Seconding Staff Between India and the UK: Employer, Permanent Establishment and Payroll Tax Are Different Questions

By CA Mithilesh Reddy, Founder and CEO, and CA Rajesh Vaishnav, Partner, Steadfast Business Consulting LLP | Direct Tax Advisory

Introduction

International workforce deployment is often presented as a payroll question: which entity pays the employee and in which country does tax need to be deducted? That is rarely the whole problem. The economic employer may differ from the paying entity, and a group entity that deploys employees may create a permanent establishment through activities that have little to do with the salary remittance.

For an India–UK arrangement, one must analyse at least three separate taxpayers or tax positions: the employee, the entity supplying or deploying personnel, and the business that receives the work. The structure becomes especially sensitive where the host directs daily activities while the home entity retains the employment contract, compensation decisions or project risk.

This article provides a practical decision framework for that arrangement. It deliberately separates salary taxation, corporate profit attribution and intercompany-service characterisation, because a favourable answer to one does not settle the others.

1. The actual deployment model takes priority

Describe who recruited the employee, who may terminate the engagement, who decides the work programme, who evaluates performance, who bears employment risk and who receives the deliverables. A secondment agreement alone may not tell the whole story where the parties operate differently in practice.

The arrangement might be a temporary employment transfer, a foreign enterprise delivering services using its personnel, or a split arrangement in which the host has operational supervision while the home employer retains broader control. The answer should emerge from documents and practice, not from the title “secondment”.

2. Salary taxation under the India–UK treaty

The synthesised India–UK treaty places dependent personal services in Article 16. Its short-stay protection requires satisfying the relevant conditions together, including the presence threshold, the paying employer requirement and the treatment of remuneration in the source State.

The familiar 183-day test is not a free-standing exemption. If the conditions concerning employer residence and the bearing of remuneration are not met, salary may be taxable in the State where employment is exercised even for a short presence. Count days as the treaty directs and retain travel documentation.

3. Economic employer and the recharge trail

Payroll may continue with the home entity for administrative convenience. That fact should be tested against who is responsible for the work, who bears compensation cost, who controls the employee’s duties and whether the host is reimbursing salary or purchasing a wider commercial service.

Where a recharge is made, reconcile payroll records to the intercompany invoice and the receiving entity’s expense ledger. A recharge carrying overhead or a service margin may present a different corporate and withholding question from a pure cost recovery; it does not necessarily change the employee’s treaty position.

4. Service PE risk can arise independently

The India–UK treaty contains a service-related PE provision in its Article 5 framework, including a rule for services performed for an associated enterprise. The applicable day-counts and activity tests must be checked against the authenticated treaty wording and periods in question.

An employee may satisfy personal tax conditions without that resolving the deploying company’s PE risk. Track all relevant personnel, connected assignments, client projects and periods, not merely one employee’s travel in isolation. The company’s function in the host jurisdiction must be described.

5. Permanent establishment is not automatically a large profit

If a corporate PE is found, profit attribution remains a distinct exercise. It focuses on the functions, assets and risks of the PE rather than attributing all profits of the foreign employer to the country of deployment.

An engineer seconded to coordinate a discrete task may create an economic contribution very different from a team concluding customer contracts or independently delivering an integrated service. Payroll recharges, project accounting and management records should support the attributable profit analysis.

6. Payroll, social security and immigration cannot be combined into one rule

The tax residence of the employee, domestic salary withholding obligations, available foreign tax relief and any applicable social-security arrangements each require separate testing. A tax treaty article is not an immigration permission, and a visa designation does not determine tax ownership of a function.

Before departure, establish a host payroll policy, employer registrations where required, travel documentation, expected working-day count and the procedure to manage changes in deployment length. Late correction can be costly where work has already been performed.

7. Intercompany billing and indirect-tax characterisation

Where the home entity invoices the host, the supply may be characterised as a service depending on the facts. The GST or VAT analysis is separate from the employee’s income-tax treatment. The existence of an employment relationship does not automatically preclude scrutiny of an intercompany supply.

Where an Indian company receives employees from a related overseas entity, assess the law on import of services, valuation and input tax credit. The CBIC circular on related-party import-of-service valuation may be relevant, but it does not answer every secondment characterisation issue.

8. A deployment memorandum for the business

An effective memorandum should contain an employer and control matrix, compensation and recharge schedule, day-count tracker, corporate PE assessment, salary tax position, treaty evidence, GST or VAT analysis, immigration assumptions and escalation triggers.

Update that memorandum when deployment becomes longer, work shifts from execution to contract negotiation, the receiving company begins exercising substantive control, or recharge arrangements change. A well-drafted initial policy loses force if the actual deployment evolves without review.

What the India-UK treaty tests for salary and for service PE

Article 16(2) of the India-UK treaty exempts remuneration for employment exercised in the other State only if three conditions are met together: the individual is present for not more than 183 days in the relevant fiscal year, the remuneration is paid by or on behalf of an employer who is not resident in the State of work, and the remuneration is not deductible in computing the profits of an enterprise chargeable to tax in that State. A host company that bears the cost through a recharge can therefore defeat the exemption even for a short stay.

Article 5(2)(k) is the service PE rule. On the treaty text published by HM Revenue and Customs, furnishing services through employees or other personnel creates a permanent establishment where the activities continue for more than 90 days within any twelve-month period, and for more than 30 days within any twelve-month period where the services are performed for an enterprise associated with the provider. A secondment to an Indian group company should therefore be counted against the shorter threshold, across all connected personnel and assignments and not only for one traveller.

How have the courts treated seconded employees?

Two decisions show the range. In DIT v. Morgan Stanley & Co. (2007) 292 ITR 416, decided on 9 January 2007, the Supreme Court upheld the Authority for Advance Rulings’ view that employees deputed to an Indian affiliate can create a service PE for the foreign enterprise where it remains responsible for their work and they stay on its payroll or retain a lien on their jobs with it.

In Centrica India Offshore Pvt. Ltd. v. CIT, reported in May 2014, the Delhi High Court treated payments for seconded employees as fees for technical services under the India-UK and India-Canada treaties on the facts, rejected the ‘reimbursement’ label, and held that the host’s day-to-day control did not outweigh the fact that the individuals remained employees of the foreign parties. Neither decision says that every secondment is taxable. Both show that payroll location, the control matrix and the recharge basis will be read together.

What changed for social security from 15 July 2026?

The India-UK Comprehensive Economic and Trade Agreement and the Agreement on Social Security Contributions (the double contribution convention) enter into force on 15 July 2026, according to the Press Information Bureau. For detached workers, the convention is reported to exempt the worker and employer from host-country contributions while they remain covered in the home country, for a period reported as up to five years, provided a certificate of coverage is held. It does not cover workers recruited locally or who localise.

Earlier commentary on UK-India deployments noted the absence of any totalisation arrangement. That position changes for postings the convention covers, although income tax, treaty and permanent establishment analysis is unaffected. Confirm the period, the certificate process and the transitional rules from the agreement text.

A pre-deployment checklist

Before the first day of work, hold the signed secondment or service agreement and a control matrix showing who directs, evaluates, can terminate and bears the risk of the individual’s work. Add a compensation and recharge schedule reconciled to payroll and to the intercompany invoice, and a day-count tracker by individual and by project.

Record the employee’s residential status analysis, treaty position and Indian salary withholding plan under section 392 of the Income-tax Act, 2025 (section 192 of the 1961 Act). Add the corporate PE assessment under Article 5 and the profit attribution approach if a PE cannot be ruled out, the GST analysis of the recharge including the related-party import-of-service valuation position in Circular No. 210/4/2024-GST, Form 3CEB mapping where the deploying entity is an associated enterprise, and the foreign exchange and social security assumptions. Finally, list the events that require re-review: an extension, a shift from execution to contract negotiation, or a change in the recharge basis.

