Expat Secondment to India: PE Exposure and Payroll Tax Issues

Sending an employee from a foreign parent to its Indian subsidiary for six months sounds like a routine HR decision. In India, it simultaneously touches four tax regimes: corporate income tax via permanent establishment risk, individual income tax and TDS under Section 192, 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 secondment agreement is drafted and how the employment relationship is characterised, produce either a clean arrangement or a multi-year tax dispute.

India’s treatment of expat secondments has been actively litigated for over fifteen years. The Supreme Court’s foundational ruling in DIT v. Morgan Stanley & Co. Inc. (2007) addressed the service PE dimension. 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. A June 2026 Delhi High Court ruling clarified the interaction between Section 192 TDS and the FTS make-available condition under the India-US DTAA. If your secondment agreement was drafted before 2022 and has not been reviewed since, the legal landscape under which it was structured has changed materially.

Does seconding an employee to India create a PE for the foreign parent?

A secondment creates a service PE of the foreign parent under the applicable DTAA when the seconded employee is functionally working for the parent rather than building the subsidiary’s capabilities, and is physically present in India beyond the treaty threshold (typically 90 days for most India DTAAs, or 30 days if the lower associated enterprise threshold applies). The Morgan Stanley ruling (2007) established that where the Indian entity is adequately compensated at arm’s length and the secondee genuinely builds the subsidiary’s capacity, the PE risk is contained. Where the secondee retains a lien over parent employment and the subsidiary recharges costs back to the parent, the risk profile shifts materially.

What is an expat secondment and how does Indian law characterise it?

An expat secondment is an arrangement under which an employee of a foreign parent is temporarily assigned to work at the Indian subsidiary, typically for three months to three years. The secondee works under the Indian entity’s day-to-day direction but maintains a continuing relationship with the home employer, most commonly through a lien on the original employment, continued participation in the parent’s social security and pension schemes, and terms of service governed by home-country employment contracts.

Indian law has no single statutory definition of secondment. Characterisation depends on the facts and documents of each arrangement. Courts have consistently held that substance governs over form: the label “secondment” in a contract does not determine the tax treatment. What matters is who the economic employer is, who controls the employee’s work, who bears the remuneration cost, and whether the services rendered benefit the Indian entity or the foreign parent.

Three structural models appear in practice:

Model 1: Pure secondment with local payroll absorption. The Indian subsidiary takes the secondee entirely on its own payroll. The subsidiary pays salary directly in India, deducts TDS under Section 192 of the Income Tax Act 1961, and there is no recharge to the foreign parent. The secondee’s home-country payroll is suspended or replaced. This model has the most straightforward tax profile: the Indian subsidiary is clearly the employer, Section 192 covers the full TDS obligation, and there is no cross-border payment requiring Section 195 analysis.

Model 2: Split payroll with partial home-country continuation. The secondee receives part of the salary in the home country from the foreign parent (typically to maintain social security contributions) and part in India from the subsidiary. The Indian portion is subject to TDS under Section 192. The home-country portion raises two questions: whether TDS under Section 195 applies to any recharge from subsidiary to parent, and whether the home-country salary element is also taxable in India under Section 9(1)(ii), which brings to charge salary income earned in India even if received abroad. This model almost always requires a shadow payroll, explained below.

Model 3: Full home-country payroll with cost recharge. The secondee remains entirely on the foreign parent’s payroll. The parent pays the full salary and then recharges the cost to the Indian subsidiary. This generates the most regulatory risk: it raises the Northern Operating Systems question on GST RCM, the Section 195 TDS question on the recharge, and the service PE question on the parent’s status. It also requires a shadow payroll in India to account for and remit TDS on the India-sourced portion of the secondee’s salary.

How does the economic employer test work in India?

The economic employer test is the central analytical tool for secondment characterisation. It asks who is the real employer of the seconded employee as an economic matter, independently of who appears on the employment contract.

The test was drawn into Indian income tax jurisprudence from OECD Commentary on Article 15 of the Model Tax Convention. Under Article 15, employment income is taxable only in the country where employment is exercised, unless one condition is satisfied: that the remuneration is borne by a PE of the employer in the source state. The economic employer concept asks whether the entity in the source state that directs the employee and bears the economic cost of the employment is, in substance, the real employer.

Indian courts apply a multi-factor test:

Factor	Indicates Indian entity is economic employer	Indicates foreign parent is economic employer
Control over day-to-day work	Indian entity directs tasks, approves leave, sets KPIs	Parent sets targets; Indian entity is secondary
Risk of satisfactory performance	Indian entity bears performance risk	Parent retains performance risk
Tools, equipment, premises	Provided by Indian entity	Provided by or owned by parent
Right to terminate secondment	Indian entity can terminate with immediate effect	Only parent can terminate or recall
Post-secondment employment lien	No lien; secondee needs fresh employment	Secondee retains lien; returns to parent on completion
Who bears salary cost economically	Indian entity pays with no recharge to parent	Parent pays with recharge or no recovery from Indian entity
Who sets remuneration	Indian entity sets India-period remuneration independently	Remuneration set by parent’s global HR policy

No single factor is determinative. The Delhi High Court in Centrica India Offshore (P.) Ltd. v. Commissioner of Income Tax-I (2014, SLP dismissed by Supreme Court) found the Indian entity was the economic employer even though formal employment contracts were with overseas entities, because the Indian entity controlled work allocation, bore business risk, and could terminate the secondment with immediate effect.

CCE&ST v. Northern Operating Systems Pvt. Ltd. (Supreme Court, 2022) pushed in a different direction. The Court found that where the overseas entities secured global contracts and seconded highly skilled employees to perform work that made the Indian entity commercially valuable to the parent, the overseas entity was the real employer and the arrangement amounted to manpower supply services. The distinction the Court drew was economic: in Centrica, the Indian entity needed the secondees to build its own capabilities independent of the parent. In Northern Operating Systems, the parent needed the secondees in India to fulfil obligations that belonged commercially to the parent.

A secondment designed to transfer skills to the Indian entity, where the secondee trains local staff, builds local client relationships, and transitions out when the local team is self-sufficient, is more defensible as a true secondment. A secondment where the secondee is delivering on the parent’s global contracts will look like manpower supply.

When does a secondment create a service PE of the foreign parent?

A service PE arises when the foreign parent furnishes services in India through employees or other personnel for aggregate periods exceeding the threshold in the applicable DTAA within a 12-month period. This article covers the day-count mechanics and the stewardship carve-out specific to secondments. For the full PE taxonomy covering fixed-place PE, dependent agent PE, construction PE, and the POEM overlap, see Treelife’s permanent establishment risk guide.

Service PE thresholds in key India DTAAs

Treaty country	General threshold	Associated enterprise threshold
United States	90 days	30 days
United Kingdom	90 days	30 days
Singapore	90 days (physical presence mandatory: Delhi HC, December 2025)	30 days
Germany	183 days	30 days
Netherlands	90 days	30 days
Japan	183 days	30 days
UAE	No service PE article; fixed-place and DAPE tests apply	Not applicable

Where the seconded employee is assigned to an Indian subsidiary that is an associated enterprise of the foreign parent (the standard case for a WOS), the lower AE threshold applies under most treaties. A secondee from a US parent to its Indian WOS who is physically present in India for more than 30 days in any 12-month period has already exceeded the threshold.

Day counting has its own rules. The Delhi High Court in CIT v. Clifford Chance Pte Ltd. (December 2025) clarified for the India-Singapore DTAA that vacation days, transit days, and business development days do not count toward the 90-day threshold. Only days on which services are actively performed count. The Court also confirmed physical presence in India is a mandatory precondition for service PE under the India-Singapore treaty, directly rejecting a virtual PE argument. Day counting is aggregate across all personnel of the foreign enterprise, not per individual. Three secondees from the same US parent each present for 35 days aggregate to 105 days, which is above the 90-day general threshold and far above the 30-day AE threshold.

The Morgan Stanley stewardship carve-out applies narrowly. The Supreme Court in Morgan Stanley (2007) held that oversight activities conducted to protect the parent’s investment (monitoring quality, reviewing financial reports, checking group standards) do not constitute a service PE. What does not qualify as stewardship: directing technical work, managing client relationships for the parent, conducting negotiations for the parent’s contracts. The carve-out is routinely over-relied upon. Assessing officers look past the stewardship label to the actual activities the secondee performed during India visits.

What is a shadow payroll and when is it required for an India secondment?

A shadow payroll is a parallel payroll run by the Indian subsidiary alongside the secondee’s actual home-country payroll. It does not pay the secondee any additional salary. Its sole purpose is to calculate, report, and remit to the Indian tax authorities the TDS obligation on the secondee’s India-sourced income, even though that income is being paid by the foreign parent outside India.

The legal basis for the shadow payroll obligation comes from two sources. First, Section 9(1)(ii) of the Income Tax Act 1961 deems salary earned in India to accrue or arise in India regardless of where it is physically paid. An expat physically working in India earns salary in India for each working day present, irrespective of whether that salary is credited to a home-country bank account. Second, the Supreme Court in CIT v. Eli Lilly & Co. (India) Pvt. Ltd. (Civil Appeal No. 5114 of 2007) held definitively that the Indian entity is responsible for deducting TDS under Section 192(1) on home-country salary paid by the foreign parent outside India, where that salary relates to services rendered in India and no work was performed for the foreign company during the India period. The Court held that the TDS provision and the charging provision under Section 9(1)(ii) form an integrated code: the Indian entity cannot escape TDS on the home-salary component by arguing that the payment was made abroad by a foreign entity.

When a shadow payroll is required:

• Model 2 (split payroll): the India-paid portion is on Indian payroll. The home-country portion paid by the parent is India-sourced under Section 9(1)(ii) and requires TDS reporting through a shadow calculation that the Indian entity runs, deposits, and reports in Form 24Q.
• Model 3 (full home-country payroll with recharge): the Indian entity runs a shadow payroll to calculate TDS on the secondee’s full India-sourced salary, deposits it with the government, and issues Form 16 to the secondee.

