INTRODUCTION
The issue of taxability of secondment of employees was more or less settled in the erstwhile service tax regime. However, a disbalance in the position taken by the industry and experts on the secondment of employees by an Overseas Company to an Indian Company has crept in with the decision of the Supreme 1 Court in Northern Operating Systems case1. The Supreme Court decision has unsettled the still water on taxability on the secondment of employees by an Overseas Company to an Indian Company, where the salary is disbursed by the Overseas Company and the same is reimbursed by the Indian Company without any markup.
In the erstwhile regime, service tax authorities have always contended that this arrangement of secondment of employees to Indian entities from overseas group companies is nothing but receipt of manpower supply services and hence taxable under reverse charge in the hands of the recipient of such service i.e. the Indian host company. The authorities have argued that reimbursement of salaries of the seconded employees to the overseas group companies is the consideration for the provision of manpower services.
The CESTAT in many decisions2 has held that in a secondment arrangement, there is an existence of an employer-employee relationship between the seconded employee and the Indian host entity, and hence there is no provision of manpower supply services.
However, the Supreme Court in the Northern Operating Systems case in a stark departure from this settled legal position and held that service tax in a secondment arrangement between an overseas group entity and an Indian group entity is payable, wherein the salary of the seconded employee is paid by the Overseas Company and the same is subsequently reimbursed by the Indian group company without mark up. The Supreme Court has further held the host Company located in India in such cases is providing Backo
The Court held that the crux of the issue is the taxability of the cross charge, which is primarily based on who should be reckoned as an employer of the secondee. The critical fact was that overseas group companies' business was to secure contracts, which can be performed by its highl y trained and s k illed personnel. Consequently, the overseas group company enters into contracts with host companies, for providing such services, by seconding its employees.
The Court noted that the overseas employer deploys the employees to the host company on secondment, in relation to its own business. Further, overseas employer pays them their salaries. Their terms of employment – even during the secondment – are in accord with the policy of the overseas company, which is their employer. Upon the end of the period of secondment, they return to their original places, to await deployment or extension of secondment.
Considering the above arrangement, the Supreme Court held that quid pro quo is implicit, as both parties are deriving economic benefits from the arrangement. The Overseas Company gets the benefit of quality work from the Indian Company and the Indian Company is able to get business due to the presence of expert seconded employees. In this context, the Court held that the secondment of employees is a taxable service of 'manpower supply'. Our view on Implications under the GST regime.
The impact of this decision is significant as it upsets the previous jurisprudence on the issue of taxability of reimbursements for seconded employees. The Supreme Court has treated secondment as a manpower supply service, only where the seconded employees are involved in the provision of a service by the host Indian company to the overseas company. While this ruling may not apply to all cases of secondment, it will open such transactions for scrutiny, having regard to the overall arrangement between the parties, especially as the authorities are likely to apply this ruling to current transactions under GST.
To determine their potential exposure to service tax, the overseas companies are required to re-evaluate secondment arrangements, especially in cases where the Indian host Company is providing a service to the overseas company under a separate inter-company agreement.
This decision of the Supreme Court has huge significance as it disturbs the earlier jurisprudence on this issue. The impact is not just limited to service tax implications but will have effects on the position under the GST regime as well. Resultantly, we have witnessed the revival of this issue leading to greater inquiries of all secondment arrangements in the ongoing GST audits. Further, the judgment is also likely to have an impact on issues arising out of these secondment arrangements from a direct tax perspective such as taxability of the amount cross charged to the Indian host company, creation of permanent establishment, etc.
Footnotes
1 CC, CE & ST Vs Northern Operating Systems Private Limited [2022 (61) GSTL 129]
2 Volkswagen India Pvt. Ltd Vs CCE [2014 (34) STR 135], Target Corporation India Private Limited Vs CCE [2021 (52) GSTL 164], Ivanhoe Cambridge Investment Advisory India (P) Limited Vs CST [2019 (21) GSTL 553], Airbus Group India Private Limited Vs CST [2016 (45) STR 120], Computer Sciences Corpn. India Private Limited Vs CST [2014 (35) STR 94]
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