The concept of secondment arises when an employee of one organization is temporarily assigned to work for another organization, often within the same corporate group, while retaining employment with the original employer. Under the GST law in India, this concept became controversial with the authorities asserting that secondment amounts to manpower supply or import of service, attracting GST liability under the reverse charge mechanism. This has led to multiple legal disputes and culminated in landmark rulings by the courts, particularly the Supreme Court judgment in the case of Northern Operating Systems Pvt. Ltd.
Background of the Northern Operating Systems Case
In this case, Northern Operating Systems Pvt. Ltd. was a part of a multinational corporate group. The parent company abroad would secure projects that required specialized skills and personnel. For better execution of such projects, the foreign group entity entered into an arrangement with its Indian affiliate, Northern Operating Systems, under which specific foreign employees possessing specialized skills were deputed to the Indian company under a secondment agreement. These seconded employees would work under the control and direction of the Indian company during the period of secondment. At the end of the deputation period, they would return to their parent employer as per the global policy of the group. The salary was paid directly to the seconded employees by the foreign company to the labor and social security laws of their home country. However, these costs were later reimbursed by the Indian company without any markup.
Proceedings were initiated by the tax authorities asserting that such arrangements constituted import of services by the Indian company under the category of manpower recruitment or supply agency services. The period in question was from October 2006 to September 2014, falling under the erstwhile service tax regime.
Judicial Analysis by the Supreme Court
In its detailed judgment, the Supreme Court observed that determining whether the relationship between the Indian company and seconded employees constitutes an employer-employee relationship requires a thorough examination of various tests developed by courts over time. The Court clarified that no single test can be determinative, and a composite view of all relevant factors must be taken into account.
Tests to Ascertain Employer-Employee Relationship
Several key tests were analyzed by the Supreme Court to understand the nature of the relationship.
Disbursement of Salary Test
Whether salary is paid by the original employer or by the host company may not be conclusive, but it does provide insight into who bears the ultimate economic burden.n
Master and Servant Relationship
This test checks who exercises control and supervision over the employee during the period of secondment
Control Test
The degree of control exercised by the host company over the seconded employee’s day-to-day work is an important determinant..
Three-Tier Test
A combination of payment of wages, degree of control, and other relevant factors must be evaluated to ascertain the nature of employment. nt
Economic Reality Test
This examines the substance of the transaction over its form by focusing on the actual economic benefit derived by the recipient ent.it.
Integration Test
This considers whether the seconded employee is integrated into the host entity’s business operations and organizational structure.e
Nomenclature Test
The terminology used in contracts or agreements is not definitive, but is a relevant consideration in construing the relationship..
Observations by the Supreme Court
The Court stated that each test provides a particular insight, but no single test is conclusive. A holistic view based on the totality of facts and circumstances must be adopted. The agreements between the Indian company and foreign entities showed that the foreign group had a structured pool of skilled employees who were seconded to India only temporarily for specific assignments. The control of such employees, although delegated to the Indian affiliate during the assignment, did not result in the transfer of employment. They continued to remain employees of the foreign company and were subject to the policies of the foreign entity. The payment of salaries by the foreign company, adherence to social security norms of the foreign jurisdiction, and repatriation of employees after completion of assignments all indicated that the original employment relationship was not severed.
The Court emphasized that merely reimbursing salaries or making remittances for seconded employees is not determinative. Rather, the economic benefit derived by the Indian company through such secondment arrangements indicates the existence of consideration. The benefit of having highly skilled employees temporarily work for the Indian company is part of the overall revenue-generating me, and such benefits constitute a form of implicit consideration under service tax and GST laws.
Effect of the Judgment on Precedents and Revenue Neutrality
The Supreme Court rejected the reliance placed by the assessee on prior rulings such as Volkswagen India and Computer Sciences Corporation, declaring them to be unreasoned and lacking precedential value. These prior rulings were found inadequate to override the comprehensive analysis undertaken in the current case. The Court held that the assessee was indeed the service recipient of manpower supply services and was liable under the reverse charge mechanism for service tax during the relevant periods.
Regarding revenue neutrality, the assessee argued that even if tax were payable, it would be entitled to claim the same as input credit, making the entire exercise revenue neutral. However, the Court dismissed this argument, holding that revenue neutrality does not negate the liability to pay tax in the first instance. The issue of refund or credit is a post-assessment matter and does not affect the chargeability of tax.
