The recent judicial developments have led to certain legal uncertainties and contradictions for compliance in case of deputation and secondment. The factual matrix of employment will have to be determined based on legal jurisprudence.

India is quickly fastening itself to be not only the hub of IT and outsourcing services but also the epicenter of manufacturing activities. The Make in India initiative by the Government has led to various global businesses setting up manufacturing facilities in India leading to a significant increase in expat employment in the country. The multi-fold increase in Global Capability Centers / Global In-house Centers has also generated various expat employment opportunity in the country. In the said background, the decision of the Karnataka HC in Stone Hill Education Foundation v. Union of India and Others[1] and Supreme Court in Northern Operating Systems[2] has opened a number of issues in relation to legal compliances. In this article we will examine the liability to pay PF on salaries paid to expats based on recent judicial developments.

International Workers - Indian PF compliance

In October of 2008, Paragraph 83 was inserted in the Scheme[3] introducing the concept of an ‘International Worker’. The Scheme defines an International Worker as a person holding a foreign passport working for an establishment in India. The Scheme prescribed that PF shall be applicable to International Workers on their full salary without any wage ceiling (as applicable for domestic workers) and the components of salary to be included for calculation of salary must be the same as domestic workers[4]. The only exemption to the said contributions has been provided to employees from countries with whom India has signed a Social Security Agreement[5].

Valuation of perquisite for calculation PF for expats

Controversy on calculation of PF for IW arose when the Supreme Court pronounced the judgment in the case of Regional Provident Fund Commissioner (II), West Bengal and Ors. v. Vivekananda Vidyamandir and Ors[6] which stated that allowances that are payable to all employees cannot be excluded from wages for calculation of PF, there were a series of investigations initiated by the EPFO with respect to PF calculation including quantum of PF paid to International Workers. While by way of a Circular[7], EPFO had directed that there unless there is a prima-facie case, there should be no roving inquiries, various companies have received notices and inquiries with respect to quantum of PF paid for International Workers.

SC on nature of employment services by expats

The Supreme Court, subsequently, in the indirect tax case of Bangalore (Adjudication) v. Northern Operating Systems Pvt. Ltd.[8] held that secondment of employees is in the nature of ‘manpower supply’ and not ‘employment’. In other words, foreign employees working with an Indian company will not be considered to be employees of the Indian Company. This judgment of the Supreme Court has far reaching implications beyond the realm of indirect tax laws as if an International Worker is not considered to be an employee of an Indian Company, it unfastens the liability on the Company to contribute to PF of the International Workers. The Courts are yet to test the argument of dual employment and implications of the same in the case of International Workers.

While the Northern Operating Systems case has not been tested in the court of law in the context of social security payments to be made by Indian Companies, as this is a Supreme Court Judgement, it is the law of the land. This created uncertainty with respect to the position of law and the validity of the inquiries by the EPFO with respect to the payment of PF to International Workers.

Karnataka HC on applicability of PF provisions to expats

In April 2024, the Karnataka High Court, in the case of Stone Hill Education Foundation v. Union of India and Others[9] struck down Para 83 of the Employees Provident Fund Scheme, 1995 as unconstitutional and arbitrary as the provisions are violative of Article 14 of the Indian Constitution. The Court held that International Workers drawing higher salaries cannot be forced to contribute towards PF on their entire salary without any wage ceiling while a wage ceiling of fifteen thousand has been prescribed for domestic workers. It is a settled position of law that any High Court’s decision with respect to a central legislation has a binding effect on all other High Court’s in the country unless it is stayed or overruled by the Supreme Court. In light of the same, the provisions with respect to payment of PF on salaries of International Workers stand struck down as on date.

Considering the above judgement, Companies can explore the option of claiming refund of PF paid to International Workers. Companies can also contest any probing enquiries being by the EPFO with respect to the same before the court of law.

Way forward

The series of judicial precedents with respect to International Workers has created an inherent contradiction on the position of law with respect to PF payment to International Workers. On one hand there are ongoing inquires on the payment and quantum of payment of PF on the salaries of International Workers specifically questioning whether allowances have been included in the calculation of wages while discharging PF. On the other hand, the requirement to pay PF on the wages to International Workers has been struck down by the Karnataka High Court judgment and the employee status of an International Worker was disregarded by the Supreme Court in tax matters. This contradiction in the position of law creates ambiguity on the compliance requirements from the companies. More clarity is awaited when pending matters are heard by the Supreme Court.

Currently, the Code on Social Security, 2020 too is silent on the topic of International Workers. The position of law may be clarified once the Employees Provident Fund scheme under the new labour code is published.

[The authors are Partner and Principal Associate, respectively, in Corporate and M&A practice of Lakshmikumaran & Sridharan Attorneys, Mumbai]

1. [1] Stone Hill Education Foundation v. Union of India and Others [W.P. No. 18486 of 2012 decided on April 25, 2024],
2. [2] C.C., C.E. & S.T. - Bangalore (Adjudication) v. Northern Operating Systems Pvt. Ltd. - 2022 SCC OnLine SC 658
3. [3] GSR 706(E) dated 1st October 2008
4. [4] “Compliance in respect of International Workers – regarding”, Notification No. IWU/7(17)2009/ dated 25.05.2012
5. [5] Para 83 (1) “Excluded Employees”, The Employee Provident Scheme, 1952
6. [6] The Regional Provident Fund Commissioner (II), West Bengal and Ors. v. Vivekananda Vidyamandir and Ors, [AIR2019SC1240].
7. [7] Circular no. C-11/20/76/Misc./2020/CBE/TN/1027 dated February 02, 2020
8. [8] C.C., C.E. & S.T. - Bangalore (Adjudication) v. Northern Operating Systems Pvt. Ltd. - 2022 SCC OnLine SC 658
9. [9] Stone Hill Education Foundation v. Union of India and Others [W.P. No. 18486 of 2012 decided on April 25, 2024],