Secondment of employees by foreign entity to Indian entity may not amount to a PE

The Income Tax Appellate Tribunal, New Delhi, India (ITAT) on 6 July 2020, in DDIT, Circle-2(2), New Delhi v M/s. Yum! Restaurants (Asia) Pte. Ltd, decided on whether a seconded employee of a non-resident entity amounted to the creation of a permanent establishment (PE) as per the India-Singapore Agreement For Avoidance Of Double Taxation (DTAA).  

A brief summary of the ITAT Order is as follows: 

  • Yum! Restaurants (Asia) Pte. Ltd (Assessee) entered into a Technology License Agreement with Yum! Restaurants (India) Private Limited (YRIPL) and the Assessee deputed an employee to YRIPL through a Deputation Agreement. The salary of the employee was paid by the Assessee but reimbursed to the Assessee by YRIPL.
  • YRIPL had both franchised outlets and its own stores in India.
  • The two issues involved in the appeal were-
  1. Whether the employee seconded by the Assessee constituted a service PE in India per the DTAA?
  2. Whether business income could be attributed to the Assessee on account of the marketing activities of its Indian affiliates which created a Dependent Agent PE as per the DTAA?
  • On the first issue, Deputy Director of Income Tax, Circle-2(2), New Delhi (DDIT) argued that the employee was in India to promote the business of the Assessee and the functions of the employee benefitted YRIPL as well as the Assessee.
  • In effect, the DDIT put forth that the reimbursement for salary provided by YRIPL amounted to a fee for technical services’ taxable on the Assessee in India.
  • The counsel for the Assessee however, highlighted that it had no right or lien over the employment of the seconded employee and he was not an employee of the Assessee.
  • Regarding the second issue of the creation of a Dependent Agent PE, the counsel for the Assessee argued that the Assessee was not a party to the franchise agreement between YRIPL and its franchisees and no business was undertaken by YRIPL for the benefit of the Assessee.

Findings of the ITAT

  • The Tribunal examined the clauses of the Deputation Agreement of the employee, which provided that the lien on employment was with the Indian entity, YRIPL.
  • The Tribunal reiterated the findings of the CIT that once the deputation of the employee was over, he was permanently moved to the payroll of YRIPL and the salary of the employee was already brought to tax in India and claimed as a business expense by YRIPL.
  • The Tribunal also held that in the absence of any separate service agreement between the Indian entity and the Assessee, and as there was no right/ lien on his employment, there could not have been a service PE.
  • The Tribunal reiterated the finding of the CIT that the Assessee “had simply acted as conduit to pay salary to him in Singapore as his family was in Singapore”.
  • The Tribunal also held that the case was distinguishable from the decision of the Hon’ble Delhi High Court in Centrica India Offshore Pvt. Ltd. v Commissioner of Income Tax-I and Ors. [2014] 364 ITR 336, wherein the non-resident company was clearly providing services and know-how through their seconded employees.
  • Based on these findings, the Tribunal upheld the CIT(A)’s decision that there was no service PE in India.
  • On the second issue, the ITAT held that none of the conditions for a Dependent Agent PE had been satisfied as per the DTAA. The ITAT further observed that the marketing activities were conducted on behalf of YRIPL and its franchisees and in the absence of any link with the business of the Assessee, there was no merit in attributing such income for constitution of a dependent agent PE.

A copy of the order dated 6 July 2020 of the ITAT, New Delhi can be accessed at:!%20RESTURANTS%20ASIA%20PTE.LTD..pdf