Secondment Of Employees And Its Tax Implication As Manpower Supply – Employee Benefits & Compensation – India – Mondaq

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Secondment is a common practice amongst global entities and corporations having presence in various jurisdictions through group entities. Such secondment practice, depending upon the business requirements of the host entity, usually involves deployment of highly skilled employees of the overseas entity well-versed with the workings/practices of the overseas entity which can be effectively implemented in the host entity's operations. Services provided by an employee to the employer in the course of employment are outside the ambit of the definition of 'service' and typically, the host Indian entity tries to qualify services received through these seconded employees outside the ambit of taxable service. Even if an amount is paid to the foreign group entity as reimbursement of salary of the seconded employees, the host entity holds that the reimbursement cannot be construed as consideration for supply of manpower services. This view is bound to change considering the recent judgement of the Hon'ble Supreme Court in the matter of C.C.,C.E. & S.T. – Bangalore (Adjudication) etc. vs M/s Northern Operating Systems Pvt Ltd. [Civil Appeal No. 2289-2293 of 2021] wherein the Apex Court held that employees seconded to an Indian company from an overseas group company are exigible to service tax as manpower supply under the service tax regime.
Northern Operating Systems (Pvt.) Ltd. (“assessee”) was registered with the Commissioner of Central Excise and Service Tax (“revenue”) as a service provider under the Finance Act, 1994 (“Act”). Proceedings were initiated against the assessee following an audit by the revenue's officials alleging non-payment of service tax concerning agreements entered into by it with its overseas group companies in foreign jurisdictions to provide general back-office and operational support to such group companies. The revenue issued show cause notices alleging that the assessee has failed to discharge service tax under the category of “manpower recruitment or supply agency service” vis-à-vis certain employees seconded to the assessee by the foreign group companies.
The revenue inter alia contended the following:
The assessee inter alia contended the following:
The crux of the issue before the Hon'ble Supreme Court was the taxability of the cross charge paid by the assessee to the overseas entity, which is primarily based on who should be reckoned as an employer of the secondee. If the Indian company is treated as an employer, the payment would in effect be reimbursement and not chargeable to tax in the hands of the overseas entity. However, in the event the overseas entity is treated as the employer, the arrangement would be treated as service by the overseas entity and taxed.
The Court referred to the provisions of the unamended Act vis-à-vis ‘manpower recruitment agency' and the definition of ‘service' post-amendment of the Act in July 2012. It was observed that prior to July 2012, what was to be assessed was whether a (i) person provided service (ii) directly or indirectly, (iii) in any manner for recruitment or supply of manpower, (iv) temporarily or otherwise. It was further observed that post-July 2012, all activities carried out by one person for another person were deemed services except certain excluded categories which categories inter alia included provision of services by an employee to the employer in relation to the employment of the employee.
The Court took note of the nature of a typical secondment arrangement wherein employees of overseas entities are deputed to the host entity on its request (Indian entity in this case) to meet its specific requirements. It was further noted that the secondees work under the control and supervision of the Indian entity and in relation to its work responsibilities. Social security legislations of the secondee's home country and business considerations result in payroll retention and salary payment by the foreign entity, which is claimed as reimbursement from the host entity.
Referring to the documents on record, the Hon'ble Supreme Court made the following observations:
Basis the above, the Supreme Court observed that the assessee had operational/functional control over the seconded employees and it was liable for the tasks assigned to such employees. Due to the payments being made by the assessee of an amount equivalent to salaries (via reimbursement) because of the overseas company's obligation to maintain the seconded employees on its payrolls, two consequences arose (i) the seconded employees continued on the payrolls of the overseas company; and (ii) the assessee had to bear the burden as the seconded employees were performing jobs in relation to the assessee's works.
In the facts of the case, certain key observations were made by the Apex Court:
In view of the foregoing, the Hon'ble Supreme Court held that while the assessee inter alia had control over the seconded employees, the overseas employer seconded such employees in relation to its business, paid their salaries, for whatever reason. Furthermore, during the secondment the terms of employment of the seconded employees were in accordance with the overseas company's policy who is their employer, and such seconded employees returned to their original places upon cessation of the secondment.
Accordingly, it was held that the assessee was service recipient of the overseas group company and the overseas company can be said to have provided manpower supply service, or a taxable service to the assessee, for the periods in question.
The Hon'ble Supreme Court's decision of holding the assessee liable to pay service tax under the erstwhile service tax regime will impact the secondment arrangements going forward. It would be necessary for Indian entities having seconded employees from overseas group companies to assess/re-assess the secondment arrangement and other allied agreements (if any) in view of the provisions of the extant Goods and Services Tax regime ad exposure of such arrangements to tax.
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