The Hon’ble Supreme Court of India recently held that an Indian company1 is liable to pay Service tax under reverse charge mechanism for secondment of employees by foreign group companies to an Indian company as it will be treated as manpower supply services.
During erstwhile service tax regime, the recipient of service, who is located in India is liable to pay tax under reverse charge mechanism where services are provided by a person who is located outside India.
Similar provisions also exist under Goods and Services Tax (‘GST’) laws which signifies that the said ruling will have bearing under the GST regime as well. Under the GST laws, reverse charge liability to pay the GST arises on Import of Services i.e., when the service provider is located outside India, the Service Recipient is located in India and the Place of Supply is in India i.e., services are received in India.
As per the erstwhile Finance Act,1994 (that governed the provisions of Service Tax in India), typically service is any activity carried out by a person for another for a consideration, and the service by an employee to the employer in the course of or in relation to his employment is excluded from the levy of service tax.
The taxpayer took the view that the secondment arrangement is in context of an employee-employer relationship, hence, should be outside the scope of Service and not chargeable to tax. The said view of taxpayer was also confirmed by the lower courts.
However, the Supreme Court set aside the judgements of lower courts disregarding the above view of taxpayer from the purview of employee-employer relationship. The Hon’ble Court passed the judgment in favour of revenue collection authorities and agreed to levy of service tax in the hands of taxpayer on the reimbursement of salaries paid to foreign company.
The Court while passing the judgement finds that the seconded employees are on payroll of the foreign company for social security benefits, etc and Indian company merely reimbursed the cost of salary to the foreign company for seconded employees on actual basis. The Court also finds that employees will be deputed back to foreign company after specified period and are temporarily loaned to the Indian company to meet the specific needs of Indian company. The control of the Indian company over the performance of the seconded employee does not establish employee and employer relationship among them.
The Court while passing the judgment held that manpower recruitment or supply agency is any service provided, directly or indirectly, in any manner for recruitment or supply of manpower, temporarily or otherwise, to any other person.
The concept of secondment of employee is conventional worldwide for the business. In virtue of the above ruling, it is clear that service provider is foreign company, service recipient is Indian Company and services are rendered in India, therefore, it will attract chargeability of tax in both regimes and Input tax credit for the taxes paid shall also be available to the taxpayer. However, it is important for the business to closely observe the arrangement where no element of service agreement is present among the parties for the secondment. This decision shall be of immense importance to the Global Mobility space. Though the decision is in service tax, the same will have implications in the present Goods and Services tax regime as well as it can impacts existing contractual arrangements of secondment of employees.
The secondment of employees continues to be a vexed issue from the perspective of income-tax law as well (domestic tax law of India) with already existing issues such as withholding, service permanent establishment exposure, issues related to characterisation as fee for technical services or mere cost-to-cost reimbursement of salaries. The said ruling can likely add to another layer of a stumbling block in the secondment arrangements.
1 M/s. Northern Operating Systems Private Ltd. (Civil Appeal No. 2289-2293 of 2021)
