Secondment Agreement vs. Service Agreement : Key Differences and Tax Implications in India

At present, there are no provisions or rules under the Act providing clear guidelines for  distinguishing secondment /deputation arrangement (contract of service) from a service arrangement (contract for service).

1. Secondment (Deputation) Arrangement

• Control and Supervision: The expatriate normallly works wholly and exclusively under the direction, control and supervision of the host entity.
• Employment Relationship: The host treats the expatriate as its own employee, benefiting from and bearing the risks of the expatriate’s day‑to‑day work.

2. Service Arrangement 

• Control and Supervision: The expatriate continues to work under the control and supervision of the home (overseas) entity.
• Contractual Relationship: The expatriate performs services to fulfil a contract between the home entity and the host entity, while the home(overseas) entity bears the  risks and responsibilities associated with it.

3. Income‑Tax Implications in India

• Under a Secondment Arrangement:
  • The host entity typically reimburses the salary cost of the expatriate paid by the home entity(on behalf of host entity from administrative convenience perspective) .
  • Reimbursements without a mark-up or a mark-up only on the costs associated with the management of expatriate’s payroll .
  • Tax Treatment: No business profits or fees for technical services arise in India.

• Under a Service Arrangement:
  • The host entity pays a service fee to the home (overseas) entity.
  • That fee could lead to business profits or fees for technical services arising/accruing in India.

5. Why This Becomes Ambiguous

The reason for ambiguity between a secondment and a service arrangement stems from the fact that the expatriate usually has continuity for employment with the home entity indicated by the following: 

1. Payroll Continuity: He continues to be on the payroll of the home entity.
2. Ongoing Employment Rights: He has continuing rights, eg, social security, share compensation scheme under employment contract with the home entity.
3. Return Obligation: He will  typically return to the home entity upon completion of the secondment period.
4. Termination Link: The secondment agreement automatically ends if the expatriate’s  employment with the home entity is terminated.