Conclusion

Cross-border staff deployment is a useful illustration of why tax analysis must follow economic facts. An employment contract, travel calendar and recharge invoice may each point to a different aspect of the arrangement.

A sustainable structure makes those records consistent from the outset. It does not treat an exemption under one tax regime as clearance under all the others.

Frequently asked questions

1. Is staying in the UK or India for fewer than 183 days sufficient?

Not by itself. All conditions in the applicable dependent-personal-services article must be satisfied.

2. Who is the employer if payroll is paid abroad?

The answer may require analysis of contractual and economic control; payroll location is one factor.

3. Can one seconded employee create PE exposure?

Potentially, depending on the treaty, activities and duration. There is no blanket exclusion.

4. Does a salary recharge always constitute fees for technical services?

No. Characterisation depends on the real supply, if any, and the applicable statute and treaty.

5. What should be prepared before deployment?

A work-scope and control matrix, day tracker, payroll and recharge plan, treaty assessment, and compliance checklist.

6. Does a seconded UK employee working in India for under 183 days pay Indian tax under the India-UK treaty?

Not necessarily. Under Article 16(2) the exemption applies only if presence does not exceed 183 days in the relevant fiscal year, the remuneration is paid by or on behalf of an employer not resident in India, and the cost is not deductible in computing the profits of an enterprise chargeable to tax in India. If the Indian host bears the cost through a recharge, the third condition can fail.

7. How many days create a service permanent establishment under the India-UK treaty?

Under Article 5(2)(k), services furnished through employees or other personnel can create a permanent establishment where the activities continue for more than 90 days within any twelve-month period, or more than 30 days where the services are performed for an associated enterprise. Check the wording in the MLI-modified text, and track days across all personnel and connected assignments, not one employee.

8. Is GST payable on salary recharged by a UK company to its Indian group company?

It can be. Where the overseas entity supplies services to a related Indian entity, the supply may be an import of services chargeable under reverse charge, depending on the facts. Circular No. 210/4/2024-GST dated 26 June 2024 addresses valuation of such imports where the recipient has full input tax credit, but it does not settle every secondment characterisation question.

Related reading from SBC

• Employee Secondment and GST: Reading Northern Operating Systems with the CBIC Clarifications
• Attributing Profits to an Indian Project Office: Which Head Office Expenses Count?
• Shared Services from Singapore: Applying the ‘Make Available’ Test to Indian Withholding
• Parent Guarantee of an Indian Subsidiary: How Transfer Pricing, Withholding and GST Fit Together
• More articles on the SBC blog

Disclaimer

This article is general professional commentary and not advice on any particular facts. Treaty eligibility, applicable law, procedural requirements and statutory amendments must be verified for the relevant tax period. It is not a description of an identifiable client engagement.

Digital Platforms and India Tax Once the Equalisation Levy Is Gone: SEP, Treaty and PE Compared

By CA Mithilesh Reddy, Founder and CEO, and CA Rajesh Vaishnav, Partner, Steadfast Business Consulting LLP | Direct Tax Advisory

Introduction

The withdrawal of India’s equalisation levy is not the same as withdrawal of India’s interest in taxing offshore digital business. It removes a separate levy; it does not repeal the income-tax rules that deal with business connection, royalty, fees for technical services or permanent establishment.

This distinction matters for platform operators, connected television businesses, advertising networks and software suppliers. The customer may be in India, the contract signed abroad, the infrastructure hosted elsewhere and the monetisation split among advertising, licensing, data and services. A single description such as “digital revenue” conceals several different tax questions.

The right starting point is to map the payment and the legal capacity in which it is earned. This article explains how significant economic presence should be assessed after the equalisation levy sunset, and why treaty access often changes the resulting answer.

1. Two levies with different legal foundations

The equalisation levy was a specific charge on defined digital transactions under the Finance Act 2016 regime. India first excluded e-commerce supplies from 1 August 2024 and later withdrew the residual online-advertising levy from 1 April 2025. The Income-tax Department overview reflects the withdrawal.

Significant economic presence is part of the Income-tax Act business-connection framework. It can establish a domestic nexus for a non-resident even without a conventional physical office. The policy may be related, but the tests are not interchangeable. Tax practitioners should not continue treating a platform transaction as automatically subject to an abolished levy.

2. Identify the transaction before measuring nexus

A platform may sell advertising inventory, licence software, provide analytics, arrange third-party services or sell hardware. Each receipt should be described by its contractual rights and obligations. The customer agreement, invoicing chain, allocation of advertising revenue and ownership of the content or technology are fundamental.

For example, a contract granting an Indian customer restricted access to a cloud platform may raise a different characterisation from one transferring commercially exploitable copyright rights. Whether a payment is royalty or business profits cannot be decided by the label “subscription” alone.

3. SEP thresholds and attribution are separate steps

Explanation 2A to section 9(1)(i) of the 1961 Act (now section 9(9)(d) of the Income-tax Act, 2025, with the thresholds in rule 13 of the Income-tax Rules, 2026, formerly rule 11UD) established an SEP test using prescribed payment or user-interaction thresholds. That domestic rule also contemplates attribution only of income connected with the relevant transactions or activities. For current periods, check the relevant statutory provision and operative rules rather than borrowing threshold figures from earlier guidance.

A system collecting India-associated users or payments is not sufficient on its own for a tax computation. The enterprise must determine whether the statutory test applies, what income is connected with the nexus, and how the governing rules treat attribution. Global profit or worldwide advertising revenue is not the default attributable amount.

4. A treaty can change the result

Under many treaties, Article 7 permits source-state taxation of business profits only where a qualifying permanent establishment exists and only to the extent attributable to it. The result requires treaty residency, beneficial entitlement where relevant, the operative treaty text and the facts relating to presence, personnel, agents and infrastructure.

Domestic business connection and treaty PE are related but distinct concepts. A platform can have a domestic SEP analysis requiring reporting even where treaty protection ultimately limits Indian taxation. Equally, a treaty claim should never be assumed where the claimant is not entitled to its benefits or a specific anti-abuse rule applies.

5. Do not overlook service and royalty classification

An advertising or streaming ecosystem may involve software licences, database access, campaign management, creative services, hosting and equipment. Those components may fall under different domestic charging provisions or treaty articles. The contract bundle should be analysed by service and right, with careful attention to who owns the intellectual property and what the recipient may do with it.

A royalty claim should identify the particular right or equipment said to be used, not merely cite the use of technology somewhere in the supply chain. A fees-for-technical-services claim similarly requires the treaty-specific definition and any “make available” requirement.

6. Permanent establishment in a digital operating model

Potential PE questions include who habitually concludes contracts, where decisions are made, whether dedicated infrastructure is at the enterprise’s disposal, and whether a local group company acts independently or on behalf of the foreign principal. Legal separation between entities is relevant but not conclusive.

A local advertising sales team that performs routine marketing is not necessarily the same as one authorised to bind the overseas enterprise. Conversely, a group should not dismiss PE exposure because standard customer terms are accepted through an offshore digital interface. Authority and actual conduct matter.

7. Withholding is a transaction-by-transaction decision

An Indian payer should distinguish payments potentially chargeable to tax under domestic law from those entitled to treaty relief. Before applying withholding, verify the payee, residence documentation, agreements, invoices, scope, PE declarations where relevant and applicable statutory procedures.

Where an agreement contains several revenue streams, a single withholding conclusion for all payments can be indefensible. The file should state which component was reviewed, why a specific treaty article applies and what evidence supports the beneficial-owner and PE assumptions.

8. An operating model that survives review

A defensible digital-tax memorandum maps contractual counterparties, customer location, rights granted, service delivery, software architecture, local functions, user or payment data, invoicing and funds flow. Reconcile the map with indirect tax and transfer pricing positions so the group does not advance inconsistent facts in different filings.

