Secondment Agreements – Legal Issues

A secondment agreement is an arrangement under which an employee of one employer (the lending/parent employer) is temporarily assigned to work for another entity (the host/borrowing employer), while the employee may continue to retain some or all of the contractual relationship with the original employer. In India, secondment is often used within multinational groups, corporate groups, public-sector organisations and specialised projects.

The principal legal difficulty is determining who is actually the employer during the secondment and whether the arrangement is genuinely a temporary employee assignment or, in substance, a supply of manpower/services.

1. Employer–employee relationship

The agreement should clearly specify:

• identity of the original and host employer;
• duration of secondment;
• reporting and supervision;
• salary and benefits;
• leave and working hours;
• disciplinary authority;
• responsibility for statutory compliance;
• termination and repatriation;
• confidentiality and intellectual property;
• applicable law and dispute resolution.

Merely describing an arrangement as "secondment" will not necessarily determine its legal character. Courts may examine the substance of the arrangement and the actual rights and obligations of the parties.

In C.C., C.E. & S.T. v. Northern Operating Systems Pvt. Ltd. (2022), the Supreme Court specifically examined the overall arrangement, including who paid the employees, who controlled their work, the reimbursement mechanism, duration, repatriation and the continuing relationship with the overseas employer.

2. Control and supervision

A major issue is who exercises effective control over the employee.

A secondment agreement should distinguish between:

• day-to-day operational supervision by the host;
• ultimate employment authority of the parent employer;
• disciplinary authority;
• power to terminate employment;
• power to determine remuneration and employment conditions.

If the host organisation exercises extensive control while the parent company merely maintains the employee on its payroll, courts and tax authorities may examine whether the arrangement is actually a manpower/service arrangement.

The Supreme Court in Northern Operating Systems adopted a substance-oriented examination rather than relying solely upon the terminology used in the agreements.

3. Salary and reimbursement

Secondment agreements frequently provide that:

1. the foreign/parent employer continues paying salary;
2. the host company reimburses salary and benefits;
3. the host may additionally pay certain allowances; and
4. the parent company may charge an administrative fee or mark-up.

This creates important tax and indirect-tax consequences.

In Northern Operating Systems, the Supreme Court considered, among other factors, that the overseas company remained involved in paying the secondees and that the Indian entity reimbursed those costs. The Court concluded on the facts before it that the arrangement constituted a taxable manpower service under the then-applicable service-tax regime.

Importantly, the decision was concerned with the specific factual structure before the Court; secondment arrangements should therefore be analysed individually rather than assuming that every secondment automatically has the same tax treatment.

4. Permanent establishment and international tax issues

Cross-border secondments can create questions regarding:

• Permanent Establishment (PE);
• Service PE;
• withholding tax;
• salary taxation;
• tax residency;
• transfer pricing;
• treaty provisions;
• social-security obligations.

In Centrica India Offshore Pvt. Ltd. v. CIT (2014), the Delhi High Court examined a secondment arrangement involving overseas employees and considered issues relating to their continued employment with the overseas entities, payment of salary and the possible creation of a service PE.

Therefore, an international secondment agreement should not be drafted merely as an HR document; it should also be reviewed from a direct-tax and international-tax perspective.

5. Consent of the employee

A secondment normally involves the employee's agreement because the employee is being assigned to a different organisation, location or working environment.

In State of Punjab v. Inder Singh, (1997) 8 SCC 372, the Supreme Court described deputation as a tripartite arrangement involving the lending employer, borrowing employer and employee. The employee's consent is therefore an important element of ordinary deputation arrangements.

A secondment document should consequently be signed or acknowledged by the employee wherever appropriate, particularly where it changes:

• place of work;
• reporting structure;
• compensation;
• duties;
• benefits;
• duration; or
• repatriation arrangements.

6. Duration and repatriation

Secondment is ordinarily temporary.

The agreement should specify:

• commencement date;
• expiry date;
• extension procedure;
• early termination;
• notice period;
• circumstances requiring repatriation;
• employee's position after repatriation.

In Ratilal B. Soni v. State of Gujarat, 1990 Supp SCC 243, the Supreme Court recognised that a deputationist does not acquire a vested right to permanent absorption merely because the employee has worked in the borrowing organisation.

Similarly, Kunal Nanda v. Union of India, (2000) 5 SCC 362 reaffirmed the principle that a deputationist ordinarily has no vested right to continue indefinitely in the borrowing organisation or demand absorption there.

Thus, a secondment agreement should expressly deal with what happens when the assignment ends.

7. Right to terminate the secondment

The agreement should distinguish between:

Termination of secondment and termination of employment.

For example:

The host company may request that an employee be recalled, but such recall does not necessarily terminate the employee's employment with the parent company.

This distinction becomes particularly important where the parent employer retains the employee's substantive employment.

In Centrica India Offshore, the court considered the fact that the overseas entity retained important employment rights, including the right concerning dismissal, even though the employee worked under the supervision of the Indian entity.

