CESTAT distinguishes SC ruling in NOS and holds expats deputation transaction as not liable to service tax

 This Tax Alert summarizes a recent ruling of Customs, Excise and Service Tax Appellate Tribunal, Hyderabad (CESTAT)  on applicability of service tax on deputation of employees by foreign company to an Indian entity.

Assessee, an Indian entity, entered into employment agreements with certain expatriate employees deputed from a foreign entity. It paid a portion of the salary, covering statutory social security contributions in the home country and other emoluments, to the foreign entity, which in turn remitted the amount into the employees’ foreign bank accounts.

CESTAT held that such payments were not exigible to service tax on the following grounds:

• There are material factual differences in the present case and the Supreme Court judgement in case of Northern Operating Systems Pvt Ltd , including the absence of any secondment agreement with the foreign entity and existence of direct employment agreements with expats.
• The expatriate employees worked solely under the control and supervision of the assessee for its Indian business operations. The employment agreements were independent of management consultancy services agreement entered into with the foreign entity. This clearly establishes employer-employee relationship between assessee and the expats

Comments:

• In what appears to be the first favorable ruling under service tax post the SC verdict, CESTAT has analyzed various criteria basis the facts in assessee’s case vis-à-vis the facts in Northern Operating System to distinguish the SC judgement on secondment transaction.
• Previously, several Tribunals had upheld the levy of service tax on employee deputation, relying on the perceived similarity of facts with the NOS decision [2025 (7) TMI 148; Service Tax Appeal No. 41736 of 2019; TS 547 CESTAT 2023 ST].
• Under GST, the Karnataka High Court, in two cases, upheld the existence of an employer–employee relationship in cross border arrangements and held that no GST was leviable, based on the specific facts of those cases [TS 647 HC(KAR) 2025 GST; 2026 VIL 147 KAR].
• Several appeals on this issue are presently pending before the Supreme Court [Civil Appeal Diary No. 38335/2023].
• Businesses with similar arrangements may rely on this ruling to support the non taxability of such transactions, particularly where no secondment agreement exists between the entities.