Written by the Delhi Legal Company India Entry & FDI Advisory team · Last updated August 2026 · Reviewed against Supreme Court and High Court authority and CBIC guidance
Introduction
The way almost every group instinctively structures a secondment is the way that creates the exposure.
The instinct is sensible. Keep the expatriate on home payroll so their social security and pension continue uninterrupted, have the Indian entity reimburse the cost, and treat it as an internal cost allocation.
Under this arrangement the secondee remains on the payroll of a foreign entity and receives the salary in the home country, while for all practical purposes working under the direction and control of the Indian entity. Generally, secondees are kept enlisted in the foreign entity during the secondment to obtain social security benefits in their home country.
That is precisely the fact pattern the Supreme Court examined in Northern Operating Systems, and it held the reimbursement to be consideration for a taxable supply of manpower.
The difficulty is that a secondment does not sit in one tax regime. In India it simultaneously touches four: corporate income tax via permanent establishment risk, individual income tax and withholding, goods and services tax via reverse charge on the salary reimbursement, and transfer pricing on the cross-border cost recharge. The same facts, depending on how the agreement is drafted and how the employment relationship is characterised, produce either a clean arrangement or a multi-year tax dispute.
Since 2022 the position has moved substantially in taxpayers’ favour on the indirect tax side — and, in July 2026, moved against them on a different front.
This guide sets out what the authorities actually decided, what has changed since, and the documentation that decides which side of the line an arrangement falls.
About this guide
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. Secondment is the arrangement where the most Indian tax regimes converge on a single set of facts, and where the drafting genuinely determines the outcome.
Where a rule is settled we state it. Where the case law is moving — and it is moving in both directions — we say so, because the honest position is that this is a documented factual position rather than a settled legal one.
Primary sources: Supreme Court and High Court authority on secondment, CBIC Instruction No. 05/2023-GST and Circular No. 210/4/2024-GST, and the income tax and GST frameworks.
1. Legal employer and economic employer
Everything turns on this distinction, so it is worth stating before the case law.
| Legal employer | Economic employer | |
|---|---|---|
| Question | Whose payroll is the person on? | Who directs the work, bears the cost and takes the benefit? |
| In a typical secondment | The overseas parent | The Indian entity |
| Evidenced by | The employment contract, payslips | Reporting lines, supervision, integration, who bears the cost |
Legal employment and economic employment are two distinct concepts, and tax liabilities should accrue only if the appropriate type of employment is ascertained and proved.
The Indian revenue’s position has been that where the two diverge — legal employer abroad, economic employer in India — the arrangement is a supply of manpower by the foreign entity rather than employment by the Indian one.
The structuring answer, therefore, is to make them converge.
2. Northern Operating Systems
The Supreme Court returned to secondments in CCE&ST v. Northern Operating Systems Pvt. Ltd. (2022) and held, on the indirect tax side, that the salary reimbursement to the overseas parent constitutes taxable consideration for manpower supply services.
2.1 The facts
The Indian assessee had an agreement with its overseas group companies to provide IT and back-office support. Employees from those overseas entities worked under the guidance and control of the assessee, with a letter of understanding issued to each secondee specifying the terms of employment. Their remuneration, including salaries and benefits, was initially paid by the overseas entity and subsequently reimbursed by the assessee.
The Court ruled that the overseas group entities were the actual employers of the seconded employees.
The Supreme Court held that the skills and expertise a secondee contributed to the Indian firm should be considered a service rendered by the overseas entity.
2.2 What changed
This was a departure from the previously settled position. The tribunal had ruled that in a secondment an employer-employee relationship comes into existence between the secondee and the host company. The Supreme Court held that service tax applies on secondment where the salary is disbursed by the overseas company and later reimbursed by the Indian company on actuals.
Note the last three words. On actuals — a pure cost reimbursement with no mark-up was still held to be consideration.
That is why groups that had assumed a no-margin recharge was safe found it was not.
3. The retreat since 2022
The position did not stay there, and the developments since matter more than the decision itself for a group structuring an arrangement today.