Legal Provisions Relevant to Supply and Consideration under GST
The GST law introduced several provisions that closely mirror the concerns discussed in the Supreme Court judgment. Under Section 7(1)(a) of the CGST Act, the term “supply” includes all forms of supply of goods or services for consideration by a person in the course or furtherance of business. Further, under Schedule I of the Act, even transactions between related persons or distinct persons without consideration may be treated as a supply if they are in the course of business. The term “related persons” includes employer and employee, and persons who are associated in the business of one another in such a manner that one controls or influences the other.
Importantly, Schedule III of the CGST Act specifies activities that are neither considered a supply of goods nor a supply of services. One of these includes services provided by an employee to an employer in the course of employment. However, whether this exemption applies depends on whether the seconded employee is deemed to be an employee of the Indian entity or remains under the employment of the foreign entity. The Supreme Court held that seconded employees remained on the rolls of the foreign company and were never absorbed into the employment of the Indian entity.
Concept of Import of Services
The IGST Act defines import of services as the supply of any service where the supplier is located outside India, the recipient is in India, and the place of supply is in India. In such cases, the Indian recipient is required to pay tax under reverse charge. The secondment arrangement, where foreign employees are deployed to work in India under the control of the Indian entity, falls within the ambit of import of services as per this definition. The foreign entity provides a service by deploying its human resources, and the Indian company derives benefit from such deployment.
Under Notification No. 10/2017 IT(R), services received from any person located in a non-taxable territory by a person in India are taxable under the reverse charge mechanism. The notification applies squarely to secondment arrangements as discussed in the judgment.
Place of Supply Rules
Under Section 13(2) of the IGST Act, the place of supply of services is the location of the recipient when both supplier and recipient are in different territories. Since the recipient is in India, the place of supply for secondment services is deemed to be in India, triggering the applicability of GST under the reverse charge mechanism.
Instruction No. 05/2023-GST and Its Relevance
To bring consistency and legal clarity to the issue, the tax department issued Instruction No. 05/2023-GST dated 13 December 2023. The instruction acknowledged that secondment of employees is not unique to the erstwhile service tax regime and will continue to remain relevant under GST. It emphasized that each case must be examined on its own merits without drawing mechanical parallels to other decisions. The instruction cited the Supreme Court’s approach in the Fiat India case, where the court discouraged rigid application of precedents without fully evaluating the unique contractual and factual context of the dispute.
The instruction further clarified that mere non-payment of GST is not enough to invoke extended period proceedings under section 74 of the CGST Act. The law requires the presence of wilful misstatement or suppression of facts with the intent to evade tax. Therefore, in the absence of mala fide intent or fraud, the longer limitation period for issuance of show cause notices is not to be mechanically invoked. Any show cause notice issued must contain material evidence establishing suppression of facts, and vague or broad allegations will not be sufficient to sustain the invocation of section 74.
Legal Safeguards Against Arbitrary Proceedings
Post the Supreme Court ruling, a number of companies filed writ petitions before High Courts seeking a stay on the adjudication of show cause notices issued for the levy of GST on secondment. In several of these cases, courts granted interim protection to the taxpayers, indicating that a deeper judicial examination of the secondment issue under GST was warranted. The decisions emphasized that the mere existence of a secondment agreement does not by itself lead to GST liability. It is necessary to examine the extent of control, supervision, financial arrangements, and overall employment structure before concluding the taxability of such arrangements.
In Mitsubishi Electric India and BMW India, the Punjab and Haryana High Court granted an ad-interim stay in proceedings relating to GST demand on secondment. Similarly, in the case of Alstom Transport and United Breweries, the Karnataka High Court issued interim relief from GST demand on salary costs incurred by the head office for seconded employees working in a branch. The Delhi High Court in Metal One Corporation also stayed adjudication proceedings on similar grounds. These rulings collectively reflect judicial concern over the blanket application of the Northern Operating Systems judgment without a fact-specific inquiry.
Distinction Between Secondment and Manpower Supply
The distinction between secondment and manpower supply services is central to this legal issue. Under manpower supply services, personnel remain under the control of the supplier, who continues to direct their work. In contrast, under a genuine secondment, the personnel are fully integrated into the organizational structure of the recipient, and the recipient exercises full control and supervision over their day-to-day activities. The challenge lies in drawing a line between these two categories, as contractual documents often contain overlapping language.
The Supreme Court in Northern Operating Systems took a nuanced view and held that while the secondee may function under the control of the Indian company during the deputation period, the overarching relationship of employment remained with the foreign entity. This finding was based on factors such as payment of salary by the foreign company, adherence to foreign social security laws, return to the foreign employer after completion of the assignment, and continued alignment with global employment policies. Thus, the arrangement was not a mere transfer of employees but a supply of services by the foreign company.
