Service PE: When Sending Employees Creates Tax Liability

The Hidden Tax Trap of Employee Deployments to India

A European consulting firm sends three specialists to its Indian client's Mumbai office for a six-week engagement. A US technology company deploys two engineers to integrate software at its Indian subsidiary. A Japanese manufacturer seconds quality control experts to its Indian factory. In each case, the foreign company may have unknowingly created a service permanent establishment (PE) in India — triggering Indian corporate tax liability on profits attributable to those activities at the foreign company rate of 35% plus surcharge and cess (effective rate approximately 38.22%).

Service PE is one of the most frequently triggered — and most commonly overlooked — forms of permanent establishment for foreign companies doing business with India. Unlike a fixed-place PE (which requires a physical office or facility), a service PE can arise from nothing more than employee travel that exceeds the threshold specified in the applicable Double Taxation Avoidance Agreement (DTAA). This article provides a comprehensive, practical guide to service PE under Indian tax law — the treaty thresholds, day-counting methodologies, secondment-related risks, landmark case law through 2025, and concrete strategies to manage exposure.

What Is a Service PE?

A service PE is a type of permanent establishment that arises when a foreign enterprise furnishes services in India through its employees or other personnel. Unlike a fixed-place PE (Article 5(1) of DTAAs), a service PE does not require a fixed business location in India. It is triggered purely by the duration of service activity performed in India by the foreign company's personnel.

Treaty Basis

Service PE is typically defined in Article 5(2)(l) or a separate paragraph of Article 5 in India's DTAAs. The standard formulation provides that a PE exists if the foreign enterprise "furnishes services, including consultancy services, through employees or other personnel engaged by the enterprise for such purpose" and such activities continue in India for a period exceeding the specified threshold within any 12-month period.

Domestic Law Nexus

Under domestic Indian tax law, Section 9(1)(i) provides a broader concept — "business connection" — which can deem income to accrue in India without requiring a PE. However, when a DTAA applies between India and the foreign company's country of residence, the treaty's PE definition prevails if it is more beneficial to the taxpayer (as established in Union of India v. Azadi Bachao Andolan). This means the service PE threshold in the treaty provides protection up to the specified number of days.

Service PE Thresholds Across India's Major DTAAs

The threshold for service PE varies significantly across India's treaty network. The following table covers the most commonly relevant treaties for foreign companies operating in India:

The critical distinction is between the 90-day treaties (USA, UK, Canada, Singapore) and the 183-day treaties (Australia, Germany, Japan, Netherlands, and others). Companies from 90-day treaty countries face a significantly tighter window before service PE triggers.

Day-Counting Rules: How Days Are Calculated

The methodology for counting days is the single most litigated aspect of service PE. India's tax authorities and treaty partners have adopted nuanced rules that foreign companies must understand.

Enterprise Days vs. Man-Days

A critical question is whether the threshold counts "enterprise days" (calendar days on which any employee of the enterprise is present in India) or "man-days" (aggregate person-days across all employees). The predominant interpretation, supported by recent tribunal decisions and CBDT practice, is:

• Enterprise days approach: If three employees are present in India on the same day, that counts as one day, not three. The threshold measures the period during which the enterprise furnishes services, not the total person-days deployed.
• Aggregation across projects: However, certain treaties (USA, Canada, Australia, China, and others) explicitly provide for aggregation of days across connected projects or related enterprises. Under these treaties, days from separate but connected service engagements for the same or connected clients are aggregated.

What Counts as a "Day"

Indian tax authorities generally count:

• Full working days in India: Days when employees actively render services
• Arrival and departure days: The day of arrival and day of departure each count as one day, even if only partial
• Weekends and holidays: If employees remain in India over weekends between working days, those days typically count

What should not be counted (though this is often contested):

• Vacation days: If an employee takes personal leave in India unrelated to the service engagement
• Business development days: Days spent on activities not connected to the service engagement (meetings with other clients, conferences)
• Transit days: If an employee transits through India without performing services

Rolling 12-Month Period

The threshold is measured against any 12-month period, not the calendar year or financial year. This is critical — a company cannot "reset the clock" on April 1 or January 1. If employees are present for 50 days in November-December 2025 and 50 days in January-March 2026, the aggregate of 100 days within that 12-month window exceeds the 90-day threshold.

Secondment vs. Service PE: The Critical Distinction

Employee secondment — where a foreign company seconds employees to work at an Indian entity — raises unique service PE questions that have generated significant litigation.