Keep separate a statutory conclusion, a modelling assumption and a commercial forecast. If expected payment volumes may cross the prescribed SEP threshold, record the trigger for a fresh review rather than relying indefinitely on an initial conclusion.

What are the SEP thresholds under the Income-tax Act, 2025?

Significant economic presence is now part of the business-connection rule in section 9 of the Income-tax Act, 2025, with the two thresholds prescribed in rule 13 of the Income-tax Rules, 2026, which carries forward former rule 11UD. Rule 13 prescribes aggregate payments of Rs 2 crore in the tax year from transactions in goods, services or property with any person in India, including downloads of data or software, and 3 lakh users with whom the non-resident systematically and continuously solicits business or who interact with it. The official rule page cites section 9(9)(d)(i) and (ii) for the two limbs, and meeting either is enough to create the nexus.

Attribution is a separate step. Only income reasonably attributable to the transactions or activities that create the nexus is deemed to accrue or arise in India, and transactions confined to the purchase of goods in India for export are excluded. The export-purchase exclusion was added to Explanation 2A of the 1961 Act with effect from 1 April 2026.

How did the equalisation levy end, and which periods remain open?

The 2 per cent levy on e-commerce supply or services stopped applying to consideration received or receivable on or after 1 August 2024, under an amendment made by the Finance (No.2) Act 2024. Section 146 of the Finance Act 2025 then amended sections 163 and 165 of the Finance Act 2016 so that the 6 per cent levy on specified services, mainly online advertisement, does not apply to consideration received or receivable on or after 1 April 2025. The Income-tax Department’s equalisation levy page records that the provisions are not applicable with effect from 1 April 2025.

These are prospective cut-offs, not a retrospective repeal, so assessments, appeals and refund claims for earlier consideration continue under the provisions as they stood. For income received on or after 1 April 2025, commentary reports that the section 10(50) exemption, which protected income already subject to the levy, no longer applies from assessment year 2026-27. The ordinary charging provisions and any treaty therefore become the operative analysis for those receipts.

A decision sequence for a foreign platform with Indian users or customers

First, list each revenue stream and the contract under which it arises, such as advertising inventory, software or content licences, hosting, data and hardware. Second, identify who pays: an Indian customer or group company triggers a withholding question under section 393(2) of the 2025 Act, while a non-Indian payer may not. Third, test the domestic charge: business connection including SEP, royalty and fees for technical services.

Fourth, test treaty entitlement: tax residency certificate, Form 41 (formerly Form 10F), beneficial ownership and any limitation of benefits or principal purpose test. Fifth, if the treaty applies, test permanent establishment on the facts: a fixed place, equipment or servers at the enterprise’s disposal, a dependent agent, and the functions of any local group company. Sixth, attribute profit: only profits attributable to a permanent establishment under Article 7 where a treaty applies, or income attributable to the SEP nexus under domestic law where it does not. Seventh, record the conclusion and the trigger for a fresh review, such as payments or user numbers approaching the rule 13 thresholds.

Common mistakes in digital-tax files after the levy

The first is treating the end of the levy as the end of exposure. The second is quoting SEP thresholds from earlier years or from commentary instead of rule 13. The third is assuming that SEP creates a treaty permanent establishment, which it does not unless the treaty itself provides so. The fourth is calling every digital receipt royalty because of the words ‘platform’ or ‘subscription’, when the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT looked at the rights actually granted in the software.

The fifth is treating the Indian subsidiary’s local activity as irrelevant because customer contracts are accepted through an offshore interface. The sixth is preparing the direct tax conclusion, the GST analysis and the transfer pricing file separately, so that each asserts a different set of facts.

Conclusion

The digital tax question after the equalisation levy is not whether India has ceased taxing offshore platforms. It is which statute and treaty article now governs each identifiable revenue stream.

Commercial reality, contract architecture and evidence of local activities will decide more than broad descriptions of online business. The strongest analysis is built around the transaction, not the business label.

Frequently asked questions

1. Does the equalisation levy still apply in October 2026?

No. The Income-tax Department states that its provisions are not applicable from 1 April 2025.

2. Does SEP automatically create a treaty PE?

No. Treaty PE is determined under the treaty, subject to its application and anti-abuse provisions.

3. Must every digital receipt be characterised as royalty?

No. The rights granted and services performed must be reviewed separately.

4. Can an Indian subsidiary create PE risk for a foreign platform?

It can on particular facts, but common ownership alone is not sufficient.

5. Can historic equalisation-levy periods be ignored?

No. Prior periods may remain relevant for compliance or disputes under the law then applicable.

6. What are the significant economic presence thresholds in India for 2026?

Rule 13 of the Income-tax Rules, 2026 prescribes aggregate payments of Rs 2 crore in the tax year from transactions with persons in India, or 3 lakh users with whom business is systematically solicited or who interact with the non-resident. The rule carries forward former rule 11UD and is linked to section 9(9)(d) of the Income-tax Act, 2025.

7. Is the equalisation levy abolished in India?

It no longer applies to new consideration. The 2 per cent e-commerce levy stopped applying from 1 August 2024, and the 6 per cent levy on specified services such as online advertisement from 1 April 2025. Earlier periods remain subject to the provisions as they stood, so assessments and disputes for those periods can continue.

8. Does significant economic presence create a permanent establishment under a tax treaty?

No. Significant economic presence is a domestic-law limb of business connection under section 9. A treaty permanent establishment is determined by the treaty’s own Article 5, and Article 7 limits India’s right to tax business profits to those attributable to a permanent establishment. A treaty-eligible enterprise therefore needs both analyses, and entitlement to treaty benefit must be documented.

Related reading from SBC

• Smart TVs, Digital Advertising and Cross-Border GST: Separate the Hardware from the Platform
• Defending the Residual Profit Split Method in India When the TPO Proposes TNMM for an Intangible-Owning Entity
• Attributing Profits to an Indian Project Office: Which Head Office Expenses Count?
• Shared Services from Singapore: Applying the ‘Make Available’ Test to Indian Withholding
• More articles on the SBC blog

Disclaimer

This article is general professional commentary and not advice on any particular facts. Treaty eligibility, applicable law, procedural requirements and statutory amendments must be verified for the relevant tax period. It is not a description of an identifiable client engagement.

Parent Guarantee of an Indian Subsidiary: How Transfer Pricing, Withholding and GST Fit Together

By CA Mithilesh Reddy, Founder and CEO, and CA Rajesh Vaishnav, Partner, Steadfast Business Consulting LLP | Direct Tax Advisory

Introduction

A parent company that guarantees its subsidiary’s bank borrowing has done something commercially real. The lender’s risk is reduced, the subsidiary borrows on better terms than it could obtain alone, and the parent has assumed a contingent liability it did not previously carry. Indian tax law responds to that in three places at once, and the three do not coordinate with one another. Each asks its own question, each reaches its own number, and each carries its own penalty and interest consequences.

The commercial amounts involved are usually modest, but the exposure is not, because each regime carries its own penalty and interest consequences, and because a position taken in one regime becomes evidence in the others. Different transfer-pricing and GST values can be justified, but the GST computation must also test the full-input-tax-credit proviso to Rule 28(2) and the documentation for the particular guarantee.

This note deals with how the three fit together on a single guarantee. It covers whether the transaction requires arm’s length pricing at all, how a defensible fee is established and why the familiar one per cent figure is not a legal standard, how the fee is characterised for withholding under a treaty, and how the prescribed GST valuation operates on a related party guarantee whether or not anything is charged. It also explains why the transfer pricing conclusion and the GST figure can legitimately differ, which is the point on which files most often become internally inconsistent. For the related question of how intra group service charges are characterised for withholding, see our note on the make available test in shared services arrangements.