How the shadow payroll works operationally:

The Indian entity processes a notional payroll for the secondee each month. It calculates the estimated annual taxable salary, including the home-country component, perquisites, and any tax equalisation payments, and determines the monthly TDS at the average income tax rate for that year. It then:

• Deposits the TDS through the electronic challan system under its own TAN
• Reports the salary and TDS in Form 24Q (filed quarterly)
• Issues Form 16 to the secondee at year end, covering both the India-paid and home-country-paid components as applicable
• Coordinates with the secondee to collect Form 12BB declarations for any claimed deductions

The shadow payroll does not duplicate salary to the secondee. The secondee continues to receive net pay from the home-country payroll. The Indian entity pays only the TDS component to the government on the secondee’s behalf. The TDS is then reflected in the secondee’s Form 26AS and claimed as credit in the India tax return.

Section 192 TDS mechanics: home-country salary, perquisites, and grossing-up

What income is taxable in India for an inbound secondee?

For an expat seconded to India, the total salary taxable in India includes:

• Basic salary paid in India by the Indian entity
• Home-country salary components that qualify as India-sourced income under Section 9(1)(ii), meaning salary earned in India even if received abroad, confirmed mandatory for TDS purposes by the Eli Lilly ruling
• Perquisites: company-provided accommodation, car, school fees for children, home leave allowance, cost of living allowance, and tax equalisation payments where the employer bears the employee’s tax liability
• Employer’s contribution to provident fund above ₹7.5 lakhs per year (Finance Act 2020 amendment, effective FY 2020-21)

The perquisite valuation rules under Section 17(2) and Rule 3 of the Income Tax Rules 1962 prescribe the taxable value of each benefit. Company-leased furnished accommodation, for example, is valued at the lower of 10%, 7.5%, or 5% of salary (depending on city population) or the actual lease rental. The formula is prescribed and must be applied correctly. It is not discretionary.

Section 192(2) and Form 12B: the dual-employer consolidation mechanism

A secondment under Models 2 or 3 creates simultaneous employment income from two entities: the foreign parent and the Indian subsidiary. Section 192(2) of the Income Tax Act 1961 addresses this directly. Where an employee is simultaneously employed under more than one employer, the employee may nominate one of those employers to consolidate the TDS obligation. The employee furnishes salary and TDS details of the other employer in Form 12B to the nominated employer, who then calculates and deducts TDS on the aggregate income.

For inbound secondments, the Indian entity should be nominated as the consolidating employer. The secondee submits Form 12B to the Indian entity at the start of the financial year or on joining, providing the home-country salary details. The Indian entity then calculates TDS on the total estimated income from both sources, deducts the consolidated amount each month, and issues a single Form 16. Without this consolidation, each entity deducts TDS only on the salary it pays. The secondee ends up with an underpayment because neither entity has accounted for the combined income, a problem that surfaces when the secondee files the India tax return and finds a material tax payable not covered by TDS credits.

Tax equalisation and the grossing-up formula

Many multinational secondment policies provide that the company bears any Indian tax cost to keep the secondee tax-neutral relative to home-country tax. When the employer bears tax on non-monetary perquisites, Section 10(10CC) of the Income Tax Act exempts that tax payment from being further taxed as a perquisite. However, where the employer bears tax on monetary salary components, that tax payment is itself a taxable perquisite under Section 17(2). The TDS computation must gross up the salary for the employer-borne tax. The correct formula is iterative:

Grossed-up salary = Net salary / (1 – applicable marginal tax rate)

Grossing up only once rather than applying this iterative formula produces a TDS shortfall. For a secondee with a 30% marginal rate on a ₹50 lakh net salary, the one-time gross-up gives ₹71.43 lakhs. The iterative gross-up gives ₹71.43 lakhs as well in a simple scenario, but the error compounds where surcharge and cess interact with multiple income sources. The Indian payroll team must apply the formula correctly each month and recalibrate when compensation components change during the year.

Section 195 TDS on the salary recharge: when it applies and what changed on 01/04/2026

Where the Indian subsidiary reimburses the foreign parent for the salary cost of the secondee (Models 2 and 3), the character of that payment governs whether TDS under Section 195 applies.

The position that has emerged from the litigation history:

Indian entity is economic employer: The payment to the parent is purely a cost reimbursement with no profit or service element. CBDT Circular 720 of 30 August 1995 clarifies that salary income of secondees should be taxed under Section 192 in the hands of the employee, and the reimbursement to the overseas employer is not separately subject to Section 195 as income of the overseas entity. A June 2026 Delhi High Court ruling affirmed this position: where the Indian entity deducted TDS under Section 192 and the deputation agreement vested day-to-day control with the Indian entity, the reimbursement did not constitute FTS taxable under Section 195. Critically, the Court held the “make available” condition under Article 15 of the India-US DTAA was not satisfied. This ruling is treaty-specific to India-US and the make-available clause, so its application under other DTAAs should be verified.

Foreign parent is economic employer: The recharge acquires the character of consideration for manpower supply services. Under Section 9(1)(vii) of the Income Tax Act, fees for technical services rendered in India are taxable in India. Where the applicable DTAA contains an FTS article, the treaty rate applies. Where the services do not qualify as technical services under the treaty, residual provisions govern. Section 195 TDS applies on the recharge amount at the applicable treaty or domestic rate.