When Secondment Creates Service PE

The fundamental question is: who is the real employer? If the foreign company seconds employees to India but retains control over their work, pays their compensation (even if reimbursed by the Indian entity), and can recall them at will, the secondment may constitute the foreign company "furnishing services" in India — triggering service PE.

Key factors that indicate the foreign company is the real employer (creating PE risk):

• Employment contracts remain with the foreign entity
• The foreign entity determines the secondee's work assignments and quality standards
• Salary is paid by the foreign entity (with cost reimbursement from the Indian entity)
• The foreign entity retains the right to recall or reassign the secondee
• The secondee continues to accrue benefits (pension, stock options) from the foreign entity

When Secondment Does NOT Create Service PE

If the Indian entity is the "real employer" of the seconded employee, the arrangement is treated as an employment relationship — not a service provision — and does not create a service PE. Key factors:

• The Indian entity exercises day-to-day control over the secondee's work
• A formal employment or secondment agreement exists between the secondee and the Indian entity
• The Indian entity bears the costs of employment (not merely reimbursing the foreign entity)
• The Indian entity has the right to terminate the secondment arrangement
• The secondee integrates into the Indian entity's operations and reporting structure

Landmark Case Law: 2024-2025 Developments

Several recent decisions have clarified service PE law in India.

Samsung Electronics (Delhi HC, 2025)

In PCIT v. Samsung Electronics Co. Ltd (ITA 1029 of 2018, TS-21-HC-2025(DEL)), the Delhi High Court held that the secondment of employees by Samsung Korea to Samsung India Electronics Pvt Ltd (SIEL) did not create a PE under Article 5 of the India-Korea DTAA. The Court found that the seconded employees were engaged in market research, data collection, and information exchange — activities that did not constitute the furtherance of Samsung Korea's own business. The ruling reinforced that secondment to a subsidiary for the subsidiary's own business activities does not create the parent's PE.

Hyatt International (Supreme Court, 2025)

In a significant counterpoint, the Supreme Court ruled that Hyatt International had a PE in India under Article 5(1) of the India-UAE DTAA despite having no physical office in India. The Court found that Hyatt's long-term "Strategic Oversight Services Agreements" gave it functional authority over core hotel operations — staffing, procurement, branding, pricing, marketing, and financial oversight — constituting continuous and substantive operational control through Indian-based personnel. This ruling demonstrates that even without traditional employee deployment, service arrangements can create PE through operational control.

Centrica India (Delhi HC, 2014, Still Influential)

The Centrica case remains a foundational precedent. The Delhi High Court held that business support services provided through seconded employees constituted both "fees for technical services" (FTS) under the India-UK DTAA and a service PE. The Court emphasised that employees' employment contracts remained with the foreign entity and their salaries were recoverable only from the overseas entity. The Indian entity was compensated on a cost-plus-15% basis, further indicating a service provision rather than an employment relationship.

Clifford Chance (Delhi HC, December 2025)

The Delhi High Court ruled that physical presence in India is mandatory for service PE under the India-Singapore DTAA. Virtual or remote service delivery from outside India does not create a service PE. This ruling provides significant comfort to companies providing cross-border services to Indian clients remotely — physical presence of employees in India remains the triggering factor.

Profit Attribution: What Gets Taxed

Once a service PE is established, the next question is: how much profit is taxable in India?

The Arm's-Length Attribution Principle

Under Article 7 of most DTAAs, India can tax only the profits "attributable" to the PE. The PE is treated as a separate and independent enterprise, and profits are attributed as if the PE were dealing with the foreign enterprise at arm's length. In practice, this means:

• Revenue from the Indian service engagement is allocated to the PE
• Costs directly attributable to the PE (employee compensation, travel, materials) are deducted
• A reasonable markup for the use of the foreign enterprise's intangibles, know-how, and risk capital is applied

Cost-Plus Method and Zero Attribution

A critical nuance: if the foreign enterprise recovers only actual costs from the Indian client (cost-to-cost reimbursement without any profit markup), there may be no profit attributable to the PE. Several tribunal decisions have held that even if a service PE is established, no income can be attributed if the foreign enterprise earns no profit from the activities performed through the PE. However, the tax authority may apply transfer pricing adjustments if the cost-only arrangement is between associated enterprises, arguing that an arm's-length markup should be imputed.

