Summary: Two recent rulings, by the Delhi ITAT and the Delhi High Court, reached opposite conclusions on the same question: Who is the real employer of seconded personnel? Although arising in different contexts, both referred to factors established in the OECD Commentary on Article 15 for determining the true employer but differed in their emphasis on those factors. While the Tribunal focused more on local control and secondees’ integration into the Indian entity, the High Court prioritised the secondees’ continuing relationship with the foreign employer. These contradictory outcomes highlight that the taxability of secondments hinges on case-specific facts, making the alignment of contractual arrangements, operational reality, and documentation extremely critical.
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A contentious issue for decades, decisions on the taxation of cross-border secondments have swung both ways. While some have termed the reimbursement of secondment costs as fees for technical services (“FTS”) or considered that the presence of secondees creates a permanent establishment, others have treated the Indian host entity as the real employer and viewed the arrangement as a non-taxable reimbursement of employee costs. Although contrary, the decisions were ultimately based on identifying the real employer of the secondees.
Recently, the Delhi Income Tax Appellate Tribunal (“Tribunal”) and the Delhi High Court (“Delhi HC”) also deliberated on the question of identifying the real employer of secondees. Although both decisions focused on the same fundamental question, their different approaches led to opposite conclusions, highlighting that the same question can be viewed through contrasting judicial lenses.
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The Tribunal’s case[1] involved a Korea-based parent company and its Indian subsidiary engaged in manufacturing and sales activities. Expatriates from the foreign parent were seconded to work at the Indian subsidiary. On the basis of statements recorded during a survey, the tax authority argued that since these personnel remained under the Korean parent’s control, the Indian subsidiary constituted the Korean parent’s fixed-place permanent establishment. Therefore, a quarter of the foreign parent’s profits should be attributed to and taxed in India.
The core issue was whether the foreign parent, through the presence and conduct of its employees, had come to carry on its own business through a fixed place in India. The Tribunal rejected that argument, finding that the expatriates were in fact employed by the Indian subsidiary, subject to its own service rules and disciplinary control, paid by it with Indian tax withheld, and contractually bound to work exclusively for it. Applying the permanent establishment article of the relevant tax treaty, the Tribunal held that the conditions for a fixed-place permanent establishment were not satisfied, and that none of the foreign parent’s income was taxable in India on this ground.
The Delhi HC case[2] involved a US-based professional services firm and its Indian member firms, to which it seconded personnel. The foreign firm had claimed that the reimbursement of costs relating to those seconded employees was not taxable in India, because it was a genuine cost recharge rather than consideration for services. The issue was whether that recharge was truly a reimbursement of salary already taxed in the hands of the employees in India or whether it was disguised consideration for services the foreign firm continued to render through those individuals.
Central to the analysis was the treatment of seconded personnel as employees of the foreign entity rather than that of the Indian entity. Only if the foreign entity remained the true employer could the recharge be viewed as consideration for services rendered through those employees and not a mere reimbursement of salary costs already taxed in India. The Delhi HC held that the Indian entity had no authority to end the secondees’ original employment relationship with the foreign firm. Instead, the foreign firm retained a lien and control over the secondees, never really ceased to be their real employer, and would resume the relationship once the secondment ended. The Court also held that the secondees transferred technical knowledge and embedded the foreign firm’s standards within the Indian entity. Concluding that the treaty’s “make available” condition was met, it therefore rendered the secondment recharge taxable as FTS.
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Despite arising in different contexts and on different facts, a common underlying inquiry connects the two cases: identifying the real employer in a secondment arrangement. Both authorities appear to have based their decisions on the same underlying principles reflected in the OECD Commentary on Article 15 of the OECD Model Tax Convention, which deals with income from employment. However, only one of them expressly referred to the Commentary.
The OECD Commentary on Article 15 of the Model Tax Convention adopts a substance-over-form approach and focuses on who controls the employee’s work, who bears the remuneration cost, and who has authority over the employment relationship. It also recognises that a different analysis may apply where an employee is released by the home employer to work exclusively for the host entity, as is often the case in secondment arrangements.
The Tribunal did not expressly invoke the OECD Commentary, its approach applied that functional inquiry closely. It found that the expatriates were employed by the Indian subsidiary and were subject to its service rules and disciplinary control. They were also paid by the subsidiary with Indian tax withholding and were contractually obligated to work solely for it. Each of these findings maps directly onto the OECD’s own indicators, who directs the work, who bears the cost, who can discipline the worker, and the Tribunal treated the presence of genuine local control as decisive in rejecting the tax authority’s fixed-place permanent establishment claim.
The Delhi HC took a different approach. It engaged directly with the OECD Commentary, which the taxpayer had heavily relied upon. Acknowledging the Commentary’s distinct treatment of employees released to work exclusively for the host entity during the secondment, the Court held that the facts did not support this exception. Instead, it attached particular significance to the foreign firm’s continuing lien over the employees and the fact that the underlying employment relationship would revive after the end of the secondment. Accordingly, the Court held that this continuing relationship far outweighed indicators of local employment, such as day-to-day control, local payroll treatment, and the Indian entity’s oversight of the assignment.
The divergence lay in the weight accorded to various employment indicators. While the Tribunal placed emphasis on local control as the decisive indicator of the real employer, the Delhi HC considered the secondees’ ceaseless employment relationship with its foreign employer as the more decisive indicator.
Link to Learnings from the SECONDMENT TALE Learnings from the SECONDMENT TALE
Cross-border secondments are a commercial necessity for multinational groups and integral to the movement of talent, expertise, and leadership across jurisdictions, but the taxation of such arrangements has long been contentious. However, with the recent divergent rulings, the spotlight is once again on the debate over the real employer.
As stakeholders await clearer guidance from a higher court on the relationship between the control-based and lien-based tests, businesses would be well-advised to revisit both existing and proposed secondment arrangements. The key lesson from these decisions is that form and substance must align. Contracts, reporting lines, cost allocations, performance management, termination rights, and any continuing ties to the foreign employer should consistently support the intended employment relationship.
The rulings also demonstrate that the tax characterisation of a secondment arrangement may be scrutinised through multiple lenses, including FTS and permanent establishment exposure. Businesses should therefore evaluate each element of a secondment arrangement, including salary recharge mechanisms, the functions performed by the seconded personnel, and the relief available under the relevant tax treaty, on its own merits, rather than assuming that a conclusion reached for one purpose will necessarily apply to another.
In the meantime, the best defence remains a robust factual record. Businesses should ensure that their documentation and operational reality consistently support the intended tax treatment of the secondment arrangement.
[1] LG Electronics Inc. v. Assistant/Deputy Commissioner of Income-tax int. Taxation, (2026) 189 taxmann.com 1013 (Delhi – Trib.).
[2] Commissioner of Income-tax (International Taxation)-1 vs. Ernst and Young U.S. LLP, (2026) 489 ITR 611 (Delhi).