Navigating the Complexities of Outward Secondment Arrangements in India: Tax and GST Implications

[Shivam Agrawal]

​​​​​As Indian businesses continue to expand their global footprint, outward secondment arrangements have become increasingly common. These arrangements involve the temporary transfer of employees from an Indian entity to an overseas entity, often raising complex questions around tax and GST implications. In this article, we will explore the tax and GST implications of outward secondment arrangements in India, with a focus on Service Permanent Establishment (PE) and Fees for Technical Services (FTS), and examine how these implications are influenced by the provisions of Double Taxation Avoidance Agreements (DTAAs) between India and other countries.

*Service Permanent Establishment (PE)*

A Service Permanent Establishment (PE) is a fixed place of business through which an enterprise carries on its business activities, as defined under Article 5 of the OECD Model Tax Convention. In the context of outward secondment arrangements, a Service PE may be established outside India if an Indian entity sends its employees to work for an overseas entity for a period exceeding 183 days in a fiscal year, or if the employees have a physical presence in the overseas country and carry out activities that are not preparatory or auxiliary in nature. However, it is essential to note that a Service PE will only be established if the lien over the employment of the seconded employees remains with the Indian entity (i.e., the home country). If the lien over employment is transferred to the overseas entity, a Service PE may not be established. Note that the establishment of a Service PE outside India may not be exempt from taxability under the Double Taxation Avoidance Agreement (DTAA) between India and the country where the services are provided.

*Fees for Technical Services (FTS)*

Fees for Technical Services (FTS) refer to payments made for technical services, including consulting, engineering, and managerial services, as defined under the Indian Income-tax Act, 1961. FTS may be applicable if an Indian entity provides technical services to an overseas entity through its employees. However, to constitute FTS, the services provided must make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. If the "make available" clause is not fulfilled, the services provided will not be considered FTS. Additionally, FTS may not be applicable if the services provided are merely for training, knowledge transfer, or similar activities that do not involve the transfer of technology or technical expertise. The taxability of FTS depends on the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and the country where the services are provided. For instance, if the DTAA between India and the overseas country provides for a lower withholding tax rate or exempts FTS from taxation, the Indian entity may be eligible for such benefits.

In this article, we'll delve into the tax and GST implications of outward secondment arrangements in India, exploring four different scenarios.

*Scenario 1: Service PE Established Outside India*

When an Indian entity sends its employees on secondment to an overseas entity, and the Service PE is established outside India, it's essential to note that the income earned by the Indian entity may still be taxable in India.

This is because the Indian entity is a resident in India, and as such, is taxable on its worldwide income, including foreign-sourced income. The fact that the Service PE is established outside India does not exempt the Indian entity from tax liability in India.

From a scope of income perspective, the income earned by the Indian entity is considered foreign-sourced income, which is taxable in India under the scope of income provisions.

The Indian entity may need to make transfer pricing adjustments to ensure that the transaction is at arm's length. This means that the Indian entity must demonstrate that the reimbursement received from the overseas entity is at a price that would be charged between unrelated parties.

Additionally, the Indian entity may claim relief under the Double Taxation Avoidance Agreement (DTAA) between India and the country where the Service PE is established.

From a GST perspective, the secondment arrangement may be considered an export of service from India to the overseas entity. As such, the Indian entity may need to obtain a GST registration and comply with GST regulations. However, the export of service may be zero-rated under GST, meaning no GST is payable.

*Scenario 2: Qualifies as FTS (Fees for Technical Services)*

If the secondment arrangement qualifies as FTS, the income earned by the Indian entity may be taxable in India.

From a scope of income perspective, the income earned by the Indian entity is considered foreign-sourced income, which is taxable in India under the scope of income provisions.

The Indian entity may claim relief under the DTAA between India and the country where the services are provided.

The Indian entity may also need to make transfer pricing adjustments to ensure that the transaction is at arm's length. This means that the Indian entity must demonstrate that the reimbursement received from the overseas entity is at a price that would be charged between unrelated parties.