8. Disciplinary action

The agreement should state who can:

• issue warnings;
• conduct disciplinary inquiries;
• suspend the employee;
• impose penalties;
• terminate employment.

The host organisation may have authority over workplace conduct, but the parent employer may retain ultimate employment powers.

A poorly drafted agreement can create disputes where the host wants to dismiss an employee but only the parent employer has contractual authority to terminate employment.

9. Employment benefits and statutory compliance

The agreement should address:

• provident fund;
• gratuity;
• social-security contributions;
• insurance;
• leave;
• bonus;
• medical benefits;
• pension;
• expatriate benefits;
• housing and relocation allowances.

For international assignments, the parties should also examine the applicable social-security rules of both countries.

10. Confidentiality and intellectual property

A secondee may gain access to confidential information belonging to:

• the parent company;
• host company;
• customers;
• suppliers; or
• group companies.

The agreement should therefore contain provisions dealing with:

• confidential information;
• trade secrets;
• data protection;
• intellectual property;
• work product;
• return/deletion of information;
• post-secondment confidentiality.

It is particularly important to identify who owns intellectual property created during the secondment.

11. Employee data and privacy

Where the employee is transferred internationally, the arrangement may involve transferring:

• payroll information;
• passport/identity information;
• performance records;
• medical/insurance information;
• tax information;
• employee contact information.

The agreement should therefore address applicable privacy and data-protection obligations and identify the parties responsible for handling employee data.

12. Immigration and work authorisation

For international secondments, the host company should ensure that the employee has the appropriate:

• visa;
• work permit;
• employment authorisation;
• registration; and
• immigration status.

The secondment agreement should allocate responsibility for obtaining and maintaining those permissions.

Important Case Laws

1. C.C., C.E. & S.T. v. Northern Operating Systems Pvt. Ltd., (2022) 5 SCC 1

This is one of the most important Indian decisions concerning international secondment arrangements. The Supreme Court examined the substance of the secondment arrangement, including control, salary payment, reimbursement, duration, repatriation and the continuing relationship with the overseas employer. On the particular facts, the arrangement was treated as a taxable manpower-service transaction under the applicable service-tax law.

Principle: Courts may examine the actual economic and contractual substance of a secondment instead of relying solely upon its label.

2. Centrica India Offshore Pvt. Ltd. v. CIT, (2014) 364 ITR 336 (Delhi)

The Delhi High Court considered a cross-border secondment arrangement in the context of taxation and permanent establishment. The overseas employees remained employees of the foreign entities, while they worked under the Indian entity's supervision.

Principle: Continued employment with the foreign entity, payroll arrangements, control and responsibility for employees can have significant international-tax consequences.

3. State of Punjab v. Inder Singh, (1997) 8 SCC 372

The Supreme Court explained the concept of deputation and treated it as involving the lending employer, borrowing employer and employee.

Principle: Deputation is ordinarily based upon consent and is temporary in character; the employee generally retains the substantive connection with the parent organisation.

4. Ratilal B. Soni v. State of Gujarat, 1990 Supp SCC 243

The Supreme Court dealt with the rights of an employee on deputation.

Principle: A deputationist does not ordinarily acquire a vested right to permanent absorption in the borrowing organisation merely because of the deputation.

The principle has subsequently been relied upon in disputes concerning repatriation and deputation.

5. Kunal Nanda v. Union of India, (2000) 5 SCC 362

The Supreme Court reaffirmed the temporary nature of deputation.

Principle: An employee on deputation generally has no vested right to continue in the borrowing organisation or obtain permanent absorption there; repatriation to the parent organisation remains an important feature of deputation.

6. Sarita Singh v. Shree Infosoft Pvt. Ltd., Supreme Court, 2022

The Supreme Court emphasised the importance of the actual contractual arrangement in determining whether an employee had genuinely been deputed abroad. The Court observed that a mere business visit without an appropriate contractual basis does not automatically establish deputation.

Principle: Documentation matters; a secondment/deputation claim should be supported by clear contractual terms and evidence.

7. Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd., (2021) 7 SCC 151

The Supreme Court considered how to determine whether a relationship is a contract of service or contract for service. It recognised that no single test universally determines the relationship and that the totality of circumstances may need to be considered. This reasoning is relevant when analysing hybrid secondment arrangements.

Principle: The legal character of an employment relationship may depend on the totality of the contractual and factual circumstances.

Key Drafting Issues in a Secondment Agreement

A comprehensive agreement should ideally contain:

Conclusion

The central legal issue in a secondment agreement is the precise allocation of employment rights and responsibilities between the parent employer, host employer and employee. A carefully drafted agreement should make clear who controls the employee, who pays salary, who bears employment liabilities, who has disciplinary and termination powers, what happens at the end of the assignment, and how tax and statutory obligations are handled.

The Northern Operating Systems decision demonstrates why simply calling an arrangement a "secondment" or "reimbursement" may not determine its legal character. The actual contractual structure and conduct of the parties can be decisive.