Tax Rate and Filing

Profits attributed to a service PE are taxed at the foreign company corporate tax rate of 35% plus applicable surcharge (2% for income INR 1-10 crore, 5% for income above INR 10 crore) and 4% health and education cess. The foreign company must:

• Obtain a PAN in India
• File an income tax return (ITR-6)
• File Form 15CA/15CB for any outbound remittances
• Maintain books of account for the PE's activities

Strategies to Avoid Service PE

Foreign companies can implement the following strategies to manage service PE risk.

1. Track Employee Days Rigorously

Implement a centralised travel tracking system that records every employee's days in India. Set alerts well before the treaty threshold:

• For 90-day treaties (US, UK, Canada): Alert at 60 days (warning) and 75 days (critical)
• For 183-day treaties (Germany, Japan, Australia, Netherlands): Alert at 140 days (warning) and 165 days (critical)

Track at the enterprise level — aggregate all employees, not just individual travelers.

2. Structure Secondments Correctly

If you second employees to an Indian entity, ensure the Indian entity is the "real employer":

• Execute a formal secondment agreement where the Indian entity assumes employer obligations
• Give the Indian entity day-to-day control over the secondee's work
• Have the Indian entity pay the secondee directly (not as a reimbursement to the foreign entity)
• Ensure the Indian entity can terminate the secondment independently

3. Use Remote Delivery Where Possible

Following the Clifford Chance ruling, services delivered remotely from outside India do not create a service PE. Structure engagements to maximise remote delivery and minimise on-site presence. When on-site presence is necessary, keep it within the treaty threshold.

4. Separate Service Engagements

For treaty countries that aggregate connected projects, ensure that separate service engagements with unrelated Indian clients are genuinely independent — different teams, different scopes, different commercial terms. The aggregation rule applies to connected or related projects, not to independently negotiated engagements.

5. Engage Through a Local Indian Entity

Instead of deploying foreign employees directly, consider having your Indian subsidiary or a local partner provide the services. The Indian entity's employees performing services in India do not create a PE for the foreign parent — the Indian entity is separately taxable in India. This is the cleanest way to eliminate service PE risk, though it requires the Indian entity to have the relevant capability.

6. Choose Treaty Country Strategically

For multinational groups with entities in multiple jurisdictions, consider routing service engagements through entities in countries with higher service PE thresholds. A consulting engagement routed through a German or Japanese entity (183-day threshold) has a significantly wider window than one routed through a US, UK, or Singapore entity (90-day threshold). Ensure this is substantively justified — the entity providing services must have genuine capability and commercial rationale.

Service PE vs. Fees for Technical Services

Foreign companies should also be aware of the interaction between service PE and fees for technical services (FTS) under Indian DTAAs.

Many Indian DTAAs include an FTS article (typically Article 12) that allows India to tax fees for technical, managerial, or consultancy services at a flat rate (typically 10-15%) at source, regardless of whether a PE exists. This creates a dual exposure:

• If services are provided without a PE, the payment may still be taxable as FTS at the treaty rate (10-15%)
• If a PE exists, the profits attributable to the PE are taxed at the full corporate rate (35% + surcharge + cess), with a credit for any FTS tax already withheld

The key question is whether the payment constitutes FTS or business profits. If it is business profits and no PE exists, India cannot tax it under the DTAA. If it is FTS, India can tax it regardless of PE status. The characterisation depends on whether the services involve "making available" technical knowledge (the MFN clause in certain DTAAs) or merely providing assistance.

Key Takeaways

• Service PE is triggered by duration, not physical presence: Exceeding the DTAA threshold (90 or 183 days in most cases) for employee presence in India creates PE and Indian tax liability
• Day-counting uses enterprise days, not man-days: Three employees present on the same day count as one day, but all employees' days aggregate toward the threshold
• The 12-month window is rolling: Companies cannot reset the clock at year-end — any consecutive 12-month period is measured
• Secondment structure is critical: If the foreign entity remains the "real employer" of seconded employees, a service PE can arise even without direct service contracts
• Remote services do not trigger service PE: The Clifford Chance ruling (December 2025) confirms that physical presence in India is required — purely virtual services from abroad are safe
• Profit attribution may be zero if costs are recovered at cost: Even with a PE, no tax is payable if no profit is attributable, though transfer pricing adjustments remain a risk

For guidance on structuring your India service engagements or managing employee deployment to avoid service PE, explore our tax advisory services and FEMA & RBI compliance services.