Deputation of employees from foreign companies to Indian companies does not create permanent establishment or a taxable presence in India now. In absence of a permanent establishment, the foreign company is also not required to pay any taxes in India.
A number of international private equity (‘PE’) houses have global deputation program for their employees under which key members employed by offshore management companies are deputed to India.
While designing such deputation program, some of the key concerns are to evaluate the risk of offshore management companies having a permanent establishment and therefore attendant attribution issues, withholding tax implications for such offshore management companies and tax liabilities of key management personnel.
Recently the Income Tax Appellant Tribunal (‘Tribunal’), Mumbai in the case of Tekmark Global Solutions has pronounced favorable ruling in respect of taxation of deputing employees to India. Offshore private equity houses could structure their deputation program to take the benefit of the principles laid down in the aforesaid decision, however, necessary care should be taken to address various complexities involved.
The Tribunal in the above case held that deputation of employees in India does not create permanent establishment in India. This is subject to the conditions that:
the control and supervision of the employee’s vests with the Indian company; and
the services rendered by the deputed employees are independent of the foreign company deputing such employees.
The Tribunal further held that payment made by the Indian company does not constitute income of the foreign company as it is pure reimbursement of the salary and other deputation costs. The ruling will provide assistance to structure the deputation to Indian companies such that the risk of creating a Permanent Establishment can be mitigated.
Foreign PE firms mostly depute their key employees to their Indian counterparts in order to facilitate the Indian teams to imbibe global standards and expertise. This deputation assists the Indian companies to provide improved results. On the other hand, it also enables the foreign depute to understand the Indian markets and transactions. The critical issue which concerns the foreign companies is the tax implication of such an arrangement.
Tax authorities have in past attempted to treat the amount received by the deputing foreign company as taxable in India either as:
Fees for Technical Services (FTS) or
Business Profits by treating the presence of offshore employees as Permanent Establishment of offshore management companies in India.
They have therefore taxed reimbursement of deputation costs as income in the hands of foreign companies subject to tax in India.
The ruling of the Mumbai Tribunal has provided clarity on the issue that mere deputation of employees does not create Permanent Establishment. The ruling dealt with a situation wherein the foreign company had deputed its personnel on purely hire out basis i.e., the employees were under the supervision of the Indian company and only their salary costs were reimbursed. In addition to that the foreign company did not have any control over the deputed employees, who were working under the control and supervision of the Indian company. However, the deputed employees continued to be under the payroll of the foreign company. The salary and other deputation costs have been charged to Indian Company based on actuals.
The Assessing Officer held that the deputed employees create a Permanent Establishment or a taxable presence and that the reimbursement of expenses is taxable in India. On appeal, the Commissioner Appeals held that there is no permanent establishment of the foreign company in India. The Tribunal upheld the decision of the Commissioner Appeals relying on the fact that the control and supervision of the employee vests with the Indian company.
The deputed employees are not rendering services in India on behalf of or for the foreign company, which could risk the creation of Permanent Establishment in India. The Tribunal also held that reimbursement of deputation costs is not income of the foreign company as there is no profit element involved. The issue as to whether reimbursement of deputation costs amounts to income of the foreign company has been previously dealt by the Bangalore Tribunal in the case of IDS Solutions Software India Private Limited and Authority for Advance Ruling in the case of Cholamandalam General Insurance Co Ltd wherein it was held that reimbursement of costs is not income of the foreign companies.
Further the Indian company remitting the amount is not required to withhold tax on such remittance as the amount does not have the element of income. However, there is a contrary ruling on the issue by the Authority for Advance Ruling in the case of AT & S India P. Ltd4 wherein such payment was not treated as reimbursement and was taxed as FTS.
Pranay Bhatia is a Partner at Economics Laws Practice, Mumbai office. Vidushi Maheshwari – Associate with ELP has assisted in writing the article.