[By Priyansh Sharma & Sejal Gupta]
The authors are students of Institute of Law, Nirma University.
Introduction
Unleashing the power of collaboration across geographical boundaries, secondment of employees has become a prevailing tradition between entities spanning different locations to send employees over, be it for temporary ventures or on project basis. However, amidst this intriguing tale, the tax landscape unveils its ever-changing twists and turns. Picture this: In the month of May 2022, the Apex court took centre stage, with its ruling in the C.C. C.E. & S.T. Bangalore v. M/S Northern Operating Systems (‘NOS’).
With an authoritative voice, it declared that the secondment of employees from global entities to their domestic counterparts falls under the enchanting spell of service tax. Why, you ask? Because, dear friend, all the essential elements for a taxable supply found their harmonious rhythm in this captivating performance.
Section 65(68) of the Finance Act, 1994 defines manpower recruitment or supply agency as “any service provided in context of hiring and supplying manpower, either temporary or permanent.” As stipulated under the Indian Contract law, a valid contract must constitute a lawful consideration, similarly an essential component of a supply of service is the ‘consideration’ received in return of that service which can be monetary or non-monetary.
In the context of cross border secondment under Schedule III (1) of the Central Goods and Services Tax Act (‘CGST’), 2017, one major contention of the host entity is that it is the employer of the seconded employees during the period of secondment and the GST liability is therefore not arising. It is significant to observe that in an attempt to settle the issue whether secondment of highly skilled workers from the foreign entity to a host entity attracts service tax to be paid by the service recipient i.e., the host entity through Reverse Charge Mechanism (‘RCM’) under Section 9(4) of the CGST Act, 2017, the Supreme Court (‘SC’) settled the jurisprudence pertaining to this, however, there are still grey areas to be filled.
Misjudged Interpretations
The SC in the NOS judgement noted that although the Indian entity is having managerial control over the seconded employees, the said employees continue to be employed by the foreign entity due to the reason that the seconded employees had to leave for their original employers after the period of secondment is extinguished.
The valid question of fact here should be that what relationship the seconded employees and the Indian entity holds during the secondment period, irrespective of these employees’ relation with their original employers before and after the secondment period. The Karnataka High Court had affirmed with this point of view in its recent ruling in M/S Flipkart Internet Private v. The Deputy Commissioner of Income .
One more observation made by the SC was that the foreign entity was paying salaries to the seconded employees during the course of secondment. As per the agreements entered by the Indian and foreign entity, the seconded employees will be receiving remuneration from the foreign entity for the availment of social security benefits accrued in their home countries. These payments were later claimed as reimbursements from the domestic entity.
One would argue that the seconded employees remained under the employment of the foreign entity due to the said setup of salary disbursement. However, the SC had answered this contention in the judgement only. It was observed that, receiving social security benefits from their home country is a legal requirement under the relevant international laws. It signifies that creating such a setup for salary disbursement is a mandate rather than discretion. It is pertinent to note that the Mumbai tribunal for Customs in M/S Volkswagen India (Pvt.) Ltd. v. Commissioner of Central Excise, has ruled that the nature of transaction cannot be determined by the method of salary disbursal, which effectively concludes this point of discussion that, receiving the money from foreign entity does not affect the relation of the seconded employees and the Indian entity which should be of ‘employee-employer’ in this context.
Reimbursements: A Tangled Web of Confusion
Section 67 of the Finance Act, 2006 provides for the valuation of taxable services for charging Service Tax. It stipulates that the gross amount of the service is taxable. It means that reimbursements, which are claimed by the service providers from service recipients in receipt of expenses incurred by the former while providing the service will be excluded from ascertaining the taxable value of service.
The picture becomes inverted with the introduction of Service Tax (Determination of Value) Rules, 2006. It includes all such expenses which are incurred by the service provider while providing service i.e., reimbursements, under the ambit of taxable amount.
In 2012, the issue of whether reimbursements would be considered while calculating tax liability on services was dealt by the Delhi High Court in Intercontinental Consultants & Technocrats P. Ltd. v. UOI, wherein it observed that reimbursements are not for services per se, but for the expenses for providing services, therefore these are not to be considered while computing the taxable value. The above-mentioned Service Tax Rules were declared inconsistent with Section 67 of the Finance Act. However, since 2015, with the amendment in the definition of ‘consideration’ in the Finance Act to include ‘reimbursable expenditure’ in the value of service, it muddles the legal position which was settled before.
In 2018, the SC, while again considering the same issue, in Intercontinental Consultants & Technocrats P. Ltd. v. UOI, has reiterated the position which was held by the Delhi High Court in 2012. This effectively signifies that the validity of the amendment brought forward to alter the definition of ‘consideration’ holds no value post this judicial precedent.
The position related to reimbursements were deemed to be settled, however the dilemma of misinterpretations on this issue exists since the ruling of NOS.
The SC has held that the foreign entity has seconded its highly skilled employees to the Indian entity and the said setting is a ‘supply of manpower service’ and due to this, it is inferred that the SC has adjudged on the reimbursement issue in a manner contrary to its precedent of 2018.
However, it is pertinent to note that the SC while delivering the judgment in NOS, had not categorically overruled the precedent of Intercontinental. The court, while disregarding the argument of the assessee which argues that they are not bound to pay consideration even if there is a manpower supply, has observed that,
“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.” [Para 58]
The hon’ble SC is of the opinion that the ‘overall effect’[1] of the other agreements between the entities is to be considered as a consideration for the supply of manpower service. For instance, a better way to reckon the consideration in the said case, inter alia, is to observe the employment arrangement of the seconded employees. It is a fact that the seconded employees, during the office hours of the Indian entity, is providing services to the foreign entity as per the relevant agreement, and this can be considered as a consideration provided by the domestic entity.
The foreign entity wanted to retain the employer status of the seconded employees during the secondment period too. Assuming this to be valid, then it is the foreign entity’s liability to provide salaries to its employees, and these employees were seconded to the Indian entity in furtherance of the foreign entity’s business by having back-office and operational support services from the former. The benefit of increased revenues reaped by the Indian entity due to the expertise of these seconded employees could have been compensated by [any] amount paid by the Indian entity, apart from the salaries and other allowances reimbursed, because these salaries are for the benefits reaped by the foreign entity (employer). This amount, apart from salaries and allowances should be subjected to service tax, as it will truly constitute a service for which consideration should be paid. According to one of the agreements, the overseas company was having services from the Indian entity, and the consideration paid to the Indian entity would be actual costs plus 15% markup. It would have been more reasonable, if the charge of service tax from the Indian entity for secondment would be based on the methodology of charging tax on markup (if any).
Conclusion
A pending petition in the name of Commissioner of GST And Central Excise Chennai v. M/s. Komatsu India Pvt. Ltd., before the SC could be very determinative in shaping the jurisprudence related to this issue further. Within the depths of this case lies a pivotal question waiting to be resolved: Does the remuneration provided to the seconded employee fall within the taxable realm as per Section 65 (105) (k) of the Finance Act, 1994? In the landmark NOS judgment, a distinguished panel of three judges graced the stage, imprinting their decision as a guiding beacon for future secondment-related endeavours. Let us tread cautiously, for their words shall forever shape the course of secondment matters yet to come.
[1] C.C., C.E. and S.T., Bangalore (Adjudication) and Ors. vs. Northern Operating Systems Pvt. Ltd. AIR 2022 SC 2450, para 55.