Relevance of Quid Pro Quo and Economic Benefit
A key basis for upholding the levy in the Supreme Court’s reasoning was the existence of quid pro quo. The Indian company gained the economic benefit of access to specialized foreign personnel, enabling it to execute contracts or assignments secured through the global network of the group. This conferred revenue advantages to the Indian company. Even if no separate consideration was paid apart from reimbursement of salaries, the benefit obtained in the form of skilled labor was sufficient to constitute consideration in economic terms.
The Court rejected the argument that since there was no profit element in the reimbursement, the transaction could not be taxed. The focus was not on markup or profit but rather on whether a service was received by the Indian company for which value could be attributed. This interpretation aligns with the broader definition of consideration under GST, which includes any payment in money or otherwise made in response to a supply.
Applicability of GST Provisions on Related and Distinct Persons
Section 7 of the CGST Act lays down the definition of supply and includes transactions between related persons or between distinct persons made in the course of business, even if without consideration. Related persons include employer and employee, directors of one another’s businesses, or persons who are controlled by a common third party. Distinct persons are defined under Section 25 as different registrations held by the same legal entity in different states.
Where secondment occurs between branches of the same legal entity, for instance between head office and a branch, the supply could be considered interstateunder GST law if it involves separate GST registrations. In such cases, the presence or absence of consideration becomes irrelevant because Schedule I deems such supplies to be taxable even without payment. If, however, the secondment is between unrelated companies or between legal persons in a group structure, the question of consideration and nature of the supply gains importance in determining taxability.
Exceptions Under Schedule III of the CGST Act
Schedule III lists activities that are neither the supply of goods nor the supply of services. This includes services rendered by an employee to an employer in the course of employment. If a seconded employee becomes an employee of the Indian company during the period of secondment, and the employment is reflected in payroll records and employment contracts, then the transaction may fall under Schedule III and be excluded from GST.
However, if the employee continues to be on the payroll of the foreign company and merely works under the Indian company’s control without severance of the original employment, the exemption under Schedule III will not apply. The Supreme Court emphasized this distinction, noting that operational control alone is not enough to establish a change in employment. The terms of the engagement, including who bears the employment obligations, who issues the appointment and termination letters, and whose policies apply to the employee, must be carefully examined.
Practical Implications for Businesses
The Supreme Court’s judgment has practical implications for how secondment arrangements should be structured and documented. Businesses must carefully draft secondment agreements to reflect the true nature of the transaction. If the intention is to transfer employment temporarily to the Indian entity, there should be clear documentation of termination or suspension of employment with the foreign entity and new employment terms issued by the Indian entity.
Where the seconded personnel remain employed with the foreign entity, the agreements should not contain language that creates ambiguity about the nature of control or remuneration. Clear separation of legal obligations, defined reimbursement mechanisms, and consistent tax positions across income tax and GST filings will be important to withstand scrutiny. Where GST is payable under reverse charge, timely payment and appropriate documentation will be critical to avoid penalties and interest.
Role of Circulars and Administrative Guidance
In addition to judicial pronouncements and statutory provisions, circulars and instructions issued by the tax department play an important role in guiding officers and taxpayers. The instruction issued in December 2023 was an important administrative step to prevent the automatic issuance of show-cause notices merely based on the Supreme Court decision. It highlighted the need for material evidence and discouraged the use of coercive provisions like section 74 without substantiation of intent to evade tax.
The instruction has provided relief to many companies and prevented arbitrary action in the name of compliance. It signals a more mature and evidence-based enforcement approach by the authorities. However, businesses must not treat the instruction as immunity from GST liability. It only provides procedural safeguards. The substantive question of taxability remains dependent on how the facts are documented and presented by the taxpayer.
Judgments in Favor of Taxability
Various rulings from the Authority for Advance Rulings (AAR) and Appellate Authority for Advance Rulings (AAAR) have favored the view that the secondment of employees attracts GST. These authorities have repeatedly emphasized the principle that the nature of the arrangement, rather than the label, determines its taxability. In other words, even if the arrangement is referred to as a secondment, if the characteristics resemble thosee of a manpower supply, GST will be applicable.
One of the common features observed in rulings favoring taxability is the continued control and supervision by the original employer over the seconded employees. If the original employer is responsible for hiring, remuneration, appraisal, disciplinary action, and termination, then it is viewed that the seconded personnel are not employees of the host company. Instead, the service provided is akin to manpower supply, which is taxable under GST.
