Import of services and reimbursed employee costs under GST

Background

Under GST law, GST is applicable on import of services in hands of recipient in India under reverse charge mechanism[RCM]. Import of services is wherein the supplier of service is outside India, recipient of service is in India and the place of supply of service is determined to be in India. Further Schedule I also sets out that import of services from related persons [such as group companies]in course of business is deemed to be a supply, even when done without consideration.

Schedule III to GST law, on the other hand, it sets out the activities which are treated as neither a supply of goods nor as supply of services. Therein at entry 1 it covers the services by employee to employer in course of employment.The intention is to exclude from tax net services by employee to employer.

It is significant that even under erstwhile service tax regime, services by employee to employer have been excluded from tax net. Same position continues under GST as well. Accordingly there has been the prevalent understanding that the employee costs being paid towards deputed employees from group entities located outside India also should not be treated as import of services nor to be taxed under RCM.

Further in numerous judgements in past including Nissin Brake India Pvt. Ltd. Vs. Commr of C. Ex., Jaipur-I (2019 (24) G.S.T.L. 563 (Tri. – Del) .maintained in Commissioner v. Nissin Brake India Pvt. Ltd. - 2019 (24) G.S.T.L. J171 (S.C.)] it was held that employment of employees on deputation from foreign parent company. Payment of salaries and perks by foreign parent company under dispatch agreement not liable to pay Service Tax as recipient of service under reverse charge mechanism. No supply of manpower service rendered by foreign parent company as no consideration paid to parent company for deployment of employees - Deputed employees working under control, direction and supervision of appellant who already deducted tax at source from the salary and other perks given to the employees - Employee-employer relationship present between appellant and deputed employees.

In a related development, the recent judgement by Supreme Court in Northern Operating Systemscase[Civil Appeal No. 2289-2293 of 2021] has led to questions on tax implications for employee services more specifically RCM in context of deputation of foreign company employees to Indian entitiesesp when done between group companies.

In this backdrop, a question which arises is whether merely by such recovery of employee costs by the foreign company would lead to attracting GST to be paid as import of services under reverse charge by the Indian entity where such foreign employees are deputed.

In this article, the author has examined the recent decision in Northern Operating supra and its implications under GST.

Recent decision of Apex Courtin Northern Operating Systems

Facts

The assessee obtained from its group companies directly or by transfer, service of expatriate employees who were paid salaries by the assessee in India, for which tax was deducted and paid to statutory benefits – such as provident fund. The assessee also remitted contributions to be paid toward social security and other benefits on account of the employees, under the laws applicable to the group companies abroad. In these circumstances, it was held by CESTAT that those seconded to the assessee working in the capacity of employees and receiving salaries by group companies were only for disbursement purposes. The employee-employer relationship existed and that the activity, therefore, could not be termed as "manpower recruitment and supply agency." It was held that that the overseas group companies which had contracted with the assessee were not in the business of supply of manpower and that the assessee was not a service recipient. On the strength of this reasoning, the assessee's appeals were allowed and the revenue's appeals were rejected.

Issue

Revenue contention that on a combined reading of the materials on record clearly establish that the arrangement between the assessee and its overseas group companies apparent through the various conditions spelt out in different documents was one of a contract for service. In other words, what was provided to the assessee by the overseas counterpart or group companies were services through its employees.

Analysis and Conclusion by Apex Court

• The assessee had operational or functional control over the seconded employees; it was potentially liable for the performance of the tasks assigned to them. It paid (through reimbursement) the amounts equivalent to the salaries of the seconded employees, has two consequences: one, that the seconded employees continued on the rolls of the overseas employer; two, since they were not performing jobs in relation to that employer's business, but that of the assessee, the latter had to ultimately bear the burden.[para 50]
• This court has consistently applied one test: substance over form,requiring a close look at the terms of the contract, or the agreements. [para 51]
• For all appearances, the seconded employee, for the duration of secondment, is under the control and direction of the assessee. What is crucial, is that they are entitled to social security benefits in the country of their origin. Furthermore, the reality is that the secondment is a part of the global policy – of the overseas employer loaning their services, on temporary basis.[para 53]
• The letter of understanding between the assessee and the seconded employee does not state that the employee would be treated as the former's employees after the seconded period. On the contrary, they revert to their overseas employer and may in fact, be sent elsewhere on secondment. The salary package, with allowances, etc., are all expressed in foreign currency.[para 54]
• The mere payment in the form of remittances or amounts, by whatever manner, either for the duration of the secondment or per employee seconded, is just one method of reckoning if there is consideration. The quid pro quo for the secondment agreement, where the assessee has the benefit of experts for limited periods, is implicit in the overall scheme of things.[ Para 58]
• It is held that the assessee was, for therelevant period, service recipient of theoverseas group company concerned, which can be said to have provided manpower supply service, or a taxable service.[para 61]

Comments and GST implication

The latest judgement has concluded it is manpower supply service by a foreign group company, though the employees on secondment by group company and under control direction of Indian entity. Accordingly it has heldRCM is applicable on such employees costs under ST.

In such a scenario, based on this judgment, it is expected that the dept could actively issue demands not just under Service tax but post 1.7.2017 demands of GST[along with interest and penalty]can be expected to be madeon employee costs paid to foreign entities.

Action points under GST

The action points under GST based on the latest development are as under:

1. The analysis of reimbursed expenses paid to group entities located outside India be doneesp employee related expenses.Contracts entered would be of paramount importance as it sets out the intention of the parties and to be ensured to capture actual facts of transactions.
2. Get assessed by competent professional if the employees costs paid by Indian entity to abroad can be considered to be incurred as part of employer- employee relationship and excluded from the tax net.
3. If it is arrived at conclusion to be supply of service[and not employment services], then tax may require to be paid under reverse charge by the recipient Indian entity.
4. Credit of tax paid under RCM can be availed to extent used to make taxable supplies/exports/supplies to SEZ unit or developer.

Conclusion

In the paper writers' view, entities would do well to examine the arrangements with the overseas companies in respect of the foreign employees, to ensure that there is no exposure of the tax liability along with interest and penalty at later date. To this end, it is suggested to get a detailed review of the agreements done with foreign entities for such employee deputations.

The author can also be reached at roopa@hiregange.com