GST on Secondment of Employees / Expats in India: Supreme Court Ruling

Companies often send their employees to their branches or sister concerns whether within or outside the home country. This is known as the secondment or deputation of employees or expats. One of the important factors in the case of secondment or deputation of expats is taxation. While the income tax provisions are pretty clear, the levy of GST in secondment or deputation of employees has been a matter of much debate. The Supreme Court of India announced a major ruling in one of its pending cases relating to the levy of GST on the secondment or deputation of employees. This subsided the confusion relating to the applicability of GST but was it an absolute ruling? What was the verdict of the Supreme Court? Let’s find out!

Facts of the Supreme Court Case on Secondment of Employees

The Supreme Court judgement on secondment of employees pertained to the case of Commissioner of Customs, Central Excise & Service Tax-Bangalore (Adjudication) Vs. M/s Northern Operating Systems Pvt. Ltd. (herein referred to as the ‘assessee’). The assessee was in India and entered into a contract with its overseas group entities to render information technology and back-office support services. The employees being sent to the assessee were to act under the control and directions as specified by the assessee. All the salary, incentives, welfare benefits and social security benefits relating to the seconded employees were to be paid by the overseas group entities to the employees. These were to be reimbursed by the assessee to the overseas group entities.

Therefore, the question was whether the assessee was liable to pay the service tax on the amount reimbursed by the assessee to the overseas group entities. 

Observations Made by The Supreme Court on the Secondment of Employees

The Supreme Court made the following observations before ruling its judgement:

• The employer and employee relationship has been excluded from the ambit of service tax under the erstwhile service tax law. This exclusion is also continued under the GST as per Schedule III of the GST act.
• The primary question here was who should be considered as the actual employer of the seconded employees. If the assessee was to be treated as the real employer, then there shouldn’t be any service tax or GST applicable to such an arrangement. However, if the overseas group entity were to be considered as the real employer, then this arrangement shall be treated as a service provided by the overseas entity to the assessee.

Supreme Court Judgement on The Secondment of Employees

The Supreme Court concluded that the overseas group entity shall be considered as the real employees of the seconded employees. The following factors played an important role in this regard:

• Payment of Benefits: The employees seconded in India continued to be on the payroll of the overseas group entity. All the social security benefits and salaries to the seconded employees were paid by such a foreign entity. Even though the assessee exercised functional and operational control, it was necessary for the performance of the duties of the seconded employees. Thus, this arrangement should be treated as a ‘contract for service’ and not a ‘contract of service’.
• Specialised Services: The nature of services involved in this arrangement was of specialised nature. The overseas group entities wanted to secure contracts that required highly skilled and trained personnel. Thus, only the employees with specific skill sets were seconded to the assessee. 
• Repatriation: The assessee and the seconded employees entered into a letter of understanding that hasn’t stated that the seconded employees shall be considered as the employees of the assessee. The assessee did not have the power to terminate the employment of the employees seconded once the period of secondment expired. After this period, the seconded employees were to be expatriated back to the overseas group entities.  
• Currency of Benefits: All the salary, allowances and benefits were paid in foreign currency. While separate allowances were provided to the seconded employees for working in India, it further stated that the seconded employees shall be considered the employees of the overseas group entity. 

Thus, the assessee in India was receiving the manpower recruitment and supply services from the overseas entity for the duration of the secondment or deputation. Thus, it would result in the import of services and be liable to GST under the reverse charge mechanism. This judgement is significant as it overpowers all the previous judgements passed by various tribunals that the services rendered by the seconded employees shall not be considered in the nature of manpower services.  

ASC Group’s Opinion

This Supreme Court judgement on secondment of employees was in line with the facts of this case whereby, as per the terms of the arrangement, it appeared that the services are in the nature of manpower services. However, a different position can be taken and this judgement might not be applicable if the terms of the arrangement are different than those present in this case. This shows the importance of the legal contracts and agreements being entered into between two or more entities, the language being used therein and the nature of arrangement that gets reflected through such contracts. In case you need any further information relating to expat regulations and taxation in India, feel free to contact the ASC Group.

Read More - Decoding Dual Employment in the case of Expats

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