Recently CBIC has issued Instruction No. 05/2023-GST dated 13th December, 2023 regarding Taxability of Secondment of Employees based on Hon'ble SC Judgement in the case of Northern Operating Systems Pvt Ltd (Copy of Order is provided at the end of the Article) where Hon'ble SC has held that arrangement of secondment of Employees is subject to tax.
In this article, we will discuss everything about GST on Secondment of Employees covering following areas:
Concept of Secondment of Employees
Many of the times, it happens that Holding Companies (generally situated outside India, though in India also in large Groups it happens) deputes their employees in the subsidiary companies for short durations like for One Year or for some specific project or so.
During this period, these employee though will get their salary from the Holding Company but will work under overall control and supervision of the Subsidiary Company. After completion of period of secondment, these employees go back to work in Holding Company.
Against this, Subsidiary Company will reimburse the Salary of these employees to their Holding Company alogn with some administration charges.
What is the Dispute regarding Taxability of Secondment of Employees
Now dispute is on taxability of Reimbursement of this salary of these Employees by the Subsidiary Company to the Holding Company. If this reimbursement is subject to GST then,
Subsidiary company needs to pay GST under RCM in case Holding Company is situated outside India, and
In case Holding Company is situated in India, Holding Company needs to discharge GST under forward charge.
Now question comes what is the dispute, dispute is actually:
Whether this Reimbursement is against Employer-Employee relation between Such Employee and Subsidiary Company as payment for Employer-Employee relation is out of preview of GST (Schedule-III), or
Whether this Reimbursement is against Service provided by the Holding Company to the Subsidiary Company in case Employer-Employee relation exist between Holding Company and such employee not between Subsidiary Company and such Employee.
So in conclusion, in these cases it needs to be decided that , who is the real Employer of such Employee. In case, it is Holding Company, it will be subject to GST and if it is Subsidiary Company who controls such employee during period of Secondment it will be out of preview of GST in terms of Schedule-III.
Key points of Hon'ble SC decision (Based on our interpretation)
Hon'ble SC while deciding the case pertaining to Service Tax Regime (principles will be applicable to GST Regime also as concept is same) has held that Holding Compnay remains the actual Employer of such employees not the subsidiary company on account of folllwing reasons:
The Test of control by an employee by another is not conclusive to decide if an employer employee relationship subsists.
One of the cardinal principles of interpretation of documents, is that the nomenclature of any contract, or document, is not decisive of its nature. An overall reading of the document, and its effect, is to be seen by the courts.
By the Secondment Agreement, the parties agree that the overseas employee is temporarily loaned to the assessee.
During the period of secondment, the assessee has control over the employee, i.e. it can require the seconded employee to return, and likewise, the employee has the discretion to terminate the relationship (Article II);
The overseas employer (group company) pays the seconded employee, which is reimbursed to the overseas company, by the assessee (Article III);
The assessee is responsible for the work of the seconded employee, i.e., the overseas employer, during the secondment period, is absolved of any liability for the job or work of its seconded employees (Article VII);
The secondment is for a specified duration, and the employment with the assessee ceases upon the expiration of that period (Article II of the secondment agreement and the “Duration” clause in the letter of understanding with the seconded employee);
The letter of understanding issued to the seconded employee specifies that the tenure with the assessee is an assignment (in one place, the term used is “At its conclusion, repatriation will be in accordance with the Global Mobility Repatriation Policy”);
The terms include the salary payable as well as other allowances, such as hardship allowance, vehicle allowance, servant allowance, paid leave, housing allowance, etc. The nature of salary and other perks underscore the fact that the seconded employees are of a certain skill and possess the expertise, which the assessee requires.
The above features show that the assessee had operational or functional control over the seconded employees; it was potentially liable for the performance of the tasks assigned to them. That it paid (through reimbursement) the amounts equivalent to the salaries of the seconded employees – because of the obligation of the overseas employer to maintain them on its payroll, has two consequences:
One, that the seconded employees continued on the rolls of the overseas employer;
Two, since they were not performing jobs in relation to that employer’s business, but that of the assessee, the latter had to ultimately bear the burden.
There is nothing unusual in this arrangement, given that the seconded employees were performing the tasks relating to the assessee’s activities and not in relation to the overseas employer. To put it differently, it would be unnatural to expect the overseas employer to not seek reimbursement of the employees’ salaries, since they were, for the duration of secondment, not performing tasks in relation to its activities or business.
There is not one single determinative factor, which the courts give primacy to, while deciding whether an arrangement is a contract of service (as the assessee asserts the arrangement to be) or a contract for service. The general drift of cases which have been decided, are in the context of facts, where the employer usually argues that the person claiming to be the employee is an intermediary.
This court has consistently applied one test: substance over form, requiring a close look at the terms of the contract, or the agreements.
The seconded employee, for the duration of her or his secondment, is under the control of the assessee, and works under its direction. Yet, the fact remains that they are on the pay rolls of their overseas employer.
It is doubtful whether without the comfort of this assurance, Employee would agree to the secondment.
The reality is that the secondment is a part of the global policy – of the overseas employer loaning their services, on temporary basis.
While the control (over performance of the seconded employees’ work) and the 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 secondment. Secondly, the overseas employer- for whatever reason, pays them their salaries. Their terms of employment – even during the secondment – are in accordance with the policy of the overseas company, who is their employer. Upon theend of the period of secondment, they return to their original places, to await deployment or extension of secondment.
In view of the above discussion, it is held that the assessee was, for the relevant period, service recipient of the overseas group company concerned, which can be said to have provided manpower supply service, or a taxable service.
Key Features of Instruction issuesd in the Matter
CBIC has issued an instruction for implementation of said decision. Key Points of the instructions are as follows:
It is noted that secondment as a practice is not restricted to Service Tax and issue of taxability on secondment shall arise in GST also.
Emphasis is on a nuanced examination based on the unique characteristics of each specific arrangement, rather than relying on any singular test.
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 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 case.
It is evident that section 74(1) can be invoked only in cases where there is a fraud or wilful mis- statement or suppression of facts to evade tax on the part of the said taxpayer. Section 74(1) 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 show cause notice, and such evidence should also be made a part of the show cause notice.
Conclusion
In our understanding, even after this instruction which is binding upon Department in terms of Section-168, still Department will go ahead mechanically in case of Secondment and will also invoke extended period to safeguard the maximum revenue.
However, as far as extended period is concerned, we are of considered opinion that this demand has arisen only after decision of Hon'ble SC (as there were multiple decisions of Hon'ble CESTAT which decided in favour of Taxpayer), therefore demand for period before date of Judgement can not be covered under extended period.
Copy of Order
Disclaimer:
We have tried to simplify the Hon’ble Court Decision based on our understanding purely for academic purpose. In case, there is any mistake in understanding of the order, we are apologised to the Hon’ble Court.
We have taken due care to the best of our knowledge while explaining the provisions surrounding the issue purely for informational/academic purpose. It should not be considered as professional advice or consultancy to be relied upon. While due care has been taken by Fab Gyan in preparing this article, certain mistakes and omissions may creep in. The Fab Gyan or its Author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.