Further, if the host company reimburses the salary and other costs to the original employer, and the original employer raises an invoice for such reimbursement, then it is regarded as a taxable supply of service under GST. Such invoices are generally subject to GST on the total amount reimbursed, including salary, allowances, and benefits provided to the seconded employees.
An important point emphasized in these rulings is the necessity to look into the contractual terms between the two companies. If the contract indicates that the seconded employees continue to be on the payroll of the original employer, and all statutory obligations like provident fund, gratuity, employee state insurance, and professional tax are also discharged by the original employer, then it is difficult to argue that there exists an employer-employee relationship between the seconded employee and the host company. In such a scenario, the arrangement is treated as a supply of manpower services by the original employer to the host company.
Additionally, the presence of a markup or service fee charged by the original employer to the host company further strengthens the view that the transaction is commercial and thus, liable to GST. Even in the absence of a markup, mere reimbursement of costs does not automatically take the transaction outside the scope of supply under GST. The GST law does not distinguish between transactions made for profit and those made without profit. Hence, even cost reimbursements can be subject to GST if they qualify as a ‘supply’ under the law.
The judgments in favor of taxability have also interpreted that the ‘recipient’ of the service in such cases is the host company, as it is the beneficiary of the manpower services. The GST liability is therefore imposed on the original employer who supplies the services of its employees to another entity.
In some rulings, it has been held that mere deputation or secondment of employees without transferring the employment contract does not create an employer-employee relationship with the host company. Therefore, such deputation arrangements are subject to GST under the category of manpower supply or business support services. This interpretation has been upheld even where the seconded employees operate under the direction of the host company, unless there is clear evidence that the host company is the legal employer.
Thus, the judicial trend under these rulings points to the principle that unless there is an unambiguous transfer of employment and control to the host company, the arrangement will be treated as a supply of service by the original employer, and accordingly, subject to GST.
Secondment and Distinction from Supply of Manpower
The controversy surrounding secondment and its GST implications largely stems from its similarity to manpower supply. While both involve the deployment of personnel from one entity to another, there are subtle yet significant distinctions. Under the GST law, the supply of manpower involves the provision of human resources, typically on a contractual basis, where the personnel remain under the control of the supplier. In contrast, secondment, at least in form, often implies a deeper integration of the employee into the recipient organization, with the recipient exercising supervision and control.
Judicial forums have had to examine the actual substance of the arrangement to determine taxability. The distinction lies in control, salary payment, employment relationship, and the contractual terms. If the seconded employee remains on the payroll of the parent company and merely works for the recipient, it leans toward manpower supply. However, if the employee is fully integrated into the recipient’s structure and is supervised and managed by them, it may fall outside the scope of supply under GST.
This demarcation is critical because the supply of manpower is a taxable service under GST, typically attracting 18% tax. If secondment is interpreted as manpower supply, tax applies; if seen as a deputation without a service element, no GST arises. Hence, careful structuring of secondment contracts is essential to determine tax impact.
Circulars and Clarifications by CBIC
The Central Board of Indirect Taxes and Customs (CBIC) has issued clarifications to address the confusion surrounding GST applicability on secondment. One such clarification was issued via Circular No. 215/1/2023-GST dated 21st June 2023. This circular emphasized that where an employee is contractually employed with one company and is sent to another entity (say, a group company or client), and continues to be on the payroll of the original company, any reimbursement of salary would constitute consideration for service and be taxable.
The CBIC clarified that in such cases, the employer (original company) is effectively supplying manpower services to the recipient (borrowing company), and the salary reimbursement is consideration. It held that the employer-employee relationship continues with the first company, and thus the secondment is a supply of manpower, attracting GST.
However, the circular also recognized that if the seconded employee is placed on the payroll of the recipient and is under its control, and there is a contractual employment with the recipient, such an arrangement will fall outside the scope of supply and will not attract GST.
This clarification is significant as it attempts to settle the debate by emphasizing substance over form. Nevertheless, the determination still depends on documentary evidence and actual control, which can vary from case to case.
Impact on Multinational Companies and Group Entities
Multinational companies (MNCs) and group entities are among the most affected by the GST implications of secondment. It is common for these organizations to share resources, especially senior executives, across jurisdictions or business verticals. Employees are often seconded for specific projects or knowledge transfer purposes. These arrangements may involve intra-group reimbursement of salaries and related costs.
Under GST, if such secondments are treated as manpower supply, it leads to tax liability for the supplying entity. The recipient company may be able to claim input tax credit, but it increases the compliance burden and cash flow implications. Further, if GST is not paid and authorities reclassify the arrangement later, it can lead to a demand for tax along with interest and penalty.
