GST Rate Amendments applicable from 20-10-2023

On 13th of December, 2023, CBIC issued Instruction No. 05/2023-GST regarding the Judgment of the Hon’ble Supreme Court in the case of Northern Operating Systems Pvt Ltd on the issue of secondment of employees by overseas entities to Indian firms. Let's understand this in detail.

What is the secondment of employees?

In the multinational corporation (MNC) environment, international firms often opt to deploy their seasoned and proficient personnel to oversee the operations of their Indian division.

For this purpose, the employees are deputed in the initial set-up stage and thereafter for taking care of management and supervision of activities of their Indian arm. In cases of extended stay, ranging from few months to year, the parent company considers to seconds its employees to India. These arrangements are structured by way of a secondment agreement.

When this happens, these expatriates, known as 'secondees,' work directly under the guidance of the Indian company, handling tasks related to the responsibilities of the Indian branch. Their salary payment is made by the foreign entity, which is claimed as reimbursement from the host entity i.e. the Indian company.

Northern Operating Systems Pvt Ltd (NOS) case

This was a case of Service Tax about secondment of employees in which the Hon’ble Supreme Court had given a ruling on 19th of May, 2022. In this case, the assessee i.e. NOS was registered with the revenue, as a service provider.

NOS was a company in a group of companies doing business abroad. NOS India had an agreement with a group company for secondment of employees in India. As per the agreement, the seconded employees would continue to be on the payroll of the group company (foreign entity) for the continuation of social security/retirement benefits, but for all practical purposes, NOS India shall be the employer.

NOS India would issue an employment letter to the seconded personnel stipulating all the terms of the employment. The employees so seconded would receive their salary, bonus, social benefits, out-of-pocket expenses, and other expenses from the group company. The group company shall raise a debit note on NOS India to recover the expenses of salary, bonus etc. and the NOS India shall reimburse the group company for all these expenses and there shall be no mark-up on such reimbursement.

NOS India received demand of service tax under Manpower Recruitment or Supply Agency service with regard to secondment of employee to the NOS India by foreign group companies. This case was decided in Supreme Court.

Hon’ble Supreme Court held that there is not one single determinative factor, to 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. For all appearances, 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.

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.

The mere payment in the form of remittances or amounts, by whatever manner, either for the duration of the secondment, or per employee seconded, is just one method of reckoning if there is consideration. The other way of looking at the arrangement is the economic benefit derived by the assessee, which also secures specific jobs or assignments, from the overseas group companies, which result in its revenues.

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. 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. The assessee NOS India was held liable to discharge its service tax liability.

Instruction No. 05/2023-GST

CBIC received representations that subsequent to the aforesaid judgment, many field formations have initiated proceedings for the alleged evasion of GST on the issue of secondment under section 74(1) of the CGST Act, 2017. As per the instruction issued by the CBIC, decision of the NOS case should not be applied mechanically in all the cases.

The Hon’ble Supreme Court in its judgment inter-alia took note of the various facts of the case like the agreement between NOS and overseas group companies, and held that the secondment of employees by the overseas group company to NOS was a taxable service of 'manpower supply' and Service Tax was applicable on the same.

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. A careful reading of the NOS judgment indicates that Hon’ble 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 may be relevant to note that there may be multiple types of arrangements in relation to the secondment of employees of overseas group companies 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.

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 the contract between the overseas company and an 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.

In this regard, section 74 (1) of CGST Act reads as follows:

"(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilized by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax,"

From the perusal of the wording of section 74(1) of CGST Act, 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 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.

Conclusion :

By issuing such instruction, CBIC has clarified that judgement of NOS case is not a doctrine for all such cases. There is no magic formula to decide such cases. Contracts are required to be scrutinized so as to clearly deal with the taxability aspect. Section 74(1) of the CGST Act, 2017 can not be invoked directly in these cases unless there is material evidence for evasion of tax.