1. Introduction
Employee secondments have long been a grey zone under India’s GST regime. Multinational companies often depute expatriate staff to their Indian affiliates, raising the question- is this simply an employer-employee relationship falling under Schedule III of the Central Goods and Services Tax Act, 2017 (“CGST Act”), or does it amount to a supply of manpower services by the overseas entity to the Indian company, taxable under GST?
The debate intensified after the Supreme Court’s decision in Commissioner of CCE & ST v. Northern Operating Systems Pvt. Ltd. (2022), where secondment arrangements were viewed as manpower supply, attracting service tax. Revenue authorities began treating all secondments as taxable supplies, issuing notices under reverse charge provisions.
However, the recent decision of the Karnataka High Court in Alstom Transport India Ltd. v. Commissioner of Commercial Taxes (2025) recalibrates this debate. The Court held that where expatriates are placed on the Indian payroll and under the Indian entity’s control, the relationship is one of employment, falling outside the scope of “supply” under Schedule III of the CGST Act. This judgment has significant implications for corporates, professionals, and the future trajectory of GST litigation on secondments.
2. Statutory Framework
The starting point is Section 7(1) of the CGST Act, which defines the scope of “supply.” Read with Schedule III, services provided by an employee to the employer in the course of employment are excluded from GST altogether.
By contrast, Section 7(1)(c) read with Schedule I deems supplies between related persons, even without consideration, as taxable supplies. Since overseas group entities and Indian affiliates are “related persons” under Explanation to Section 15, revenue has argued that secondment is covered by this deeming fiction.
Valuation rules further complicate the matter. Under Section 15(1), the value of supply is the transaction value, but for related parties, open market value or prescribed rules may apply. The reverse charge mechanism (“RCM”) under Section 9(3) and 9(4) requires the Indian recipient to discharge GST liability where supply is from a foreign entity.
Thus, the statutory scheme offers two competing possibilities-
i. If the secondee is treated as an employee of the Indian company, Schedule III applies and no GST arises.
ii. If the arrangement is viewed as manpower supply by the foreign entity, it is a taxable import of services under RCM.
3. Revenue’s Stand
Post-Northern Operating Systems, revenue authorities began issuing notices asserting that-
– The foreign entity continues to employ the expatriate, as it pays social security and retains long-term control.
– Reimbursements of salary and benefits by the Indian entity are “consideration” for manpower supply.
– The arrangement is between related parties; hence, even in absence of an invoice, value must be imputed under Rule 28 of the CGST Rules, 2017.
Accordingly, demands were raised on the full value of salaries and reimbursements, with interest and penalty.
4. Petitioner’s Case in Alstom Transport India Ltd.
Alstom Transport India Ltd., engaged in railway and metro projects, seconded employees from its overseas group companies. Crucially-
– Separate employment agreements were executed between expatriates and the Indian company.
– Expatriates were placed on the payroll of the Indian company, with salaries paid directly and TDS deducted under the Income Tax Act, 1961.
– The Indian company extended statutory labour law benefits, enforced its code of conduct, and exercised day-to-day operational control.
– Social security contributions continued to be made by the foreign employer in the home country, for regulatory compliance, reimbursed by the Indian company.
The company argued that this was a classic employer-employee relationship. Therefore, under Schedule III, services rendered by these employees could not be taxed as supplies.
5. Karnataka HC’s Reasoning
The High Court accepted the petitioner’s position and carefully distinguished Northern Operating Systems–
– The Supreme Court decision was based on facts where expatriates were not fully integrated into the Indian entity and continued to operate under foreign control.
– In Alstom, operational control was squarely with the Indian entity; expatriates worked exclusively for it, received salary directly, and were treated as employees under Indian labour law.
– The GST Circular No. 210/4/2024-GST (June 26, 2024) supported this interpretation by clarifying that in related party transactions, where the recipient is eligible for full ITC, the declared value may be accepted and, if no invoice is raised, the value may be deemed “Nil.”
The Court concluded that the secondees were employees of the Indian company. As such, their services were excluded from GST under Schedule III, and no manpower supply was involved. Even if the arrangement were viewed as supply, the absence of consideration in the form of an invoice meant that the taxable value was “Nil.”
6. Comparative Lens- Delhi HC in Metal One Corporation India Pvt. Ltd.
The Karnataka High Court’s approach in Alstom is not an outlier. In Metal One Corporation India Pvt. Ltd. v. Union of India (Delhi HC, 2024), the Delhi High Court considered a similar secondment arrangement. There too, expatriates were under the effective control of the Indian affiliate, receiving salaries locally, and enjoying statutory employment protections. The Court endorsed the GST Council’s Circular No. 210/4/2024-GST, holding that where no invoice was raised in a related party transaction and the Indian company had full ITC entitlement, the value could be deemed Nil.
The Delhi HC thus aligned with the principle that mere reimbursement of salaries does not constitute “consideration” for manpower services. This provides taxpayers with persuasive authority across jurisdictions that Northern Operating Systems cannot be mechanically applied to every secondment.
7. Implications for Businesses
The judgments in Alstom and Metal One are encouraging for taxpayers but also demand careful structuring of secondment arrangements. Businesses must recognise that-
- Documentation is decisive– If expatriates are shown as employees on the Indian payroll with Indian tax withholding, the relationship will more likely be treated as employment under Schedule III.
- Contractual control matters– Agreements must emphasise that day-to-day control, HR functions, and disciplinary powers rest with the Indian entity.
- Social security reimbursements are not fatal– Courts have accepted that such payments may continue overseas for regulatory compliance, without undermining the employment character in India.
- Litigation risk persists– Revenue may continue to rely on Northern Operating Systems until the Supreme Court clarifies the distinction. Companies must prepare to defend their arrangements with strong factual records.
8. Constitutional Dimension
Beyond statutory interpretation, the issue also implicates constitutional guarantees. If salary reimbursements are taxed as manpower supply without clear statutory authority, it risks violating Article 265 of the Constitution of India, which prohibits the collection of tax without authority of law.
Moreover, the doctrine of substance over form requires courts to recognise the true nature of the relationship. Where the Indian entity is the real employer, treating the arrangement as a taxable supply between related parties stretches the statute beyond its intent. This doctrinal safeguard ensures that GST remains a tax on commercial supplies, not on pure employment relationships.
9. Compliance Checklist for Employers
To minimise disputes and align with judicial trends, businesses should-
– Execute fresh employment contracts with secondees under Indian law.
– Ensure secondees are placed on the Indian payroll, with TDS deducted under the Income Tax Act.
– Provide statutory benefits (PF, gratuity, leave benefits) under Indian labour law.
– