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Secondment is a strategic arrangement often used by global companies and conglomerates, involving the temporary transfer of employees within the same group of companies.  This practice, prevalent in multinational corporate structures, facilitates the sharing of specialized skills and expertise across different jurisdictions.  It serves to optimize resources and operational efficiency by leveraging the strengths of diverse global locations. The arrangement typically involves agreements between overseas and local entities, enabling the deployment of skilled personnel where they are most needed.  This process, aimed at fulfilling specific tasks or projects, has significant tax implications, affecting both direct (income tax) and indirect taxes (service tax/Goods and Services Tax) in the involved jurisdictions.

A typical secondment agreement involves three parties –

For example, an Indian company enters into an agreement with a foreign company for secondment of employees to address a manpower shortfall for a new project.  Under this arrangement, the foreign company’s employees are assigned to assist in the project.  Payment for these employees is managed either directly by the Indian company or through reimbursement to the foreign company. This collaborative effort allows the Indian company to fulfill its project needs with skilled personnel from its foreign partner.

Types of Secondment of Employees

Secondment of employees can be classified into two types:

1. Internal or Intra-Secondment: This involves the transfer of employees within the same company, such as moving staff from one department to another. For example, transferring employees from the Sales department to the Marketing department for a certain duration.
2. External or Inter-Secondment: This type occurs when employees are transferred to a different organization for a specified period. An example of this would be Company ‘A’ needing additional staff for a project and entering into a secondment agreement with Company ‘B’ to borrow some of its employees.

GST vis-à-vis Salary Under Secondment Arrangements

Under the GST framework, the employer-employee relationship has specific tax implications.  Services provided by an employee to his/her employer during the course of employment are not considered as a supply of goods or services, as per Schedule III of the Central Goods and Services Tax Act, 2017(‘CGST Act’).

This is further clarified in Entry 1 of Schedule III, which states that such services fall outside the GST scope.  In the context of secondment, the reimbursement of an employee’s salary does not constitute a supply, as it lacks the reciprocity typically required for a transaction to be considered a supply under GST.  Therefore, in situations where there is a clear employer-employee relationship, the services rendered by the employee are not subject to GST, as outlined in Schedule III of the CGST Act.

Employees often choose to remain under the employment of their original employer during a secondment, primarily to retain benefits like pension or other similar social securities.  Such secondment agreements typically involve the original employer, the employee, and the host employer, a practice known as “International hiring out of labor.”

During a secondment, the original employer and the host entity must jointly decide who will compensate the secondee.  If the secondee’s original employer pays them, there should be a clear agreement for the host to reimburse these costs. The possibility of adjusting the secondee’s remuneration to account for salary changes should also be considered.  Moreover, the two parties need to agree on handling additional payments like overtime, bonuses, and expenses, which could depend on the secondee’s productivity and existing payment arrangements. Typically, the secondee stays on the original employer’s payroll, maintaining employment rights and home country social security benefits, while working for the host.

The general understanding is that secondment arrangements fall outside the scope of the Goods and Services Tax (GST) Act, 2017.  This is because services provided by seconded employees to their employer are not considered goods or supplies and therefore, exempt from GST.  Similarly, secondment arrangements are not subject to GST as they involve an employee-employer relationship rather than a supply of goods or services.  However, the GST department has argued that providing employees from a parent company to an Indian entity should be considered a supply of services, potentially making GST applicable in such cases.

In instances where there is no explicit provision addressing manpower supply services, Section 13(3) of the Integrated Goods and Services Tax (IGST) Act serves as the residuary clause, thereby guiding the determination of the place of supply.

In such scenarios, the place of supply is deemed to be India, given that it corresponds to the location of the Indian entity availing the services.  Consequently, as per the provisions of Section 13(3) of the IGST Act, the place of supply is established within India.

Furthermore, since the place of supply is located within India and the supplier is situated outside India, this transaction may fall under the category of “import of services”.  As per the provisions outlined in Notification No. 10/2017-Central Tax (Rate) dated June 28, 2017, such imported services are subject to GST under the reverse charge mechanism.

In summary, when analyzing secondment transactions involving “manpower supply services” received from foreign group entities, the determination of GST applicability hinges on identifying the place of supply. With Section 13(3) of the IGST Act guiding this determination as the residuary clause, the transaction is deemed to have its place of supply in India. Subsequently, it qualifies as an “import of services,” making it liable to GST under the reverse charge mechanism, as specified in Notification No. 10/2017-Central Tax (Rate) dated June 28, 2017.  However, the moot point remains to be examined as to whether a secondment arrangement specific to facts is actually in the nature of manpower supply service or not.

Supreme Court Decision – Facts on Secondment of Employees

In the Supreme Court’s judgment regarding the secondment of employees, the case involved the Commissioner of Customs, Central Excise & Service Tax (“CC, CE & ST”) -Bangalore and M/s Northern Operating Systems Pvt. Ltd. (the Assessee). The Assessee, based in India, had an agreement with its overseas group companies to provide IT and back-office support.  Employees from these overseas entities worked under the guidance and control of the Assessee along with letter of understanding being issued to such secondees specifying the terms of employment. Their remuneration, including salaries and benefits, was initially paid by the overseas entity, and subsequently reimbursed by the Assessee.

Therefore, the question was whether the Assessee was liable to pay the service tax on the amount reimbursed by the Assessee to the overseas entities.

Supreme Court Judgement on the Secondment of Employees

In the Supreme Court’s decision on employee secondment, the court ruled that the overseas group entities are the actual employers of the seconded employees.  The Supreme Court affirmed the application of the Reverse Charge Mechanism (RCM) on the Assessee for the secondment of employees.  Contrary to widespread expectation, the ruling upheld Assessee’s liability to pay service tax for the services rendered by seconded employees. This conclusion was based on several factors:

1. Payment of Benefits: The seconded employees in India were officially part of the overseas group entity’s payroll. The foreign entity was responsible for their salaries and social security benefits.  Despite the Indian company’s operational control, this setup indicated a ‘contract for service’ rather than a ‘contract of service’.
2. Specialized Services: The arrangement focused on specialized services, with the overseas entities sending highly skilled personnel as needed by the Indian company.

• Repatriation: The agreement between the Indian company and the seconded employees did not classify them as permanent employees of the Indian firm. Post-secondment, the employees were to return to their original overseas employers and the terms of employment even during the secondment period were in accordance with the overseas company policy.

1. Test of Control: Test of control during the secondment period was not conclusive proof to decide employer-employee relationship.
2. Currency of Benefits: Compensation, including salaries and benefits, was paid in foreign currency, supporting the notion that the seconded employees remained part of the overseas entities.

This judgment sheds light on the nature of secondment arrangements and their interpretation in the context of employer-employee relationships.  Although the judgment was rendered during the erstwhile law of service tax, the principles should continue to apply considering similar provisions/ interpretational issues under GST.

CBIC Clarification on Secondment of Overseas Employees to Indian Companies and Section 74(1) of CGST Act

Following the judgment by the Honorable Supreme Court, numerous GST departments had initiated proceedings by issuing Show Cause Notices to companies, demanding the payment of GST under the Reverse Charge Mechanism for secondment of employees, categorizing it as manpower supply.  To offer clarity regarding the secondment of employees by overseas group companies to Indian companies, the Central Board of Indirect Taxes and Customs (CBIC) issued Instruction No. 05/2023-GST on December 13, 2023.  This instruction also sheds light on the interpretation and application of Section 74(1) of the CGST Act in light of the Supreme Court’s ruling in the case of Northern Operating Systems Private Limited. Here is a breakdown of the key points highlighted in the CBIC instruction and their implications:

1. The instruction refers the Supreme Court’s verdict on May 19, 2022, in the case of CC, CE & ST, Bangalore vs. Northern Operating Systems Private Limited. This ruling delved into the nature of employee secondment from overseas entities to Indian firms and its implications for Service Tax.
2. CBIC underscores the necessity for a nuanced examination based on the unique characteristics of each specific secondment arrangement. It warns against applying a blanket interpretation of the judgment to all cases and stresses the importance of a case-specific analysis.
3. The instruction cites a previous observation by the Supreme Court in the case of Commissioner of Central Excise, Mumbai Vs. M/s Fiat India (P) Ltd., emphasizing that each case hinges on its own facts. A superficial resemblance to another case is not determinative, and the distinctiveness of each case should be weighed in while determining tax implications.
4. Addressing concerns over the mechanical invocation of the extended period of limitation under Section 74(1) of the CGST Act in cases involving secondment, the instruction clarifies that this section can only be invoked in the presence of evidence of fraud, wilful misstatement, or suppression of facts aimed at evading tax. Mere non-payment of GST does not suffice to trigger this provision.
5. Field formations advised to meticulously consider the unique factual circumstances of each case involving secondment. The CBIC discouraged the mechanical invocation of Section 74(1) and underscored the necessity for specific evidence of fraud or wilful misstatement before issuing show cause notices.

Conclusion

The recent instruction by the CBIC offers valuable guidance on the nuanced examination of secondment arrangements and the application of Section 74(1) of the CGST Act. As businesses navigate the complexities of cross-border employment structures, this clarification seeks to ensure a fair and evidence-based approach to tax implications under the GST regime. While the department has not explicitly stated that secondment of employees cannot be considered “manpower supply,” it stresses the importance of evaluating each case individually based on its facts. It would be critical for taxpayers to ensure that secondment agreements are entered into considering the local laws and ensure that the documentation represents on ground reality as also ensuring that the terms of secondment arrangement are such that the tax exposure under the GST provisions are minimized.