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Subhasish Pamegam*
I. INTRODUCTION
In an attempt to provide relief to the taxpayers against whom Show Cause Notices (SCN) have been issued by the tax authorities, the Central Board of Indirect Taxes and Customs (CBIC) has recently issued instructions dated 13th December, 2023, to bring in clarity on the complexities surrounding the taxation of cross-border secondment of employees and the application of section 74(1) under the Central Goods and Services Tax Act (CGST). The instructions came as a response to the ramifications observed after the North Operating Systems (NOS) case, cautioning against the mechanical application of the judgement in all cases without taking into account the nuances of different cases involving secondment arrangements.
This article first, aims to critically analyse the CBIC's instructions, focusing on the potential ambiguities that may arise in assessing the taxability of secondment arrangements, considering their complexity. Secondly, the article sheds light on the applicability of Goods and Services Tax (GST) to secondment arrangements. Finally, it provides measures to address the need for clearer guidelines to avoid varying interpretations and protracted litigations.
II. THE COMPLEXITIES OF SECONDMENT ARRANGEMENTS
After the judgement in NOS case, the CBIC received various representations challenging the initiation of SCNs by several field formations against the taxpayers for alleged evasion of GST on secondment of employees under section 74(1) of the CGST Act. To address this issue, the board issued instructions directing a case-specific approach to assess the tax liability under GST, considering the intricate nature of secondment arrangements. The instructions directed the tax authorities to conduct a meticulous examination of the terms and conditions of the contract of each secondment arrangement to determine tax implications under GST.
Amidst these challenges, it is crucial to recognize that a “secondment arrangement”, which involves the temporary transfer of skilled employees from one entity to another, either domestically or internationally, is far from a uniform concept. Secondment is not a one-size-fits-all concept. There exists a diverse spectrum of arrangements, each characterized by unique terms, conditions, relationships between the overseas company and the India entity and the specific services rendered during the secondment period. The intricate nature of such arrangements introduces a layer of complexity in determining their tax implications under the GST regime.
Each case presents a unique set of circumstances, necessitating a tailored analysis. A careful consideration of distinct factual matrixes is indispensable. It involves scrutinizing the specificities of the contractual relationship, understanding the motivations behind the secondment arrangement, and assessing the impact on both the overseas entity and the Indian subsidiary. Therefore, the tax authorities need to move beyond a generic application of rules and instead adopt an approach that respects the inherent diversity in secondment arrangements.
In the NOS case, the Supreme Court scrutinized the nature of arrangements involving secondment of employees by overseas companies to Indian entities and its implications on service tax. It held that each arrangement has distinctive features and necessitates a nuanced assessment based on the unique characteristics of each secondment arrangement. It held that the secondment arrangement must involve a ‘supply of manpower’ for subjecting transactions involving reimbursement of salaries of the seconded employees to the overseas entity to the erstwhile service tax regime. The crux of the ruling emphasized on divergence from a one-size-fits-all approach to a more nuanced approach to assess the tax implications of such arrangements. However, the court's classification of secondment as a taxable service under the umbrella of 'supply of manpower’ is an over-generalisation of the nuanced nature of such arrangements.
The broad categorization resulted in a situation where the tax authorities have overlooked the diverse nature of such secondment arrangements. Each secondment arrangements differ in the scope of services, duration and purpose of the secondment, the dynamics of the employer-employee relationship, contributions to projects or strategic initiatives, variability in contracts and terms, and the impact on both the Indian and overseas entities involved. For instance, when employees contribute to projects, skill transfers, or strategic initiatives of the Indian entity, their role goes beyond mere a ‘supply of manpower’, which involves providing generic or specialized labour by an overseas entity to an Indian entity. Their contributions become integral to the specific goals and objectives of the host company, which is in the nature of ‘employer-employee relationship’ and thereby exempting such services from GST under Schedule III to Section 7(2) of the CGST Act. Therefore, this generic classification has resulted in misinterpretations by the tax authorities.
The aftermath of the NOS judgement has spurred a wave of inquiries and legal battles between the tax authorities and the taxpayers, with the latter turning to various High Courts (HC) seeking relief based on the distinction in the factual matrix of their case. This was the result of the misinterpretation of the NOS judgement by the tax authorities where they issued SCNs without appreciating the distinct facts of each case.
