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Case Laws Income Tax
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Salary expense genuineness requires proof of actual services, business purpose, and fair testing of adverse third-party statements.
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Proof of tenancy rights governs insolvency recovery of corporate-debtor premises from occupants lacking enforceable possessory interests.
Where premises form part of the corporate debtor's assets, Sections 18 and 25 of the Insolvency and Bankruptcy Code, 2016 require the resolution professional to take custody, control, preservation and protection measures. An occupant resisting recovery must prove a subsisting tenancy, leasehold interest or enforceable licence through reliable evidence of the parties' intended relationship and its essential terms. Permission to stock goods or conduct limited business activity, prolonged occupation, and business or utility records do not independently create rights in the premises. Section 60(5)(c) supports insolvency jurisdiction over asset-recovery measures connected with the insolvency estate.
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Case Laws Customs
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Reasonable belief in gold seizure requires recorded objective grounds before the reverse burden for smuggling can arise.
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Case Laws Income Tax
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Political contribution deductions require proof that payments are genuine, not merely bank transfers, receipts, and recipient registration.
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Case Laws GST
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Estate-limited GST recovery permits post-death assessment of legal representatives while protecting heirs' independent assets after business discontinuance.
Section 93 permits post-death GST determination against a legal representative where a liable person dies. If the business is discontinued, tax, interest and penalty may be recovered only from the deceased's inherited estate and only within its capacity; the heir's independent assets remain outside that limit. Proceedings may be initiated without a pre-death notice, but must be addressed to the legal representative in that capacity, follow the applicable adjudication process, and provide hearing and a reasoned order.
Case Laws FEMA
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Recorded reasons to believe govern foreign-asset seizure; non-confirmation requires appellate resolution before contradictory adjudication proceeds.
Section 37A permits seizure of equivalent domestic assets only where the authorised officer records written reasons to believe that foreign assets are held in contravention of FEMA. The competent authority must examine the material after hearing both sides and either confirm or set aside seizure. A reasoned non-confirmation based on an absent statutory threshold is substantive on seizure, though it does not finally decide the underlying contravention. Pending appeal, the adjudicating authority cannot displace that finding or adopt a contrary premise; Section 37A(4) applies only to confirmed seizure.

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Employee Secondment under the India-USA DTAA: Employment Rights, Reimbursements and Included Services

2 November, 2026

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This commentary provides doctrinal analysis and practical insights on the legal issue discussed below. The judgment is analysed in the context of its factual background, issues framed, and conclusions reached by the Court.

2026 (6) TMI 1051 - DELHI HIGH COURT

1. Introduction

Cross-border secondment presents two distinct income-tax questions: who employs the personnel during their Indian assignment, and whether the overseas enterprise earns consideration for services through those personnel. Neither the description "salary reimbursement" nor deduction of tax from employees' salaries conclusively answers the second question.

In 2026 (6) TMI 1051 - DELHI HIGH COURT, the High Court decided the secondment issue in favour of the revenue authority. It held that the secondees retained their employment connection with the US assessee and that their functions made technical knowledge, skills and experience available to the Indian host entities. Recovery of their costs was consequently taxable as technical-service consideration under domestic law and Article 12 of the India-USA Double Taxation Avoidance Agreement.

The decision requires careful separation of operational supervision, underlying employment rights, the character of inter-entity receipts and the treaty's additional "make available" condition. It does not justify treating every secondment as taxable merely because an overseas payroll or return arrangement exists.

2. Legal & Statutory Context

Domestic source rule and the salary exclusion

Section 9(1)(vii)(b) of the Income-tax Act, 1961, corresponding to Section 9(7)(a)(ii) of the Income Tax Act, 2025, deems fees for technical services payable by a resident to accrue or arise in India. The exception concerns services utilised in a business or profession carried on outside India, or for making or earning income from a source outside India.

