The Supreme Court Larger Bench in Civil Appeal No. 2289-2293 of 2021 has held that the secondment of employees by an overseas group company (OGC) to an Indian company is liable to service tax based on a detailed analysis of the agreements and applying the principle of ‘substance over form’.
Facts and issue
The taxpayer entered into agreements with its group companies located outside India to provide general back office and operational support to such group companies. To provide the aforementioned services and assist in the business, the group entities provided certain technical personnel to the taxpayer. The group companies select the employees who are seconded to the taxpayer under an agreement for a temporary period. During the term of secondment, the taxpayer has control over the seconded employees and is responsible for their work. The employees continue to be on the payroll of the group companies for the purpose of continuation of social security, retirement and health benefits.
However, for all practical purposes, the taxpayer is the employer. The overseas group company pays remuneration to the seconded employees and claims reimbursement from the taxpayer. The letter of understanding issued to the seconded employee specifies that the tenure with the taxpayer is an assignment, and repatriation would be in accordance with the global mobility repatriation policy. The seconded employees file income-tax returns and contribute to the provident fund in India. Moreover, the taxpayer issues prescribed forms to the seconded employees as provided under the Income-tax Act, 1961. Revenue authorities sought to recover service tax on the amounts paid to the overseas group companies for providing ‘manpower recruitment and supply agency services’ to the taxpayer. The issue before the Supreme Court was whether the overseas group companies, with whom the taxpayer had entered into secondment agreements, provides manpower services to the taxpayer.
Supreme Court’s decision:The Supreme Court holds that, regarding employees seconded to the taxpayer for the duration of secondment, the taxpayer was the recipient of manpower recruitment and supply services from the overseas group companies. However, the Supreme Court also holds that invocation of the extended period of limitation is not tenable. Upon a review of the previous judgment in Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd., the Apex Court held that there no one single determinative test, but that what is applicable is “a conglomerate of all applicable tests taken on the totality of the fact situation in a given case that would ultimately yield, particularly in a complex hybrid situation, whether the contract to be construed is a contract of service or a contract for service.
Depending on the fact situation of each case, all the aforesaid factors would not necessarily be relevant, or, if relevant, be given the same weight.” Taking a cue from the above observations, while the control over performance of the seconded employees’ work and the right to ask them to return, if their functioning is not as is desired, is with the assessee, the fact remains that their overseas employer in relation to its business, deploys them to the assessee, on secondment. Secondly, the overseas employer- for whatever reason, pays them their salaries. Their terms of employment – even during the secondment – are in accordance with the policy of the overseas company, who is their employer. Upon the end of the period of secondment, they return to their original places, to await deployment or extension of secondment.
The conclusions of the Apex Court are based on the following observations.
Nature of service provided by the group companies
The crux of the issue is the taxability of the cross-charge, which is primarily based on who should be reckoned as an employer of the secondee, the Indian company or the overseas entity. In this regard, the Supreme Court refers to the principles established by the court. The court has relied on the principle of ‘substance over form’ and held that the ‘cardinal principles of interpretation of documents, is that the nomenclature of any contract, or document, is not decisive of its nature’. The overall effect of the agreements clearly points to the fact that the overseas group company has a pool of highly skilled employees who are entitled to a salary structure as well as social security benefits. Considering their expertise and specialisation, these employees are seconded or deputed to the group entities for use of their skills.
Upon cessation of the term of secondment, they return to their overseas employer, or are deployed on some other secondment. For all appearances, the seconded employee is under the control of the taxpayer and works under its direction during the period of secondment. Nevertheless, the fact remains that they are on the payroll of the overseas employer. This is a legal requirement since they are entitled to social security benefits in the country of their origin. The secondment is a part of the global policy of the overseas employer and, on cessation of the secondment period, the employees have to be repatriated in accordance with the global repatriation policy of the overseas employer. The employment, even during the secondment, is in accordance with the policy of the group company, who is their employer. The salary package with allowances is expressed in foreign currency, which are substantial and could have been only by resorting to a standardised policy of the overseas employer.
Consideration and quid pro quo is implicit
The taxpayer argued that it is not required to pay any consideration to the group companies. The court observes that one method of reckoning if there is consideration, is payment in the form of remittances or amounts for the secondment. The other way of looking at the arrangement is the economic benefit derived by the taxpayer, who also secures specific jobs or assignments, from the group companies, thus resulting in its revenue. The quid pro quo for the secondment agreement, where the taxpayer has the benefit of experts for limited periods, is held to be implicit in the overall scheme of things.
Revenue neutrality
Regarding the argument on revenue neutrality, the court observes that it is called upon to adjudicate about the nature of the transaction and whether the incidence of service tax arises by virtue of the provision of secondment services. Whether a particular rate of tax or no tax is payable, whether the whole or part of the duty is claimed as refund etc., is held as irrelevant.
Precedential value of earlier rulings
The earlier orders in the matters of SRF Ltd. v. Commissioner and Commissioner of Central Excise v. Coca Cola India Pvt. Ltd., relied upon in the context of revenue neutrality or secondment are held as having limited or no precedential value since they were without any independent reasoning. Considering the previous orders of the Customs, Excise and Service Tax Appellate Tribunal on this issue, it was held that the taxpayer’s view about its liability is neither untenable nor malafide. The Revenue’s contention about the existence of wilful suppression of facts or deliberate misstatement is turned down. It noted that in the impugned order CESTAT had relied on its rulings in Volkswagen India Pvt. Ltd. v. CCE, Pune-I and Computer Sciences Corporation India Pvt. Ltd. v. Commissioner of Service Tax, NOIDA to hold that the method of disbursement of salary cannot determine the nature of transaction. The Court was of the view that the orders of the Apex Court in Volkswagen and Computer Science Corporation which also merely affirmed the CESTAT ruling was not reasoned and had no precedential value.
Implications under GST regime
The secondment arrangements are of course continuing under the GST regime as well. Mostly the provisions of GST related to taxability of services are similar to what they were under the service tax regime. The decision of the SC in Norther Operating Systems will obviously have implications on all such arrangements under the GST regime as well. It is not that the controversies have not arisen under the GST regime till date. Objections have already been raised by authorities in various situations. The Appellate Authority for Advance Ruling, Tamil Nadu (AAAR) in the case of M/s. Tamil Nadu Generation and Distribution Corporation Limited has, in similar case of secondment arrangements, already held that reimbursement given by the host entity for payment paid to the seconded employees by their original employer would be covered within the ambit of ‘supply of services’ and accordingly GST would be applicable. Now the secondment of employees by an overseas entity to an Indian entity will be treated as an import of service. Under GST, it will be exigible for IGST the set off of which will be available as input tax credit in accordance with the law.