[Analysis] GST on Secondment of Employees

Table of Contents

1. CC, CE & ST Bangalore vs Northern Operating Systems (P.) Ltd [2022] 138 taxmann.com 359/61 GSTL 129/92 GST 792 (SC)
2. Legal Provisions
3. Instruction No. 05/2023-GST dated 13th December 2023

1. CC, CE & ST Bangalore vs Northern Operating Systems (P.) Ltd [2022] 138 taxmann.com 359/61 GSTL 129/92 GST 792 (SC)

1.1 Brief Facts of the case

• The assessee is a part of overseas group companies, which secures contracts that are to be performed by its highly trained and skilled personnel
• Therefore, taking advantage of the globalized economy and having regard to locational advantages, the overseas group company enters into agreement with its affiliates or local companies, such as the assessee for optimizing the economic edge
• As a part of this agreement, a secondment contract is entered into by the overseas company with the assessee, whereby the overseas company’s employee or employees possessing the specified required skills are deployed for the duration the task is estimated to be completed in
• On the cessation of the secondment period, they have to be repatriated in accordance with global repatriation policy of the overseas entity
• Seconded employee, for the duration of secondment, is under the control of the asseessee and works under its direction
• The salary is paid to the seconded employee by the Foreign company as per the legal requirement. since the seconded employees are entitled to social security benefits in the country of their origin. Subsequently, these costs are reimbursed by the assessee without any markup
• As per provisions of the Income tax, the Indian company issues the prescribed form; further, the seconded employees file income tax returns and contribute to the provident fund
• Proceedings were initiated by the department on the ground that the activity of secondment would amount to import of service by the assessee from the foreign entity under the category of Manpower recruitment or supply agencie services or a taxable service for the period October 2006 to September 2014

1.2 Various Tests discussed by the SC to ascertain employer-employee relationship

• Disbursement of salary Test
• Master/servant relationship
• Control test
• Three tier test: Payment of wages/Remuneration/sufficient degree of control, other factors
• Asset ownership or Profit/Loss
• Economic reality test
• Integration Test
• Nomenclature Test

1.3 Observations of the Supreme Court

• The Court while analyzing the facts in the present matter stated that no one test of universal application can ever yield the correct result
• It is a conglomerate of all applicable tests taken on the totality of the fact situation in a given case that would ultimately yield, particularly in a complex hybrid situation, whether the contract to be construed is a contract of service or a contract for service
• The overall effect of the four agreements entered into by the assessee, at various periods, with NTS or other group companies clearly points to the fact that the overseas company has a pool of highly skilled employees, who are entitled to certain salary structure as well as social security benefits. These employees having regard to their expertise and specialization are seconded for use of their skills. Upon cessation of the term of secondment, they return to their overseas employer, or deployed on some other secondment
• While the control and right to ask them to return, if their functioning is not as is desired is with the assessee, the fact remains that their overseas employer in relation to its business, deploys them to the assessee on the secondment. Secondly the overseas employer-for whatever reason, pays them their salaries. Their terms of the employment, even during secondment are in accord with the policy of the overseas company who is their employer. Upon the end of the period of the secondment they return to the original places, to await deployment or extension of secondment
• The mere payment in the form of remittance or amounts by whatever manner, either for the duration of secondment or per employee seconded is just one method of reckoning if there is consideration. The other way of looking at the arrangement is economic benefit derived by the assessee, which also secures specific jobs or assignments, from the overseas group companies, which results in its revenues. The quid pro quo for the secondment agreement where the assessee has the benefit of experts for limited periods, is implicit in the overall scheme of things
• Mere non-payment of duties is equivalent to collusion or wilful misstatement or suppression of facts is untenable

1.4 Fallouts of the Supreme Court Judgment

1. Noprecedential value of Supreme Court/CESTAT judgments relied by the Respondent
2. Levyof service tax upheld on the grounds of implicit consideration
3. Revenueneutrality position discarded

1.5 Finding of the SC on Volkswagen India Ltd -2013-TIOL1640- CESTAT

The decision had been relied upon by the Assessee. The findings of SC is as under.