Explanation 2 to Section 9(1)(vii), corresponding to Section 9(7)(b) of the Income Tax Act, 2025, defines FTS as consideration for "managerial, technical or consultancy services", including "the provision of services of technical or other personnel". Crucially, it excludes consideration "which would be income of the recipient chargeable under the head 'Salaries'". The statutory question is therefore the character of the recipient's income, not merely whether salary expenditure underlies a payment.

For employees themselves, Section 9(1)(ii), corresponding to Section 9(3)(a) of the Income Tax Act, 2025, treats salary earned in India as Indian-source income. Salary payable for services rendered in India is regarded as earned in India. This employee-level source rule must remain distinct from the overseas enterprise's service receipts.

Treaty protection and the additional inclusion threshold

Section 90(2) of the Income-tax Act, 1961, corresponding to Section 159(4) of the Income Tax Act, 2025, provides that domestic provisions apply "to the extent they are more beneficial to that assessee". Consequently, the broader domestic definition cannot dispense with a narrower applicable treaty requirement.

Under Article 12(4) of the India-USA DTAA, "fees for included services" covers payments for technical or consultancy services, including through technical or other personnel, where the specified conditions are met. The relevant limb, Article 12(4)(b), requires services that:

"make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design."

Thus, the presence of technically qualified personnel is not itself sufficient. Under the knowledge-transfer limb, the recipient must acquire an enduring capability rather than merely receive the benefit of expertise applied by another person.

Article 12(5)(e), beginning "Notwithstanding paragraph 4", excludes amounts paid "to an employee of the person making the payments". Its employment limb makes the identity of the employer important. However, payment to an overseas enterprise does not become an employee payment merely because its amount corresponds to payroll costs. The enquiry remains whether the enterprise receives service consideration or merely recovers expenditure discharged on the Indian employer's behalf.

Salary taxation and withholding on enterprise receipts

Section 192(1) of the Income-tax Act, 1961, corresponding to Section 392(1) of the Income Tax Act, 2025, requires deduction from income chargeable as salary "at the time of payment", at the average rate calculated on estimated salary income for the relevant year.

By contrast, Section 195(1) of the Income-tax Act, 1961 concerns payments to specified non-resident recipients of a "sum chargeable under the provisions of this Act", excluding income chargeable as salary. Deduction ordinarily arises on credit or payment, whichever is earlier. Its corresponding non-salary non-resident payment provision is Section 393(2), Table, serial number 17, of the Income Tax Act, 2025.

Article 16 of the India-USA DTAA separately governs employment remuneration. Employment exercised in India may attract Indian taxation. The short-stay exception requires all three conditions: presence not exceeding an aggregate of 183 days in the relevant taxable year; payment by or on behalf of an employer not resident in India; and remuneration not borne by that employer's Indian permanent establishment, fixed base or trade or business. These employee-level rules do not determine whether the overseas enterprise separately earns included-service income.

The alternative business-profits enquiry

Article 5(2)(l) of the India-USA DTAA addresses furnishing services through employees or other personnel, but expressly excludes "included services as defined in Article 12". Its alternatives concern activities aggregating more than 90 days within any twelve-month period, or services performed for a related enterprise. Both require the foreign enterprise to furnish services within India; corporate association alone does not establish that activity.

Article 7 of the India-USA DTAA governs business profits and the consequences of an Indian PE. Article 7(6) preserves the operation of articles separately dealing with particular income, while Article 12(6) redirects attributable receipts to the applicable business-profits or independent-personal-services framework where its conditions are satisfied. Accordingly, failure of the included-services test is not necessarily the end of the tax enquiry, but neither does it automatically establish a service PE.

3. Interpretative Issues

The principal questions are connected but should not be collapsed into a single test:

  • Does exclusive control over daily work establish Indian employment despite continuing overseas employment rights?
  • Is the Indian host's power to end an assignment equivalent to power to terminate the underlying foreign employment?
  • Does offshore payroll administration discharge the Indian host's obligation, or the foreign employer's independent obligation?
  • Does the secondee merely apply expertise, or transmit a capability that the host can subsequently use independently?
  • Does reimbursement of actual expenditure establish absence of income, or merely determine the price of a service?
  • What evidentiary weight attaches to salary withholding, employment contracts, repatriation provisions and continuing social-security benefits?