1. Is a guarantee an international transaction at all

Section 163 of the Income-tax Act, 2025 (section 92B of the 1961 Act, the meaning of international transaction) defines the transactions to which the arm’s length requirement attaches. The corresponding provision in the 1961 Act was expanded by the Finance Act 2012, with retrospective effect, by an Explanation that lists guarantees among capital financing transactions. The 2025 Act carries the same treatment forward, so a guarantee remains within the categories the provision names, and the argument described below is about whether naming is sufficient rather than about whether the category exists.

Whether that listing is sufficient by itself has been genuinely contested, and a blog that presents the area as settled will mislead.

In Bharti Airtel Ltd. v. ACIT, the Delhi Bench held in March 2014 that a transaction is an international transaction only if it has a bearing on the profits, income, losses or assets of the enterprise, that this requirement applies even to transactions named in the retrospective Explanation, that the impact must be real rather than contingent or hypothetical, and that the onus lies on the Revenue. On that reasoning a guarantee that costs the guarantor nothing falls outside the provision.

The Ahmedabad Bench reached a similar result in Micro Ink Ltd. v. ACIT, ITA No. 2873/Ahd/10, holding that a parent’s guarantee to its subsidiary is a shareholder activity in the nature of quasi capital rather than the provision of a service, and therefore outside the limb of the provision dealing with the provision of services.

The other line is at least as strong. In CIT v. Everest Kanto Cylinder Ltd., ITA No. 1165 of 2013, pronounced on 8 May 2015 by Dharmadhikari and A.K. Menon JJ, the Bombay High Court proceeded on the footing that the guarantee was within the provision and decided the case on benchmarking. In Advanta India Ltd. v. ACIT, IT(TP)A No. 1643/Ban/12, decided on 30 June 2015, the Bangalore Bench held that a guarantee involving a cost to the assessee does fall within the provision and distinguished Bharti Airtel on that basis.

The practical conclusion for an adviser is straightforward. Arguing that no international transaction exists is available on the right facts, particularly where the guarantee was given purely in a shareholder capacity and cost the guarantor nothing. It is not a position to build a compliance strategy on. Most groups should benchmark and document, and keep the threshold argument in reserve.

2. What an arm’s length guarantee fee looks like

Transfer pricing officers have historically applied a one per cent commission as a default. That figure is an administrative convention. It is not in the statute, it is not in the rules, and it has been displaced on evidence.

Everest Kento Cylinders is the authority that matters, and it should be stated precisely because it is often overstated. The Bombay High Court dismissed the Revenue’s appeal for want of a substantial question of law. It held that the transfer pricing officer’s comparison of a holding company’s corporate guarantee with commercial bank guarantee rates was not a comparison between like transactions, and that the commission the assessee had charged could not be called in question in the manner the officer had done. The Court declined to interfere with the deletion of the adjustment. It did not itself fix an arm’s length rate, and it did not hold that 0.5 per cent is the arm’s length rate. What it establishes is that the administrative benchmark can be displaced, and that bank guarantee pricing is the wrong comparable.

The reasoning matters more than any number. A bank issuing a guarantee is selling a product, carries regulatory capital against it and prices for profit. A parent guaranteeing its own subsidiary is protecting an investment it already owns. The two are not in the same market.

Two methodologies are used to displace the default, and they answer slightly different questions.

The benefit approach measures what the borrower gained. It compares the interest rate the subsidiary obtained with the guarantee against the rate it would have obtained on its own standalone credit profile, and treats some share of the saving as the arm’s length fee. Its strength is that it is grounded in an observable commercial benefit. Its weakness is the counterfactual rate, which has to be established rather than assumed, ideally from a bank’s own indicative pricing or from a credit assessment.

The expected loss approach measures what the guarantor assumed. It estimates the probability that the borrower defaults, estimates the proportion of exposure that would be lost on default, and derives the expected loss the guarantor has taken on. Its strength is that it prices the risk actually borne, which is what a guarantor would charge for. Its weakness is that each input requires support, and an unsupported default probability carries no more weight than a bare assertion.

Either approach can be defended. Neither can be defended as a conclusion without the working. The file should contain the credit analysis, the source of each input, the sensitivity of the result to the main assumptions, and the reason the chosen approach fits the transaction.

3. One further point on quantum: guaranteed versus drawn

A guarantee is frequently issued for a facility limit well above what the borrower actually draws. For transfer pricing, the better view is that the guarantor’s exposure is to the amount outstanding from time to time, and pricing on the drawn amount reflects the risk actually assumed. For GST, as set out below, the prescribed value is expressly tied to the amount guaranteed rather than the amount disbursed. The two regimes diverge on this point by design, and a file should say so rather than leave the inconsistency to be discovered.

4. Withholding on the fee

Where a fee is actually paid to the foreign guarantor, the payer must consider section 393(2), Table serial number 17 of the 2025 Act (section 195, withholding on sums payable to non-residents), and the treaty characterisation that determines the rate.

The characterisation question is live and has produced an important decision that is widely miscited. In Metso Outotec OYJ (earlier Outotec Oyj) v. Dy. CIT, (2023) 203 ITD 79 / (2024) 227 TTJ 715 (Kol Trib), the Kolkata Bench held that a corporate guarantee fee arose in India and was taxable as Other Income under Article 21 of the India Finland treaty, on the reasoning that giving the guarantee was a shareholder obligation protecting the subsidiary’s business interests rather than part of the guarantor’s regular business activity.

Two points about that decision. First, it is a treaty characterisation case. It is not a transfer pricing case, it decided nothing about benchmarking, and it laid down no arm’s length rate. It is cited for the latter proposition with some frequency and should not be. Second, its actual holding is adverse and important: where a guarantee fee is characterised as other income rather than business profits, a taxpayer relying on the absence of a permanent establishment to claim nil taxability may find that the article it is relying on does not apply.

The characterisation therefore has to be worked out against the specific treaty, and the analysis should address the residuary article, not stop at business profits. Where a fee is payable, the treaty documentation requirements apply in the usual way: residency certificate, Form 10F and a beneficial ownership declaration.

5. The GST position

Section 15(1) of the CGST Act values a supply at the transaction value where the supplier and recipient are not related and price is the sole consideration. Where they are related, value is determined under the rules.

Rule 28(2) was inserted by Notification No. 52/2023-Central Tax dated 26 October 2023 and retrospectively amended by Notification No. 12/2024-Central Tax dated 10 July 2024 with effect from 26 October 2023. Circular No. 225/19/2024-GST dated 11 July 2024 sets out how it operates. The points that matter commercially are these.

• The value is one per cent of the amount guaranteed per annum, or the actual consideration, whichever is higher. Where a fee is actually charged above that figure, the fee is the value.
• The base is the amount guaranteed, not the amount disbursed. A guarantee of a facility limit is valued on the limit.
• Rule 28(2) applies to guarantees issued or renewed on or after 26 October 2023. Guarantees issued before that date are valued under the pre-existing Rule 28.
• Each renewal is a fresh supply.
• For a multi year guarantee, the one per cent is multiplied by the number of years, tax is paid at issuance, and part years are pro-rated.
• Where the recipient is eligible for full input tax credit, the invoice value is deemed to be the value of supply.
• Co-guarantors: where the aggregate actual consideration exceeds one per cent of the guaranteed amount, that aggregate is the value; otherwise each pays on one per cent of the amount it guarantees.
• A loan takeover alone is not a taxable event unless a fresh guarantee is issued or an existing one renewed.
• Rule 28(2) does not apply where the recipient of the guarantee service is located outside India, so an outbound guarantee is outside it.

Where the guarantor is outside India and the recipient is the Indian subsidiary, the supply is an import of services and the Indian entity discharges tax under reverse charge. Where the Indian entity is eligible for full credit, the cash effect nets out, but the compliance is not optional and the credit depends on correct discharge and documentation.

