Posting to India: A comment on the consequences of current Indian case law in the so-called “Centrica case” by Burkhard Wiegert, WB finance & compliance®.

A few years ago, the international company “Centrica Plc” transferred some back-office activities such as accounting, debt collection and customer relationship to Indian third-party companies. In order to coordinate the work of these third-party companies and ensure compliance with certain quality standards, a local subsidiary was founded (Centrica India Pvt Ltd; “CIPL” for short).

In order to enable the subsidiary to carry out its tasks, the British parent company sent several employees from the parent company to its Indian subsidiary on the basis of secondment contracts. Salary payments for these employees continued to be made directly by the parent company on behalf of the subsidiary. The subsidiary reimbursed these costs to the parent company.

The question now arose as to whether these payments were “real” refunds. Refunds of salary payments would not have any service tax or withholding tax (see also here) inferior.

The court opinion did not see posted employees as employees of the Indian company, but rather as employees of the parent company. Here is a selection of the arguments:

  • The employment relationship with the parent company continues to be guaranteed regardless, even if the Indian company terminates the contract.
  • The employee remains in the parent company's social plans or under the influence of British social security.
  • The Indian subsidiary's payments to the parent company are independent of the parent company's obligation to pay salary to the assignee.
  • The employee is at least indirectly subject to instructions from the parent company.

According to the Indian court, the parent company had provided services to the Indian subsidiary by transferring business knowledge to the subsidiary through the delegates. Consequently, the payments now had to be reprocessed as “payment for technical services”; so service tax and withholding tax also applied.

Posting and its legal consequences

And now, from our perspective, things get really exciting!

The postings were each intended to last at least one to two years. The determination that the employees cannot be attributed to the Indian subsidiary and that the British parent company has provided services in India to an Indian company (namely the subsidiary) for more than half a year leads directly to one under Indian tax law taxable permanent establishment.

Even if the agreed double taxation agreements provide for certain exceptions, less than pleasant discussions with the Indian tax office seem to be inevitable. From our experience, the risk that an Indian tax official comes to a one-sidedly disadvantageous assessment and seeks to tax as large a portion of the company's profits as possible in India is absolutely realistic.

The second – at least equally unpleasant – risk is that foreign parent company falls directly within the reach of Indian jurisdiction via its permanent establishment. Many foreign investors set up an Indian subsidiary precisely because they want to minimize tax and liability risks. But with a permanent establishment established in India, every Indian plaintiff would have the immediate opportunity to sue the parent company directly in India. And this in a legal system in which I can bring any absurd lawsuit to trial with the “right lawyers”...

Waiver of posting...?

Does this mean that as a German parent company I should currently completely forego “classic” postings to India?

Easier said than done! Because exactly the aspects listed above (guarantee of continued employment after return, remaining in social security or social plans, authority only to give instructions through the parent company, etc.) are a basic requirement for many employees to even agree to employment in India. A dilemma!

This topic is even more important to treat them with due care and not to send them out “blindly” at random. Because in practice there is not only “black & white”. That's why you should check all possible models for feasibility and risks - not only in Germany, but also in India! – check and discuss.

Evaluate your existing and possible posting models and create simple, clearly understandable structures. If you need help or “critical” feedback, please contact us. WB finance & compliance® – the specialist department of Dr. Wamser + Batra group of companies on questions of Indian administration and Indian corporate law.