While this is a judgment under the pre-GST service tax laws, the legal provisions analyzed in this judgment are similar to corresponding provisions under GST and to that extent, this judgment has the potential to re-open the Pandora box of service tax/GST issues on secondment/deputation of manpower, whether from outside India to India or within India.
Facts of the case
The respondent, i.e., Northern Operating Systems Pvt. Ltd. (Assesses), had contracted with its overseas group entities for rendering back-office support and information technology support services. Under the contract, the overseas entity was required to second its employees (Seconded Employees) to the Assesses as per the Assessor’s requests. The Seconded Employees were required to act under the directions and control of the Assesses. However, the salary, bonus/incentives, social security, and welfare benefits of the Seconded Employees were paid to them by the overseas group entity. Such expenses were subsequently reimbursed by the Assessee to its overseas entity.
The liability to pay service tax on such reimbursements by the Assessee was in question before the Supreme Court (SC).
Provisions under consideration of the SC
Prior to 2012, ‘manpower recruitment or supply agency’ services were specifically defined as a taxable service under the Finance Act, 1994. Thereafter, with the implementation of the negative list regime from 01.07.2012, the definition of ‘service’ was expanded to encompass any activity carried out by one person for another (other than specified exclusions).
However, services provided by an employee to an employer were excluded from the definition of service under Section 65B (44) (b) of the Finance Act, 1994. This exclusion of services of an employee to employer from the tax net continues even under the GST regime, as per Entry 1 of Schedule III of the Central Goods and Services Tax Act, 2017.
The framework of analysis adopted by the SC to ascertain amenability to service tax of the reimbursements was to identify the “real” employer of the Seconded Employees. If Assessee were to qualify as the” real” employer, there would be no liability of service tax on the Assessee. However, if the overseas group entity was held to be the” real” employer of the Seconded Employees, it would be tantamount to provision of services by the overseas group entity to the Assessee.
Judgment
Observing that no singular determinative test, could be laid down to conclude vis a vis employer-employee relationship, the SC held that such examination must be based on a multitude of factors. Thus, adopting a “substance over form” approach to identify the “real” employer, the SC undertook a detailed review of –
(1) master services agreements between the Assessee and the overseas entities.
(2) secondment agreements.
(3) letters of understanding issued to the Seconded Employees by Assesee.
On the basis of this analysis, the SC concluded that the overseas group entities were the “real” employers of the Seconded Employees, in light of the following factors: –
| 1 | Lien on employment of Seconded Employees vested with the overseas entity – The SC noted that, the Seconded Employees continued to be on the foreign entity’s payroll. Further, all salary payments and social security benefits were paid by the foreign entity. While the operational and functional control was exercised by the Assessee over the seconded employees only for the secondment period, such control was necessary to ensure performance of the duties entrusted to them. However, it was merely facial. Thus, the arrangement was a” contract for service” and not a “contract of service”. |
| 2 | Specialised nature of services – The Court took cognizance of the “vital fact” that the nature of business of the overseas group entities was to secure contracts which required highly trained and skilled personnel. Thus, the Seconded Employees possessing the specific skill sets were being deployed to the Assessee which is also evident from the nature of the perks and salary paid. Thus, it was observed that the Seconded Employees were seconded to the Assessee for the use of their specific skills. |
| 3 | Repatriation back to overseas entity – The letter of understanding between the Assessee and the Seconded Employees nowhere stated that the Seconded Employees would be treated as employees of the Assessee after the period of secondment. Further, the Assessee could not terminate the employment of Seconded Employees on cessation of the secondment period; the Seconded Employees had to be repatriated to their overseas employer and could be sent elsewhere on secondment. Thus, the Assessee was not empowered to terminate the employment of the Seconded Employees or even amend their terms of employment in an adverse manner. |
| 4 | Salary/allowances in foreign currency – The fact that salary package, allowances, etc., were all expressed in foreign currency and separate allowances were granted for working in India further buttressed that the Seconded Employees were the employees of the overseas entity. |
Accordingly, it was held that the Assesses was the service recipient of manpower recruitment and supply services provided by the overseas entity, vis a vis the employees it seconded to the Assesses, for the duration of their deputation or secondment.
Our Comments
The subject decision is significant as it upsets the previous jurisprudence on the issue of taxability of reimbursements for seconded employees. Various indirect tax Tribunal judgments in the past had held that services rendered by seconded employees are not in the nature of manpower supply services. Practically speaking, indirect tax authorities had almost given up the fight vis a vis secondment/deputation of manpower; but this judgment may reinvigorate them and lead to greater scrutiny of all secondment arrangements during upcoming GST audits.
This article is only a knowledge-sharing initiative and is based on the Relevant Provisions as applicable and as per the information existing at the time of the preparation. In no event, RMPS & Co. or the Author or any other persons be liable for any direct and indirect result from this Article or any inadvertent omission of the provisions, update, etc if any.
For more information please go below attached order copy : –
https://main.sci.gov.in/supremecourt/2021/14156/14156_2021_2_1501_36077_Judgement_19-May-2022.pdf
Published on: April 9, 2024