INTRODUCTION
A lot of Multinational Companies (MNCs) have the practice of seconding/deputing one or more of its employees to its sister companies within and outside their country. Such transactions have come under the scanner of the Department wherein demand for service tax was raised.
MNCs started receiving demands from Department for payment of GST under reverse charge mechanism for employees seconded from group companies outside India.
Supreme court in the case of Northern Operating System Private Limited (NOS), passed a landmark ruling by considering the secondment of expatriates as import of “Manpower Supply Services.” Thereby it requires the Indian Company to pay tax on such transactions under Reverse Charge Mechanism (RCM).
BACKGROUND
In the current business environment, secondment of employees by one group entity to another is a widespread practice. In the present case, overseas group entities seconded several employees to its Indian entity. The employees continued the payroll of the overseas entities for continuity of employment benefits but were operationally controlled, directed and supervised by the Indian entity in terms of its separate contract with seconded employees. The seconded employees received their salary, bonus, social benefits, out-of-pocket expenses, and other expenses from the overseas entities. The overseas entities in-turn recovered these costs (without any markups) from the Indian entity.
The Indian revenue authorities alleged that the secondment forms manpower recruitment or supply agency services and hence the Indian entity should have discharged service tax on the same.
UNDERSTANDING SECONDMENT
Secondment is a temporary phase of arrangement where an employee is transferred from one job to another, usually in the same group of company for a definite period for the mutual benefit of all parties involved in the arrangement. There are various concerns associated with secondment of employees like payroll, employer- employee relationship status, control over the employee, income tax, indirect Tax and several related issues.
INDIAN COMPANY LIABLE FOR SERVICE TAX ON SECONDED EMPLOYEES
As per service tax rules, import of service is any service provided from outside India and received in India. Tax on such services is known as tax on import of services and the service receiver is liable to pay service tax on import of services.
The Supreme Court of India has held that, in certain situations, service tax is payable on the secondment of employees to India from overseas companies where the Indian company has had the benefit of expert services for the period of the secondment.
The Indian company receiving human resources can be liable to pay service tax on the salaries of seconded employees reimbursed to the overseas company.
SUPREME COURT RULING:
The Supreme Court after consideration of the relevant tax provisions and agreements executed between the group entities ruled that the Indian entity was the service recipient of the overseas entities, which can be said to have provided manpower supply services or a taxable service.
This is a significant ruling which is likely to affect several multinational groups which have entered or plan to enter secondment arrangements with their Indian entities. The Supreme Court did consider a “substance over form” approach for deciding the employer-employee relationship. However, some of the ‘negative’ factors considered by the Supreme Court while pronouncing its ruling are likely to have a far-reaching impact in evaluating similar arrangements.
Further, while the present ruling was given under indirect tax, it is likely to also have an impact on evaluating these arrangements from a direct tax perspective (for e.g., creation of permanent establishment, taxability of amounts cross charged to the Indian entity, etc.)
The decision of whether an arrangement between group entities is in nature of manpower supply services or not requires evaluation of who is the “Real employer.” If it is concluded that the overseas entities are the employers, the arrangement qualifies as workforce supply services and in-turn is subject to service tax. On the other hand, if it is concluded that the Indian entity is the employer, the arrangement is outside the purview of service tax.
There is not one single seminal factor to decide the employer-employee relationship. The key is to follow a substance over form approach which requires a close look at the terms of the contract or the agreements.
Implications under GST:
Besides the decision was taken under the erstwhile law, the practice of wide applicability of GST as well as secondment and deputation continue. Th GST applicability is figured out based on the place of supply of power services received from foreign entities.
Though the Supreme court judgement has relevant assess on the stands taken under other laws including GST, it deals with the applicability of service tax.
For this, Section 13(3) of IGST Act, being the residuary clause would apply since there is no specific clause relating to manpower supply services. Thus, the place of supply would be India (being location of the Indian entity). Further, since place of supply is in India and the location of supplier is outside India, it would amount to “import of services” and liable to GST under reverse charge mechanism.
(Notification No. 10/2017-Central Tax (Rate) dated 28th June 2017). In addition to the above, going by the principle of the Supreme Court decision, if the arrangement of the transaction writes down existence of secondment of employees, GST could be demanded. Further, if it can be proved that there is quid pro quo to the Indian entity (being a recipient of ability of such expats), the department could demand tax on the same.
Actions points for taxpayers:
Considering the Supreme Court order, it is imperative for taxpayers to re-look into the terms of agreements with their expats and seconded employees. Employment agreements may be entered into with the expats to set up an employer-employee relationship between the Indian entity and the expats. It is suggested to obtain professional opinion and guidance before entering into secondment agreements upon amendments of taxpayers.
Conclusion:
The Supreme Court order has prompted the Department to demand and issue notices to taxpayers relating to secondment/deputation of employees. It is seen that notices are being issued to MNCs even where employment agreements are entered into with Indian companies. Thus, for taxpayers who have received notices, it is important to analyse the contract in detail and check if the SC judgement applies to them or not. Given the multitude of implications, a clarification from the Government would be highly expected.
(This article is written by Vinishadevi, audit executive at R V K S And Associates)