Two distinctions are particularly important. First, operational control and enduring employment attachment may point in different directions. Secondly, identifying the foreign enterprise as employer does not, without further analysis, establish the "make available" requirement.

4. Detailed Commentary & Analysis

Contractual integration did not conclude the employment enquiry

The assessee relied on extensive provisions favouring Indian employment. The arrangements contemplated exclusive Indian control and supervision, local performance appraisal, responsibility for salary and expenses, disciplinary authority and restrictions on recall. They also stated that the foreign employment privity and lien would cease during Indian employment. Payments made overseas were described as administratively convenient disbursements recoverable at actual cost without markup.

The High Court nevertheless concluded that the foreign employment attachment survived. It emphasised the limited assignment period, return to the assessee, continuing overseas benefits and the distinction between ending the Indian assignment and severing employment with the assessee. The Indian host entities could relieve the secondees, but could not terminate the underlying overseas employment relationship.

This contractual tension is central to the ruling. A clause declaring cessation of lien was not treated as conclusive when the wider arrangement indicated continuing attachment and eventual resumption of the foreign employment. The Court regarded the assessee as retaining overarching control despite local operational supervision.

Doctrinally, an economic-employer enquiry examines the actual allocation of employment rights and obligations. Day-to-day supervision is significant, but the judgment shows that it may not outweigh salary obligations, benefit continuity, dismissal rights and the temporary nature of the placement. Conversely, the description "deputation" cannot alone replace that substantive enquiry.

"Make available" requires transmission, not merely technical effort

The technical-enablement test reproduced in the judgment requires knowledge or skill to be imparted to and absorbed by the recipient so that it can deploy the relevant techniques without continuing dependence on the provider. As the quoted formulation explains, "It is not enough that the services offered are the product of intense technological effort".

The High Court found the threshold satisfied because the functions included training, implementation of group policies and processes, and maintenance of quality standards. It accepted the finding that, once the processes were imbibed, the Indian host entities could apply them without the secondees' continuing assistance.

The relevant transfer need not involve ownership of formal intellectual property. Techniques and skills required to operate a business-described in the reasoning as "soft intellectual property"-can satisfy the clause. Nevertheless, the finding remains capability-based: neither professional qualifications nor a general assertion of enduring commercial benefit substitutes for identifying what the recipient can thereafter do independently.

The decision therefore makes linkage evidence especially important. Training obligations, implementation work and the capability allegedly transferred must be connected to the particular secondment and payment being examined. The existence of group policies, without that connection, should not be converted into a universal presumption of treaty inclusion.

Reimbursement and absence of markup are not independent exemptions

The Court rejected the proposition that recovery at actual cost necessarily excludes taxable income. If the foreign enterprise supplies services through personnel who remain its employees, recovery of the corresponding expenditure can constitute consideration for those services. The word "reimbursement" describes the payment mechanism but does not conclusively identify its legal character.

A genuine payment made on behalf of an Indian employer remains distinguishable. The critical question is whose obligation was discharged and whether the foreign enterprise supplied a separate service. Cost reconciliation is necessary to substantiate reimbursement, but it cannot cure an adverse finding about the underlying service relationship.

This distinction also explains why absence of profit is not decisive. Where Section 115A of the Income-tax Act, 1961 applies, subsection (3) disallows expenditure or allowance deductions under the specified computation provisions. Taxability of covered receipts is therefore not determined simply by showing that the enterprise recovered no more than its expenditure.

Salary withholding does not settle enterprise-level chargeability

Salary taxation addresses the employees' remuneration. Taxation of an overseas enterprise addresses its separate receipt for services. Accordingly, salary withholding does not by itself establish impermissible double taxation or extinguish a separately established withholding obligation on service consideration.

