Brief: Cross-border secondment arrangements have remained one of the most litigated issues in international taxation, with courts repeatedly examining whether such arrangements constitute a genuine employer-employee relationship or a taxable provision of services by the foreign entity. While the Delhi High Court’s decision in Centrica India Offshore Pvt. Ltd. v. Commissioner of Income Tax (Delhi High Court), (2014) 364 ITR 336 (Delhi) laid down the foundational principles, subsequent judicial decisions have demonstrated that the tax treatment of secondment arrangements is inherently fact-specific.
It is common for an overseas parent or group company to second experienced personnel to its Indian affiliate to provide technical expertise, managerial support, or specialised knowledge. While these arrangements serve legitimate commercial objectives, they have increasingly become the subject of tax disputes in India.
The controversy primarily revolves around the tax characterisation of payments made by the Indian entity to the overseas company. Taxpayers generally view these payments as mere reimbursements of salary costs under an employer–employee relationship. The tax authorities, however, have often taken the position that the overseas entity is rendering managerial, technical, or consultancy services by making its employees available to the Indian company, thereby attracting withholding tax obligations under the Income-tax Act, 1961 and the applicable tax treaty.
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The Centrica Decision
The Delhi High Court’s decision in Centrica India Offshore Pvt. Ltd. v. Commissioner of Income Tax [(2014) 364 ITR 336 (Delhi)] is widely regarded as the seminal judgment on the taxation of cross-border secondment arrangements in India. The case involved employees of overseas group entities who were seconded to Centrica India Offshore Pvt. Ltd. (“CIOP”), an Indian company engaged in providing back-office support services to entities within the Centrica group.
The Delhi High Court upheld the Revenue’s position. It observed that the employees continued to have an employment relationship with the overseas entities and that the secondment arrangement enabled the foreign entities to provide skilled personnel possessing specialised knowledge and expertise to the Indian company. The Court further held that the overseas entities were not merely recovering salary costs but were, in substance, rendering services through their employees. Accordingly, the payments were held to be taxable as Fees for Technical Services, and CIOP was held liable to deduct tax at source under section 195.
Judicial Developments after Centrica
Later court rulings have shown that the principles established in Centrica are not applied automatically. Judicial bodies have regularly investigated the essence of the secondment agreement, especially focusing on who held actual authority over the workers and if the foreign organisation was simply enabling the movement of staff or providing services via those employees.
In AT&S India Pvt. Ltd., In re [(2007) 287 ITR 421 (AAR)], the Authority for Advance Rulings determined that payments from the Indian firm to its Austrian parent for seconded workers were classified as Fees for Technical Services under section 9(1)(vii) of the Income-tax Act, 1961. The AAR noted that the foreign organisation was offering specialised technical skills via its employees, thus considering the arrangement as a service provision.
However, a different approach was adopted by the Bangalore Bench of the ITAT in Abbey Business Services India Pvt. Ltd. v. DCIT [(2012) 20 ITR (Trib) 45 (Bangalore)]. The Tribunal held that reimbursement of salary costs for seconded employees did not constitute FTS where the employees worked under the control and supervision of the Indian entity. The Karnataka High Court subsequently affirmed this view. The decision highlighted that transfer of effective control and integration of employees into the Indian entity’s operations are crucial factors in determining whether a secondment constitutes a genuine employment arrangement.
More recently, the Delhi High Court in Commissioner of Income Tax (International Taxation) v. Ernst & Young U.S. LLP [ITA Nos. 423/2025 & connected matters, decided on 18 June 2026] applied the principles laid down in Centrica. The Court held that the secondment arrangement involved EY US providing services through its employees, and the reimbursement payments were taxable in India as Fees for Technical Services.
Key Factors Considered by Courts in Determining Taxability of Secondment Arrangements
The judicial decisions discussed above demonstrate that there is no automatic rule that every secondment arrangement results in either taxability or non-taxability. Indian courts have adopted a fact-specific approach and have examined the overall substance of the arrangement rather than merely relying on the terminology used in the agreements. Certain factors have consistently emerged as relevant in determining whether a secondment arrangement represents a genuine employer–employee relationship or a provision of services by the overseas entity:
1. Control and Supervision over Employees
One of the most significant factors considered by courts is the entity exercising effective control and supervision over the seconded employees. Where the Indian entity directs the day-to-day activities, assigns responsibilities, evaluates performance, and exercises managerial control, courts have been more inclined to view the arrangement as a genuine secondment. Conversely, continued control and involvement of the overseas entity may indicate that services are being provided by the foreign entity.
2. Identity of the Real Employer
Courts have examined whether the Indian entity assumes the role of the employer during the secondment period. Factors such as the right to instruct employees, determine their work responsibilities, take disciplinary action, and decide their continuation in the role are relevant in determining the real employer.
3. Nature of Payments Made by the Indian Entity
The mere fact that payments are made on a reimbursement basis does not determine the tax treatment. Courts have examined whether the payment represents a pure recovery of employment costs or whether it is consideration for services rendered by the foreign entity. The presence of a mark-up or commercial profit element may indicate a service arrangement, while a genuine cost reimbursement may support the taxpayer’s position.
4. Continued Relationship with the Overseas Entity
The extent of the connection retained by the foreign entity with the seconded employees is also relevant. Continued involvement in employment decisions, performance management, or supervision may suggest that the foreign entity continues to provide services through its employees. Accordingly, the distinction between a taxable service arrangement and a genuine secondment depends on the overall facts and circumstances. Courts have moved beyond the contractual form of the arrangement and have focused on the economic and operational reality of the relationship between the parties.
Practical Implications and Conclusion
The evolving judicial position on secondment arrangements highlights the importance of carefully structuring and documenting cross-border employee deputation arrangements. Multinational enterprises should ensure that the contractual terms accurately reflect the actual working relationship between the parties and that the Indian entity assumes sufficient control over the seconded employees where the intention is to create a genuine employer-employee relationship. Factors such as the authority to supervise employees, allocation of responsibilities, performance evaluation, disciplinary control, and assumption of employment-related risks should be clearly documented. Further, arrangements involving mere reimbursement of salary costs should be supported by appropriate documentation demonstrating that such payments represent a recovery of employment expenses and not consideration for services rendered by the overseas entity.
The decisions in Centrica, Abbey Business Services, and Ernst & Young U.S. LLP demonstrate that there is no blanket rule governing the taxation of secondment arrangements. While Centrica and the recent EY US decision highlight that secondments may be taxable where the foreign entity continues to provide services through its employees, decisions such as Abbey Business Services establish that arrangements involving a genuine transfer of control to the Indian entity may not result in such tax implications.
Ultimately, Indian courts have consistently emphasised that the tax consequences of a secondment arrangement depend upon its substance rather than its form. The mere use of a secondment agreement or reimbursement of employee costs does not determine the outcome. The decisive question remains whether the overseas entity is merely facilitating the deployment of employees or whether it is rendering services through those employees. As cross-border workforce arrangements continue to evolve, businesses must carefully evaluate their secondment structures in light of these judicial principles to mitigate potential tax risks.
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