Service tax applicability on secondment of employees

 The Hon’ble Supreme Court of India in the matter of M/s Northern Operating Systems Pvt. Ltd. (“NOS”) in relation to taxability of the arrangement of secondment of expat employees to Indian entity under reverse charge mechanism.

 

In this judgment, the Apex Court has inter-alia held that secondment of expat employees by the overseas affiliate to the Indian entity is a taxable service of “manpower recruitment and supply” and the Indian entity is required to pay service tax on the same under reverse charge mechanism. The Hon’ble Court however held that extended period of limitation was not invocable.

 

The detailed analysis of the judgment is hereunder –

 

Facts of the case

 

NOS provides ITES and back office support services to its overseas group companies. It had entered into a secondment agreement with its overseas group company Northern Trust Management Services Ltd. (“NTMS”) in relation to secondment of employees of NTMS to NOS for specified durations. The key clauses of the agreement are as under –

 

• When required NOS can request NTMS for their managerial and technical personnel to assist in business and the selected overseas employee shall be temporarily loaned to the NOS;

 

• NOS executes a separate letter of employment with such seconded employees, describing the period of secondment and the compensation;

 

• During the period of secondment, the employees act in accordance with the instructions and directions of NOS;

 

• The seconded employees are under the payroll of NTMS for the purpose of continuation of social security/retirement benefits;

 

• The amounts paid to the seconded employee is reimbursed by NOS to NTMS;

 

• NOS is responsible for the work of the seconded employee and the overseas employer, during the secondment period, is absolved of any liability for the job or work of its seconded employees;

 

• Further, NOS also has the right to seek replacement or return of the seconded employees before the cessation of such secondment agreement;

 

• The secondment is for a specified duration, and the employment with NOS ceases to exist upon expiry of that period and seconded employee returns to NTMS or any other location on the direction of NTMS.

 

• Apart from salary, seconded employees are also eligible for allowances like annual home leave allowance, trip allowance, hardship allowance etc.

 

Issue Involved

 

·         Whether the arrangement of secondment of employees by NTMS to NOS is a taxable service in the nature of “manpower recruitment and supply” service warranting a discharge of service tax under reverse charge mechanism?

 

Contentions of Revenue

 

·         NOS has a service agreement with its overseas group company for provision of back office support services and another agreement for secondment of employees to NOS. Accordingly, the overseas group company provided the services of its employees to NOS for the performance of agreed tasks.

 

·         The seconded employees were employees of the overseas group company and were only operationally under the control of NOS since without such control it would not be practicable to ensure performance of tasks assigned to such seconded employees by NOS.

 

·         Real reason or purpose for the secondment by the overseas group company to NOS was to ensure that their expertise was utilized for the performance of tasks by NOS in terms of the service agreement.  

 

·         The salary, allowances, the duration of the secondment, were all determined by the overseas employer and not by NOS. Upon completion of the assignment, the seconded employees were to return to their original positions in the overseas company. The control which was with the assessee was for a limited duration – it was not enabled to impose sanctions, such as cut in salary, etc. It was argued that all these circumstances indicated that contract between the parties was essential for the supply of services by the overseas group company to NOS.

 

Contentions of NOS

 

·         The instant transaction / service can be a taxable service only if the same is provided by a manpower recruitment or supply agency and the foreign group company cannot be considered as a “Manpower Supply Agency”.  

 

·         The seconded employees were in effect own employees of NOS insofar as they were contractually hired by NOS, controlled by NOS, devoted time and effort to NOS and required to report to NOS’s office. Further, the process of disbursal of salaries and allowances by NTMS was solely for the sake of convenience and to ensure continuation of social security benefits to the expats. It was argued that the employee-employer relationship had always been kept out of the ambit of service tax.

 

·         The salaries paid to group companies cannot be said to be consideration for provision of service and thus such demand (of service tax in lieu of salaries), was untenable.

 

·         It was also argued that the entire amount to be paid is available as input credit and refundable to NOS in cash as refund of input credit for export of services and hence the demand was revenue neutral.   

 

Judgment by the Apex Court  

 

The Hon’ble Court upon a detailed perusal of the various agreements (including secondment agreement) and judgements inter alia held as under –

 

·         The crux of the issue is the taxability of the reimbursement of salary cost, which is primarily based on who should be reckoned as an employer of the secondee. If the Indian company is treated as an employer, the payment would in effect be reimbursement and not chargeable to tax in the hands of the overseas entity. However, in the event the overseas entity is treated as the employer, the arrangement would be treated as service by the overseas entity and taxed.

 

·         The Hon’ble Court while arriving at its conclusion relied on various judgements under various laws, the key principles of which are as follows –

-       The employees deputed by a group company do not become the employee of the Company to which it is deputed.

-       The test of control, or manner of performance of a task, by an employee is not conclusive to decide if an employer employee relationship subsists

-       In order to determine whether a contract is contract of service or contract for service, it becomes vital to consider a conglomerate of all applicable tests. Further, if there are multiple factors involved then all the factors should be given equal weightage in decision making.

 

·         It was observed that the letter of understanding issued to the seconded employee specified that the tenure with the assessee is an assignment (in one place, the term used is “At its conclusion, repatriation will be in accordance with the Global Mobility Repatriation Policy”).

 

·         The Hon’ble court applied the test of substance over form and observed that under the secondment arrangement, overseas employer had loaned services of its employees in relation to its own business on a temporary basis and the employees would be repatriated to the overseas employer on cessation of such secondment arrangement. Further, remittance of salary by the original employer i.e. NTMS was only to cater to social security needs and is a pre-requisite to any secondment arrangement.

 

·         It was also observed that mere payment in the form of remittances or amounts is just one method of reckoning if there is consideration. The other way of looking at the arrangement is the economic benefit derived by the assessee, which also secures specific jobs or assignments, from the overseas group companies, which result in its revenues.

 

·         Further, the argument on revenue neutrality was not considered by the Apex Court.

 

·         The Apex Court considering all of the above factors, ruled that the India counterpart i.e. NOS although had executed a letter of employment, was the recipient of manpower recruitment service provided by the overseas company NTMS and was required to discharge service tax on the same.

 

·         Invocation of extended period of limitation was held not tenable since the assessee had relied on the favourable pronouncements in its own case.

 Comments:

 

This judgement will have a far reaching impact on the industry wherein the industry position has been that no service tax/ GST is payable on such transactions. Similarly, tax authorities are likely to raise a demand under GST as well. However, industry is currently evaluating the impact of this judgement to decide an appropriate way forward.  The judgement may also impact the position of withholding taxes under the income tax law.