The safest practice where economic employer characterisation is uncertain: deduct TDS under Section 195 at the applicable treaty rate, file the quarterly return in Form 27Q, and obtain a certificate under Section 195(2) if the Indian entity believes the payment is not chargeable to tax. The certificate provides a legal basis for reduced or nil deduction. Proceeding without the certificate and later being found liable results in disallowance of the recharge as a deductible expense under Section 40(a)(i), in addition to TDS interest under Section 201(1A) at 1.5% per month from the date of payment.

Form 145 and Form 146 replace Form 15CA/15CB from 01/04/2026

From 1 April 2026, outward remittances from the Indian entity to the foreign parent, including salary recharges, must use Form 145 (the self-declaration by the remitter, replacing the old Form 15CA) and, where the remittance is taxable and exceeds ₹5 lakhs in a financial year, Form 146 (the Chartered Accountant certificate, replacing Form 15CB). These are filed under the Income Tax Rules 2026 read with Rule 37BB. The acknowledgement numbers from both forms must be quoted on the A2 application submitted to the Authorised Dealer bank before the SWIFT transfer is processed. AD banks will not release remittances without these filings. Any secondment structure that involves a cross-border recharge needs this process built into its payment workflow from 01/04/2026 onwards. For the full FEMA outward remittance framework covering permissibility, current account categorisation, and AD bank documentation, see Treelife’s FEMA compliance guide.

What is the GST impact of a secondment arrangement?

The GST treatment of expat secondments became significantly more uncertain after CCE&ST v. Northern Operating Systems Pvt. Ltd. (Supreme Court, 2022, Civil Appeal No. 2289 of 2021). The Court held, applying a substance-over-form analysis, that the secondment of employees by an overseas entity to its Indian subsidiary was liable to service tax under the Reverse Charge Mechanism. The ruling has been applied to GST by extension, since the structure of the provision of services is the same.

What the Northern Operating Systems ruling means under GST

Under the GST framework, where a foreign entity provides a service to an Indian registered entity, the supply is an import of service under Section 2(11) of the IGST Act. Under Section 5(3) of the IGST Act read with Notification No. 10/2017-Integrated Tax (Rate), this import of service is subject to GST under RCM, meaning the Indian recipient pays GST directly to the government. If the secondment is characterised as manpower supply (the NOS outcome), the salary reimbursement paid by the Indian subsidiary to the overseas parent is the consideration for an import of service, and GST at 18% applies under RCM.

The Indian subsidiary pays this GST through its electronic cash ledger and can then claim Input Tax Credit in the same return period, provided it is eligible under Section 17(5) of the CGST Act. For subsidiaries making taxable outward supplies, the cash flow impact is largely neutral. For subsidiaries with restricted ITC eligibility, such as mixed supply scenarios or exempt services, the RCM liability is a real cost.

The Indian entity must: issue a self-invoice under Section 31(3)(f) of the CGST Act in the tax period the liability arises (at the time of accrual, not payment); pay the IGST in cash through the electronic cash ledger; and report the liability in Table 3.1(d) of GSTR-3B. Missing the self-invoice in the correct period causes an ITC timing mismatch and attracts 18% interest under Section 50(3) of the CGST Act on the delayed payment.

When is a secondment not subject to GST RCM?

The counterpoint to Northern Operating Systems is the Centrica/Tekmark line of cases. Where the Indian entity is the genuine economic employer, the salary reimbursement is not consideration for a service. It is the Indian entity recovering a cost it asked the overseas entity to front. In those cases, GST does not apply.

The factual distinction that determines the outcome:

• Centrica model: Indian entity was the real employer, controlled the work, bore performance risk, could terminate immediately. GST on reimbursement: not applicable.
• Northern Operating Systems model: Overseas entity was the real employer, secondees performed work for the overseas entity’s business benefit, Indian entity was the downstream executor. GST on reimbursement: applicable at 18%.

Post the NOS ruling, assessments on Indian companies with expat employees have increased. The burden of proof to demonstrate that the Indian entity is the genuine employer falls on the assessee. Documentation quality at the time of secondment is the primary defence.

The GST Council has received representations to issue a clarificatory circular providing a clean carve-out for cases where the Indian entity is the economic employer and TDS under Section 192 is being deducted. As of the date of this article, no such circular has been issued. Businesses should assess each secondment arrangement on its economic employer characterisation and apply RCM where the characterisation points to the overseas entity as the real employer.

How does transfer pricing apply to the salary recharge?

Where the Indian subsidiary reimburses the foreign parent for the secondee’s salary, the reimbursement is a cross-border transaction between Associated Enterprises under Section 92 of the Income Tax Act (Section 163 of the Income Tax Act 2025), requiring arm’s length pricing.

The TP question for a secondment recharge has two parts. First: is the recharge amount arm’s length? If the parent recharges at pure cost with no markup, and the Indian entity is the economic employer, a nil markup is defensible as a cost allocation rather than a service. If the secondment is properly characterised as manpower supply, the India transfer pricing framework expects a cost-plus markup. ITAT decisions have applied markups of 5% to 15% on manpower supply recharges between AEs in technology and professional services.