6. Why the two references to one per cent are not the same figure

This is the point on which files most often become internally inconsistent, so it is worth stating plainly.

The transfer pricing one per cent is an administrative benchmark with no statutory basis, applied by officers in the absence of better evidence, and displaceable on evidence as Everest Kanto shows. The GST valuation mechanism is subject to the full-input-tax-credit proviso and is not displaced merely by demonstrating a lower arm’s-length fee by showing that an independent party would have charged less.

Accordingly, a defensible transfer-pricing fee can differ from the GST value calculated for the same guarantee, once the full-credit proviso and other applicable conditions have been considered. That is not an inconsistency. The transfer pricing file should record why, so that the GST position is not later produced as an admission that the arm’s length fee was one per cent.

7. A worked example

Assume a foreign related entity guarantees a borrowing facility for an Indian group company, with loan drawdowns differing from the face amount guaranteed. This example is hypothetical; the guarantee terms, eligibility for input tax credit and the documentation of any fee must be examined independently.

Transfer pricing. For periods governed by the Income-tax Act, 1961, the relevant accountant’s report is Form 3CEB under section 92E; tax years governed by the Income-tax Act, 2025 use section 172 and Form No. 48 under rule 85 of the 2026 Rules. Benchmark the transaction by reference to borrowing benefits and guarantee risk using independently sourced inputs. Neither a reported judicial percentage nor a GST percentage is a substitute for this exercise.

Withholding. Where a fee is paid, the treaty characterisation is worked out against the applicable agreement, addressing both the business profits article and the residuary article, with Metso Outotec noted as the reason the residuary article cannot be ignored. Treaty documentation is obtained before payment.

GST. For a covered related-party guarantee issued or renewed on or after 26 October 2023, apply Rule 28(2) and Circular No. 225/19/2024-GST, including the proviso deeming the invoice value to be the supply value where the recipient is eligible for full input tax credit. Otherwise, the prescribed base ordinarily depends on the amount guaranteed, not just the amount drawn; the guarantee term, renewal date, any reverse-charge liability and actual credit eligibility must be documented.

Consistency. A single note records all three positions, explains why the transfer pricing rate and the GST deemed value differ, and is retained in the file. It costs an hour and is worth considerably more than that at assessment.

8. Where these arrangements go wrong

First, no fee is charged and nothing is documented. The absence of a fee is a defensible position on the right facts, but it must be a reasoned position recorded at the time, not a gap.

Second, a rate is adopted without working. A file that states a rate of half a per cent and contains nothing behind it is in a worse position than one that adopts the default, because it has invited the question without answering it.

Third, the GST obligation is missed entirely. Rule 28(2) applies whether or not consideration is charged, and groups that charge nothing frequently assume there is nothing to value.

Fourth, renewals are not tracked. Each renewal is a fresh supply, and a guarantee rolled over annually generates an annual liability that is easy to overlook because nothing new appears to have happened.

Fifth, the base is wrong. GST is valued on the amount guaranteed. Computing it on the drawn amount understates the liability, sometimes by a wide margin where the facility limit is far above utilisation.

Sixth, the treaty analysis stops at business profits. Metso Outotec shows that the residuary article can apply, and a withholding position that has not addressed it is incomplete.

Seventh, the three positions are prepared by three teams and never reconciled. This is the most common failure and the easiest to fix.

9. A review checklist

1. Identify every guarantee, letter of comfort and similar instrument given or received within the group, with issue date, term, amount guaranteed and amount drawn.
2. Determine for each whether Rule 28(2) applies, by reference to the issue or renewal date against 26 October 2023.
3. Compute the GST deemed value on the amount guaranteed, pro-rating part years and multiplying for multi year terms, and confirm the reverse charge discharge and credit position.
4. Diarise renewals as fresh supplies.
5. Benchmark the fee for transfer pricing using a documented benefit or expected loss analysis, with sources for every input.
6. Record why the transfer pricing rate differs from the GST deemed value.
7. Work out the treaty characterisation of any fee actually paid, addressing the residuary article.
8. Obtain treaty documentation before payment.
9. Report the transaction in Form 3CEB under section 172 (section 92E).
10. Consider whether the shareholder activity argument is available on the facts, and record the position either way.
11. Reconcile the transfer pricing, withholding and GST positions in a single note.
12. Review the position at each renewal rather than treating the original analysis as permanent.

Practitioner’s perspective

Corporate guarantees are among the smallest transactions a group reports and among the most reliably mishandled, because they fall between three teams and nobody owns them. The tax cost of getting the fee wrong is usually modest. The cost of missing the GST valuation across several years, or of taking inconsistent positions that are then produced against each other, is not.

Two things are worth emphasising. The one per cent transfer pricing benchmark is an administrative convention and Everest Kanto shows it can be displaced on evidence, but only on evidence; an unsupported lower rate is worse than the default. And the prescribed GST valuation is ordinarily based on the guarantee amount rather than the drawn amount, subject to the full-credit proviso, and afresh on every renewal. Those three features between them account for most of the exposure we see.

Where a guarantee is already in place and none of this has been done, the right sequence is to establish the GST position first, because it accrues with time and interest runs, and then to build the transfer pricing file.

Direction of the guarantee: where Everest Kanto fits and where it does not

In Everest Kanto the assessee was an Indian holding company that charged its foreign subsidiary a commission of 0.5 per cent on a guarantee supporting the subsidiary’s bank borrowing, and the transfer pricing officer substituted three per cent by reference to commercial bank guarantee rates. That is an outbound guarantee: the Indian entity was the guarantor and the question was whether it had earned enough.

The facts in this article run the other way. A foreign parent guarantees an Indian subsidiary’s borrowing, so the Indian entity is the beneficiary and the question is whether it should pay a fee at all, and how much. The comparability reasoning transfers, because a holding company protecting an investment is not selling a bank product. The numerical result does not transfer: a 0.5 per cent rate accepted on one set of facts is not a benchmark for another. For an inbound guarantee the analysis should be built on the subsidiary’s own credit position and the borrowing cost it would have faced without the guarantee, which is why the benefit approach needs evidence of the standalone rate.

Frequently asked questions

1. Is a parent guarantee an international transaction requiring arm’s length pricing?

The position is contested. Bharti Airtel and Micro Ink support the view that a guarantee with no bearing on the guarantor’s profits, income, losses or assets falls outside the provision, treating it as a shareholder activity. Everest Kanto and Advanta India proceed on the footing that it is within. Most groups should benchmark and document, and keep the threshold argument in reserve.

2. Is the arm’s length guarantee fee one per cent?

No. One per cent is an administrative benchmark with no statutory basis. In Everest Kanto the Bombay High Court dismissed the Revenue’s appeal, leaving undisturbed the Tribunal’s deletion of an adjustment based on a three per cent rate derived from commercial bank guarantee pricing, which the Court held was not comparable to a holding company guarantee. It did not itself fix 0.5 per cent as the arm’s length rate.

3. What methodologies are used to price a guarantee?

The benefit approach, which measures the interest saving the borrower obtained and allocates a share of it, and the expected loss approach, which estimates the probability of default and the loss given default to price the risk assumed. Either is defensible with supporting work; neither is defensible as a bare conclusion.

4. Is GST payable where no guarantee fee is charged?

Yes. For covered related-party guarantees, Rule 28(2) specifies one per cent of the guaranteed amount per annum or actual consideration, if higher. Where the recipient is eligible for full input tax credit, the proviso deems the invoice value to be the value of the supply; that proviso must be tested separately.

5. Is GST valued on the amount guaranteed or the amount drawn?

On the amount guaranteed. Circular No. 225/19/2024-GST confirms that the value depends on the amount guaranteed, not the amount disbursed.

