Since liberalisation in 1991, several Multi-National Corporations (“MNCs”) have established their business in India. MNCs typically choose to depute their experienced and qualified staff to manage the activities of their Indian subsidiary. Employees, who are generally foreign nationals of other countries technically known as ‘Expatriates’, are assigned for the first stages of setup and then for managing and supervising the operations of their Indian subsidiary. For these purposes, the parent company may decide to ‘second’ their employees to India and such understandings are recorded under a ‘secondment agreement.'
In the secondment arrangement, these expatriates, also known as "secondees," are deputed by the parent company to an Indian company. For all practical purposes, the seconded employees work under the direction and control of the Indian entity. Under this arrangement, the secondee remains on the payroll of a foreign entity and receives the salary in the home country. The Indian company reimburses the salary of the secondee to the foreign company. Generally, the secondees are kept enlisted in the foreign entity during the secondment period to obtain benefits of social security by the expat in their home country.
In general, the understanding is that a secondment arrangement does not fall under the purview of the Goods and Services Tax (“GST”) Act, 2017. The obvious rationale is that the services provided by seconded employees to their employer are not considered goods or supplies and hence, are exempt from GST. Similarly, secondment agreements are regarded as outside the purview of GST as an employee-employer relationship is not a supply of goods or services.
However, it was contended by the GST department that the provision of employees by the parent company to an Indian entity should be considered as a supply of services, which would mean GST would be applicable in such cases. This issue has been raised in the case of C.C., C.E. & S.T.-Bangalore (Adjudication) etc. v. M/s. Northern Operating Systems Pvt. Ltd. (“Northern Case”). While the Supreme Court (“SC”) has adjudicated on the matter in terms of the Service Tax regime as such was the applicable law to the parties, the Service Tax regime has now been subsumed in the GST regime, and the holdings of the case are applicable for the new regime.
Northern Operating Systems Pvt. Ltd. is the Indian branch of its parent company, the Northern Trust Company. As per their secondment agreement, remuneration to the employees was given by the parent company, and the Indian branch reimbursed the amount to the parent company. The secondees were supervised and controlled by the Indian branch. The Indian branch was treating the secondees as its own employees, but was not discharging any service tax on the amount it was reimbursing to the parent company.
The SC observed that the Indian branch benefitted economically upon securing certain assignments and jobs from the parent company, which led to the accrual of revenue.
Hence, it was stated, “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, for the two different periods in question (in relation to which show cause notices were issued)” [Para 61, Northern Case].
Hence, the SC held that the Indian branch was the recipient of services in cases of secondment agreements, and would be liable to pay service tax on the same.
Following the judgement within the Northern case, the GST department considers secondment agreements to attract provisions of GST and holds the Indian branch responsible for the determination and payment of the applicable tax considering the reverse charge mechanism employed in such agreements. Hence, the GST authorities are taking an aggressive stance in upholding their legal interpretation of taxation of secondment agreements. It is learned that the GST department has issued a notice to several companies regarding the payment of GST on their secondment agreements, with the Northern case judgement being referenced to establish their legal position. However, at this juncture, it may be clarified that the judgement in the Northern case was given on the basis of its own peculiar facts, and is not applicable across the board in respect of the companies which have entered such particular secondment agreement.
Within the Northern case, the SC had also stated,
“As discussed previously, 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”.
Hence, the SC has itself acknowledged that there cannot be a single determining factor, and that the aforementioned judgement cannot be applied universally. Hence, if a company is given notice in such matters, they may put forth certain defences. Some of these defences are stated as under:
It has to be emphasized that the Northern case judgement cannot be ipso facto applicable in all cases. It is trite law that a decision is only an authority for what it actually decides. Hence, the scenario of different companies needs to be observed independent of any other company.
The secondment agreement must be interpreted and considered as per the Companies Act, 2013, and not strictly as per the GST Law. The mere secondment of such employees would not amount to the rendition of services through them by the overseas entities.
Service providers within secondment agreements exist within a master-servant relationship, while service agreements have both parties exist as principals.
Legal employment and economic employment are two distinct concepts, and tax liabilities should accrue only if the appropriate type of employment is ascertained and proved.
There are several other arguments that may be made against the interpretation of the GST department, but these should provide a foundation for a company’s overall argument.
In our opinion, since the current legal situation of secondment agreements is still open to vagueness and confusion, the Central Board of Excise and Customs should be approached. The subsequent plan of action, including utilising writ jurisdiction at the later stages can be reviewed based on the Board's decision. It is important to note that the GST Appellate Tribunal has not been established, despite being five years since GST was introduced. Hence in case of any grievance, the taxpayers are required to go to the High Court.
Furthermore, it would be prudent for these Indian subsidiaries to re-examine the secondment agreements in view of the above discussions. Defendable employment agreements and secondment agreements should be in place to make it obvious that the Indian subsidiary is the actual and legitimate employer of the foreign employees working as secondees.
About the authors: Gautam Khaitan is the Managing Partner of OP Khaitan & Co. Ruchesh Sinha is an Of-Counsel at the Firm.