Secondment payments treated as taxable service income, creating a service PE and triggering withholding tax on remittances.

Payments under the secondment arrangement were treated as consideration for services, not mere salary reimbursement, because the foreign entities remained the employers, supplied the secondees, and continued to bear employment-related obligations. The arrangement constituted fees for technical services under the India-UK treaty and satisfied the make-available test under the India-Canada treaty, giving the foreign entities a service permanent establishment in India. The amounts therefore accrued as income to the overseas entities and were taxable in India, so the Indian payer was required to deduct tax at source under section 195. The writ petition failed and the advance ruling was sustained.

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Issues: (i) Whether payments made by the assessee to the overseas entities under the secondment arrangement were fees for technical services and gave rise to a service permanent establishment under the relevant tax treaties; (ii) Whether the amounts paid were mere reimbursement of salary costs or income accruing to the overseas entities and outside the doctrine of diversion of income by overriding title; (iii) Whether tax was deductible at source under section 195 of the Income-tax Act, 1961.

Issue (i): Whether payments made by the assessee to the overseas entities under the secondment arrangement were fees for technical services and gave rise to a service permanent establishment under the relevant tax treaties.

Analysis: The seconded personnel were supplied by the overseas entities and remained on their payroll with continuing entitlement to their employment benefits. The arrangement showed that the overseas entities rendered services through those personnel to the assessee. Their functions were managerial in character and, under the India-UK treaty, fell within the broader treaty definition of fees for technical services. Under the India-Canada treaty, the secondment also satisfied the additional requirement that technical knowledge, experience, skill, know-how or processes were made available to the assessee for future use. The overseas entities therefore had a service permanent establishment in India through the secondees.

Conclusion: The issue is decided against the assessee.

Issue (ii): Whether the amounts paid were mere reimbursement of salary costs or income accruing to the overseas entities and outside the doctrine of diversion of income by overriding title.

Analysis: The nomenclature of reimbursement was not determinative. The contractual structure showed that the overseas entities remained the employers responsible for salary and benefits, while the assessee paid for the provision of personnel and associated services. The payment was not diverted at source by an overriding title in favour of the secondees. It accrued to the overseas entities and their own contractual obligation to the employees was separate from the assessee's liability to them.

Conclusion: The issue is decided against the assessee.

Issue (iii): Whether tax was deductible at source under section 195 of the Income-tax Act, 1961.

Analysis: Since the payments constituted income in the hands of the overseas entities and were taxable in India under the applicable treaty and domestic law, the assessee was obliged to deduct tax at source on the remittances made under the secondment arrangement.

Conclusion: The issue is decided against the assessee.

Final Conclusion: The writ petition failed and the advance ruling was sustained, with the consequence that the assessee remained liable to deduct tax at source on payments made under the secondment arrangement.

Ratio Decidendi: Where foreign employees are seconded to an Indian subsidiary but remain attached to and remunerated by the foreign employer, and the arrangement results in the provision of managerial or technical services that make available skill or know-how, the payments are taxable income of the foreign employer and attract withholding under section 195.

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