After multinational companies in India received a number of GST notices over “secondment” of overseas employees, the Central Board of Indirect Taxes (CBIC) has instructed its field officers to not apply a 2022 Supreme Court ruling “mechanically” in all cases.
Secondment refers to the deputation of employees or expats to another part of the organisation within or outside the country. This has led to questions about taxability of such employees — whether they would be treated as part of the Indian subsidiary or the overseas group company.
In May last year, in the case of Northern Operating Systems Pvt. Ltd, the Supreme Court had held that secondment/deputation of employees from the overseas company to an Indian entity is in the nature of “manpower recruitment and supply services” and hence, would be liable to service tax.
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The authorities had extended this under the GST as well, issuing notices to several multinational companies, including automobile and FMCG firms, seeking details of expats and seconded employees working with them
CBIC’s move, asking officers to carefully investigate each case, comes after the industry made several representations to the CBIC about a blanket invocation of the SC ruling by field formations for all such working arrangements between overseas entities and companies in India.
“It may be relevant to note that there may be multiple types of arrangements in relation to secondment of employees of overseas group company in the Indian entity. In each arrangement, the tax implications may be different, depending upon the specific nature of the contract and other terms and conditions attached to it. Therefore, the decision of the Hon’ble Supreme Court in the NOS judgement should not be applied mechanically in all the cases. Investigation in each case requires a careful consideration of its distinct factual matrix, including the terms of contract between overseas company and Indian entity, to determine taxability or its extent under GST and applicability of the principles laid down by the Hon’ble Supreme Court’s judgement in NOS case,” the instructions issued by the CBIC on Wednesday stated.
The CBIC noted that a “careful reading of the NOS judgement” indicates that the Supreme Court’s emphasis is on a “nuanced examination based on the unique characteristics of each specific arrangement, rather than relying on any singular test”. It has also been represented by the industry that in many cases involving secondment, the field formations are mechanically invoking extended period of limitation under section 74(1) of the Central GST (CGST) Act.
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Section 74(1) of the CGST Act pertains to the determination of non-payment or underpayment of tax or wrongful availment of input tax credit under GST by fraud or any wilful misstatement or suppression of facts.
The CBIC said Section 74(1) cannot be invoked merely on account of non-payment of GST, without specific element of fraud or wilful mis-statement or suppression of facts to evade tax, asking its field formations to take these instructions into consideration for investigating such cases and issuing show cause notices. “Only in the cases where the investigation indicates that there is material evidence of fraud or wilful mis-statement or suppression of fact to evade tax on the part of the taxpayer, provisions of section 74(1) of CGST Act may be invoked for issuance of show cause notice, and such evidence should also be made a part of the show cause notice,” it said.
Manish Gaur, Senior Partner, Lakshmikumaran & Sridharan Attorneys, said that the instructions issued by the CBIC have brought much relief to the taxpayers as it clarifies that the judgement cannot be applied in a mechanical manner and facts of each case must be carefully analysed before proposing a demand. “The instruction will also require the Department to be open to the probability that there could be cases of employment of foreign persons in India which do not tantamount to import of manpower services, thereby not having a tax implication,” he said.
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These instructions will also help in closure of various show cause notices issued on this matter. “Such proactive, timely and much needed directions have played a significant role in successful implementation of GST. Where the said instructions are judiciously followed at ground level, these could help closure of various show cause notices issued on the matter,” Abhishek Jain, Indirect Tax Head & Partner, KPMG said.