Second: is the economic rationale documented? Transfer pricing officers now require a benefit test analysis: the Indian entity must demonstrate that it received a genuine benefit from the secondee’s presence that a hypothetical third-party enterprise would have been willing to pay for. A secondee who builds the subsidiary’s processes, technical capacity, or revenue passes the benefit test. A secondee primarily serving the parent’s global clients from an India base fails it.

From Tax Year 2026-27, Form 48 under Section 172 of the Income Tax Act 2025 (replacing Form 3CEB) requires specific disclosure under Note 14 of seconded employee costs not recharged to the Indian entity. This disclosure must be prepared with data from the parent entity, not from the Indian entity’s books alone, and must be ready well before the 31 October Form 48 filing deadline. For the full transfer pricing documentation framework covering the FAR analysis methodology, method selection, the Local File and Master File structure, and Form 48 disclosure requirements, see Treelife’s transfer pricing documentation guide and the intercompany service fees arm’s length pricing guide.

For recurring, material secondment recharges above ₹5 crores annually, a unilateral or bilateral Advance Pricing Agreement under Section 168 of the Income Tax Act 2025 covering the recharge methodology locks in the pricing approach for up to five years, eliminating annual TP audit risk on the recharge at a flat application fee of ₹20 lakhs under Rule 106 of the Income Tax Rules 2026. For the APA process and timing, see Treelife’s APA guide.

Social Security Agreements and EPF: what inbound secondees need to know

Under the Employees’ Provident Funds and Miscellaneous Provisions Act 1952, EPF applies to foreign nationals working in India as International Workers. The contribution rate is 12% of basic wages by the employee and 12% by the employer. Where no SSA exemption applies, these contributions are mandatory regardless of the secondee’s home-country social security coverage, which creates a double contribution risk.

India has signed and operationalised Social Security Agreements with over 20 countries as of 2026, including Germany, France, Japan, South Korea, the Netherlands, Denmark, Luxembourg, Norway, Hungary, Belgium, Switzerland, Finland, Sweden, Czech Republic, and Australia. Where a valid SSA exists, the secondee may obtain a Certificate of Coverage (CoC) from the home-country social security authority confirming coverage under the home-country system, and present this to EPFO to claim exemption from EPF contributions in India for the secondment period.

The CoC application process is digital through the EPFO International Workers Portal. The CoC applies to “detachment” periods, typically up to 36 months under most India SSAs, though the exact period varies by treaty. Where the secondment extends beyond the permitted detachment period, the CoC exemption lapses and India EPF contributions become mandatory.

The secondment agreement should specify which country’s social security scheme applies. Where the SSA country is covered, obtain the CoC before the secondee arrives in India. Processing delays are common. A secondee who starts work before the CoC is obtained may face EPFO demands for the interim period.

For countries not covered by an SSA with India, including the United States, the United Kingdom (the India-UK Social Security Agreement was signed in February 2026 but is pending ratification and not yet in force as of the date of this article), and Canada, secondees are subject to EPF contributions in India in addition to any home-country social security obligations. The total employer cost impact of dual social security contributions should be factored into the secondment cost model.

What does the secondment agreement need to cover to reduce risk?

The secondment agreement is the primary document that both tax authorities and courts will read first when assessing the arrangement. Agreements that do not address the economic employer question directly create ambiguity that assessing officers fill in ways that typically favour revenue.

A secondment agreement for an India assignment should address:

• Employer for local law purposes: Specify that the Indian subsidiary is the employer during the secondment period for Indian labour law, income tax, and social security compliance.
• Line of reporting and authority: The secondee should report to the Indian entity’s management. Any residual reporting to the parent should be described as a coordination arrangement, not a management relationship.
• Salary payment and recharge mechanics: If the parent fronts the salary cost, characterise the recharge as a cost allocation (with or without markup) and ensure the character is consistent with how GST and TDS will be handled. Specify whether Forms 145/146 will be filed per remittance.
• Right to terminate and recall: The Indian entity should have the right to terminate the secondment with notice. The parent’s right to recall should be limited and subject to notice to the Indian entity.
• Lien on original employment: If the secondee retains a lien, disclose it in the agreement. A lien alone is not disqualifying, but combined with other factors pointing to parent economic employer, it strengthens the revenue’s position. Consider whether the lien can be suspended for secondments exceeding 12 months.
• Scope of secondee’s activities in India: Describe clearly what the secondee will do. Stewardship activities should be explicitly distinguished from activities that generate value for the parent. The scope description must match the secondee’s actual job description and KPIs. A mismatch is the most common fact pattern in assessments.
• Shadow payroll and TDS responsibility: Specify which entity is responsible for running the shadow payroll, depositing TDS, filing Form 24Q, and issuing Form 16.
• Section 192(2) consolidation: Specify that the secondee will submit Form 12B to the Indian entity, nominating it as the consolidating employer for TDS on aggregate salary.
• Social security and EPF: Specify which country’s social security scheme applies. Reference the applicable SSA and the CoC process. Confirm that the CoC will be obtained before the secondment commences.
• Tax gross-up or equalisation: If the employer bears Indian tax, specify the grossing-up methodology and confirm the iterative formula applies.

