Every deputation and secondment is not manpower supply and each case is based on its unique factual matrix which is required to be determined based on legal jurisprudence.

While emerging as a global manufacturing and outsourcing hub, India has also attracted a lot of expats for various talent opportunities in recent years. The boom in Global Capability Centres (GCCs) or Global In-house Centres (GICs) has further widened India’s talent pool to sustain multiple functionalities like Audit, Finance, HR, Marketing, Analytics, and other functions. The expats are helping companies in relation to outsourcing functions and also in expanding Indian operations to meet the local demand. The decision of the Supreme Court in Northern Operating Systems[1] (‘NOS’) has opened number of issues in respect of the nature of services provided by expats in India.

The tax investigative authorities were quick to act on the observation of the Supreme Court and have initiated pan-India roving inquiries/investigations in relation to the expenditure incurred for the expats without examining the factual matrix unique to each secondment arrangement. Aggrieved by such inquiries/ investigations, various companies made representations before the Central Board of Indirect Taxes and Customs (CBIC). The CBIC, considering the representations made by the Indian companies and the improper application of the decision by many field formations, vide Instruction No. 5/2023-GST dated 13 December 2023 (‘Instruction’) clarified not to follow cookie-cutter approach in the matters related to secondment. The CBIC clarified that the decision in the NOS Case was very fact specific and therefore, tax implications may differ depending upon the specific nature of the contract and employment terms attached to it. The High Courts of various jurisdictions[2] relied upon the Instruction and have granted stay order to various organizations in the cases where show cause notices have been issued for alleged evasion of tax pertaining to secondment of employees.

This article discusses the observation of the Supreme Court in NOS case, recent investigations on the issue, CBIC Instruction, interim orders passed by different High Courts on factual matrix of the cases, legal position under the GST law and way forward.

GST legal position: Services supplied by an employee to the employer is exempt from GST

Section 7(2) read with Para 1 of Schedule III of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) provides that the services provided by an employee to the employer in the course of or in relation to his employment shall neither be treated as supply of goods nor as a supply of services for the purposes GST levy. Here, question arises as to who shall be considered as an ‘employee’ and whether the secondees/expats deputed in India from overseas will also be considered as an employee of the host Indian company?

Test / factors to determine the employee-employer relationship

The Hon’ble Supreme Court and various High Courts have repeatedly laid down various tests or factors to determine the relationship of employer-employee or master-servant. The said tests/ factors to be considered are discussed below:

1. Right to supervise/ Control Test: To determine the relationship between master and servant, prima facie there shall exist the right in the master to supervise and control the work. The master’s right should not only be limited to direct the work to be done but also the manner in which the work should be done. Thus, the master shall be in control of execution of the work.[3] 
2. Economic reality test: Whether the employer has economic control over the worker’s subsistence, skill and continued employment?
3. Whether the person employed is integrated into the employer’s business or is a mere accessory thereof.
4. Person employed is on the payroll of host company or not. Who pays the wage or other remuneration to the person employed?
5. Who owns the assets with which the work is to be done? Who ultimately makes the profit or loss?
6. Person who has engaged himself to perform services whether is performing them as a person in business or on his own account.[4]

Further, the Supreme Court in the matter of Silver Jubilee Tailoring House v. Chief Inspector of Shops & Establishments[5] has held that to determine whether a contract is ‘for’ service or ‘of’ service, the Courts can perform a balancing operation weighing up the factors which point in one direction and balancing them against those points that are in opposite direction. Thus, the aforesaid factors can be considered by the Courts and after performing balancing act and weighing all the relevant factors, conclusion can be made depending upon the unique factual matrix of every case.

These factors remain relevant even after NOS case because the Supreme Court has specifically mentioned that the court observation is based on specific facts of the case. To understand the rationale behind the taxability of secondment in NOS case it is relevant to understand the unique facts of the matter relevant for current discussion.

Application of aforesaid tests/factors on NOS case:

We will now delve into the specific factual matrix under which the transaction was held taxable.

The NOS/assessee was assigned certain specific task by the overseas group company. However, NOS lacked right talented pool to perform the assigned task and to meet the expectations of the overseas group company. Therefore, the overseas group entity deputed its own employees in India with NOS for the task to be performed in turn being delivered to the overseas company. The wages and other remuneration of the deputed employees were paid to them by the overseas entity in foreign currency which then was reimbursed by NOS to the overseas entity against the debit note issued by the overseas entity. The employees were on the pay roll of the overseas company and were providing services in relation to the tasks assigned to NOS which were then ultimately provided to the overseas company. 