3.1 The CBIC instruction
Instruction No. 05/2023-GST dated 13 December 2023 directed that the decision in Northern Operating should not be applied mechanically in all cases. Investigation in each case requires careful consideration of its distinct factual matrix, including the terms of contract between the overseas company and the Indian entity, to determine taxability and the applicability of the principles laid down.
Because of the increased scrutiny following the judgment, the Board clarified that it should not be applied mechanically and instead be based on the facts in each case, including contractual terms. Courts have also granted interim relief to taxpayers facing show cause notices.
3.2 The valuation circular
GST Circular No. 210/4/2024-GST dated 26 June 2024 clarified that in related party transactions, where the recipient is eligible for full input tax credit, the declared value may be accepted and, if no invoice is raised, the value may be deemed “Nil”.
This is a powerful practical protection. Where the Indian entity can recover full input tax credit, the valuation route can reduce the exposure to nil even if the arrangement is characterised as a supply.
Relying on this circular, the Delhi High Court quashed demands for GST on salaries paid to seconded expatriates, holding that absent any mark-up and with full input tax credit available, the value of supply could be treated as nil.
3.3 Alstom and Metal One
Later decisions distinguished Northern Operating Systems on the facts, and the distinction is instructive because it maps directly onto how to structure.
The Supreme Court decision was based on facts where expatriates were not fully integrated into the Indian entity and continued to operate under foreign control. In Alstom, operational control was squarely with the Indian entity, expatriates worked exclusively for it, received salary directly, and were treated as employees under Indian labour law.
The Court concluded that the secondees were employees of the Indian company. As such, their services were excluded from GST under Schedule III and no manpower supply was involved. Even if the arrangement were viewed as a supply, the absence of consideration in the form of an invoice meant that the taxable value was “Nil”.
3.4 Where that leaves you
The judgments are encouraging for taxpayers but demand careful structuring. Revenue may continue to rely on Northern Operating Systems until the Supreme Court clarifies the distinction, and companies must prepare to defend their arrangements with strong factual records.
Two defences, in order of preference:
Primary. The secondee is an employee of the Indian entity, so Schedule III applies and there is no supply at all.
Fallback. Even if there is a supply, with no mark-up and full input tax credit available the value is nil.
Structure for the first and preserve the second.
4. The July 2026 development, on the other side
While the indirect tax position improved, the direct tax position has tightened.
In July 2026 the Delhi High Court reaffirmed that secondment cost reimbursements are taxable as fees for technical services.
4.1 Why this matters
This is a different characterisation on a different limb. Where the reimbursement is treated as fees for technical services, withholding obligations arise on the payment to the overseas entity — at treaty rates where a treaty applies and the documentation is in place, and at domestic rates where it is not.
So a group that has successfully argued no GST applies may still face a withholding question on the same payment.
4.2 The planning consequence
An arrangement structured only against the GST risk is structured against half the problem.
Where the reimbursement runs from the Indian entity to the overseas entity, ask the withholding question separately: what is this payment, under which treaty article, at what rate, with what documentation. See tax residency certificates and Form 10F.
The cleanest arrangements avoid the question by not having a cross-border payment at all — which is the point of putting the secondee on Indian payroll.
5. The four regimes, in one table
| Regime | The question | Driven by |
|---|---|---|
| Permanent establishment | Does the secondee create a service PE or a fixed place PE of the parent? | Whose business the secondee serves, and under whose control |
| Individual tax and withholding | Is the person taxable in India, and who withholds? | Residence, days present, and where the employment is exercised |
| GST | Is the reimbursement consideration for a supply of manpower? | Whether the Indian entity is the employer, and the valuation |
| Transfer pricing | Is the recharge at arm’s length? | Mark-up, benefit test, documentation |
| Provident fund | Contributions on what base? | International worker status — no wage ceiling, global remuneration for Indian services |
5.1 The regimes pull in the same direction
This is the useful insight, and it simplifies the design.
For GST, you want the Indian entity to be the employer. For permanent establishment, you want the Indian entity to be the employer — because a secondee who serves the parent’s business under the parent’s control is the classic service PE fact pattern. For transfer pricing, a person genuinely employed by the Indian entity removes the recharge question entirely.
