] while in other cases the court found as a matter of fact that employees of foreign entity did not have a right of disposal but merely permitted to be present at discretion of Indian entity [see end note 3].

Fees for technical services (FTS) Indian domestic law provides for source based taxation on consideration for services which are in the nature of managerial, technical or consultancy. Some of the Indian treaties also replicate this provision. It is pertinent to note that FTS is taxable in India on gross basis at the rate of 25% [see end note 4] or at the rate provided in relevant Double Tax Conventions ('DTC') [see end note 5], whichever is lower. Such services are excluded from the purview of Service PE.  Some treaties, however, provide for a narrow definition of FTS and in such cases the consideration may not attract tax either as PE profit or as FTS.

Transfer Pricing Implications The Indian Transfer Pricing Regulations are largely at par with the international practices and require every company transacting with related enterprise (‘Associated Enterprises’ or ‘AEs’) situated in a foreign jurisdiction to offer for tax so much of profits as would have been earned if it were dealing with unrelated parties. If the Indian entity bears the remuneration of seconded employees, then tax authorities need to be satisfied that nature of services performed by them is not in the nature of shareholder activities or duplicative activities. While these expressions have not been used in Indian domestic law the focal point is that payment by Indian entity should be commensurate with the benefit it has received on account of services rendered by seconded employees.


Multiple aspects need to be taken care of, ranging from personnel tax, via PE exposure for foreign enterprise to TP implications on Indian entity. MNC's, therefore have to be vigilant in structuring the transaction so that tax cost is optimised without exposing itself to controversies.

[The author is a Senior Associate, Lakshmikumaran & Sridharan, New Delhi]

End Notes:

  1. Centrica India Offshore Pvt. Ltd., WP (C ) No. 6807/2012 dated 25.04.2014, DIT (International Taxation) v. Morgan Stanley & Co. Inc. Appeal (civil) 2914 of 2007 dated 9th July, 2007.
  2. Motorola Inc. v. Dy. CIT [2005] 147 Taxman 181 (AAR), Western Union Financial Services Inc. v. Asstt. DIT [2007] 104 ITD 34 (ITAT Delhi).
  3. Rolls Royce Plc. v. Dy. DIT [2008] 19 SOT 42 (ITAT Delhi) affirmed by Delhi High Court [2011] 339 ITR 147, Seagate Singapore International Headquarters Pvt. Ltd. [2010] 322 ITR 650 (AAR).
  4. Section 115A of the Income Tax Act, 1961.
  5. 0% to 25%.
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