Karnataka HC granted ad-interim stay on adjudication proceedings on levying IGST on secondment of manpower

The Hon'ble Karnataka High Court in the case of M/s Alstom Transport India Ltd. v. State of Karnataka [Writ Petition No. 23915 of 2023 dated July 09, 2024] passed an ad-interim stay order on the adjudication proceedings seeking the levy of the Integrated Goods and Service Tax ("IGST") on the salaries paid directly to expatriates and held that that Circular No. 210/4/2024-GST dated June 26, 2024("the Circular") might have bearing on stand of Assessee insofar show cause notice ("SCN") is concerned. Therefore, without getting into merits of matter, the Assessee was to be relegated to stage of reply to SCN and authorities concerned could take note of applicability of Circular to facts on hand.

Facts:

M/s Alstom Transport India Ltd. ("the Petitioner") was engaged in the business of designing, manufacturing, supplying, installing and commissioning of goods relating to railways and metro projects. The Petitioner received the Show Cause Notice dated September 26, 2023 ("the Impugned SCN") issued by the Revenue Department ("the Respondent") demanding IGST of Rs.59,57,19,228/- along with interest and penalty in accordance with the case of the Supreme Court, in the case of M/s. Northern Operating Systems Private Limited [CA No. 2289-2293/2021],and held that the secondment of employees by the overseas entity qualifies as 'manpower supply services' provided to the Indian entity, and therefore, the salaries and other expenses recovered from the Indian entity is exigible to service tax on a reverse charge basis.

During the period from July 2017 and March 2023, employees of overseas group entities (expats) were on the payroll of the Petitioner in India. Hence, the Petitioner had entered into employment agreement with the expats.

Further, during the period of employment with the Petitioner, the salary was paid directly by the Petitioner. On parallel, the overseas group entity continued to provide social service benefits available at home country to the expats employees and the cost incurred in respect of such benefits were recovered as reimbursements from the Petitioner.

The Petitioner contented that the payment of salary made to the expats does not attract IGST as the same does not amount to manpower and recruitment supply of services from the overseas group entities. The value of supply and services by the overseas entities is to be determined by taking the value prevalent in the invoices, which would be open market value terms of Section 15(4) of the Central Goods and Services Tax Act, 2017 ("the CGST Act").

Hence, aggrieved by the Impugned Notice, the Petitioner filed present the writ petition before the Hon'ble High Court of Karnataka.

Issue:

Whether the services from the Expats qualify as supply of manpower and attract GST?

Held:

The Hon'ble Karnataka High Court in Writ Petition No. 23915 of 2023 held as under:

· Observed that, as perthe Circular,where the foreign affiliate is providing certain services to the related domestic entity, and where full Input Tax Credit ("ITC") is available to the said related domestic entity, the value of such supply of services declared in the invoice by the said related domestic entity may be deemed as open market value in terms of second proviso to Rule 28(1) of Central Goods and Services Tax Rules, 2017 ("the CGST Rules"). The relevant para of the circular is quoted below:

"3.6 In case of import of services by a registered person in India from a related person located outside India, the tax is required to be paid by the registered person in India under reverse charge mechanism. In such cases, the registered person in India, is required to issue self-invoice under Section 31(3)(f) of CGST Act and pay tax on reverse charge basis.

3.7 In view of the above, it is clarified that in cases where the foreign affiliate is providing certain services to the related domestic entity, and where full input tax credit is available to the said related domestic entity, the value of such supply of services declared in the invoice by the said related domestic entity may be deemed as open market value in terms of second proviso to rule 28(1) of CGST Rules. Further, in cases where full input tax credit is available to the recipient, if the invoice is not issued by the related domestic entity with respect to any service provided by the foreign affiliate to it, the value of such services may be deemed to be declared as Nil, and may be deemed as open market value in terms of second proviso to rule 28(1) of CGST Rules."

· Further, in cases where full ITC is available to the recipient, if the invoice is not issued by the related domestic entity with respect to any service provided by the foreign affiliate to it, the value of such services may be deemed to be declared as Nil and may be deemed as open market value in terms of second proviso to Rule 28(1) of CGST Rules.

· Held that, the Petitioner was referred to the stage of reply to the SCN without even considering the merits and permitted to reply within period of three weeks. Thereafter, the Respondent can adjudicate regarding the reply within the period of eight weeks.

Our Comments:

Reliance is place on a pari materia case of the Hon'ble Supreme Court CC, CE & ST, Bangalore (Adj.) v. Northern Operating Systems Private Limited (NOS) [ Civil Appeal No. 2289-2293 of 2021 dated May 19, 2022] held that the assessee was, for the relevant period, service recipient of the overseas group company concerned, which can be said to have provided manpower supply service, or a taxable service, for the two different periods in question in relation to which show cause notices ("SCN")were issued. Hence, the Hon'ble Supreme Court held that the Indian branch was the recipient of services in cases of secondment agreements, and would be liable to pay service tax on the same.

The Central Board of Indirect Taxes and Customs (CBIC) issued an important Instruction No. 05/2023-GST dated December 13, 2023, in accordance with the judgment of the Hon'ble Supreme Court in the case of Northern Operating Systems Private Limited (NOS)(supra). The instruction pertains to the nature of the secondment of employees by overseas entities to Indian firms and its Services Tax implications.

It has been emphasised that there may be a difference in arrangements with respect to the secondment transaction, resulting in a difference in tax implication. Accordingly, the NOS decision should not be applied mechanically or without application of mind. Each and every case shall be carefully evaluated, taking into consideration the different factuals, especially the contractual terms, to determine taxability under GST in consonance with the principles laid down by the Supreme Court.

It has also been represented by the industry that in many cases involving secondment, the field formations are mechanically invoking extended period of limitation under section 74(1) of the CGST Act. Therefore, from the perusal of wording of section 74(1) of CGST Act, it is evident that section 74(1) can be invoked only in cases where there is a fraud or wilful mis- statement or suppression of facts to evade tax on the part of the said taxpayer. Section 74(1) cannot be invoked merely on account of non-payment of GST, without specific element of fraud or wilfulmis-statement or suppression of facts to evade tax. Therefore, only in the cases where the investigation indicates that there is material evidence of fraud or wilful misstatement or suppression of fact to evade tax on the part of the taxpayer, provisions of section 74(1) of CGST Act may be invoked for issuance of SCN, and such evidence should also be made a part of the SCN. Hence, the extended period of limitation, as prescribed under Section 74 of the CGST Act, cannot be applied in the absence of fraud or wilful misstatement or suppression of facts to evade tax. Accordingly, the evidence for the invocation of the extended period shall form part of the SCN.

The above aspects may be kept in consideration while investigating such cases and issuing show cause notices.

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