Central Government Issues Clarification on Secondment of Overseas Employees to Indian Companies

In a significant development, the Central Board of Indirect Taxes and Customs (“CBIC”) has issued Instruction No. 05/2023-GST dated December 13, 2023 (“Instruction”), providing clarity on the secondment of employees by overseas group companies to Indian companies. The instruction also addresses the application of Section 74 (1) of the Central Goods and Services Tax (“CGST”) Act, following the Supreme Court of India’s judgment in the case of “Commissioner of Customs, Central Excise and Service Tax v. Northern Operating Systems (P) Ltd. (“NOS”)” reported as AIR 2022 SC 2450 in which case the Court while construing a contract for secondment, upheld the demand for service tax on the supply of manpower by a foreign company to its Indian affiliate. 

Background

In the said case, NOS, an Indian company, received seconded employees from its overseas group entities located in USA, UK, Dublin (Ireland), Singapore, etc., for temporary work assignments in respect of which the Indian tax authorities (Revenue) sought to levy service tax on the payments made by NOS to the foreign entities, claiming it was a "manpower supply" service. On the contrary, the case of NOS was that the seconded employees remained employees of the foreign entities and there was no service provided to them. The overseas employer (group company) used to pay the seconded employee, which was reimbursed by NOS and NOS had operational or functional control over the seconded employees; it was potentially liable for the performance of the tasks assigned to them.

The Supreme Court, while emphasizing the "substance over form" approach, looked beyond the contractual agreements to the actual nature of the relationship and held that the definition of manpower recruitment or supply agency is wide enough to include 'recruitment' as well as 'supply' of manpower. The Court held that the seconded employees were being paid by the overseas entity and they were to return to the original employer at the end of the secondment. Therefore, the overseas entity was held to be the employer of the seconded employees. Hence, the Court concluded that the host entity was the service recipient for service (of manpower recruitment and supply services) by the overseas entity, in regard to the employees it seconded to the host entity, for the duration of their deputation or secondment and therefore the host entity is liable to pay service tax on the reimbursement being recipient of the service being provided by the overseas entity.

The judgement of NOS Case therefore unsettled the settled position of law on the issue of taxability of reimbursements in case of secondment of employees especially in cases where the Indian host Company is providing a service to the Overseas Company, and seconded employees are working in relation to such service.

CBIC Instruction

Vide the latest Instruction, the CBIC acknowledged that there may be multiple types of arrangements in relation to secondment of employees of overseas group company in the Indian entity. In each arrangement, the tax implications may be different, depending upon the specific nature of the contract and other terms and conditions attached to it.

The CBIC noted that a careful reading of the NOS judgement indicates that the Supreme Court’s emphasis is on a “nuanced examination based on the unique characteristics of each specific arrangement, rather than relying on any singular test”. It has also been represented  by  the  industry  that  in  many  cases  involving secondment, the field formations are mechanically invoking extended period of limitation under section 74(1) of the Central GST (CGST) Act.

Therefore, the decision of the Hon’ble Supreme Court in the NOS judgment should not be applied mechanically in all the cases. Investigation in each case requires a careful consideration of its distinct factual matrix, including the terms of contract between overseas company and Indian entity, to determine taxability or its extent under GST and applicability of the principles laid down by the Hon’ble Supreme Court’s judgment in NOS.

The CBIC further directed that only in the cases where the investigation indicates that there is material evidence of fraud or willful mis- statement or suppression of fact to evade tax on the part of the taxpayer, provisions of section 74(1) of CGST Act may be invoked for issuance of show cause notice, and such evidence should also be made a part of the show cause notice.