Taxation is a significant consideration when it comes to the secondment of employees. The provisions under Direct Tax are rather straightforward, but there has been much disagreement about Indirect Tax i.e. whether or not to charge GST/ Service Tax when employees are seconded. This article is aimed to examine this issue in detail in order to bring some clarity in this regard & discuss the effect of judicial pronouncements on applicability of GST/ Service Tax and how to analyse the implications on case-to-case basis.

Introduction:

Secondment of employees is a common practice especially between the Multinational Companies (“MNCs”)/ Group Companies, where a company arranges/transfers/deputes its employees from one job to another job, either in the same company or in another company for a temporary period, such period is called period of secondment.

The employee of the foreign entity may be sent on secondment to provide services as part of the manpower pool in India when a native Indian entity and a foreign entity collaborate or when an Indian subsidiary of a non-native enterprise comes into play. After completion of such period, the employees are again directed to the seconder company.

Generally, there are three parties involved in secondment agreements:

1. The Employer or Seconder
2. The Employee or Secondee
3. The Host i.e., the entity to which the Secondee render its service

It is to be noted that, during such deputation or secondment, such employee works under the under the direction, supervision and control of the deputed/seconded company and receives salary and other benefits as per their policy. Employers often transfer their employees to sister concerns or branches/ divisions, whether they are located domestically or abroad. Further, in various scenarios the entire salary of the said employee is processed and paid by the company who has deputed/seconded its employee and then such amount is recovered from the deputed/seconded company, in order to preserve the continuation of the employment benefits or to avoid migration pain in case of cross-border secondment.

For example: An Indian company needs to start a project, however it lacks in manpower to start the project, therefore, in order to meet its manpower requirement, the company entered into an agreement with a foreign company to arrange its employees to the facilitate in the project. In this case, the remuneration of such employees will either be given directly by the Indian company or indirectly by way to reimbursement to the foreign company.

Types of Secondment of employees:

1. Internal or Intra-Secondment – Internal Secondment means transfer of employees from one department of a company to another department. The important point to be considered in this type of secondment is that the employees are transferred within the same company.

Example: Some of the employees from Sales department are transferred to marketing department for a specific period.

2. External or Inter-Secondment – External Secondment means transfer of employees to another organization for a specific period.

Example: Company ‘A’ requires some employees for a project for specific period, therefore, it entered into a secondment agreement with Company ‘B’ to transfer some of its employees.

Tax implication on Employer-Employee relationship:

In this regard, it is to be noted that under the GST regime, services of the employee to the employer are considered as neither supply of goods nor supply of services as per the Schedule – III to the Central Goods and Services Tax Act, 2017 (“CGST Act”). Further, Entry 1 of Schedule – III to the CGST Act states that services by an employee to the employer in the course of or in relation to his employment are outside the scope of GST.

In GST, in order to qualify as ‘supply’, there must be reciprocity and the person providing the consideration is expected to receive something in return. In the case of secondment, reimbursement of salary is not a supply since there is no service being provided. Further, such amount is towards the employer-employee relationship. Thus, if there is employer-employee relationship between the parties, then the service provided by the employee to the employer would be considered outside the scope of GST as the same are excluded vide Schedule III to the CGST Act and hence, not be liable to GST.

Further, under the erstwhile Service Tax regime, one of the key issues was whether there is a provision of ‘manpower services’ by overseas entity to the Indian entity despite existence of employer-employee relationship between the Indian entity and the seconded employee, Further, the services provided by the employee to employer in the course of or in relation to its employment were excluded from the definition of ‘Service’ as per Section 65B(44) of the Finance Act, 1994 (“the Finance Act”). Hence no Service Tax was applicable on activities performed by employees to employers in course of employment.

Thus, in order to know the taxability on secondment of employee, it is very important to know whether employer-employee relationship is established between the Secondee and the Host – as the taxability of the same is solely dependent on the fact that who is the employer of the seconded employee.

Judicial pronouncements:

The Hon’ble Delhi High Court had discussed the employer-employee relationship between the host and secondee in M/s. Centrica India Offshore Pvt. Ltd v. CIT Commissioner of Income Tax-I & Ors. [W.P.(C) No. 6807/2012 dated April 25, 2014] – (Affirmed by the Hon’ble Supreme Court in Review Petition (Civil) No. 2644 of 2014 dated December 10, 2014), wherein, in order to determine that employment relationship between the host and secondee, the Court considered the secondment agreements rather than the remuneration paid. In view of the Court, while the control and supervision on seconded employees was exercised by the Indian entity, the right of lien on employment with the overseas entity remained for the seconded employees as the seconded employees were getting retirement and social security benefits from the overseas entity. Further, even if the secondment could be terminated by the Indian entity, the employee still had a lien on the employment with the foreign entity as the Indian entity could not terminate the original employment with the seconder. Also, the secondees cannot sue the host for non-payment of the salary. Therefore, there was no employment relationship between the host and the secondee.

Further, the CESTAT, Bangalore, in M/s Target Corporation India Pvt Ltd v. C.C.E., Bangalore [Service Tax Appeal No. 20459 of 2016, dated January 19, 2021] set aside the order passed by the Commissioner for demand of differential service tax amounting to INR 28,37,08,191/-, on secondment of the employees by the companies under agreement and held that such an activity cannot be termed as “manpower recruitment or supply agency” where employee-employer relationship exist.

