[Opinion] Talk of the town: Notice regarding secondment of employees

Among the global business conglomerates, the topic of discussion nowadays is the notice issued by the Directorate General of GST Intelligence (DGGI) regarding the taxability of secondment of employees. With more businesses operating globally, the secondment of employees has become a common practice to take advantage of the location and specialised skills of employees or for the realisation of specific goals of the management.

‘Secondment’ refers to an arrangement between two companies to deploy an employee of an organisation to another on agreed terms and conditions. In a typical case of secondment, an employee of an overseas entity may be deployed to an Indian entity or vice versa. Usually, during the secondment term, the employee is under control and under the supervision of the transferee entity but is on the payroll of its transferor for the ease of complying with social security procedures of the country and migration procedures. Thus, the transferor pays the salary and other perquisites to the deployed employee and the same is reimbursed from the transferee on an actual basis. Apart from the above, dual employment or secondment – while being on payroll of the transferee – also exists.

‘Manpower recruitment or supply agency’ means any person engaged in providing any service, directly or indirectly, in any manner for recruitment or supply of manpower, temporarily or otherwise, to any other person. Whereas under an employer-employee relationship, one person employs the other on different terms and conditions. As per the service tax law before July 2012, certain services were specifically covered under taxable services. One such service was ‘manpower recruitment’ services. After an amendment in the service tax law in July 2012, every service provided was taxable except those specified in the negative list, which included service between the employer and employee. Even under GST legislation, the service between the employer and employee is not taxable as per Schedule III. Accordingly, the service provided by an employee to employer in course of employment was always excluded from the scope of tax, while manpower service has always been taxable.

Under the erstwhile regime, the matter of classification of the secondment of employees under the employer-employee arrangement or manpower services has always been under dispute. The tax authorities were of the view that the arrangement of secondment is a taxable service, as the same could be classified as a service to provide manpower to an entity, whereas different appellant forums have pronounced such arrangement to be covered under the employer-employee relationship. Therefore, in most cases, it was held that the secondment of employees is a non-taxable service.

In May 2022, the landmark judgment of the Supreme Court in the erstwhile regime on the secondment of employees proved to be a game changer for the industry and a ray of hope for the tax authorities.

This article discusses about the apex court ruling and the way forward for organisations.

Brief facts of the case

Northern Operating Systems Pvt Ltd (referred as ‘Indian entity’) entered in an agreement with its foreign group entities to provide general back office and operational support. To facilitate the support, the Indian entity can request its foreign counterpart for the secondment of managerial and technical persons to India for specified period, as and when needed.

It was agreed between the parties that although the deployed employees would be on the payroll of the foreign entity, they would work in accordance with the instructions and directions of the Indian entity. In addition, the Indian entity shared a letter of understanding to employees, stating the terms of the employment. Under the arrangement, employees so seconded would receive their salaries, bonuses, social benefits, out of pocket expenses and other expenses from the foreign entity. Furthermore, the foreign entity shall raise a debit note on the Indian entity to recover the expenses on an actual basis.

The Indian tax authorities, while concluding an audit of the Indian entity, contended that it has failed to discharge appropriate taxes on the reimbursement paid to the foreign entity with respect to the deployed employees. As a result, the Indian entity appealed to the Customs Excise and Service Tax Appellate Tribunal (CESTAT), which passed the judgement in favour of the entity and set aside the demand classifying the arrangement to be of employer-employee. Aggrieved with the unfavourable order, tax authorities resorted to file an appeal to the Supreme Court. Thus, the question in front of the Supreme Court was who would be considered as an employer of the seconded employee and applicability of tax in such a scenario.

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