GST and Service Tax on Secondment of Employees

1. Background:

One may notice a general practice in multinational companies wherein the parent company deputes its manpower resources to subsidiaries companies for particular projects, assignments or otherwise. The manpower is generally deputed for a specific span of time (say 5 years). Once the assignment/projects get completed, the employees returned to their native territories.

In these arrangements, the remuneration is generally paid by the home company (Parent) directly to the employee concerned in their local currencies and the same is in turn reimbursed by the Subsidiary Company to the parent company. It is general practice that a separate employment contract is awarded by the Indian subsidiary for the project/assignment period to the employee concerned.

Under the erstwhile Service Tax regime, the department has issued Show Cause Notices (‘SCN’), both for pre and post negative list regime, to various Indian MNCs demanding service tax on the reimbursement amount paid by the Indian Subsidiary company to its parent company. In few cases, the SCNs were also issued to the domestic companies whereby the employees are deputed on project basis.

In this document we have briefly analysed the service tax implications on the given transaction and its status before the judiciary. The document also covers the GST implications on the impugned transaction.

2. Treatment under Service Tax regime:

In Pre Negative list it was argued by the Department that the given services would cover within the meaning of Manpower Recruitment or Supply Agency’s Services and thus services tax would be applicable on the same. However, various Tribunals and High Courts in various cases have held that the given supply would not qualify as Manpower Recruitment or Supply Agency’s Services. Few cases in this regard can be referred as under:

(i) Arvind Mills Limited [2014] 45 taxmann.com 376 (Gujarat)

(ii) Target Corporation India (P.) Ltd. [2014] 45 taxmann.com 376 (Gujarat)

(iii) Samsung India Electronics (P.) Ltd. [2015] 59 taxmann.com 444 (New Delhi – CESTAT)

It is noteworthy, negative list era of regime of service tax all services were made taxable except those covered under negative list or unless otherwise specifically exempted. The services by an employee to the employer in the course of or in relation to his employment were kept outside the ambit of service tax by explicitly excluding it from the definition of Services.

In a recent judgment of M/s Imasen Manufacturing India Private Limited [2021] 128 taxmann.com 255 for the negative list period, the Commissioner (Central Excise & CGST, Jaipur) held that reimbursements made by Indian Company to its parent company for employee Secondment is not taxable. The Commissioner in its order confirmed the employer-employee relationship between the seconded employee and the Indian Company.

In this regard one may also refer the case of Franco Indian Pharmaceutical (P.) Ltd. [2016] 69 taxmann.com 198 (Mumbai – CESTAT), wherein it was held that if the contract of employment is entered with one company and later on employees are deputed to another group companies, cost shared will not be liable to service tax because conduct of the parties shows that employee will work for more than one company and there is no intent to earn revenue.

3. Treatment under GST regime:

GST regime is also in conformity with the service tax negative list regime in this regard, and have kept these services outside the purview of taxability. Schedule III to the CGST Act, 2017 read with section 7, states that services by an employee to the employer in the course of or in relation to his employment would be treated neither as a supply of goods nor a supply of services.

4. Our Comments:

It is well-established fact that service tax is not chargeable on services of employees to the employer and provisions in relating to same are very well incorporated in the service tax provisions. However, as far as deputation of employees are concerned, one can rely on the draft CBIC circular (F. No. 354/127/2012-TRU) which states that where staff is employed by one or more employers who normally share the cost of such employment, the services provided by such employee will be covered by the exclusion provided in the definition of service. However, if the staff has been engaged by one employer and only made available to other for a consideration, it shall not be a case of joint employment.

Therefore, on the backing of above mentioned rulings and draft clarification, the intention of the appellate authorities seems quite clear to classify such arrangements as employer-employee relationship instead of manpower recruitment or supply agency’s services.