• “60.This court is also of the view for similar reasons, that the order of the CESTAT, affirmed by this court, in Volkswagen and Computer Science Corporation, are unreasoned and of precedential value
• 61.In view of the above discussion. It is held that the assessee was for the relevant period, service recipient of overseas group company concerned which can be said to have provided manpower supply services, or taxable service, for the two different periods in question(in relation to which SCN was issued)

1.6 Findings of the SC on Consideration

One of the arguments of the assessee was that arguendo, the arrangement was “manpower supply” (under the unamended Act) and a service [(not falling within exclusion (b) to Section 65 (44)] yet it was not required to pay consideration to the overseas group company. The mere payment in the form of remittances or amounts, by whatever manner, either for the duration of the secondment, or per employee seconded, Is just one method of reckoning if there is consideration. The other way of looking at the arrangement is the economic benefit derived by the assessee, which also secures specific jobs or assignments, from the overseas group companies, which result in its revenues. The quid pro quo for the secondment agreement, where the assessee has the benefit of experts for limited period, is implicit in the overall scheme of things.

1.7 Findings of the SC on Revenue Neutrality

9. As regards the question of revenue neutrality is concerned, the assessee’s principal contention was that assuming it is liable, on reverse charge basis, nevertheless, it would be entitled to refund; it is noticeable that the two orders relied on by it (in SRF and Coca Cola) by this court, merely affirmed the rulings of the CESTAT, without any independent reasoning. Their precedential value is of a limited nature. The incidence of taxation, is entirely removed from whether, when and to what extent, Parliament chooses to recover the amount.

2. Legal Provisions

2.1 Legal Provisions for Levy and Collection

Section 7. Scope of supply

(1) For the purposes of this Act, the expression – “supply” includes-

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

(aa) …………….

(c) the activities specified in Schedule I, made or agreed to be made without a consideration;

Schedule I – Activities to be Treated as Supply Even if Made Without Consideration

(2) Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:

Related persons defined u/s 15

Explanation. – For the purposes of this Act,-

(a) persons shall be deemed to be “related persons” if-

(i) such persons are officers or directors of one another’s businesses;

(ii) such persons are legally recognized partners in business;

(iii) such persons are employer and employee;

(iv) any person directly or indirectly owns, controls or holds twenty-five
per cent. or more of the outstanding voting stock or shares of both of them;

(v) one of them directly or indirectly controls the other;

(vi) both are directly or indirectly controlled by a third person;

(vii) together they directly or indirectly control a third person; or

(viii) they are members of the same family;

(b) the term “person” also includes legal persons;

(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.

Section 7. Scope of supply

(2) Notwithstanding anything contained in sub-section (1),––

(a) activities or transactions specified in Schedule III; or

(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council,

shall be treated neither as a supply of goods nor a supply of services

Schedule III – Activities or Transactions Which Shall be Treated Neither as a Supply of Goods Nor a Supply of Services

(1)Services by an employee to the employer in the course of or in relation to his employment.

Import of service

As per Section 2(11) of IGST Act Import of services means supply of any service, where:

(i) the supplier of service is located outside India;

(ii) the recipient of service is located in India; and

(iii) the place of supply of service is in India

RCM Notification – Import of Service

As per Notification no.10/2017 IT(R) dated 28.06.2017, Serial No. 1 reads as:

Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient.

Place of Supply as per Section 13(2) of IGST Act 2017

The place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of the recipient of services: Provided that where the location of the recipient of services is not available in the ordinary course of business, the place of supply shall be the location of the supplier of services.

