[Opinion] Revenue Over Drive for GST on Secondment Agreements

D Arvind – [2023] 150 taxmann.com 302 (Article)

It is an often-occurring phenomenon when a native Indian entity and a foreign entity collaborate or when an Indian subsidiary of a non-native enterprise comes into play, the employee belonging to the outside foreign entity may be sent on secondment to render services as part of the manpower pool in India.

Employees are frequently kept enlisted in non-domestic organizations (foreign entity) with the exclusive aim of obtaining benefits of social security in those regions. Otherwise, for all practical purposes, the seconded employees become employees of the Indian entity and work under the direction and control of the Indian entity.

The taxability of consideration paid to foreign entities as a reimbursement of salary and perks paid to seconded employees working in India was taken to the Supreme Court in the case of CCE & ST v. Northern Operating Systems Pvt. Ltd. under the Service Tax regime.

In this case, the Revenue on behalf of the central government relied on various agreements made between the respondent Northern Operating Systems Pvt. Ltd. and its group companies located in the USA, UK, Ireland, Singapore, etc.

As per the master agreement, made between Northern Operating Systems Pvt. Ltd. (Indian company) and Northern Trust company ( a foreign company ) the Indian company was to provide general back office and operational support to the foreign company. This included foreign investment, investment management, evaluation and reporting on investments, IRAS fund accounting, securities management, lending operations, and taxes. Such services would be provided by Indian company to group entities or other parties nominated by Northern Trust Company (a foreign company).

Consequent to the master agreement, a secondment agreement was made between a foreign company and Northern Operating Systems Pvt. Ltd. (an Indian company). Under this agreement, the foreign company and its group companies would second employees to the Indian company, who would be remunerated through the payroll of their foreign employer. The Indian company will have to reimburse expenses paid during the secondment agreement in respect of the remuneration of seconded employees, including salary, incentive, out-of-pocket expenditure, etc.

Though the seconded employees work under the control and direction of the Indian company, an independent letter of agreement between a foreign company and one of the seconded employees specifically states that the secondment was a limited-duration assignment in terms of which the employee had the right to terminate the engagement.

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