Multinational companies often share their talent pool across borders and jurisdictions to achieve various objectives. Most common purposes are to supervise the quality, procurement or delivery, sharing knowledge of technology or process, with affiliates or group entities etc. In the Indian context, typically, these arrangements are structured in the form of dual employments where the seconded employee remains on the payrolls of the company in the base location or the head office ('employer') and continues to draw their salary in that country itself, for maintaining the social security status in that country. The Indian affiliate, to which the employees are seconded, ('host affiliate') take these employees on its payrolls for the agreed tenure and reimburses the salary of the employees to the employer under a letter of understanding or a secondment agreement. The host affiliate, normally, also undertakes the tax deduction and labour law related compliance required under the local laws. The seconded employees operate and work under the control and supervision of the host affiliate and provides all their services to the host affiliate. Once the agreed tenure is completed, the seconded employee either returns to the employer or is seconded to another affiliate in a different country, under a similar arrangement.
Under the erstwhile service tax regime, the authorities consistently agitated the taxability of such arrangements by arguing that the arrangements amount to the provision of service by way of "supply of manpower" and thus the reimbursements paid by the host affiliate should be charged to service tax. The tax tribunals (CESTAT) in most of the matters, after considering the facts of each such case, mostly took the view that the reimbursements made by the host affiliate to the employer, cannot be treated as consideration for a service from the employer. Mostly the view was taken on the basis of the fact that the seconded employees were paid salary by the host country and all local tax law and labour law related compliance are also undertaken by the host affiliate. As a result, various matters reached the stages of higher litigation.
Just last week, the Supreme Court ('SC') of India dealt with a similar matter in the case of CCE v. Northern Operating Systems [TS-216-SC-2022-ST] and has put to rest the controversy. The SC, while looking at the "substance over form" of these arrangements has held that such arrangements are nothing but provision of service by the employer to the host affiliate and therefore should be subject to service tax. Let us understand why the SC held such arrangements as taxable.
Facts of the case
Northern Operating Systems Pvt. Ltd. ('the assessee'), entered into secondment arrangements with its overseas group companies for certain specialized services to be provided by the personnel of the overseas group companies. The seconded employees were required to work under the control and supervision of the assessee but continued being on the payroll of the overseas entity.
SC examined the scope of 'service' in tax law prior to and after the advent of the negative list regime under the erstwhile service tax regime. SC analysed the nature of the relationship between the assessee and the seconded employees by looking at various documents. It held that preference should be given to 'substance over form', while analysing the terms of the agreement. SC observed that the seconded employees were being paid by the overseas entity and they were to return to the original employer at the end of the secondment. Therefore, the overseas entity was held to be the employer of the seconded employees. Hence, the SC concluded that the host entity is liable to pay service tax on the reimbursement as they are recipient of the service being provided by the overseas entity.
The decision of the SC will of course have implications on all the matters which are pending litigation at different levels and the courts and authorities will likely follow the SC ruling, unless the companies are able to demonstrate that the facts of their particular matter are strikingly different. Thus, all those companies whose matters are under litigation, having similar facts, will have to look at the liability getting crystalised and books getting impacted due to heavy interest amounts and penalties hitting their books. A realistic call should thus be taken by the companies having pending litigation on similar matters.
As regards the situation, where the notices were not served till now, the limitation period will be the saviour and those situations will have to be dealt accordingly.
Implications under GST regime
The secondment arrangements are of course continuing under the GST regime as well. Mostly the provisions of GST related to taxability of services are similar to what they were under the service tax regime. The decision of the SC in Norther Operating Systems will obviously have implications on all such arrangements under the GST regime as well. It is not that the controversies have not arisen under the GST regime till date. Objections have already been raised by authorities in various situations.
The Appellate Authority for Advance Ruling, Tamil Nadu (AAAR) in the case of M/s. Tamil Nadu Generation and Distribution Corporation Limited has, in similar case of secondment arrangements, already held that reimbursement given by the host entity for payment paid to the seconded employees by their original employer would be covered within the ambit of 'supply of services' and accordingly GST would be applicable.
The Way Forward
This judgement is likely to have significant implications on companies involved in secondment agreements. The SC noted that no single factor would be sufficient to decide such cases, however, SC's observations would play a crucial role in determining liabilities involving similar arrangements. Therefore, companies will have to review their existing secondment agreements to re-visit their tax positions and analyse whether they need to re-structure the arrangement or compute possible tax liabilities arising on the group, out of such arrangements.
Post this ruling of the SC, wherever the companies would have taken defense based on the favorable decisions of the tribunals under service tax regime, all such matters will have to be re-looked at in detail to understand the present arrangement and the need to re-structure the arrangement or compute the tax liability on the group.
Originally published by taxsutra.
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