Now let’s apply the test/ factors discussed above to determine who is the employer of the seconded employees in the facts of NOS Case.

On performance of the balance act and weighing all relevant factors, it can be observed that in the NOS case, though the assessee had operational and functional control but all other relevant tests/ factors such as economy test, payroll, liability to pay wages, work done ultimately for the overseas entity etc., concludes that the overseas company is the employer of the secondees. Further, since NOS was deriving economic benefit from the secondment arrangement, the same amounts to import of manpower services from the overseas company.

Here, it is to be noted that as the Hon’ble Supreme Court has pointed out that its observations are specific to the factual position of the case, the observations made in the NOS case does not have universal application. Further, it is pertinent to note that the said court has not appreciated the scope of dual employment, working for subsidiary for development of Indian market strategies, specific exemption provided in GST, deemed valuation provisions under GST, reciprocity of arrangement, etc.

Factual differentiation of NOS case

While the judgment of the NOS case is fact specific and decides tax liability specific to the unique arrangement between the parties thereto, it did not stop the flood of investigation by many field formations against many Indian entities entering into secondment arrangements with overseas group entities. Some of the investigations initiated ahead of the decision of NOS case were concluded in issuance of show cause notices for alleged evasion of tax under Section 74(1) of the CGST Act. Aggrieved by the same, various representations have been made before the CBIC and consequently, the CBIC, vide the Instruction clarified the applicability of the principle laid down in the NOS case. It clarified that the decision of the Supreme Court is based on the facts of the case and the Supreme Court has also emphasized on examination of unique characterization of each specific arrangement, rather than relying on a singular test. Therefore, the decision of the Supreme Court in the NOS case should not be applied mechanically in all the cases and careful consideration of different facts including terms of contract is required in each case. The CBIC Instruction also clarified that Section 74(1) of the CGST Act cannot be invoked in the case of mere non-payment of tax.

Relying on the Instruction, the High Court of Karnataka, Punjab and Haryana, and Delhi have granted stay order on the investigations initiated or SCN issued pertaining to evasion of tax on secondment of employees in India from overseas group companies.

The factors such as control by the host Indian entity, secondee being on the payroll of the Indian host entity, payment of wages either fully or partly by the Indian host entity, skill being utilised on the work assigned by the Indian host entity etc, are the distinguishing factors that can distinguish the facts of any secondment arrangement from the facts of the NOS case.

Way forward

The secondment and deputation arrangement for GIC, GCC and manufacturing operations are required to be reviewed in light of the legal jurisprudence laid down by the Supreme Court and as per appropriate valuation mechanism provided under the GST laws.

The pending litigation of GST and service tax needs to be examined in light of the aspects discussed above. The factual position, evidence and legal arguments are required to be taken at appropriate forum. The Tribunals and lower authorities blindly following decision in NOS case needs to be made aware of distinguishing factors of each case. Secondment arrangement in future needs to be examined taking into consideration the factors laid down by the Court of law, and legal jurisprudence in relation to employer-employee relationship, to mitigate the tax risk.

The year 2024 will be a landmark year as the issue of secondment may be concluded by the Courts considering the pending issue before the Hon’ble Supreme Court in the matter of Komatsu India Pvt. Ltd.[6] and pending cases before the High Courts[7].

[The authors are Partner and Senior Associate, respectively, in the Indirect Tax Advisory practice at Lakshmikumaran & Sridharan Attorneys, Mumbai]

1. [1] CE & ST & Ors. v. Northern Operating Systems Pvt. Ltd., AIR 2022 SC 2450
2. [2] Alstom Transport India Limited v. State of Karnataka, 2023 (11) TMI 210; Metal One Corporation India Pvt. Ltd. v. Union of India & Ors., 2023(11) TMI 1062
3. [3] Dharangadhra Chemicals Works Ltd. v. State of Saurashtra, 1957 SCR 158
4. [4] Lee Ting Sang v. Chung Chi-Keung, (1990) 2 AC 374
5. [5] 1974 (1) SCR 747
6. [6] Commissioner of GST and CE Chennai v. Komatsu India Pvt. Ltd., 2022-VIL-97-SC-ST
7. [7] Supra Note 2