The Hindu Business Line : Secondees, on second thoughts

In the Morgan Stanley (MS) case, the employment of secondees remains with MS US, though MS India actually picks up their salary costs. MS India could be treated as the economic employer of the secondees, since, not only it is picking up the salary costs, but the secondees are also working under the direct control and supervision of MS India [the discussion draft of OECD commentary on Article 15(2) also expresses the same view]. Therefore, under the OECD model tax treaties, one can safely say that the secondees represent MS India and also work under the economic employment of MS India and thus there is no question of them creating any PE of MS US in India.

However, the Indian model tax treaties [India-US tax treaty is not much of an exception] need more deliberation, as they conceive of the "source rule" concept of taxation of fee for technical services (FTS). Under the India-US tax treaty, the preamble to the definition of fees for technical services contains the words — consideration for rendering of any technical or consultancy services [including through the provision of services of technical or other personnel], if such services make available technical knowledge, etcetera, etcetera. However, the definition provides that any payment, inter alia, made to an employee of the payer would fall outside the ambit of FTS.

In the instant case, if one considers the position that MS India becomes the economic employer of the secondees, then MS US may be said not to be providing any technical services as per the general connotation of the said term, since providing services generally means doing something as per the request of the service recipient. However, the difficulty arises with the bracketed words contained in the definition of FTS, i.e., "including through the provision of services of technical or other personnel".

What do these words mean? There is not much precedence on the exact meaning of the said term, however, there is a possibility of the same referring to making available technical personnel by one entity at the disposal of another entity, even in a case where the first entity does not retain control or supervision on the people deputed. In that situation, the secondment of technicians by an US parent to the Indian subsidiary could fall in the category of rendering services by the US parent through the provision of services of technical personnel, so as to attract the provisions of FTS per se.

In case the employments or service contracts of the secondees are transferred to the Indian subsidiary under a similar situation, then a position could be taken that the payments made by the Indian subsidiary for the salary costs of the secondees would represent salaries paid to employees and, accordingly, the same would fall outside the ambit of FTS. In essence, the same result is achieved even in a situation where the employments or service contracts of the secondees are retained at the level of the foreign parent, however, the secondees virtually become the economic, if not legal, employees of the Indian subsidiary, as they work under the direct supervision and control of the Indian subsidiary and not the foreign parent company.

However, the difficulty is created by the express provisions of FTS, namely, the words "including through the provision of services of technical or other personnel". The OECD is not faced with such a dilemma, since the concept of FTS, in the form referred to above, is quite unique to both the domestic tax laws of India and also majority of the Indian tax treaties.

If the payments attract the provisions of FTS, the next issue is whether the foreign parent should charge a mark-up on the cost, which again is a transfer pricing issue. For the moment, one can say that if the services of the secondees fall within the ambit of FTS, then the same would not create a service PE, since a service PE does not cover services, which yield FTS. However, the presence of the secondees in India could give rise to a fixed place of business PE of the foreign parent in case the secondees remain in India for a substantial period, thus attracting net basis form of taxation.

Perhaps, a net basis form of taxation would be the better option in this scenario, since the foreign company would be required to pay tax on an arm's length mark-up, which needs to be added as a topping to the cost. Thus, there is no clarity on the relevant issue and it is always advisable to transfer the payroll or employment of the secondees from the level of the foreign parent to the Indian subsidiary, in order to mitigate all issues relating to FTS and PE of the foreign parent.

(Concluded)

(The author is Executive Director, PricewaterhouseCoopers.)

(The first and second parts of this article appeared on June 1 and 15 respectively.)