Different Scenarios to be analyzed for taxability issues on Manpower Supply Services under GST Laws

Presently, the treatment of manpower supply services for employee secondment is a grey area under GST Laws. In May 2022 the Supreme Court of India in case of CC, CE & ST, Bangalore (Adj.) etc. Vs. Northern Operating System Private Limited (NOS) in Civil Appeal No. 2289-2293 of 2021 dated 19.05.2022 ruled that the secondment of employees between the group companies qualifies as a taxable service under the category of Manpower Supply Services. This judgement clarified that secondment agreements can be considered as taxable services under Indian tax laws. Companies having secondment arrangements had to re- evaluate their tax obligations both under the service tax and GST regime. There is no clarity on whether the reimbursement will be considered as a taxable service or not.

Basis the aforementioned judgement, various companies received show cause notices under the GST regimes as to why they will not be held liable for payment of GST under the reverse charge mechanism (RCM) for the import of manpower services from their parent/holding overseas companies. The value of supply shall be the amount of remuneration paid to the seconded employees. However, in absence of clarity on interpretation various High Courts have stayed such proceedings.

Further Instruction No. 5/2023-GST, Dated December 13, 2023, is issued by the Central Board of Indirect Tax and Customs (CBIC), wherein attention is invited to the aforesaid mentioned judgement. This matter is examined by the board and it appears that the Hon’ble Supreme Court judgement inter-alia took notes of the various facts of the case like the agreement between NOS and overseas group companies and held that secondment of employees by the overseas group company to NOS was a taxable manpower supply services.

This instruction released by CBIC clarified that there may be a multiple type of arrangements or scenarios in relation to the secondment of employees of overseas group companies in the Indian entity. In each scenario, 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 Supreme Court should not be applied mechanically in all 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 Indian entity to determine taxability or its extent under GST and applicability of the principles laid down by the Hon’ble Supreme Court judgement in NOS case. It has also been represented by the industry that in many cases involving secondment, the field formations are mechanically invoking extended periods of limitation under section 74(1) of the CGST Act, 2017. Hence, this instruction also clarifies the applicability of section 74(1) of the CGST Act, 2017.

In this regard, Section 74(1) of the CGST Act, 2017 states that 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 willful-mis statement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made or who has wrongly availed or utilized input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice.

It is evident that that the aforesaid section can only be invoked in the cases where there is fraud, willful misstatement or suppression of fact to evade tax on the part of the said taxpayer. This section cannot be invoked merely on account of non-payment of GST without a specific element of fraud or willful misstatement or suppression of facts to evade tax. Therefore, only in the cases where investigation indicates that there is material evidence of fraud or willful misstatement or suppression of fact to evade tax on the part of the taxpayer, provision of section 74(1) of the CGST Act, 2017 may be invoked for issuance of show cause notice and such evidence should also be a part of the show cause notice.

Conclusion of the instruction issued by the CBIC

The instruction emphasizes that the Supreme Court’s decision in the NOS case should not be applied mechanically. Different factual situations and contractual terms will determine the GST applicability for each secondment agreement. CBIC discourages the automatic use of section 74(1) of the CGST Act, 2017. This section allows extended time for tax assessment in case of fraud or deliberate misinformation. It highlights the importance of considering specific details of each secondment agreement rather than following a one-size-fits-all approach based on a single court case.

Below are the scenarios to understand the taxability under GST as per the industry perspective

Dispatch of employees by overseas companies to their subsidiaries in India is a very common practice. In certain cases, these employees are dispatched via. secondment and dispatch agreements between the overseas entity and the Indian entity and in other cases there are only employment contracts between dispatched personnel and the Indian entity. Further, sometimes the salary paid by the overseas entity is recovered by the Indian Company via. debit notes and in a few cases no reimbursement is being made by the Indian Company to the overseas entity.

1. Existing employment contract between a foreign company and seconded employees

Where the foreign parent company has an employee on its payroll and that employee is dispatched to an Indian subsidiary and foreign company continues to pay the employee’s salary and manage their benefits. In this case, only a view can be taken that the service has been imported by the Indian Company. However, facts of the case are to be identified and analyzed independently keeping in mind the arrangement whether it is a case of secondment or only service provision by the overseas entity.

1. Agreement between Indian Subsidiary company and seconded employees: -

If there is only an employment agreement between the Indian subsidiary company and the seconded employees and there is no role of a foreign subsidiary company in terms of salary and other allowances to seconded employees, then in this case, a view is possible that it is an employment arrangement between Indian Company and the employee. Nevertheless, there are many other factors which are to be checked separately whether:

• Any consideration is being charged by the foreign entity for this service;
• Overseas entity is paying salary or other allowances to the dispatched personnel;
• Overseas entity is raising debit notes to recover such salary and allowances from Indian Company;

1. Secondment agreement between Indian & overseas entity and employment agreement between Indian entity and dispatched personnel: -

There are cases wherein two types of agreements are entered into between an Indian company, an overseas company and the dispatched personnel which are:

1. Secondment and dispatch agreement: A secondment agreement is generally a two-party agreement between an Indian and an overseas entity. Dispatch agreement is a triparty agreement between the Indian company, overseas entity and the dispatched personnel.
2. Employment agreement: Employment contract between the Indian Company and the dispatched personnel.

In these cases, it is worth analyzing, whether any reimbursement is being claimed by the foreign company from the Indian Company. Further, it is also to be seen that any income is derived by the overseas entity from the Indian Company for this arrangement.

Just to conclude, to analyze GST implications on these arrangements, it is important to check the following:

• Terms of arrangement between the Indian and foreign Company and the dispatched personnel;
• If a foreign company is deriving any benefit from the Indian company in these arrangements;
• If reimbursement is being made by the Indian Company to the foreign company for the payment made overseas;
• Which entity is managing the payroll of the dispatched personnel;
• Is there any global policy of secondment in the overseas entity; and
• Is there any global policy of repatriation in the overseas entity;