Hence, group entities must ensure their secondment agreements are drafted carefully. They must define employment terms, control, reporting structure, and payroll responsibility in unambiguous terms. In cases where the employee is intended to be fully integrated into the recipient entity, the recipient should ideally execute a direct employment contract. If reimbursement is involved, it should be without markup and backed by clear documentation to support the nature of the arrangement.
Implications for Indian Subsidiaries of Foreign Companies
Indian subsidiaries of foreign companies often face issues where foreign employees are seconded to work in India, or vice versa. In such scenarios, the seconding entity may raise an invoice to the Indian company for salary reimbursement. This triggers the question of whether it constitutes an import of service, attracting a reverse charge mechanism (RCM) under GST.
If the seconded employee remains employed with the foreign parent and is working under the control of the Indian entity, the arrangement may be considered an import of manpower service. The Indian company would then be liable to pay GST under RCM. This adds to compliance obligations and necessitates proper valuation of the services.
Moreover, in some instances, secondment may also invoke Transfer Pricing implications under Income Tax law, apart from GST considerations. Hence, Indian subsidiaries must align their tax strategies and legal documentation for both domestic and international compliance.
To mitigate risks, Indian companies should consider either directly employing the seconded personnel or entering into contracts that reflect a genuine employer-employee relationship with them. Proper documentation, including board resolutions, payroll processing, control mechanisms, and supervision records, becomes vital to defend their position before tax authorities.
Key Judicial Precedents
Over time, several judicial authorities have examined the taxability of secondment arrangements under GST and service tax laws. Notable among them are:
- C.C., C.E. & S.T. Bangalore v. M/s Northern Operating Systems Pvt. Ltd. – In this case, the Supreme Court held that secondment of employees by a foreign entity to an Indian company, where the foreign entity pays the salary and is reimbursed by the Indian company, is a taxable service. The court emphasized substance over form and concluded that the arrangement amounted to a manpower supply.
- Volkswagen India Pvt. Ltd. case – The CESTAT held that reimbursement of salary to a group company for seconded personnel amounts to manpower supply service and is taxable under GST.
- Abbott Healthcare Pvt. Ltd. v. C.C.E. & S.T. – It was observed that mere reimbursement of salary does not negate the service element if the seconding entity retains control and employment relationship.
- Bharat Oman Refineries Ltd. case – The Authority for Advance Rulings (AAR) held that the secondment of employees with no direct employment relationship with the recipient and with reimbursement of salary is taxable under GST.
These rulings reinforce the need for thorough documentation and clear delineation of employment terms. Businesses must ensure that secondment is not merely a disguised manpower service to avoid unexpected tax liabilities.
Best Practices for Structuring Secondment
Given the evolving jurisprudence and regulatory clarifications, businesses must adopt best practices to ensure compliance and avoid litigation:
- Direct Employment Model: Wherever feasible, the seconded employee should enter into a direct employment contract with the recipient company.
- Transfer of Payroll Responsibility: The recipient should ideally place the employee on its payroll, deduct taxes, and handle employment compliance
- Clear Contractual Terms: The secondment agreement must explicitly specify the reporting hierarchy, the scope of work, the salary responsibility, and the employment status.
- Documentation of Control: Maintain records showing the recipient exercises day-to-day control, assigns duties, conducts performance evaluations, and manages leave and benefits.
- Avoid Markups: Reimbursement should be at cost, with no service fees or markup, to support the position that it is not a supply of service.
- Obtain Advance Ruling: Where high-value or complex secondments are involved, obtaining a GST advance ruling can provide certainty and reduce future disputes.
- Audit Compliance: Regular audits of secondment arrangements, payroll, and tax positions can help identify risks early and correct course.
By adhering to these practices, organizations can reduce the ambiguity and potential tax exposure arising from secondment arrangements.
Conclusion
The issue of GST on secondment of employees remains a complex and evolving area, shaped by statutory provisions, judicial pronouncements, and departmental circulars. While secondment in its true form may fall outside the scope of GST when it reflects a genuine employer-employee relationship, any deviation in control, payroll, or documentation may expose the arrangement to tax as a manpower supply service. Businesses, especially large corporations and multinationals, must proactively assess their employee deployment strategies, revise contracts if necessary, and ensure alignment with legal and tax requirements. The goal should be to structure secondment in a manner that supports the intended tax position, withstands scrutiny, and facilitates smooth operations without unintended liabilities.