6. Does each renewal attract GST again?

Yes. Circular No. 225/19/2024-GST treats each renewal as a fresh supply. A guarantee rolled over annually generates an annual liability.

7. What about guarantees issued before 26 October 2023?

Rule 28(2) applies to guarantees issued or renewed on or after 26 October 2023. Those issued earlier are valued under the pre-existing Rule 28, though a renewal after that date brings the renewal within the new rule.

8. How is a guarantee fee characterised for withholding under a treaty?

It depends on the treaty. In Metso Outotec the Kolkata Bench held a guarantee fee taxable as other income under Article 21 of the India Finland treaty, on the basis that giving the guarantee was a shareholder obligation rather than part of the guarantor’s regular business. A withholding analysis that addresses only business profits is incomplete.

9. Does Metso Outotec establish an arm’s length guarantee rate?

No. It is a treaty characterisation case and decided nothing about benchmarking or rates. It is sometimes cited for a transfer pricing proposition it does not contain.

10. Can the transfer pricing rate and the GST value legitimately differ?

Yes. The transfer pricing rate is the arm’s length price established on evidence. The GST figure is a prescribed deemed value that applies regardless of what an independent party would have charged. The file should record why they differ so that the GST figure is not later treated as an admission.

11. Who pays GST on a guarantee given by a foreign parent to its Indian subsidiary?

The Indian subsidiary pays, under reverse charge, because the supply is an import of services from a related person outside India. Where it is eligible for full input tax credit, the invoice value is deemed to be the value of supply under the proviso to Rule 28(2), so the cash effect can net out, but discharge and documentation must still be correct.

12. Which section of the Income-tax Act, 2025 covers corporate guarantees as international transactions?

Section 163 of the Income-tax Act, 2025, titled ‘Meaning of international transaction’, which corresponds to section 92B of the 1961 Act. Its capital financing limb includes any type of long-term or short-term borrowing, lending or guarantee. Arm’s length pricing follows under section 165, documentation under section 171 and the accountant’s report under section 172.

13. Is tax deducted at source on a guarantee commission paid to a foreign parent?

Where a fee is actually paid to a non-resident guarantor, the payer must consider deduction under section 393(2) of the Income-tax Act, 2025 (section 195 of the 1961 Act). The treaty characterisation, including the residuary article, decides whether and how much tax is chargeable. Treaty documents should be obtained before payment.

Related reading from SBC

• Shared Services from Singapore: Applying the ‘Make Available’ Test to Indian Withholding
• Employee Secondment and GST: Reading Northern Operating Systems with the CBIC Clarifications
• No FTS Article in the India-UAE Treaty: How Offshore Engineering Income Is Taxed in India
• Seconding Staff Between India and the UK: Employer, Permanent Establishment and Payroll Tax Are Different Questions
• More articles on the SBC blog

Disclaimer

This article is for general information and does not constitute professional advice. It reflects the law as understood at the date of publication and does not take account of later developments. Statutory references give the Income-tax Act, 2025 section with the Income-tax Act, 1961 section in brackets; section 536 preserves the 1961 Act for proceedings pending on 31 March 2026 and for earlier tax years. The transfer pricing treatment of guarantees is an area in which tribunal authority is divided, and outcomes turn on the specific facts and documentation. No reader should act on the basis of this article without taking advice on their own circumstances.

Shared Services from Singapore: Applying the ‘Make Available’ Test to Indian Withholding

By CA Mithilesh Reddy, Founder and CEO, and CA Rajesh Vaishnav, Partner, Steadfast Business Consulting LLP | Direct Tax Advisory

Introduction

Most tax treaties India has entered into since the 1990s qualify the definition of fees for technical services with a condition borrowed from the United States model: the service must make something available to the recipient. The condition exists because the drafters distinguished between buying expertise and acquiring it. A payment for the first is a payment for a service and belongs to the provider’s business profits. A payment for the second is closer to a payment for knowledge, and the source State is given a limited right to tax it.

Where that condition applies, it governs the withholding treatment of most regional shared services arrangements into India. It is also routinely applied as though it were a question about the whole agreement, when it is a question about each service. A regional headquarters supplying several categories of support will frequently find that six fall outside the definition and one falls inside, and the correct answer is not a single rate applied to the whole invoice.

This note deals with how that condition applies to an intra group shared services arrangement, where a regional headquarters supplies several distinct categories of support to an Indian subsidiary under a single agreement and a single fee. It covers the treaty text and its three limbs, the exclusions that are frequently overlooked, a service by service framework, the two withholding approaches available and what each requires by way of evidence, the gross up problem, and the transfer pricing analysis that has to agree with whatever conclusion is reached. Where the treaty contains no technical services article at all, a different analysis applies, and that is dealt with in our note on treaties with no fees for technical services article.

1. The treaty text

Article 12(4) of the India Singapore agreement defines fees for technical services as payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature, including the provision of such services through technical or other personnel, if such services:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or

(c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.

Two drafting features carry most of the weight, and the second is frequently misread.

The limbs are disjunctive, so a service caught by any one of them is within the definition. It follows that the enabling condition is not a gateway through which every payment must pass. It governs limbs (b) and (c), where it appears expressly and, in limb (c), again as an exclusion. Limb (a) contains no enabling requirement at all. A service that is ancillary and subsidiary to the application or enjoyment of a right, property or information for which a royalty under paragraph 3 is paid is within the definition whether or not anything is made available. Where a group licenses technology and also supplies support in relation to it, limb (a) has to be tested first, and a conclusion that nothing was made available does not answer it.

Article 12(2), as substituted by the 2005 Protocol, caps the source state rate at ten per cent of the gross amount where the recipient is the beneficial owner.

2. The exclusions in Article 12(5), which are frequently overlooked

Article 12(5) removes a list of payments from the definition notwithstanding Article 12(4). The exclusions cover payments for services ancillary and subsidiary, and inextricably and essentially linked, to a sale of property; services ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in international traffic; teaching in or by educational institutions; services for the personal use of the individual making the payment; payments to an employee of the payer, or to an individual or firm of individuals other than a company for professional services as defined in Article 14; services connected with an installation or structure used for exploration or exploitation of natural resources; and services referred to in paragraphs 4 and 5 of Article 5.

The exclusion for payments to an individual or a firm of individuals for professional services is worth noting in any arrangement where part of the support is delivered by a professional firm rather than by the group entity. So is the sale related exclusion, where support services accompany a supply of goods.

3. What “make available” actually requires

The test is not whether the service is technical. It is not whether the recipient benefits. It is not whether the recipient’s staff learn something incidentally. The question is whether, after the engagement, the recipient is equipped to apply the technology or process itself, without recourse to the provider.

Three propositions follow, and each is contested often enough to be worth stating.

Recurrence is evidence but it is not proof. Where the same service is bought year after year, that is consistent with nothing having been transferred, and it is a useful fact to put forward. It is not conclusive, because a recipient may acquire a capability and still choose to outsource its exercise for commercial reasons.

A deliverable is not itself a transfer of capability. A report, a recommendation, a signed off control assessment or a market analysis is the product of the provider’s expertise, and handing it over transfers the output rather than the method that produced it.

Training is the difficult category. A structured programme that teaches a methodology, supported by manuals, templates and process documentation which the recipient retains and uses afterwards, is the clearest case of a service that does make available. An induction briefing, or an update session on a change of policy, is not. Between those two the answer turns on whether the recipient keeps and uses the materials and can run the process unaided afterwards.

4. A service by service framework

The analysis has to be conducted category by category. The following reflects how a typical regional support arrangement resolves, and the reasoning is more important than the conclusion, because the conclusion depends on how the particular service is actually delivered.