The converse is equally important: where the Indian host is genuinely the employer and the overseas enterprise merely disburses salary on its behalf, the remittance may lack any independent income character. The conclusion follows from the employment and payment structure, not from salary deduction alone.

The secondment determination was final, not a remand

The High Court answered the secondment questions in favour of the revenue authority and set aside the tribunal's contrary conclusions. It characterised the tribunal's treatment as perverse and per incuriam because adequate reasons were absent and the applicable secondment precedent had not been properly addressed. Ordinary deference to factual findings in an appeal under Section 260A did not protect an inadequately reasoned conclusion.

The separate remand concerning other service receipts should not be confused with this determination. The secondment reimbursement issue itself was decided against the assessee.

5. Judicial / Administrative Perspective

Continuing foreign employment and taxable consideration

In 2014 (5) TMI 154 - DELHI HIGH COURT, the Court examined whether secondment recoveries were service consideration despite local supervision and salary withholding. The secondees retained overseas employment, benefits and lien; the Indian host could end secondment but not the underlying employment. Their functions also built the host's ability to perform the work subsequently. The Court treated the receipts as consideration, applied the relevant technical/included-services provisions and sustained withholding. This was the central authority applied in the principal ruling: continuing foreign employment and actual skill transmission outweighed reimbursement terminology and absence of markup.

The earlier advance ruling in 2012 (3) TMI 243 - AUTHORITY FOR ADVANCE RULINGS requires separate treatment. It found that salary claims lay against the foreign employers and rejected both the reimbursement argument and diversion by overriding title. However, it did not classify the demonstrated managerial functions as treaty technical or included services. Instead, it found a service PE and consequent withholding liability. Its significance lies in showing that income character, FTS classification and PE-based chargeability are separate questions. Its managerial-services conclusion must not be presented as identical to the subsequent High Court's technical-service analysis.

In 2012 (8) TMI 466 - AUTHORITY FOR ADVANCE RULINGS, involving a US foreign principal, salary and benefits continued overseas and dismissal rights remained with that principal. The Indian host could terminate the assignment, not the employment. The Authority held that the recoveries were income rather than mere reimbursement and required withholding. It did not finally determine the precise treaty character or applicable withholding rate on the material available. The ruling supports examination of surviving employment rights, but cannot establish the "make available" condition without evidence of the relevant functions.

A contrasting reimbursement analysis appears in 2009 (1) TMI 19 - AUTHORITY FOR ADVANCE RULINGS. Although the foreign entity remained employer, the Authority treated partial recovery of salary and benefits within a mutually beneficial contractual arrangement as reimbursement rather than income-generating consideration. Detailed salary particulars, debit notes and reciprocal commercial terms informed the result. This authority demonstrates that foreign-employer status alone does not answer every receipt-characterisation question. It does not, however, displace the principal ruling where continued employment and an identifiable included service were affirmatively found.

Indian employment and genuine salary reimbursement

In 2009 (1) TMI 363 - ITAT BANGALORE-A, the tribunal examined secondment alongside appointment as managing director, board resolutions and corporate powers. The secondee devoted his time to the Indian host, followed its directions and was subject to its approval and replacement rights. These instruments established employment for practical purposes. Accountability, indemnity and warranty provisions were inconsistent with an independent technical-services contract; confidentiality alone did not change that conclusion. Salary reimbursement therefore attracted no further withholding. The relevance lies in the substantive employment framework, not in a general exemption for all secondments.

In 2012 (2) TMI 549 - ITAT BANGLORE, the question was whether expatriate salary reimbursement attracted non-resident withholding. Full-time service under the Indian host's direction and control, together with its contractual responsibilities, led the tribunal to recognise the host as economic employer. It treated the arrangement as employment rather than technical-service provision and held that salary withholding did not require an additional deduction on the reimbursement. Its application depends on establishing the Indian employment relationship that the principal ruling found insufficiently demonstrated on its own facts.