Departure compliance: ITCC, Form 157, and FRRO obligations

Income Tax Clearance Certificate and Form 157

Under Section 420 of the Income Tax Act 2025 (replacing Section 230 of the 1961 Act), a foreign national who is not domiciled in India, has earned income in India, and is departing may be required to obtain an Income Tax Clearance Certificate before leaving. This is not a blanket requirement for all departing secondees. Under CBDT guidance, ITCC is required only where: (a) the person has tax arrears exceeding ₹10 lakhs outstanding against them not stayed by any authority, or (b) the person is involved in serious financial irregularities under investigation. From 1 April 2026, the relevant form under the Income Tax Rules 2026 is Form 157 (the declaration/undertaking) with Form 159 (the clearance certificate).

For secondees completing a routine India assignment with all TDS properly deducted, no open assessments, and no pending tax demands, the ITCC is not required. However, where a secondment has run for more than two years, the salary has been substantial, and there are open prior-year assessments or a Section 195 TDS dispute, the ITCC risk is real. Clearing all TDS liabilities, filing the India return for each year of the secondment, and confirming no outstanding demands before the departure date is good practice regardless of formal ITCC requirements.

FRRO registration

Under the June 2026 MHA gazette notification under the Immigration and Foreigners Act 2025, foreign nationals who intend to stay beyond 180 days must now complete FRRO registration before completing 180 days of stay, rather than within 14 days of the 180-day mark as previously applied. For a secondee arriving in India, FRRO registration must be initiated by approximately day 160 to allow for processing time. The sponsoring employer shares compliance responsibility: FRRO failures reflect on the employer’s record during future visa renewals for other staff.

Employment Visa minimum salary and documentation

The Employment Visa for inbound secondees requires a minimum annual salary of USD 25,000 (approximately ₹20 lakhs) per current MHA guidelines. Where the secondment uses a split payroll, part paid in India and part in the home country, the Employment Visa application and supporting documentation must reflect total compensation, not just the India-paid component. An application showing only ₹8 lakhs paid locally when the secondee earns a total of USD 80,000 will face questions at renewal. The visa documentation package should include the secondment agreement, a letter from the Indian entity confirming total compensation and assignment terms, and the payroll structure.

Common mistakes that create avoidable assessments

1. Missing the Eli Lilly obligation on home-country salary

Companies frequently assume that because the secondee is on the Indian subsidiary’s rolls, the home-country salary paid by the parent for social security purposes does not create any Indian TDS issue. The Supreme Court in Eli Lilly (2009) resolved this. The Indian entity is responsible for TDS under Section 192(1) on home-country salary where that salary relates to services rendered in India and no work was performed for the foreign company during the India period. Leaving the home-country salary component out of the shadow payroll causes systematic short-deduction across the entire secondment period.

2. No shadow payroll, no Form 24Q, and no Form 16 on the full package

Companies using Model 3 frequently run payroll only in the home country and issue no Indian tax documents. The secondee files a personal tax return in India, claims TDS credits from the Indian entity’s Form 26AS, and finds nothing there because the Indian entity never ran a shadow payroll or deposited TDS. The Indian entity is then the assessee-in-default under Section 201, with interest at 1.5% per month from the date each salary payment was made.

3. Missing the 30-day AE service PE threshold

Most companies track against the 90-day general threshold. The 30-day AE threshold under most India DTAAs applies where the secondee provides services to the Indian subsidiary, which is an AE of the parent. A secondee from a US parent present for even 35 days in India in a 12-month period has exceeded this threshold. Day-count compliance systems set to alert at 90 days systematically miss the lower AE threshold.

4. Relying on the stewardship label without documenting actual activities

A secondee who flies into India every six weeks and describes all India visits as “stewardship” in meeting minutes and expense reports, while actually reviewing deal terms, meeting clients, and approving pricing decisions, has created a document trail that actively contradicts the stewardship claim. The carve-out requires contemporaneous documentation of activities, not retrospective reclassification.

5. No GST RCM on salary recharge

Following Northern Operating Systems, Indian subsidiaries that reimburse the foreign parent for secondee salary costs, where the economic employer characterisation indicates the overseas entity is the real employer, must pay GST at 18% under RCM. Many companies with legacy arrangements from before 2022 have not updated their GST treatment. Assessments are being raised from the date the reimbursement arrangement was in place, not from the date of the ruling.

6. Section 195 TDS default and the Section 40(a)(i) disallowance

Where Section 195 TDS is required on the salary recharge and was not deducted, the entire recharge is disallowed in the Indian entity’s tax computation under Section 40(a)(i). A ₹90 lakh annual recharge that is disallowed increases the Indian entity’s taxable profit by ₹90 lakhs, generating approximately ₹34 to 37 lakhs of incremental tax at effective corporate rates, on top of the TDS interest liability under Section 201(1A).