It is a well-settled position that a judgement cannot be uniformly applicable in cases with different facts and mere similarity between cases is insufficient, as even a singular detail can alter the entire context. This position was reaffirmed by Delhi HC, in the matter of Mitsubishi Electric Automotive India v. Union of India where the court directed the tax department against taking any coercive actions, considering the variations in the secondment arrangements. Similarly, interim reliefs were granted to BMW India by the Punjab and Haryana HC, Metal One Corporation by the Delhi HC, and Alstom Transport India by the Karnataka HC.
III. ANALYSIS: APPLICABILITY OF GST TO SECONDMENT OF EMPLOYEES
There is no definitive formula in the nature of a singular test for determining the applicability of GST to arrangements involving secondment of employees. A comprehensive analysis of all the factors involved in cases related to such secondment arrangements is necessary. It is to be noted that not every factor elucidated by the author below holds equal relevance or weight across all cases. However, the examination of these four factors is crucial in determining the GST applicability.
Firstly, the applicability of GST to the secondment of employees is contingent upon the reimbursement of the rendered services by the Indian company to the overseas entity that seconded the employees. If the Indian company reimburses the overseas company as a consideration for the services provided by the overseas company through its seconded employees and pays an additional mark-up on the services provided, then GST is applicable to the secondment arrangement. This was held by the Authority of Advance Rulings, Maharashtra in Maansmarine Cargo International LLP where it held that the Indian company will be deemed as the service recipient and the employee's services become a taxable supply under section 7 of CGST.
The applicability of GST on the secondment of employees was dealt with in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. vs. Union of India, where the Supreme Court held that the secondment of employees from an overseas company to an Indian entity would not fall under the category of a "supply" under the GST law, provided that the overseas company does not levy any consideration for the services rendered by its employees to the Indian entity.
While the court's clarification on the applicability of GST in cases where the overseas company charges a fee or consideration provides valuable guidance to businesses in India, it falls short in considering various crucial factors such as presence of a lien on employment, the specific terms of secondment, the treatment upon completion of secondment (whether the employees will be reintegrated into the overseas company or not), the right to terminate employment, the reasons for secondment, the nature of services rendered between the overseas company and the Indian entity, and the legal versus economic employer status of the Indian company. For instance, the presence of a ‘lien on employment’, where the overseas company retains control over the seconded employees even if they are temporarily assigned to work for another entity i.e. right to terminate them, right to influence their tasks etc., can significantly impact the nature of the secondment.
In Director Income Tax v. M/S Morgan Stanley & Co. Inc., it was held that the lien by the overseas entity over the seconded employees would determine whether there is an employer-employee relationship between the seconded employees and the Indian entity to whom the employees are seconded. In presence of a lien by the overseas entity over the seconded employees, the overseas entity would be the employer and their services would constitute “supply of manpower”. Therefore, the extent of control and the presence of a lien on employment are crucial factors that tax authorities may consider in assessing the tax implications of the secondment.
Secondly, the application of GST to the secondment of arrangement also depends upon whether there was a supply of manpower by the overseas company to the Indian entity. Section 7(2) of the CGST Act excludes activities or transactions specified in Schedule III from being treated as either supply of goods or services. Entry 1 of Schedule III of the CGST Act provides that "services by an employee to the employer in the course of or in relation to his employment" and such services are also excluded from the definition of "service" under Section 65B(44) of the Finance Act, 1994. Therefore, if the secondment arrangement involves an employer-employee relationship between the seconded employees and the Indian entity, GST would not be applicable. The seconded employees shall be considered an employee only if they work directly under the control and supervision of the secondee company. The judicial position indicates that the reimbursement of salary by the secondee company to the seconded company does not constitute a supply if it is part of the employer-employee relationship.
Thirdly, when considering secondment transactions as manpower supply services from an overseas entity, understanding the place of supply becomes crucial in determining GST applicability. Section 13(3) of the Integrated Goods and Services Tax Act (IGST) serves as the residuary clause in the absence of specific provisions for manpower supply services. It states that the place where the services are performed will be deemed to be the place of supply. Therefore, the place of supply would be India, given the location of the Indian entity. Considering that the place of supply is in India and the supplier's location is outside India, it qualifies as an "import of services" and is subject to GST under the reverse charge mechanism.
