[Opinion] Key Takeaways from CBIC’s Instructions on Taxability of Seconded Employee

B. Sairam & S. Sashi Barathvaj – [2024] 158 taxmann.com 394 (Article)

GST authorities are citing the Supreme Court’s judgment in the Northern Operating Systems (NOS) case to raise GST demands on Indian companies’ seconded employees. Companies are thereby concerned about the financial burden and potential Income Tax implications.

Industry representatives have raised concerns about field formations using Section 74(1) in many secondment cases without proper justification. This section allows extended limitation periods for investigating tax evasion cases involving fraud, wilful misstatement, or suppression of facts.

The Central Board of Indirect Taxes and Customs (CBIC) has issued an Instruction No. 05/2023-GST dated 13 December 2023 that clarifies and guides against the mechanical application of Northern Operating Systems (NOS) Judgment and promotes a more individualized approach to secondment taxability under GST.

Background

Multinational companies (MNCs) often send employees to work in their subsidiaries or affiliates in different countries (including India) on temporary assignments (hereinafter referred to as “secondment”).

Secondment arrangements are increasingly used by MNC to leverage expertise and managing operations of their Indian subsidiaries.

Taxability of such arrangements under GST is a contentious issue.

The question arises that arises is whether a seconded employee becomes an employee of the seconded company, and does this affect exigibility to tax?

A bird’s eye-view of the Hon’ble Supreme Court’s judgment in (Northern Operating Systems)

The Hon’ble Supreme court examined whether a secondment contract was a contract of service, employer-employee relationship (not taxable) or a contract for service, independent contractor relationship for tax purpose (taxable).

Key factors considered by the Hon’ble SC were Control over employees (Indian company had significant control despite overseas payroll), Purpose of secondment (specific tasks for Indian company, not general business of foreign company) and Lien on employment (remained with foreign company, not Indian company).

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