Service category	Typical analysis	Indicative characterisation
Strategic management oversight	Board level direction and review. The provider exercises judgment on behalf of the group; no methodology passes to the Indian entity.	Business profits
Treasury and liquidity advisory	The provider runs the analysis and recommends a position. The Indian entity acts on the recommendation but cannot replicate the modelling.	Business profits
Human resources strategy and leadership development	Coaching and advisory delivered to individuals. Capability accrues to the person, not to the entity as a transferable process.	Business profits
Legal and compliance advisory	Advice on specific questions. The answer is supplied; the ability to answer the next question is not.	Business profits
Internal audit and risk assurance	An assurance opinion on the recipient’s processes. The output is the assurance, and the audit methodology stays with the provider.	Business profits
Sustainability and corporate responsibility reporting support	Assistance in preparing a report to a framework the recipient does not own.	Business profits
Internal control and compliance training programmes	Where structured training is delivered with retained manuals, control matrices and documented process frameworks the recipient then operates itself, the enabling condition is met.	Fees for technical services, in whole or part

The point of the table is not the labels. It is that a single arrangement can straddle the line, and that the characterisation of each category follows from how the service is delivered and what the recipient is left holding.

5. Two withholding approaches, and how to choose

Once the analysis is done, the group has a decision to make, and it is a decision about risk appetite and documentation capability rather than about law.

The conservative approach applies the treaty rate to the whole of the service fee. It is simple, it is certain, and it costs money on the services that are not fees for technical services. Where the recipient is entitled to credit in its own jurisdiction the cost may be partly recovered, but where the contract requires the Indian entity to bear the tax, the cost is real and falls on India.

The segregated approach applies withholding only to the categories that satisfy the enabling condition. It reflects the correct legal position and it is defensible, but only if the supporting record exists. That record is specific.

• A service schedule in the agreement that describes each category separately, with its own scope and its own deliverables.
• Invoices that bill each category separately rather than as a single monthly support fee.
• Time records or an allocation basis that ties cost to category.
• Deliverables retained and filed, so that the nature of what was supplied can be shown rather than asserted.
• For any category treated as fees for technical services, the materials that evidence the transfer, since that category must also be capable of being proved.
• A contemporaneous analysis note recording the characterisation of each category and the reasons for it.

A group that bills a single consolidated support fee and then argues for segregation at assessment stage is in a weak position, because the only evidence of what was supplied is the invoice, and the invoice says “support services”.

6. The gross up problem

Many intra group service agreements require the Indian recipient to bear any withholding tax arising in India. The commercial intention is that the provider receives the agreed fee net. The tax consequence is that the Indian entity funds the tax from its own resources, and the grossed up amount, not the invoice amount, becomes the base.

Two points follow. First, the clause should be read before the first invoice is raised, not after. Where the characterisation analysis shows that most categories are business profits, the gross up exposure is confined to the minority that is not, and the clause can be scoped accordingly. Second, a gross up clause interacts with the transfer pricing position. If the Indian entity bears a cost that an independent party in its position would not bear, the arm’s length character of the arrangement is in question, and the two analyses need to be consistent.

7. The transfer pricing dimension

A shared services arrangement between associated enterprises is an international transaction under section 163 of the Income-tax Act, 2025 (section 92B of the 1961 Act, the meaning of international transaction). It requires arm’s length pricing under section 165 (section 92C, determination of arm’s length price), documentation under section 171 (section 92D, maintenance of information and documents) and the accountant’s report under section 172 (section 92E, the Form 3CEB report).

Three questions arise in sequence and they are often answered out of order. Were the services actually rendered? Did the recipient derive a benefit? Is the charge arm’s length? The first two are evidential and are where most intra group service adjustments are made. A benefit test is not satisfied by a management assertion; it is satisfied by evidence of what was delivered and what the recipient would otherwise have had to do.

Shareholder activity should be identified and excluded at the outset. Costs incurred by the parent in its capacity as shareholder, such as the cost of group consolidation for the parent’s own reporting or investor relations, are not chargeable to the subsidiary at all. A charge that includes them invites an adjustment on a basis that has nothing to do with the mark up.

8. Treaty documentation

Treaty entitlement requires a valid tax residency certificate for the relevant period, Form 10F filed electronically (for tax years under the Income-tax Act, 2025, its successor Form 41, furnished under rule 75 of the Income-tax Rules, 2026 for section 159(8)) with particulars matching the certificate, and a declaration of beneficial ownership and absence of a permanent establishment in India. The permanent establishment question deserves more attention than it usually receives in a shared services context. Where provider personnel spend time in India delivering the services, the service permanent establishment threshold in Article 5 becomes live, and a day count should be maintained for the same reason it is maintained in any cross border service arrangement.

The limitation of benefits provisions of the India Singapore treaty should also be considered, because entitlement under that agreement has historically carried conditions that do not appear in other treaties.

9. A worked example

A Singapore regional headquarters provides seven categories of support to its Indian subsidiary under an agreement effective from the start of a financial year, on a cost plus basis billed monthly. The agreement requires the Indian entity to bear Indian withholding tax. The annual fee is material relative to the Indian entity’s profit.

Step one. Break the fee into the seven categories and establish, for each, what was delivered and what the Indian entity retained. This is done by reading the deliverables, not the agreement.

Step two. Apply the enabling condition to each category. On the facts described above, six categories produce outputs and decisions; one, the structured internal control training with retained manuals and control matrices, transfers a process the Indian entity then operates itself.

Step three. Quantify the two approaches. Under the conservative approach the treaty rate applies to the whole fee and the Indian entity funds it grossed up. Under the segregated approach it applies only to the training category. The difference is the decision the group is actually making.

Step four. Build the record that the segregated approach requires: restructure the invoicing to bill by category, put a service schedule into the agreement, retain deliverables, and prepare a characterisation note before the first payment rather than after the first notice.

Step five. Align the transfer pricing file, excluding shareholder costs, evidencing rendition and benefit, and ensuring the Form 3CEB description of the transaction matches the characterisation adopted for withholding.

10. Where these arrangements are usually weak

First, the agreement describes the services in a single clause. A schedule that lists seven categories with their own scopes is the foundation of the whole position, and it is cheap to draft before execution and impossible to create afterwards.

Second, invoicing is consolidated. A single line for regional support fees makes segregation unprovable whatever the underlying facts.

Third, deliverables are not retained. The reports, control matrices and advice notes that prove what was actually supplied are held by the provider, or by individuals, and cannot be produced three years later.

Fourth, the withholding position and the transfer pricing position are prepared by different teams and do not agree. A transaction described one way in Form 3CEB and another way in the withholding analysis is an invitation.

Fifth, shareholder costs are embedded in the cost pool. This is the most common cause of adjustment in intra group service cases and it is entirely avoidable.

Sixth, no day count is kept for provider personnel visiting India. A service permanent establishment finding would displace the entire analysis, because the income would then be attributable to a permanent establishment and taxable on a net basis under Article 7 regardless of characterisation.

11. A review checklist

1. Read the current text of the applicable treaty, including protocols and the synthesised text, and confirm the wording of the technical services article.
2. List every service category actually supplied, from the deliverables rather than from the agreement.
3. For each, record what the recipient was left holding and whether it can now perform the activity unaided.
4. Check each category against the exclusions in Article 12(5) before concluding.
5. Decide between the conservative and segregated approaches, and record the reasons.
6. If segregating, restructure the agreement schedule and the invoicing before the next payment cycle.
7. Identify and remove shareholder activity costs from the pool.
8. Evidence rendition and benefit for the transfer pricing file.
9. Reconcile the withholding characterisation with the Form 3CEB description.
10. Maintain a day count for provider personnel present in India and monitor it against the treaty threshold.
11. Confirm the residency certificate, Form 10F and beneficial ownership declaration for each year.
12. Model the gross up exposure under each approach and confirm the commercial terms reflect the intended allocation.