7. Transfer pricing benefit test not documented

Transfer pricing documentation for secondment recharges often covers only whether the recharge amount is arm’s length. Officers now require the benefit test: what did the Indian entity receive from the secondee’s presence that a third-party enterprise would have been willing to pay for? Without this analysis, the deduction for the recharge is at risk even if the amount passes the arm’s length test.

8. Forgetting Form 145/146 for recharges from 01/04/2026

Outward remittances to the foreign parent for salary recharges made on or after 1 April 2026 require Form 145 and, where taxable and above ₹5 lakhs, Form 146. Finance teams continuing to use Form 15CA/15CB workflows after that date are filing with superseded forms. AD banks will flag the discrepancy and delay the transfer.

Treelife practitioner note

In the secondment engagements we have run at Treelife, the most consistent pattern is that the legal documents say one thing and the operational facts say something different. A secondment agreement will describe the Indian entity as the employer with full control over the secondee’s work. The secondee’s email signature carries the parent company’s branding. The secondee’s KPIs are set by the parent’s global HR team. The secondee participates in the parent’s global leadership meetings. The secondee’s performance review is conducted by the parent’s CHRO. In an assessment, none of these operational facts are explained by the secondment agreement.

The economic employer characterisation in India is determined by what actually happens, not what the contract says should happen. We conduct a factual audit before advising on tax treatment: reviewing role descriptions, KPIs, reporting structures, email access configurations, participation in global versus India-specific forums, and the actual content of India-based meetings. That factual audit determines the payroll tax treatment, the GST RCM obligation, and the PE analysis. Getting the facts right before structuring the documents is the sequence that matters.

Section 195 is where we see the most immediate exposure in existing arrangements. Companies that have been remitting salary recharges to the foreign parent without TDS are accumulating a liability under Section 201, with interest under Section 201(1A) at 1.5% per month from the date of each payment. For a secondment running two years with a monthly recharge of ₹25 lakhs, that interest liability alone can reach ₹54 lakhs before a formal assessment begins. The cleanest path is a voluntary review before the arrangement appears in a scrutiny assessment, because the penalty discretion for cooperating assessees under Section 270A is materially better.

Frequently asked questions

Q: If the Indian subsidiary deducts TDS under Section 192 on the secondee’s salary, does the overseas parent also pay tax in India on the salary recharge?
A: Not automatically. CBDT Circular 720 of 30 August 1995 clarifies that where salary income of a seconded employee is already subject to TDS under Section 192 in the hands of the employee, the salary reimbursement to the overseas employer is not separately subject to Section 195 TDS as income of the overseas entity, provided the Indian entity is the economic employer and the payment is a pure cost recovery. The June 2026 Delhi HC ruling confirmed this for the India-US treaty, adding that the “make available” condition under the FTS article was not satisfied. Where the arrangement looks like manpower supply, the Section 192 / Section 195 question needs separate analysis.

Q: What is a shadow payroll and does every India secondment need one?
A: A shadow payroll is a parallel payroll calculation run by the Indian entity to account for and remit TDS on a secondee’s India-sourced income, even when that income is paid by the foreign parent abroad. It is required under Section 192(1) read with Section 9(1)(ii) wherever the home-country salary relates to services rendered in India, as confirmed by the Supreme Court in Eli Lilly (2009). Models 2 and 3 both require a shadow payroll. Model 1 (full local payroll absorption) does not, because the Indian entity already runs the actual payroll.

Q: How does Section 192(2) work for a secondee paid by two entities?
A: Section 192(2) allows an employee with simultaneous employment income from more than one employer to nominate one employer to consolidate TDS on aggregate salary. The employee submits Form 12B to the nominated employer with details of the other employer’s salary and TDS. For inbound secondments, the Indian entity should be nominated as the consolidating employer. It then calculates TDS on the total estimated income from both sources, deposits the consolidated TDS each month, and issues a single Form 16 at year end. Without this nomination and consolidation, neither entity accounts for the combined income, and the secondee faces a material tax payable on filing the India return with no corresponding TDS credit.

Q: What are the Form 145 and Form 146 requirements from 01/04/2026 for salary recharges?
A: From 1 April 2026, outward remittances from India to a non-resident, including salary recharges from the Indian subsidiary to the foreign parent, must use Form 145 (replacing Form 15CA, the self-declaration by the remitter) and, where the remittance is taxable and exceeds ₹5 lakhs in a financial year, Form 146 (replacing Form 15CB, the CA certificate). Both must be filed electronically on the income tax portal before the AD bank will process the SWIFT transfer. Finance teams continuing to use Form 15CA/15CB workflows after 1 April 2026 are using superseded forms.

Q: Does the secondee need a separate Indian tax registration?
A: Yes. The secondee, if a non-resident or resident but not ordinarily resident, must file an Indian income tax return if India-sourced income exceeds the basic exemption limit. A PAN is required for TDS and return filing purposes. The Indian entity must collect Form 12BB from the secondee at the start of the financial year covering declarations for deductions and exemptions relevant to TDS computation.