From a GST perspective, the secondment arrangement may be considered an export of service from India to the overseas entity. As such, the Indian entity may need to obtain a GST registration and comply with GST regulations. However, the export of service may be zero-rated under GST.

*Scenario 3: Neither of the Above Conditions Fulfilled*

If the secondment arrangement does not fulfill either of the above conditions, and the Indian entity receives only reimbursement for expenses without any markup, the reimbursement may not be taxable in India.

From a scope of income perspective, the reimbursement received by the Indian entity is not considered income, and therefore, is not taxable in India under the scope of income provisions.

In this scenario, there may be no GST implications, as the arrangement may not be considered an export of service.

*Scenario 4: Received Money with Markup in India*

If the Indian entity receives money with a markup in India, the income earned, including the markup, may be taxable in India.

From a scope of income perspective, the income earned by the Indian entity, including the markup, is considered Indian-sourced income, which is taxable in India under the scope of income provisions.

The Indian entity may need to make transfer pricing adjustments to ensure that the transaction is at arm's length. This means that the Indian entity must demonstrate that the reimbursement received from the overseas entity is at a price that would be charged between unrelated parties.

From a GST perspective, the secondment arrangement may be considered an export of service from India to the overseas entity. As such, the Indian entity may need to obtain a GST registration and comply with GST regulations. However, the export of service may be zero-rated under GST.

Conclusion

Outward secondment arrangements can give rise to complex tax and GST implications in India. It's essential for businesses to carefully evaluate the tax and GST implications of these arrangements to ensure compliance with Indian tax laws and regulations.

By understanding the tax and GST implications of outward secondment arrangements, businesses can navigate these complexities with confidence and ensure that they are in compliance with Indian tax laws and regulations.

Discussions to this article

[Shivam Agrawal]

Edits/ Additions:
1. It is to be noted that Article 5(3)(b) of the UN Model differs from OECD Model regarding Service PE. OECD Model does not include a Service PE clause; however, a suggested Service PE clause is included in the OECD Commentary on Article 5.

2. Export of Services under Section 2(6) of the IGST Act

Section 2(6) of the IGST Act defines "export of services" and provides the conditions for a supply of service to be considered as an export. One of the conditions specified in clause (v) of Section 2(6) is that the supplier of service and the recipient of service are not merely establishments of a distinct person.

Explanation 1 to Section 8 of the IGST Act provides that where a person has a business establishment in India and another establishment outside India, and both establishments are merely separate units of the same person, then the supply of goods or services between such establishments shall not be considered as exports.

Therefore, a conjoint reading of Section 2(6) and Explanation 1 to Section 8 is required to determine whether a supply of service between two establishments is considered as an export or not. If the supplier and recipient are separate legal entities and not merely establishments of a distinct person, and the other conditions specified in Section 2(6) are met, then the supply of service may be considered as an export.

3. Structuring Secondment Agreements for Optimum Tax Benefits

To maximize the tax benefits available under the DTAA and Indian tax laws, it is essential to structure the secondment agreement and supporting documents in a manner that enables optimum benefit within allowed tax planning. This includes:

• Clearly defining the terms and conditions of the secondment arrangement, including the scope of work, duration, and compensation.
• Ensuring that the lien over the employment of the seconded employees remains with the Indian entity, to enable the benefits of a Service PE.
• Structuring the reimbursement mechanism to ensure that it is at arm's length, and that the Indian entity is not subject to taxation on the reimbursement.
• Ensuring that the documentation supporting the secondment arrangement, including invoices, receipts, and certificates, is accurate and complete.
• Considering the tax implications of the secondment arrangement on both the Indian entity and the overseas entity, to ensure that the arrangement is structured in a tax-efficient manner.

By structuring the secondment agreement and supporting documents in a manner that enables optimum benefit within allowed tax planning, Indian businesses can minimize their tax liability and maximize their competitiveness in the global market.