Fourthly, if the secondment arrangement indicates that there is supply of service and there exists a quid pro quo relationship benefiting the Indian entity (acting as the recipient of expertise from such expatriates), GST is applicable to the arrangement. However, to determine the true nature of a secondment arrangement, a singular test is not sufficient and requires a combination of all applicable tests taken on the entirety of the factual matrix of the case.
IV. CONSIDERATIONS AND BEYOND : MULTIFACETED FACTORS SHAPING TAXATION OF SECONDMENTS
While consideration or fee for services rendered by the seconded employees is a crucial factor in determining taxability, other critical factors need to be examined in determining the taxability of secondment arrangements. Firstly, the underlying purpose or motivation behind seconding employees is crucial in determining its tax implications. If the primary purpose is skill enhancement, knowledge transfer, or strategic collaboration, and not merely the supply of labour, it shall not be considered as supply under section 7 of CGST.
The specific conditions outlined in the secondment agreement, such as the duration, scope of work, and responsibilities of the secondees during their tenure with the Indian entity can help determine the purpose of the secondment arrangement. Further, to determine the existence of the employer-employee relationship in the absence of a clarification in the arrangement, Article 15 of the Organisation for Economic Co-operation and Development Model Tax Convention 2014 (OECD) which laid down the basic factors for determining such relationships can be considered.
Secondly, although the absence of consideration for the services of the seconded employees might suggest a lack of direct financial benefit, the indirect benefits derived by the Indian entity from the enhanced expertise or improved services of the seconded employees, through the transfer of specialized knowledge by the overseas entity, can still be considered as a supply.
Thirdly, legal-employer status and economic-employer status are crucial in examining secondment arrangement because although overseas entities are the legal employers of the seconded employees on paper, the Indian entities are the economic employers that, in substance, exercise functional and managerial control over the employees and benefits from the services of the employees.
Fourthly, in cases involving joint employment where the seconded employees are employed jointly in both the overseas entity and the Indian entity, such employees can be considered to be in an employee-employer relationship with both the companies and therefore, such transactions would be exempt from being considered supply.
Fifthly, it was held in the Intercontinental Consultants case that the erstwhile service tax is applicable only to the consideration paid to the overseas entity on the gross amount charged for the provision of services, not merely on the amount of salaries paid to the seconded employees.
However, it's essential to note that these considerations should be seen in conjunction. The absence of consideration remains a foundational aspect, and additional factors like the nature of services, control mechanisms, and the broader context of the secondment relationship play supplementary roles. There might not be a strict hierarchy among these considerations, but collectively, they contribute to the overall assessment of taxability of secondment arrangements. The significance of each consideration can vary based on the specific facts of each case, the industry involved, and the legal framework of the overseas company’s jurisdiction. The tax authorities might weigh these factors differently depending on the specific factual matrix.
V. WAY FORWARD
The CBIC’s proactive response to the multifaceted challenges faced by the taxpayers after the NOS judgement, which calls for a nuanced examination of each case before the issuance of SCNs, not only safeguards against hasty actions but also holds significant implications for subsequent adjudication process. This will serve as a guideline for both businesses and tax authorities, aiding them in making informed decisions as they navigate the complexities of cross-border employment within the GST framework. However, this shift, while necessary, introduces ambiguity, as the term "case-by-case" opens room for diverse interpretations. The lack of specific guidelines creates interpretational challenges, potentially leading to inconsistent jurisprudence and prolonged litigations.
To address such issues, comprehensive efforts by the board are imperative. Firstly, clearer guidelines should be introduced to provide a structured approach to evaluating secondment arrangements. Secondly, considering the diversity of industries and their unique secondment practices, industry-specific guidance could be developed in sectors such as IT, manufacturing, or services to enhance precision in the assessment of secondment arrangements. Thirdly, collaborative frameworks between tax authorities, businesses, and industry experts can facilitate open dialogues. This will ensure a fair and equitable tax assessments of secondment arrangements under GST.
† Subhasish Pamegam is a 3rd year student at Gujarat National Law University, Gandhinagar.
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