[Opinion] Secondment contract as ‘services’: SC held under Indian taxation regime

Neha Sinha – [2022] 145 taxmann.com 126 (Article)

Background

Secondment of employees have become increasingly popular amongst corporate entities which enter into secondment arrangements to leverage the expert knowledge and specific skill sets. The seconded employees work on a deputation basis in the seconded companies they are seconded to which require their technical expertise on certain matters. Since the seconded employee works for the seconded company during the secondment period, a pertinent question arises on whether the seconded employee becomes an employee of the seconded company. If yes, then what are the likely implications in the context of service tax.

In the recent case of CC, CE & ST v. Northern Operating Systems (P.) Ltd. [2022] 138 taxmann.com 359/92 GST 792, the Supreme Court (“Court”) answered the question if secondment contracts had the effect of contract of service or contract for service for the taxability under Finance Act, 1994.

In the Finance Act, 1994, before the amendment introduced in 2012, a service provided by a manpower recruitment or supply or recruitment agency was a taxable service under section 65(105)(k). ‘Manpower recruitment or supply agency‘ refers to any person engaged in providing any service or recruitment or supply of manpower. With the amendment in 2012, section 65B laid down a negative list of activities/arrangements which are excluded from the scope of ‘service’ and are not taxable. All activities carried out by one person for another for consideration are deemed services. A contract of service, i.e., employer-employee arrangement is excluded from the ambit of ‘service’ in terms of section 65B(44) of Finance Act, 1994.

In the present case, the assessee had entered into a secondment contract with its overseas group companies whereby the overseas group company deployed its experts to the assessee on a secondment. The seconded employees continued to be in the payroll of the overseas company and it paid the salary to those seconded employees during the secondment, however, the overseas company was reimbursed by the assessee for such salary paid. The assessee was charged service tax under the ‘reverse charge mechanism’ for the services it received from the overseas company with respect to its seconded employees. Refuting the taxability of the service, the assessee contended that under the secondment agreement, the seconded employees came under the control and supervision of the assessee, thus creating an employer-employee relationship between the assessee and the seconded employees which is outside the purview of the service tax regime.

To determine the taxability of service, the Court had to answer two questions-

(i) what was the true nature of the relationship between the seconded employees and the assessee?

(ii) what was the nature of the service provided by the seconded employees to the assessee?

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