In light of the recent judgement pronounced by Honorable Supreme Court in the case of Northern Operating Systems Private Limited (NOS), CBIC has issued Instruction No. 05/2023-GST to prescribe the manner in which adjudication with respect to taxability in case of secondment has to be dealt. The said instruction emphasizes that, the cases involving secondment, should be intercepted on a nuanced examination i.e. based on the unique characteristics of each specific arrangement, rather than relying on any singular test.
In order to understand the same, let us understand the concept of a secondment:
Concept of Secondment
Secondment in general parlance means a temporary transfer of employee to another job or position, either, within the same organization or a different organization.
This concept is growing and gaining popularity owing to the entry of various Multi-National Companies in India in this ever-emerging global economy. Generally, there are three parties to a Secondment Agreement namely- the Employer (also known as the 'Seconder'), the Employee (also known as the 'Secondee') and the Host (organization where the transfer is made)
In most of the Secondment arrangements, the core question which needs to be addressed is the issue of taxability and to determine who shall be reckoned as an employer of the secondees.
Under the Indirect tax regime, the issue of taxability of secondment arrangements has always been a matter of dispute. However, the same has be dealt by the Supreme Court efficiently in its recent judgement in the case of Northern Operating Systems Private Limited (NOS).
We shall now discuss the decision pronounced by Honorable Supreme Court in case of NOS, as below:
Commissioner of Customs, Central Excise and Service Tax, Bangalore (Adjudication) v. Northern Operating Systems Private Limited
In this case, NOC had entered into multiple secondment agreements with its overseas group company (hereinafter referred to as 'OGC') whereby OGC would provide managerial and technical personnel on Secondment to NOS and after completion, they were required to return to OGC or another host country, as the case may be. These secondee employees were in control and management of NOS; but to protect their social security interests as well as retirement and health benefits, they remained on the payroll of OGC, which was later reimbursed by NOS without any mark-up on expenses.
Here, the contention of the revenue, on perusal of various documents was that the arrangement between NOS and OGC is that of a “contract for service”; and, the contention of the Assesse was that the arrangement is that of employer and employee and thus is a “contract of service”.
Apex Court on careful perusal of various documents in this case held that OGC is the employer of the secondees and the transaction between OGC and NOS is a “Contract for Service” and therefore the said service would be taxable and made the assesse liable to pay service tax for the relevant periods.
Impact of the above judgement under GST
Services, provided in course of employment, were excluded from the ambit of service tax under erstwhile regime. The said exclusion is followed under GST by way of an entry in Schedule –III of the Central Goods and Service Tax Act, 2017.
The decision laid down by Apex Court in case of Northern Operating Systems squarely applies under GST regime. Therefore, in case where the arrangement between the seconder and the Host organization is that of “Contract for Service”, the place of supply is in India and the location of the supplier is outside India, it would amount to “import of services”. Hence, the said transaction shall be subject to GST under reverse charge mechanism.
A precipitous interpretation of the Supreme Court's judgement was made by the GST Officers in cases involving secondments and cross border manpower agreements. It further led to a hasty burst of Investigations and Notices invoking Section 74 (1) of the CGST Act, 2017, without appreciating the peculiar facts of each case.
Clarification issued by CBIC vide above-referred Instruction
In light of the increase in number of cases that are being investigated following the Apex Court's Judgement, CBIC stepped in and provided the captioned instruction. A gist of such clarifications is summarized as below:-
- The Board noted that the issue of taxability of secondment of employees is not restricted to service tax regime. The same continues in GST regime as well. While Hon'ble Supreme Court in its judgement had inter-alia taken note of the various facts of the case like the agreement between NOS and OGC before deciding that the same shall be treated as taxable service of 'Manpower Supply' and Service Tax is applicable on the same.
- The Board, also referred to another Supreme Court judgement in case of Commissioner of Central Excise, Mumbai V. M/s Fiat India (P) Ltd in Civil Appeal 1648-49 of 2004 which observed that each case depends on its own facts and a close proximity between two cases is not enough, because sometimes a single significant detail may alter the entire aspect.
- The Board also stated that there can different types of secondment arrangements. In case the tax implication can be different depending upon the specific nature of the contract and the terms & conditions attached to it. The judgement pronounced by Apex Court in the case of Northern Operating Systems should not be applied mechanically in all cases involving secondment and that taxability if any, under GST should be determined on the merits & facts of the case.
- Also, it is categorically stated by the Board in the captioned instruction that, Section 74 (1) of the CGST Act, 2017 shall be invoked, only, if the specific element of–
- Fraud
- Willful mis-statement; or
- Suppression of facts to evade tax
Is present and that evidence pertaining the same shall be made a part of the show cause notice.
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