The separate decision in 2012 (2) TMI 550 - ITAT BANGALORE likewise considered the distinction between employment and a technical-services contract. The tribunal relied on reporting obligations, host policies, replacement rights, supervision and indemnity arrangements to identify the Indian host as employer during deputation. Overseas payment of emoluments for convenience did not alter the salary character. The decision illustrates a contractual route to genuine local employment, but its reasoning cannot be reduced to the proposition that operational supervision necessarily defeats continuing foreign employment rights.

In 2022 (4) TMI 1444 - ITAT BANGALORE, the tribunal considered the India-USA treaty framework directly. Separate Indian employment contracts, local control, salary withholding on the entire remuneration and employees' Indian returns supported economic employment by the Indian host. The recoveries were cost-to-cost, and the "make available" requirement was not satisfied. The tribunal rejected FTS/FIS characterisation and consequential default and interest treatment. Its importance is the concurrence of two findings-genuine Indian employment and absence of knowledge transfer. Neither can be assumed solely because payroll documentation exists.

In 2022 (6) TMI 1251 - KARNATAKA HIGH COURT, the Court examined a payer's application under Section 195(2) in the India-USA treaty context. Appointment letters, local control, employment treatment and actual-cost recovery supported the payer's position, while the assessing authority had failed to establish "make available". The Court directed issuance of a nil-deduction certificate for that limited determination. It also recognised the payer's statutory remedy as distinct from the recipient's mechanism under Section 197. The case supplies both a substantive contrast and a procedural safeguard: a withholding determination requires examination of chargeability, not merely identification of personnel provision.

In 2023 (1) TMI 922 - ITAT DELHI, the assignment agreements expressly placed employer rights with the Indian host and required the foreign entity to surrender those rights during assignment. Salary treatment was supported by withholding certificates and employee returns. The tribunal rejected FTS characterisation under domestic law and the India-Japan treaty. The employment findings offer a useful comparison, particularly the effective surrender of foreign rights. The treaty conclusion cannot, however, replace the separate language-based enquiry required under Article 12 of the India-USA DTAA.

In 2024 (9) TMI 77 - ITAT DELHI, the tribunal examined transfer arrangements, memoranda and employment contracts rather than treating secondment as inherently taxable. The Indian associated enterprises were found to exercise direct control, bear salary obligations and operate salary withholding; no material established an independent managerial or technical service by the foreign enterprise. The recoveries were therefore not FTS. Its relevance is evidentiary: identifying services rendered by the foreign enterprise is a distinct requirement. Its India-Japan treaty setting also cautions against assuming identical treaty outcomes.

In 2023 (11) TMI 187 - ITAT CHENNAI, the issue arose through disallowance of secondment expenditure for alleged failure to withhold. Exclusive Indian control, actual-cost reimbursement and salary withholding evidenced by certificates supported deletion of the disallowance. The tribunal treated a service-tax authority relied upon by the department as inapplicable to that income-tax question. The ruling illustrates that payer-side deduction disputes turn on the same underlying receipt characterisation; it does not establish that salary withholding invariably excludes a separately proved foreign-enterprise service.

Limited comparison with indirect-tax employment findings

In 2020 (12) TMI 1018 - CESTAT BANGALORE, the tribunal found an employer-employee relationship and rejected manpower-supply classification because salary disbursement and reimbursement did not establish the necessary service-provider relationship. The employment indicia are comparable, but the service-tax result does not determine included-service income under the treaty. The Supreme Court manpower-supply reasoning invoked in the administrative proceedings in the principal dispute also prevents treating a tribunal-level employment conclusion as a universal rule for secondment.

In 2020 (9) TMI 7 - CESTAT BANGALORE, local direction and control supported employment, while overseas payroll continuity for social-security and retirement purposes was not treated as converting the arrangement into manpower supply. This is a useful factual contrast: the principal income-tax ruling gave continuing benefits weight alongside lien, repatriation and restricted termination powers. The difference reinforces the need to evaluate the complete employment relationship under the relevant charging framework.