3. Instruction No. 05/2023-GST dated 13th December 2023

3.1 Gist of the Instruction

• It is to be noted that secondment, as a practice, is not restricted to service tax and the issue of taxability on secondment shall arise in GST also
• Emphasis on nuanced examination based on unique characteristics of each specific arrangement
• Citing the SC judgement of M/s Fiat India instruction highlighted each case depends on its own facts discouraging resemblance approach
• Further nonpayment of GST alone is insufficient to invoke proceedings under section 74 of CGST Act 2017 without wilful mis-statement or suppression of facts to evade tax
• Material evidence of fraud or wilful misstatement or suppression of facts should form part of the show cause notice

3.2 Writ Petitions filed pursuant to NOS Judgment

The High Courts have provided ad-interim stay in adjudication of the SCNs’ demanding GST on secondment of employees

1. P&H HC in Mitsubishi Electric India (P.) Ltd. v. UOI, CWP NO. 25351 OF 2023 dated November 9, 2023 and BMW India (P.) Ltd. v. UOI, CWP NOS.27034 and 27036 OF 2023 December 1, 2023
2. Karnataka HC in Alstom Transport India Ltd. and United Breweries Ltd., In re [2022] 143 taxmann.com 23/67 GSTL 366 (AAR-KARNATAKA) (Interim stay for GST levy on salary costs incurred by HO for BO)
3. Delhi HC in Metal One Corporation India (P.) Ltd. v. Union of India [2023] 157 taxmann.com 689 (Delhi)

3.3 Fate of ITC – whether available?

Relevant GST Provisions which may be applicable for Service tax payments

Section 142(3) of CGST Act

(3)Every claim for refund filed by any person before, on or after the appointed day, for refund of any amount of CENVAT credit, duty, tax, interest or any other amount paid under the existing law, shall be disposed of in accordance with the provisions of existing law and any amount eventually accruing to him shall be paid in cash, notwithstanding anything to the contrary contained under the provisions of existing law other than the provisions of sub-section (2) of section 11B of the Central Excise Act, 1944 (1 of 1944):

Provided that where any claim for refund of CENVAT credit is fully or partially rejected, the amount so rejected shall lapse:

Provided further that no refund shall be allowed of any amount of CENVAT credit where the balance of the said amount as on the appointed day has been carried forward under this Act.

Circor Flow Technologies India (P.) Ltd v. Principal Commissioner of GST & Central Excise – [2021] 133 taxmann.com 327/[2022] 59 GSTL 63 (Chennai-CESTAT)

Though credit is not available as Input Tax Credit under GST law, credit under erstwhile Cenvat Credit Rules is eligible to assessee – Such credit has to be processed under Section 142(3) of CGST Act, 2017 and refunded in cash to the assessee.

Various High Courts have upheld the validity of sec.16(4) under GST:

1. Andhra Pradesh HC in Thirumalakonda Plywoods v. Assitt. Commissioner State Tax [2023] 152 taxmann.com 640/99 GST 232/76 GSTL 172 (AP)
2. Patna HC in Gobinda Construction v. Union of India [2023] 154 taxmann.com 311/99 GST 918 (Patna)
3. Calcutta HC in BBA Infrastructure Ltd. v. Senior Jt. Commissioner of State Tax [2023] 157 taxmann.com 345 (Cal.)

Relevant GST Provisions

Section 16(4) of CGST Act

A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the thirtieth day of November following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.

[Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section date for furnishing the details under sub-section (1) of said section for the month of March, 2019]

Section 31(3)(f) of CGST Act

A registered person who is liable to pay tax under sub-section (3) or subsection (1) of section 9 shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both;

Karnataka HC in Toyota Kirloskar Motor Pvt. Ltd. (Interim stay for ITC-recovery for delayed IGST payment on employee-secondment)

Section 17(5) of CGST Act

(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

(a)…….

(i) any tax paid in accordance with the provisions of sections 74, 129 and 130

3.4 Way Forward

1. Important to vet the documents/agreements in place and amend necessary clauses if required or enter into new agreements to safeguard tax positions under GST and Income Tax
2. Important to structure Secondment agreements and align the tax position under Income tax and GST
3. Evaluate resorting to second proviso to Rule 28 for valuation purposes when full ITC is available to the Taxpayer considering Circular No. 199/11/2023 for valuation purposes
4. Await developments of writ petitions/appeals filed in various High Courts or the Apex Court