All three point the same way. The only pull in the other direction is home social security — and section 8 addresses that.
See permanent establishment risk in India for the PE analysis in full.
6. What decides the outcome: documentation
Documentation is decisive. If expatriates are shown as employees on the Indian payroll with Indian tax withholding, the relationship will more likely be treated as employment.
Contractual control matters. Agreements must emphasise that day-to-day control, HR functions and disciplinary powers rest with the Indian entity.
Group entities should ensure secondment agreements unequivocally reflect the host entity as the operational and economic employer where the Schedule III exemption is intended, and maintain clear documentation such as board resolutions, payroll records, organisational charts and email correspondence to substantiate the nature of the employment relationship and withstand departmental scrutiny during audits or investigations.
6.1 The evidence that actually persuades
| Evidence | What it shows |
|---|---|
| Indian payroll and Indian withholding | The strongest single indicator |
| Employment agreement with the Indian entity | The legal relationship, not just the economic one |
| Organisational chart showing Indian reporting lines | Integration into the Indian business |
| Appraisal and performance records held by the Indian entity | HR function sits in India |
| Disciplinary authority vested in the Indian entity | Control in substance |
| Board resolution appointing or engaging the person | Corporate act, contemporaneous |
| Email correspondence showing day-to-day direction from India | What actually happened, not what the contract says |
| Provident fund enrolment with the Indian entity | Treatment as an employee under Indian law |
6.2 The last row is the one groups get wrong
Email correspondence is contemporaneous and it is what an investigation asks for. A file containing an immaculate secondment agreement and three years of emails showing the secondee reporting to the parent is worse than no agreement, because it demonstrates that the paperwork does not describe the arrangement.
The documents have to match the conduct, and the conduct is what is examined.
7. What does not work
| Approach | Why it fails |
|---|---|
| Reimbursing at cost with no mark-up | The Supreme Court held reimbursement “on actuals” was still consideration |
| Calling it a secondment in the agreement | The label does not determine the characterisation; the facts do |
| A letter of understanding with the secondee | Present in Northern Operating Systems and did not prevent the finding |
| Keeping the person entirely on home payroll | The single fact most associated with an adverse outcome |
| Documenting Indian control while the person reports abroad | Conduct defeats the paperwork |
| Assuming a short assignment is outside the analysis | Duration affects PE day counts but not the employment characterisation |
7.1 The “on actuals” point deserves emphasis
Groups reach for cost-only recharge as the conservative option, reasoning that where there is no profit there can be no service.
Northern Operating Systems held otherwise. The absence of a mark-up went to valuation, not to whether a supply occurred.
What the mark-up point does help with is the fallback defence — no mark-up plus full input tax credit supports a nil valuation. It is useful, but as a second line rather than a first.
8. The social security tension, and how to resolve it
This is the genuine constraint, and it is why groups keep people on home payroll in the first place.
8.1 The concern
An executive moved to Indian payroll for three years may break continuity in their home pension and social security, which is a real cost to the individual and a real obstacle to accepting the assignment.
8.2 The answer, in two parts
Home contributions can continue. Social security reimbursements are not fatal. Courts have accepted that such payments may continue overseas for regulatory compliance without undermining the employment character in India.
So the arrangement can put the secondee on Indian payroll for salary while home social security contributions continue and are reimbursed — and that residual reimbursement does not, by itself, defeat the position.
The salary of the secondees is directly disbursed by the Indian entity and the residual portion, mainly the social security benefit, is paid by the foreign entity and then reimbursed by the Indian entity.
That is the shape of the arrangement that works.
The Certificate of Coverage does the rest. Where an operative social security agreement exists between India and the home country, a Certificate of Coverage allows the employee to remain covered at home and exempts them from Indian provident fund contributions for the detachment period.
That resolves both sides: the person stays in their home system, and India does not double-charge.
8.3 Where there is no agreement
For a non-agreement country the position is harder. Indian provident fund applies as an international worker — no wage ceiling, contributions on the full remuneration for Indian services, and a balance locked until 58.
