Secondment and treaty taxation: deputed employees can create a service PE, shifting only effectively connected fees to business profits.

Seconded employees can create a service permanent establishment in India where the treaty threshold is met, even if they remain on the foreign enterprise's payroll and retain lien, and stewardship or preparatory activities do not by themselves create a PE. Receipts for transfer of know-how, patents, trademarks and confidential information were treated as royalty, while consideration for services rendered through personnel was treated as fees for technical services. The treaty override to the business profits article applied only where such income was effectively connected with the permanent establishment; on that basis, fees linked to the deputed employees moved to business profits, while royalty and other technical fees without effective connection remained taxable under the relevant royalty/FTS article.

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Issues: (i) Whether the deputation of eight employees of the assessee to the Indian enterprise constituted a service permanent establishment in India under the treaty. (ii) Whether the receipts from transfer of intellectual property rights and services rendered through personnel were taxable under the royalties and fees for technical services article or were to be brought under the business profits article by reason of the treaty override clause.

Issue (i): Whether the deputation of eight employees of the assessee to the Indian enterprise constituted a service permanent establishment in India under the treaty.

Analysis: The treaty provision on services permanent establishment required furnishing of managerial or similar services in India through employees or other personnel for an aggregate period exceeding the prescribed threshold. The temporary technical consultants and resident technical consultants were found to be part of the assessee's own personnel on secondment, with the assignment agreement only formalising the terms already contemplated by the technology transfer arrangement. The employees continued to remain on the assessee's payroll, retained their lien, and were not shown to have become employees of the Indian enterprise. Stewardship activities and inspection or testing activities were treated as preparatory or auxiliary and therefore did not create a permanent establishment.

Conclusion: The deputed eight employees constituted a service permanent establishment in India, and the contrary finding was reversed.

Issue (ii): Whether the receipts from transfer of intellectual property rights and services rendered through personnel were taxable under the royalties and fees for technical services article or were to be brought under the business profits article by reason of the treaty override clause.

Analysis: The transfer of know-how, patents, trademarks and confidential information was held to be royalty, while the consideration attributable to services rendered by the personnel was fees for technical services. The treaty clause sending income back to the business profits article applied only where the royalty or fees for technical services were effectively connected with the permanent establishment. The royalty for transfer of intellectual property rights was not effectively connected with the permanent establishment. The fees attributable to the second category of personnel also lacked such effective connection. By contrast, the fees attributable to the secondment of the eight employees arose out of the very contract that was effectively connected with the permanent establishment, and therefore moved to the business profits article for computation and taxation.

Conclusion: Royalty and fees for technical services relating to the second category of personnel remained taxable under the royalties and fees for technical services article, while fees for technical services relating to the deputed eight employees were taxable under the business profits article.

Final Conclusion: The Revenue succeeded on the existence of a service permanent establishment and on the tax treatment of the deputed employees' consideration, but only partly succeeded on the overall tax characterization issue; the assessee succeeded on the interest issue under section 234B.

Ratio Decidendi: Personnel on secondment who remain employees of the foreign enterprise can constitute a service permanent establishment, and treaty income is shifted to the business profits article only where the royalty or technical fee is effectively connected with that permanent establishment.

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