Beacon of hope for secondment matters under the GST regime?

The article discusses the position of secondment matters in the current GST regime following the Supreme Court's decision in the Northern Operating Systems case.
Lakshmikumaran & Sridharan - Vishwanath K, Teesta Banerjee, Ananya Raghavendra
Lakshmikumaran & Sridharan - Vishwanath K, Teesta Banerjee, Ananya Raghavendra

In May of 2022, a landmark judgement was pronounced by the Hon’ble Supreme Court in the matter of Northern Operating Systems Pvt. Ltd. (‘NOS’), holding service tax to be payable on the supply of manpower services in situations where foreign expatriates (‘expats’) belonging to an overseas group entity are deployed in the Indian group entity for a temporary period (commonly referred to as ‘secondment’). This led to chaos and disruption in various multinational industries, primarily since till the date of such judgement, relying on jurisprudence held in the favour of the assessees, they had not discharged any service tax for secondments.   

Considering the consistent favourable rulings in the service tax regime, the assessees adopted a similar treatment in the GST regime. The departmental authorities also did not raise any issues for more than 5 years.

While the NOS judgement had implications in respect of the service tax period transactions, this judgement also consequently led to a plethora of notices being issued to assessees making GST demands on secondments, based on a blanket application of the NOS judgement to all secondments. The authorities were not even bothered about the application of the GST law in cases of related party transactions, as opposed to the service tax law.

Although the judgement was pronounced only in May 2022, the Department (having kept quiet for more than 5 years) has not only been raising demands for GST on such secondment from the period of July 2017 onwards, but also has been seeking to demand interest and invoke penal provisions even for periods prior to the date of the judgement. Unfortunately, the tax liability, including interest and penalty, is being calculated by considering the full remuneration paid to the expats, that is, Indian salary, overseas salary and perquisites, leading to a high tax liability, interest and penalty. Various assesses succumbed to the pressures of multiple notices and proceedings by the Department and undertook the payment of such high amount of tax liability since the entire exercise was revenue neutral and credit was immediately available. In fact, in many cases the credit was again being returned by way of refund on account of exports.    

However, certain entities stood their ground to contest GST liability on secondment considering the various favourable judgements in the erstwhile regime.

Recently, a writ petition was filed before the Hon’ble Karnataka High Court challenging the Show Cause Notice (‘SCN’) issued pursuant to the decision in NOS. Arguments were briefly presented before the Hon’ble High Court to contest the GST liability on the salary paid by the Indian entity stating that the same does not amount to a ‘taxable supply.' The counsel for the petitioners also sought an interim prayer seeking the stay of any adjudication pursuant to issuance of the aforementioned SCN. The petitioners breathed a sigh of relief as the Hon’ble High Court granted such stay in an interim order dated November 2, 2023.

While there has only been an interim order by the Hon’ble High Court in the instant Writ Petition, this order is nevertheless a huge development in the GST regime, giving assessees a hope in anticipation of some relief in respect of payment of GST liability in cases of secondment.  

It appears that there is still a possibility to seek relief in terms of application of the value on which the GST liability is to be determined, specifically in respect of the portion of salary paid by the Indian entity in INR to the expat, in the light of second proviso to Rule 28 of the Central Goods and Services Rules, 2017. Such relief would lead to there being no liability or substantial reduction in tax liability, including for past periods, especially where factually, no payments have been made to the foreign entity but rather, payments were made directly to the expats by the Indian entity. The reduction in tax liability will also result in substantial reduction in the interest amount (if at all applicable), considering the reduction in the value on which GST liability is to be discharged.  In fact, the date from which interest at all is payable, that is, from July 1, 2017 or from the date of judgment of the Hon'ble Supreme Court is another aspect pending consideration by the government.

The instant matter has been listed on December 7, 2023 for arguments and thereafter, the final judgement is to be awaited to see if there is any light at the end of the tunnel to settle the continuous ambiguities and chaos post the NOS decision.

About the authors: Vishwanath K and Teesta Banerjee are Associate Partners and Ananya Raghavendra is an Associate at Lakshmikumaran & Sridharan.

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