That is a cost to build into the assignment rather than a problem to structure around. See provident fund for international workers.
9. The service PE dimension
The Supreme Court’s foundational ruling in DIT v. Morgan Stanley & Co. Inc. (2007) addressed the service PE dimension.
The question on this limb is different from the GST one. It is whether the parent, through the secondee, is furnishing services in India for a period that crosses the treaty threshold — which creates a permanent establishment of the parent and brings attributable profits into Indian tax.
9.1 What reduces the risk
- The secondee works for the Indian entity’s business, not the parent’s
- The Indian entity, not the parent, bears the cost and takes the benefit
- The secondee does not report to, or take instructions from, the parent on day-to-day work
- Day counts are tracked against the applicable treaty threshold
- The secondee has no authority to conclude contracts binding the parent
9.2 The day-count register
Whatever the structure, maintain a day-count register per individual per treaty year. It is the primary control on the PE question and it cannot be reconstructed reliably after the fact.
10. Two situations, worked through
Scenario A — The arrangement that matched Northern Operating Systems
A US group seconds four executives to its Indian back-office subsidiary. All remain on US payroll, receive US salary and benefits, and the Indian entity reimburses the full cost on actuals. A letter of understanding sets out the terms with each secondee. Day-to-day they work under Indian management.
The problem. That is materially the Northern Operating Systems fact pattern — overseas payroll, reimbursement on actuals, letters of understanding, Indian operational control — and the Supreme Court held the reimbursement to be consideration for manpower supply.
What is available. The CBIC instruction that the decision should not be applied mechanically, and the valuation route where full input tax credit is available. Both are real, and both are defences rather than a clean position.
What would have been better. Indian payroll, Indian withholding, Indian employment agreements, with only the home social security element continuing overseas and being reimbursed.
Scenario B — The arrangement that worked
A European group seconds a senior engineer to its Indian subsidiary for two years. She signs an employment agreement with the Indian entity, is paid from Indian payroll with Indian withholding, is enrolled in provident fund, reports to the Indian managing director, and is appraised by the Indian entity. Her home pension contributions continue and are reimbursed by the Indian entity.
Why it holds. Legal and economic employer converge in India. The Schedule III position is available on the primary argument, the PE risk is materially reduced because she serves the Indian business under Indian control, and there is no cross-border recharge of salary to characterise.
What still needs doing. The residual social security reimbursement is a cross-border payment and needs its own characterisation. Day counts are tracked. The file holds the organisational chart, the appraisal records and the email trail showing Indian direction.
11. Twelve mistakes
- Keeping the secondee entirely on home payroll, which is the fact most associated with an adverse outcome.
- Assuming a no-mark-up recharge is safe. Reimbursement on actuals was still held to be consideration.
- Relying on the label. Calling it a secondment does not determine the characterisation.
- Relying on a letter of understanding, which was present in Northern Operating Systems and did not help.
- Structuring only against GST, when the July 2026 authority puts the reimbursement in issue as fees for technical services.
- Drafting Indian control while the person reports to the parent. Conduct defeats the paperwork.
- Not keeping the email trail, which is what an investigation actually examines.
- Treating the PE question as covered because the GST question was addressed. They are separate limbs.
- No day-count register, which cannot be reconstructed reliably afterwards.
- Assuming home social security forces home payroll. Courts have accepted that residual social security payments may continue without undermining the position.
- Not obtaining a Certificate of Coverage where an operative social security agreement exists.
- Not budgeting Indian provident fund on the full uncapped base where no agreement applies.