In 2019 (8) TMI 8 - CESTAT NEW DELHI, the tribunal applied the employment exclusion to a secondment arrangement supported by local control, statutory contributions and salary withholding. The relevant service-tax distinction concerned service "by an employee to the employer in the course of or in relation to his employment". This supports examination of actual employment conduct, but does not establish that an overseas enterprise's recovery is necessarily outside Article 12.

In 2023 (5) TMI 523 - CESTAT NEW DELHI, the tribunal excluded secondee-related reimbursements and benefits from taxable value where they were not consideration for the service. Its analysis centred on Section 67 of the Finance Act, 1994 and the amount charged "for such service". The limited comparative lesson is that consideration must be identified, not presumed from expenditure recovery. Service-tax valuation cannot itself determine whether the foreign enterprise earns taxable treaty income.

In 2025 (7) TMI 1611 - KARNATAKA HIGH COURT, exclusive functional and administrative control, direct salary payment, Indian tax deductions and employment benefits supported genuine employment within Entry 1 of Schedule III to the CGST Act, 2017. That employment analysis is relevant by comparison. The GST charging and valuation framework, however, cannot substitute for determining foreign-enterprise income and the "make available" condition under the India-USA DTAA.

6. Implications & Observations

The authorities disclose materially different outcomes, but not a safe classification based solely on the word "secondment". The principal ruling places substantial weight on continuing foreign employment and demonstrable transfer of capability. Decisions favouring reimbursement generally rest on affirmative findings of Indian employment, absence of a separate foreign-enterprise service, or failure of the applicable treaty threshold.

A coherent examination therefore covers:

  • Employment instruments and actual conduct: appointment, salary liability, appraisal, discipline, dismissal, recall, repatriation and enforceable employee rights.
  • Surviving foreign rights: whether they are genuinely suspended, or continue through lien, benefits and a return obligation.
  • Payment evidence: payroll records, debit notes and reconciliation demonstrating whose expenditure was discharged.
  • Service evidence: the particular training, techniques, processes or other capability transferred, and the recipient's ability to use it independently.
  • Separate tax streams: employee salary compliance and enterprise-level chargeability, followed by the appropriate withholding enquiry.
  • Reasoned adjudication: findings addressing both employment and treaty inclusion rather than relying exclusively on certificates, labels or professional qualifications.

Section 195(2) permits the payer to seek determination of the appropriate chargeable proportion. The nil-deduction authority discussed above confirms the relevance of that safeguard without converting a tentative withholding determination into a universal final assessment of secondment arrangements.

Treaty reliance also remains subject to the residency-certificate and prescribed-information requirements in Section 90(4) and (5), corresponding to Section 159(8) of the Income Tax Act, 2025. These procedural requirements support treaty access; they do not prove satisfaction or non-satisfaction of Article 12's substantive conditions.

Finally, substance-over-form analysis does not dispense with evidence. Contractual declarations cannot conclusively control tax characterisation, but neither can they be disregarded merely because they produce a favourable tax result. Their operation must be tested against the allocation of rights, obligations and services actually established.

7. Concluding Remarks

The principal ruling rejects a reimbursement-based exemption where secondees remain substantively attached to the US employer and transmit technical capability to Indian host entities. Its reasoning turns on the combination of surviving employment rights and satisfaction of Article 12(4)(b), not on overseas payroll administration alone.

The enduring distinction is between an Indian employment relationship supported by genuine salary disbursement arrangements and a foreign enterprise's provision of included services through its personnel. Accurate characterisation requires separate, reasoned findings on employment, consideration and knowledge transfer. Salary withholding and absence of markup remain relevant evidence, but neither is a complete answer.

 


Full Text:

2026 (6) TMI 1051 - DELHI HIGH COURT

Topics

Acts Income Tax