Furthermore, the Hon’ble Supreme Court in C.C., C.E. & S.T. – Bangalore (Adjudication) etc. v. M/s Northern Operating Systems Pvt. Ltd. [Civil Appeal No. 2289-2293 of 2021 dated May 19, 2022], adopted the principle of substance over form and negated the existence of an employer-employee relationship between the parties and classified the arrangement to be a manpower supply service, wherein, the Indian company entered into an agreement with overseas company to transfer its employees for managerial and technical assistance. It was held that the quid pro quo is implicit as both the parties i.e., the Indian company and foreign company are getting economic benefit and the Indian company was the service recipient for service (of manpower recruitment and supply services) by the overseas entity and accordingly liable to discharge tax under RCM for such secondment/deputation.

Author’s Note: The Hon’ble Supreme Court in the Northern Operating Systems (ibid) mainly relied on the secondment agreement to conclude that whether there is any employment relationship between the Host and the Secondee. On the basis of the secondment agreement, it was construed that the services are in the nature of manpower services. It was observed that the employees are continued to be on the payroll of the overseas company, also the secondment agreement does not specifically state that the employees shall be considered as the employees of the Indian company. In the above case, it was agreed between the parties that although the deployed employees would be on the payroll of the foreign entity, they would work in accordance with the instructions and directions of the Indian entity. In addition, the Indian entity shared a letter of understanding with the employees, stating the terms of the employment. Under the arrangement, seconded employees would receive their salaries, bonuses, social benefits, out of pocket expenses and other expenses from the foreign entity. Furthermore, the foreign entity will raise a debit note on the Indian entity to recover the expenses on an actual basis. Based on the above facts, the Hon’ble Supreme Court considered that since the deployed employee was in operational or functional control of the Indian entity during the secondment period and the overseas entity has a pool of highly skilled human resources deployed specifically to the Indian entity. Thus, due to their specialised skills and expertise, such employees are deployed to other entities and the salary and perquisites are discharged accordingly. Also, the salary package, allowances, etc., were all expressed in foreign currency. The secondment is a part of the global policy of the overseas entity loaning its services temporarily. On the cessation of the secondment period, they must be repatriated in accordance with the global policy of the overseas entity. Hence, the said agreement was classified as a manpower supply service and no employer-employee relationship exists. It is pertinent to note that the Hon’ble Supreme Court did not touch the taxability on the other types of secondment arrangements, wherein, the employee is under the control and payroll of the Indian entity or only perquisites are reimbursed by the overseas entity or reimbursements are in INR only, etc. The above judgment came as a surprise for MNCs”/ Group Companies/ Sister Concerns, which opened up a Pandora’s box and now the Revenue Department had started issuing notices proposing demand for payment of GST on secondment of employees. However, the judgment passed by the Hon’ble Supreme Court cannot be applied on all the secondment cases, if the terms of the secondment agreements are different than those in the above-mentioned case. Hence, it can be said that the secondment agreement is the most important key to consider the taxability on secondment of employees. Moreover, this judgment should not be applied retrospectively by the Revenue Department, to avoid unnecessary litigations on the subject matter. It is worthwhile to mention here that in this regard, recently, the Hon’ble Punjab and Haryana High Court in M/s Mitsubishi Electric India Private Limited v. s. Union of India & others [CWP 25351 of 2023, dated November 9, 2023] had granted interim stay on the proceedings initiated by the Revenue Department in pursuance of the Show Cause Notice (“SCN”) w.r.t. GST demand on salaries paid to seconded employees in Indian Currency. Similarly, the Hon’ble Delhi High Court in Metal One Corporation India Pvt. Ltd. v. Union of India & Ors. [W.P.(C) 14945/2023 dated November 20, 2023] stayed the proceedings pursuant to the SCNs, while holding that the salaries paid to employees, even though seconded by a foreign affiliate, in terms of the employment agreements with the respective employees, cannot be considered as payment for manpower services supplied by the foreign affiliate. Further, the Hon’ble Karnataka High Court in M/s Alstom Transport India Ltd. v. State of Karnataka [WP 23915 of 2023, dated November 2, 2023] had also taken the cognizance of such issue and had stayed the adjudication of SCN issued by the Revenue Department proposing to levy IGST on salaries paid directly by the Indian entity to the expats. Recent Development: Recently, the CBIC vide Instruction No. 05/2023-GST dated December 13, 2023, has issued the clarification on the issue of nature of secondment of employees by overseas entities to Indian firms and its tax implications in accordance with the judgment of the Hon’ble Supreme Court in the case of Northern Operating Systems (supra), wherein, it has been clarified that the decision of the Hon’ble Supreme Court in the said judgment should not be applied mechanically in all the cases. Further, 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. Furthermore, it has been clarified that Section 74(1) of the CGST Act cannot be invoked merely on account of non-payment of GST, without specific element of fraud or wilful mis-statement or suppression of facts to evade tax. Therefore, only in the cases where the investigation indicates that there is material evidence of fraud or wilful misstatement 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 SCN, and such evidence should also be made a part of the SCN. The time was ripe when such clarification was required to be issued in line with the spirit of the law on the issue w.r.t. levy of GST on secondment of employees, in order to settle the dispute and lessen the burden of Courts/ Revenue Department.

Conclusion:

It can be concluded that the terms of the secondment agreement are very important to know the taxability of Secondment of employees. Considering the judgment of the Hon’ble Supreme Court in the case of Northern Operating Systems (supra), if it is proved as per the secondment agreement that there is no employment relationship between the Host and the Secondee and it is construed that the services are in the nature of manpower services, then GST would be leviable. Thus, it would be prudent for relevant companies to pro-actively review such the inter-company services agreements or secondment agreements between secondee employees and the host to identify necessary amendments/ additional documentation and mitigate the risk from the perspective GST provisions.

In Author’s view, it is very important to give more focus while drafting the secondment agreement, with utmost care, precision and brevity, to carefully to preserve the employer-employee relationship between the Host and the Secondee, so that such services provided may fall outside the scope of GST being covered under Schedule III to the CGST Act.