12. Checklist
Design
- Decision taken that the Indian entity will be both legal and economic employer
- Employment agreement with the Indian entity, not only a secondment agreement between the companies
- Indian payroll with Indian withholding, from the first month
- Only the residual home social security element left with the overseas entity
- Certificate of Coverage applied for where an operative social security agreement exists
- Provident fund cost on the uncapped international worker base budgeted where no agreement applies
- Employment visa sponsored by the Indian entity — see employment visas for expatriates in India
Documentation
- Secondment agreement stating that day-to-day control, HR functions and disciplinary powers rest with the Indian entity
- Organisational chart showing Indian reporting lines
- Board resolution recording the engagement
- Appraisal and performance records held by the Indian entity
- Payroll records evidencing Indian disbursement and withholding
- Email correspondence retained, showing day-to-day direction from India
The four regimes
- GST: primary position under Schedule III documented; fallback nil-valuation position preserved through no mark-up and full input tax credit
- Withholding: any cross-border reimbursement characterised, with treaty position and documentation in place
- Permanent establishment: day-count register maintained per individual per treaty year; no contract-concluding authority for the parent
- Transfer pricing: any recharge benchmarked and documented
- Individual tax: residence position assessed, Indian return filed, acknowledgements retained for visa renewal
Planning a secondment to India?
The instinctive structure — home payroll, cost reimbursement — is the one the Supreme Court examined and found taxable, and structuring against GST alone leaves the withholding question open. Tell us the role, the home country and how long the assignment runs and we will tell you whether a Certificate of Coverage is available, what the agreement needs to say, and what the arrangement costs across all four regimes.
13. Frequently asked questions
Q1. What is a secondment to India?
An arrangement where a parent company deputes an employee to work for its Indian entity. Typically the secondee remains on the overseas payroll and receives salary in the home country while working under the direction and control of the Indian entity, with the Indian entity reimbursing the cost.
Q2. Why is that arrangement risky?
Because it is materially the fact pattern the Supreme Court examined in Northern Operating Systems, where it held that salary reimbursement to the overseas parent constitutes taxable consideration for manpower supply services. The instinctive structure is the one that attracted the finding.
Q3. What is the difference between legal and economic employer?
The legal employer is whose payroll the person is on. The economic employer is who directs the work, bears the cost and takes the benefit. In a typical secondment they diverge — legal employer abroad, economic employer in India — and the revenue’s position has been that divergence indicates a supply of manpower rather than employment.
Q4. What did Northern Operating Systems decide?
That the overseas group entities were the actual employers of the seconded employees, and that the skills and expertise the secondee contributed to the Indian firm should be considered a service rendered by the overseas entity. Service tax was held to apply where salary was disbursed by the overseas company and reimbursed by the Indian company on actuals.
Q5. Does a cost-only reimbursement avoid the problem?
No. The Supreme Court held that reimbursement “on actuals” was still consideration — the absence of a mark-up went to valuation rather than to whether a supply occurred. No mark-up remains useful for the fallback nil-valuation argument, but it is a second line rather than a first.
Q6. Has the position softened since 2022?
Substantially, on the indirect tax side. CBIC Instruction No. 05/2023-GST dated 13 December 2023 directed that the decision should not be applied mechanically and that each case requires consideration of its distinct factual matrix including contractual terms. Courts have also granted interim relief against show cause notices.
Q7. What does the 2024 valuation circular do?
Circular No. 210/4/2024-GST dated 26 June 2024 clarified that in related party transactions where the recipient is eligible for full input tax credit, the declared value may be accepted, and if no invoice is raised the value may be deemed nil. The Delhi High Court relied on it to quash demands on seconded expatriate salaries.
Q8. How did Alstom distinguish Northern Operating Systems?
On the facts. The Supreme Court decision concerned expatriates who were not fully integrated into the Indian entity and continued to operate under foreign control. In Alstom, operational control was squarely with the Indian entity, expatriates worked exclusively for it, received salary directly and were treated as employees under Indian labour law — so the secondees were employees of the Indian company and excluded under Schedule III.
Q9. What are the two defences available?
Primary: the secondee is an employee of the Indian entity, so Schedule III applies and there is no supply. Fallback: even if there is a supply, with no mark-up and full input tax credit available the value is nil. Structure for the first and preserve the second.
Q10. What changed in July 2026?
The Delhi High Court reaffirmed that secondment cost reimbursements are taxable as fees for technical services — a direct tax characterisation on a different limb. A group that has successfully argued no GST applies may still face a withholding question on the same payment.
