International secondment/ deputation of employees between affiliate companies is a common practice among multi-national companies. Typically, in cases of secondment to India, those employed with a foreign company are relieved by that entity, and then put to work full-time for the Indian subsidiary/ entity. However, to make disbursement and administrative processes easier, remuneration of such employees (other than income tax and social security benefits) are paid by the foreign company and deposited into the employee’s bank account in his/ her home country. The payment is later reimbursed by the Indian entity.
As is well known, there are tax and regulatory implications for such arrangements. For instance, authorities seek to levy service tax on the Indian entities under reverse charge mechanism where such secondment arrangements are considered as manpower supply service.
Specifically, there are two aspects that affect secondment transactions from a service tax standpoint. One is the payment of salary by the Indian entity (or by the foreign entity on its behalf) to the seconded employees, and the other is the reimbursement of the salary cost borne by the foreign entity.
Service tax implications, or even litigation on this issue, as of now, hinge on whether an employer-employee relationship is established between the Indian entity and the seconded employee(s). If the answer is ‘yes’, it would mean that there is no service rendered, and hence no service tax is to be levied on both aspects of the secondment arrangement and vice versa. Judicially, while there have been case laws that have
Volkswagen India employed many foreign nationals who were previously employed with another group entity, and, for this purpose, entered into an Inter-company Employment Agreement with its holding company, Volkswagen AG, Germany. Further, it also entered into a separate agreement with employees who were seconded to Volkswagen India. The clauses of the agreement showed that the employees were not subject to any instruction or control from the foreign entity, and worked solely under the control, direction and supervision of Volkswagen India. The Revenue Department contended that such international employees go back to the foreign company after a certain period and, even during their employment with Volkswagen India, the social security liability is discharged in the employees’ home country — hence, the transaction was one of supply of labour/ manpower by the foreign company to the Indian entity. The CESTAT, in view of the specific facts and clauses of the agreements, held that the international employees working under Volkswagen India are working as its employees and have established an employer-employee relationship. Further, there was no supply of manpower service rendered to the Indian entity by the foreign company. It was also clarified that the method of disbursement of salary cannot determine the nature of the transaction.
While the judgment clearly sets a favourable precedent for industry, it is important for companies that employ expatriates to have robust documentation to clearly demonstrate an employer-employee relationship with seconded employees.
Keyur J. Shah, Senior Manager, contributed to this article.
The author is Executive Director – Indirect Tax, PwC India.