Payment to seconded employees is FTS; Foreign co. is real employer if Indian co. can cancel secondment agreement only

Overseas entity was the real employer of seconded employees when Indian entity had only the right to terminate the secondment without conferring the right to terminate the original employment. Reimbursement of salary of seconded employees to the overseas entities was to be regarded as FTS when they rendered quality control services till the necessary skills were acquired by the resident employee group.

Facts:

a)  The CIOP ('petitioner'), incorporated in India, was wholly owned subsidiary of Centrica Plc. (a company incorporated in the UK).The BSTL and DEML were other subsidiaries of Centrica Plc.

b)  These overseas entities outsourced their back office support functions to third party vendors in India. To ensure that the Indian vendors complied with quality guidelines, the petitioner was established in India.

c)  Accordingly, the petitioner entered into a secondment agreement with these overseas entities, wherein employees continued to remain on the payrolls of the overseas entities. The petitioner was required to reimburse salary costs to the overseas employers.

d)  The issue which arose for the consideration in the instant case was:

Whether the secondment of employees by the overseas entities, would fall within Article 12 of the India-Canada and Article 13 of the India-UK DTAAs?

The High Court held in favour of revenue as under:

1)  Sums paid to the overseas entities for the seconded employees could be covered by the India-Canada DTAA, when it was established that not only technical services were performed, but the enterprise made available the skills behind that service to the other party;

2)  The India-UK DTAA defines Fees for Technical Services ('FTS') as "payments of any kind of any person in consideration for therendering of any technical or consultancy services (including the provision of services of a technical or other personnel)". In this case, the overseas entities had, through the seconded employees, provided technical services to the petitioner including the provision of services of personnel;

3)  The nature of the services rendered by the CIOP was in the nature of "business support services" and was covered within the fold of "technical or consultancy" services. The CIOP and seconded employees were to oversee the quality of service rendered by vendors to the overseas entities, which would fall within the scope of the technical or consultancy services.

4)  It was admitted by the petitioner that the reason for entering into the secondment agreement was to provide support for the initial years of operation, till the necessary skills were acquired by the resident employee group;

5)  All direct costs of such seconded employee's, social security plans, other benefits and costs were ultimately to be paid by the overseas entity. The petitioner was given the right to terminate the secondment only, excluding the right to terminate the original employment relationship (the services of the secondee vis-à-vis the overseas entities);

6)  The Division Bench in DIT v. E-Funds IT solutions [2014] 42 taxmann.com 50 (Delhi) highlighted that the nature of activity undertaken by the employees was determinative of whether it constituted a service. In the present case, the overseas entities outsourced their back office support functions to third party vendors in India. The seconded employees were to oversee quality control of the work of such vendors. This work could not be characterized as mere stewardship;

7)  What could have been left to the petitioner to do was, in fact, being done through the seconded employees, whose expertise and training lent quality and content to the Indian entity. Therefore, the real employer of these seconded employees continued to be the overseas entity concerned. And the payment made by the petitioner to the overseas entities was to be treated as FTS. - Centrica India Offshore (P.) Ltd. v. CIT [2014] 44 taxmann.com 300 (Delhi)