Q11. How many tax regimes does a secondment engage?
Four or five. Corporate income tax via permanent establishment risk, individual income tax and withholding, GST via reverse charge on the salary reimbursement, transfer pricing on the cross-border recharge, and provident fund, where the secondee is an international worker with no wage ceiling.
Q12. Do the different regimes pull in different directions?
Mostly not, which simplifies the design. For GST you want the Indian entity to be the employer; for permanent establishment you want the same, because a secondee serving the parent’s business under the parent’s control is the classic service PE pattern; and for transfer pricing, genuine Indian employment removes the recharge question. Only home social security pulls the other way.
Q13. What documentation actually decides the outcome?
Documentation is decisive. Expatriates shown as employees on the Indian payroll with Indian tax withholding are more likely to be treated as employed in India, and agreements must emphasise that day-to-day control, HR functions and disciplinary powers rest with the Indian entity.
Q14. What supporting records should be maintained?
Board resolutions, payroll records, organisational charts and email correspondence substantiating the nature of the employment relationship, sufficient to withstand departmental scrutiny during audits or investigations. Appraisal records held by the Indian entity and provident fund enrolment also help.
Q15. Why does email correspondence matter so much?
Because it is contemporaneous and it is what an investigation examines. A file containing an immaculate agreement and three years of emails showing the secondee reporting to the parent is worse than no agreement, because it demonstrates the paperwork does not describe the arrangement.
Q16. Does a letter of understanding with the secondee help?
Not by itself. Letters of understanding specifying terms of employment were present in Northern Operating Systems and did not prevent the finding that the overseas entities were the actual employers. The substance of control and payroll matters more than the instrument.
Q17. Must the secondee be moved to Indian payroll?
It is the strongest single indicator, and the arrangement that works generally has salary disbursed directly by the Indian entity with only the residual portion — mainly the social security element — paid by the foreign entity and reimbursed.
Q18. Does continuing home social security defeat the position?
No. Courts have accepted that such payments may continue overseas for regulatory compliance without undermining the employment character in India. Social security reimbursements are not fatal, which is what makes the Indian-payroll structure workable in practice.
Q19. What about Indian provident fund?
The secondee is an international worker, so contributions are due on full remuneration with no wage ceiling. Where an operative social security agreement exists, a Certificate of Coverage obtained before the assignment exempts them for the detachment period. Where none exists, the cost should be budgeted rather than structured around.
Q20. Does a secondment create a permanent establishment?
It can. The question is whether the parent, through the secondee, is furnishing services in India beyond the treaty threshold. Risk is reduced where the secondee works for the Indian entity’s business rather than the parent’s, the Indian entity bears the cost and takes the benefit, and the secondee has no authority to conclude contracts binding the parent.
Q21. What is the primary control on permanent establishment risk?
A day-count register per individual per treaty year, maintained contemporaneously. It cannot be reconstructed reliably after the fact, and it is the first thing asked for when the question arises.
Q22. Is a short assignment outside the analysis?
No. Duration affects permanent establishment day counts but not the employment characterisation for GST or the withholding question on any reimbursement. A three-month secondment structured on home payroll with a cost recharge raises the same characterisation issues as a three-year one.
Related reading
- Permanent establishment risk in India — the service PE limb in full
- Provident fund for international workers — the cost the secondment triggers
- Employment visas for expatriates in India — who sponsors, and why it should be the Indian entity
- Transfer pricing for Indian subsidiaries — benchmarking any recharge that remains
Talk to us before the assignment letter goes out
Delhi Legal Company works exclusively with foreign companies establishing and operating in India. Secondment structuring and agreement drafting, permanent establishment and day-count controls, GST and withholding analysis on any recharge, provident fund and Certificate of Coverage support, and the employment visa the Indian entity will sponsor — handled as one workstream, because a single set of facts drives all of them.
How we usually start. Tell us the role, the individual’s home country, the assignment length and how you currently propose to pay them. We come back with the structure that holds across all four regimes, what the agreement needs to say, whether a Certificate of Coverage is available, and the full cost of the assignment.