Summary:

The issue before the Hon’ble Karnataka High Court (‘the High Court’) was whether the secondment of employees from a foreign group entity to the Indian company, in the absence of any invoice, constitutes a taxable supply of manpower services liable to IGST. The High Court, relying on Circular No. 210/4/2024-GST dated 26.06.2024 (‘the Circular’) set aside the demand and held that since no invoice was raised in respect of the services received from its foreign affiliate, the value of such services must be deemed to be ‘Nil’

Facts:

• During the period July 2017 to March 2023, the employees of the petitioner’s overseas group companies were seconded to work in India for a fixed tenure
• Such arrangements are governed by a dual-contractual framework comprising a Secondment Agreement between the foreign and the petitioner and an Employment Agreement between the seconded employee and the petitioner
• The petitioner entered into employment agreements with the expatriate employees, placing them on its payroll, paying their salaries directly, and deducting applicable taxes at source under Indian law, while the overseas entities continued to provide certain social security benefits available in the home countries
• While the petitioner disbursed the salary directly to the secondees, certain components such as social security contributions or benefits mandated under the laws of the home country may be paid by the foreign entity, which are later reimbursed by the petitioner
• The Tax authorities treated this arrangement as an import of “Manpower Supply Service” by the petitioner and issued Show Cause Notice (SCN) proposing IGST liability under the reverse charge mechanism. The SCN reached to the High Court wherein it was remanded with direction to take note of the Circular before passing any adverse order
• Despite submission of additional documents and explanations in line with the Circular, the Tax authorities proceeded to pass order confirming IGST demand on alleged import of manpower services

Issues before the High Court:

Whether the secondment of employees from a foreign group entity to its Indian subsidiary, in the absence of any invoice, constituted a taxable supply of manpower services liable to IGST?

Discussion and Ruling:

Hon’ble High Court held that the secondment arrangement in the present case, does not lead to any tax liability under the GST regime, basis the following:

• The seconded employees were under the exclusive control of the petitioner, integrated into its organization, and governed by its internal policies. Their salaries were paid by the petitioner after deducting tax at source, and they received statutory employment benefits. These factors established a genuine employer-employee relationship, attracting the exclusion under Schedule III of the CGST Act and not constituting a taxable supply
• The Circular clarified the legal position regarding cross-border intra-group services and stated that, where full input tax credit is available to the recipient and the related domestic entity (the petitioner) does not raise an invoice for services received from its foreign affiliate, the taxable value of such services may be deemed to be ‘Nil’ in terms of Rule 28 of the CGST Rules. Accordingly, even if such secondment arrangement is assumed to be a supply, the deeming fiction under the Circular neutralises any scope for further tax liability
• The High Court further held that businesses must assess secondment arrangements on a case-to-case basis and consider the following factors:
  • who bears the economic burden and controls long-term employment;
  • whether the posting is task-specific or open-ended;
  • how salary is paid directly by the Indian entity or via the foreign company; and
  • whether the secondee is absorbed into the Indian organization or returns to the foreign entity post-assignment.

Hon’ble Delhi High Court, in Metal One Corporation India Pvt. Ltd. vs. Union of India & Ors. [2024 DHC 8298 DB], quashed similar show cause notices demanding IGST on the secondment of employees where no invoices were raised for the alleged manpower supply. The Court held that where an overseas group entity seconded employees without raising any invoice, the value of such services would be deemed to be ‘Nil’. Similarly, various other High Courts, including the Allahabad High Court and the Madras High Court, have also granted relief to assessees in matters concerning the levy of GST on salaries paid to seconded employees.