Delhi High Court upholds Centrica ruling: employee secondment may trigger permanent establishment

by DLA Piper
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Multinationals with operations in India should take note of the Delhi High Court’s recently decision in Centrica India Offshore Pvt Ltd., in which it upheld a ruling of the Authority for Advance Rulings that an employee secondment that brings global affiliate employees to India may give rise to a permanent establishment (PE) in India.

Background

Centrica India Offshore Pvt. Ltd. was a subsidiary of Centrica Plc., United Kingdom (Centrica UK). The overseas entities outsourced some of their back-office support functions to third-party vendors in India. Centrica UK set up Centrica India to act as an interface between the third party vendors in India and the overseas entities. Centrica India provided services to overseas entities in terms of a service agreement under a cost-plus arrangement.

Centrica India, in order to comply with its obligations in the service agreement, had asked Centrica UK and its other global affiliate entities to provide staff with knowledge and experience of various processes and practices. Pursuant to that request, a secondment agreement was entered into between Centrica India and the overseas entities, under which some managerial employees of the overseas entities were deputed to Centrica India for short-term assignments ranging from three to nineteen months).

The general terms of these secondments were as follows:

  • The secondees had to function and act exclusively and as reports directly to Centrica India (i.e., under its control and supervision).
  • Overseas entities were not responsible for the work of the secondees and had no responsibility for their errors or omissions or for the work performed by them.
  • All the rules, regulations, policies and other practices established by Centrica India for its employees were to apply to the secondees. Centrica India had to bear all risks in respect of work performed by the secondees and had the benefit from their output.
  • The secondees continued to participate in the overseas entities' retirement and social security plans and other benefits in accordance with its applicable policies.
  • The termination clause in the secondment agreement was qua the parties to the agreement and was not qua the secondees.

Furthermore, as a matter of convenience to the seconded employees, their salaries were paid directly into their overseas bank accounts and claimed as reimbursement from Centrica India.

High court ruling

The Delhi High Court ruled that since the deputed employees were imparting technical expertise and know-how to the local employees of Centrica India, thereby transferring and making available their technical ability for future consumption, these services qualify as “technical services” under the Double Taxation Avoidance Agreement (DTAA) between India and the UK.

Furthermore, although the control and supervision of the seconded employees rested with Centrica India, since Centrica UK (and other global subsidiaries) bore all risks in relation to their work, (including the employees being entitled to participate in overseas retirement and social security plans and other benefits), there was no purported relationship between Centrica India and the deputed employees (distinguishing between Legal Employer and Economic Employer). Accordingly, the presence of the seconded employees triggered permanent establishment for Centrica in India.

Multinationals take note

The Centrica ruling, by itself, may not be the final verdict on how seconded employees can trigger a permanent establishment for a multinational company in India. But this ruling brings into focus how critically important the terms of a secondment agreement can be.

To ensure that a secondment agreement does not trigger a potential permanent establishment exposure, it is vital to document “substance” and the terms of employment, together with the rights and obligations of the employees, as comprehensively as possible.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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