Practitioner’s perspective

The enabling condition is one of the more taxpayer favourable provisions in India’s treaty network, and it is frequently under used because groups apply a single rate to the whole arrangement for administrative convenience. The convenience is real, and for a small arrangement it may be the right answer. For a material arrangement it is an avoidable cost.

What determines whether the better answer is available is almost entirely a documentation question, and it is decided at contracting stage. A service schedule, category level invoicing and retained deliverables cost very little to put in place at the start of an arrangement and cannot be created once a notice has issued. In our experience the groups that defend a segregated position successfully are not the ones with the better legal argument. They are the ones whose invoices show what was supplied.

One further point. The analysis should be revisited when the arrangement changes. A category that was advisory when the arrangement began may evolve into something that transfers a methodology, and a characterisation note prepared three years ago and never revisited is a liability rather than a protection.

Treaty status check: protocols, the MLI and anti-abuse rules

The wording of Article 12(4) that this article relies on has not been changed by the Multilateral Instrument. The MLI does not rewrite the definition of fees for technical services. What it adds to the India-Singapore treaty, as a covered tax agreement, is the principal purpose test: treaty benefit can be denied where obtaining it was one of the principal purposes of an arrangement. CBDT Circular No. 1/2025 dated 21 January 2025 explains that the test operates prospectively from the date it takes effect in each treaty, and notes that the Singapore treaty’s own limitation of benefits clause (Article 24A) continues to apply.

The 10 per cent cap in Article 12(2) comes from the Protocol that entered into force on 1 August 2005 and was notified by Notification No. 185/2005 dated 18 July 2005. Before relying on any characterisation, read the current consolidated treaty text on incometaxindia.gov.in, including all protocols, and confirm that no later instrument has altered Article 12 or Article 5.

For a Singapore provider that is a genuine regional headquarters, the entitlement documents (tax residency certificate, Form 10F or Form 41, and a beneficial ownership declaration) are best accompanied by evidence of substance in Singapore: personnel, premises and expenditure. That evidence answers both the limitation of benefits clause and the principal purpose test.

Service permanent establishment: when provider staff visit India

A characterisation of fees as business profits holds only while the provider has no permanent establishment in India. On the published treaty text, Article 5 contains a service PE rule for services furnished through employees or other personnel, with a threshold of more than 90 days in a fiscal year and a shorter threshold of more than 30 days where the services are performed for a related enterprise. Because shared services are by definition supplied to a group company, the shorter threshold is the one to test first.

Keep a day count by individual and by assignment for every provider employee who works in India, including workshops, training sessions and audit visits. If a permanent establishment exists, the income attributable to it is taxed on a net basis under Article 7 and the fees for technical services analysis under Article 12 gives way, because Article 12(6) disapplies Articles 12(1) and 12(2) where the right or contract is effectively connected with the permanent establishment.

Frequently asked questions

1. What does “make available” mean in the India Singapore treaty?

Article 12(4)(b) requires that the service make available technical knowledge, experience, skill, know-how or processes which enables the person acquiring the services to apply the technology contained therein. The recipient must be left able to apply the technology itself, not merely to benefit from the provider having applied it. The condition governs limbs (b) and (c); limb (a) has no such requirement.

2. Is a technical service automatically fees for technical services?

No. The service must be managerial, technical or consultancy in nature and must satisfy one of the three limbs of Article 12(4). A highly technical service that leaves the recipient no more capable than before does not satisfy limb (b). It may still fall within limb (a) if it is ancillary and subsidiary to the enjoyment of a right or information for which a royalty is paid, so limb (a) must be tested separately.

3. Does repeated purchase of the same service prove nothing was made available?

It is good evidence but not conclusive. A recipient may have acquired a capability and still choose to outsource its exercise for commercial reasons. Recurrence should be presented alongside evidence of what was actually delivered.

4. Can one agreement contain both categories?

Yes, and that is the normal case in a regional support arrangement. The analysis is conducted service by service, and it is entirely consistent for most categories to be business profits and one to be fees for technical services.

5. What rate applies where the condition is satisfied?

Article 12(2), as substituted by the 2005 Protocol, caps the source state rate at ten per cent of the gross amount where the recipient is the beneficial owner. Where treaty benefit is not available, the domestic rate applies under section 207 of the 2025 Act (section 115A, the special rate on royalty and fees for technical services in the hands of non-residents).

6. What documentation does a segregated withholding approach require?

A service schedule describing each category separately, invoices raised by category, time or allocation records tying cost to category, retained deliverables, and a contemporaneous note recording the characterisation of each category and the reasons for it.

7. Who bears the tax where the agreement contains a gross up clause?

The Indian entity, from its own resources, and the grossed up amount becomes the base. The clause should be reviewed before the first invoice, and its effect should be consistent with the transfer pricing position.

8. What exclusions apply under Article 12(5)?

Among others, payments for services inextricably linked to a sale of property, for teaching by educational institutions, to an individual or firm of individuals other than a company for professional services as defined in Article 14, and for services connected with an installation used for exploration or exploitation of natural resources.

9. Does the arrangement create a permanent establishment risk?

It can. Where provider personnel are present in India delivering the services, the service permanent establishment threshold in Article 5 becomes relevant. A finding of a permanent establishment would displace the characterisation analysis entirely, because the income would be taxable on a net basis under Article 7.

10. How does the withholding analysis interact with transfer pricing?

The arrangement is an international transaction under section 163 (section 92B) requiring arm’s length pricing, documentation and Form 3CEB reporting. The description of the transaction in the transfer pricing file should match the characterisation adopted for withholding, and shareholder activity costs should be excluded from the charge altogether.

11. Does the MLI change the make available condition in the India-Singapore tax treaty?

No. The Multilateral Instrument does not change the definition of fees for technical services in Article 12(4). It adds the principal purpose test to the India-Singapore treaty, which can deny treaty benefit for arrangements whose principal purposes include obtaining it. The treaty’s own limitation of benefits clause continues to apply alongside it, as CBDT Circular No. 1/2025 notes.

12. Are management fees paid to a Singapore parent taxable in India as fees for technical services?

Not automatically. They are taxable as fees for technical services only if the services fall within a limb of Article 12(4), and for managerial services that usually means the make available test. In Tagit Pte. Ltd. v. Dy. CIT, the Delhi Tribunal held management fees were not fees for technical services where make available was not shown. Each case turns on its facts.

13. What documents are needed to claim India-Singapore treaty relief on service fees paid from India?

The Singapore recipient needs a tax residency certificate for the relevant period and Form 10F, which Form 41 replaces for tax years under the Income-tax Act, 2025 (rule 75 of the Income-tax Rules, 2026). A beneficial ownership declaration and a no-permanent-establishment confirmation are usual practice, and the limitation of benefits clause should be checked.

Related reading from SBC

• No FTS Article in the India-UAE Treaty: How Offshore Engineering Income Is Taxed in India
• Parent Guarantee of an Indian Subsidiary: How Transfer Pricing, Withholding and GST Fit Together
• Seconding Staff Between India and the UK: Employer, Permanent Establishment and Payroll Tax Are Different Questions
• Digital Platforms and India Tax Once the Equalisation Levy Is Gone: SEP, Treaty and PE Compared
• More articles on the SBC blog

Disclaimer

This article is for general information and does not constitute professional advice. It reflects the law as understood at the date of publication and does not take account of later developments. Statutory references give the Income-tax Act, 2025 section with the Income-tax Act, 1961 section in brackets; section 536 preserves the 1961 Act for proceedings pending on 31 March 2026 and for earlier tax years. Treaty positions turn on the specific facts, the contractual documentation and the current text of the applicable agreement. No reader should act on the basis of this article without taking advice on their own circumstances.