Q: Does an expat secondee qualify for the Article 15 DTAA exemption?
A: Article 15 of most India DTAAs exempts employment income from taxation in the source state if three conditions are met: the employee is present for less than 183 days in a 12-month period, the remuneration is paid by a non-resident employer, and the remuneration is not borne by a PE of the employer in the source state. In a typical secondment to an Indian subsidiary, the third condition fails because the remuneration is borne by the Indian entity either directly or through a recharge. The Article 15 exemption is therefore generally unavailable for secondees to Indian subsidiaries.

Q: Is EPF applicable to expat secondees in India?
A: Yes, unless an SSA exemption applies. Foreign nationals working in India are classified as International Workers under the EPF Act 1952 and attract contributions at 12% (employee) and 12% (employer) on basic wages. Where India has an operative SSA with the secondee’s home country and the secondee holds a valid Certificate of Coverage from the home-country authority, EPF contributions in India are exempt for the permitted detachment period. India has operative SSAs with Germany, France, Japan, South Korea, the Netherlands, Denmark, Luxembourg, Norway, Hungary, Belgium, Switzerland, Finland, Sweden, Czech Republic, and Australia, among others. The US and UK are not covered by operative SSAs as of the date of this article. The CoC must be obtained before the secondee arrives in India.

Q: Can a secondment create both a service PE and a POEM risk simultaneously?
A: Yes. PE and Place of Effective Management address different questions. PE determines whether the foreign parent has a taxable presence in India. POEM determines whether the foreign parent becomes a deemed Indian tax resident taxable on worldwide income. Both can be asserted simultaneously. POEM is more likely where the India-based secondee is the key decision-maker for the entire foreign enterprise.

Q: What is the transfer pricing treatment if the parent charges a markup on the salary recharge?
A: If the parent adds a service fee or markup on the recharge, the Indian subsidiary is paying for a service rather than recovering a cost. The markup is subject to transfer pricing analysis to confirm it is arm’s length. Indian transfer pricing officers have examined markups of 5% to 15% on cost for manpower supply services between AEs in technology and professional services. The markup may also be subject to Section 195 TDS as fees for technical services depending on treaty characterisation.

Q: What records should the Indian entity maintain for a secondment?
A: Minimum documentation: the secondment agreement and any amendments; the local employment letter for the secondee; the secondee’s job description, KPIs, and performance reviews during the India period; meeting records and attendance logs showing what activities were performed in India and under whose direction; expense records and salary payment records distinguishing India-paid and home-country-paid components; Form 12BB and Form 12B from the secondee; Form 16 and Form 24Q filings for each year; TDS certificates issued; shadow payroll computation sheets; and, where a recharge is involved, the recharge invoices, the Form 145/146 filings, and evidence of the transfer pricing benefit test analysis.

Q: What is the ITCC requirement for a secondee departing India?
A: Under Section 420 of the Income Tax Act 2025, an Income Tax Clearance Certificate is required before departure only where the secondee has tax arrears exceeding ₹10 lakhs outstanding and not stayed, or is under investigation for serious financial irregularities. For secondees with all TDS properly deposited, returns filed, and no open demands, no ITCC is required. From 1 April 2026, the relevant form is Form 157 (declaration/undertaking) and Form 159 (the clearance certificate) under the Income Tax Rules 2026. Regardless of ITCC applicability, clearing all India tax obligations, meaning filing the final ITR and confirming no outstanding demands, before the secondee’s departure date is standard practice.

Q: How long can a secondment last before it creates structural complications?
A: A secondment exceeding 182 days in a financial year makes the secondee a resident of India for income tax purposes under Section 6(1)(a), extending Indian tax to worldwide income for that year. This changes the TDS rate structure and the availability of certain treaty benefits. A secondment running continuously for more than two years may trigger POEM concerns if the secondee is the foreign parent’s key decision-maker. From a PE perspective, the AE service PE threshold under most DTAAs can be exceeded within the first calendar month. Duration management is a day-one compliance consideration.

Q: What FRRO obligation applies to inbound secondees?
A: A foreign national staying in India beyond 180 days must register with the Foreigners Regional Registration Office. Under the June 2026 MHA notification under the Immigration and Foreigners Act 2025, registration must be completed before the 180-day mark if the foreign national intends to extend the stay, rather than within 14 days of arrival as previously applied. For a secondee arriving for a six-month or longer assignment, FRRO registration should be initiated by approximately day 160 to allow processing time.

Regulatory references:

• Income Tax Act 1961, Section 9(1)(ii): Salary earned in India deemed to accrue in India
• Income Tax Act 1961, Section 9(1)(vii): Fees for technical services deemed to accrue in India
• Income Tax Act 1961, Section 6(1)(a) and Section 6(6): Residency determination for individuals
• Income Tax Act 1961, Section 17(2) and Rule 3 of Income Tax Rules 1962: Perquisite valuation
• Income Tax Act 1961, Section 192: TDS on salary; Section 192(1A): employer option to pay tax on non-monetary perquisites; Section 192(2): simultaneous/successive employment consolidation mechanism
• Income Tax Act 1961, Section 195: TDS on payments to non-residents; Section 195(2): certificate for nil or reduced TDS
• Income Tax Act 1961, Section 201 and Section 201(1A): Consequences of failure to deduct TDS and interest thereon