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Supreme Court Ruling Sets The Foundation For GST On Secondment Of Employees – Employee Benefits & Compensation



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Japanese Multinational companies often share their talent pool
across borders and jurisdictions by secondment of Japanese
nationals. This enables the group to understand cultural
differences and for the affiliates to take advantage of the
experience of the parent or group company. It also creates an
opportunity to strengthen the relationship within the group.

A secondment is an arrangement, where an employee has a
relationship both with the seconding and host Company. As an
example, a Japanese multinational, may provide an employee on
secondment to an Indian subsidiary / group company. During the
period of secondment, the employee’s status with the Overseas
Group company is dormant, as if the employee is on long leave, and
that with the Indian Company (‘Host Company’) is active.
The employee remains on the payrolls of the Group company in Japan
and receives its salary in Japan. The Indian Company or host
reimburses the whole or part of the salary of the employee to the
Group Company in Japan. The seconded employee operates and works
under the control and supervision of the host company. On
completion of secondment, the employee reverts to the Group
Company.

The Service Tax authorities have in the past contended that host
company receives ‘manpower services’, for which the host
company pays a consideration, in the form of reimbursement of
salary to the overseas Group company. The CESTAT (Customs, Excise
& Service Tax Appellate Tribunal) has ruled, that in a
secondment, an employer- employee relationship comes into existence
between the seconded employee and the host, and hence there is no
supply of manpower.

The Supreme Court of India in a recent ruling, in the case of
Commissioner of Customs, Central Excise & Service
Tax-Bangalore (Adjudication) Vs. M/s Northern Operating Systems
Pvt. Ltd.
has made a departure from this settled
legal position and held that service tax is applicable, on
secondment of employees by an Overseas Company to an Indian
Company, where the salary is disbursed by the Overseas Company and
the same is later reimbursed by the Indian Company on actuals.

The Supreme Court Decision in The Northern Operating Case

In the Northern Operating case, the Indian host Company was
providing Backoffice Support Services, to the Overseas Group
Company and seconded employees were working in connection with
these Backoffice Support Services.

The Court held that the crux of the issue is the taxability of
the cross charge, which is primarily based on who should be
reckoned as an employer of the secondee. The critical fact was that
overseas group companies’ business was to secure contracts,
which can be performed by its highly trained and skilled personnel.
Accordingly, the Overseas Group Company would enter into contracts
with host companies, for providing such services, by seconding its
employees.

The Court noted that the overseas employer, deploys the
employees to the host company on secondment, in relation to its own
business. Further, the overseas employer, pays them their salaries.
Their terms of employment – even during the secondment
– are in accord with the policy of the overseas company, who
is their employer. Upon the end of the period of secondment, they
return to their original places, to await deployment or extension
of secondment.

Considering the above arrangement, the Supreme Court held that
quid pro quo is implicit, as both the parties are deriving
economic benefit from the arrangement. The Overseas Company gets
the benefit of quality work from the Indian Company and the Indian
Company is able to get business due to presence of expert seconded
employees. In this context, the Court held that secondment of
employees is a taxable service of ‘manpower supply’.

Our view on Implications under the GST regime

This decision is significant as it upsets the previous
jurisprudence on the issue of taxability of reimbursements for
seconded employees. The Supreme Court has treated secondment as a
manpower supply, only where the seconded employees are involved in
the provision of a service by the host Indian company to the
overseas company. While this ruling may not apply to all cases of
secondment, it will open such transactions for scrutiny, having
regard to the overall arrangement between the parties, especially
as the authorities are likely to apply this ruling to current
transactions under GST.

Japanese Companies will need to revisit the clauses of their
inter-company services agreements, secondment agreements, and
letters issued to seconded employees, especially in cases where the
Indian host Company is providing a service to the Overseas Company,
and seconded employees are working in relation to such service.
Companies will also need to maintain necessary documentation for
identifying the purpose of secondment keeping in mind this
judgment.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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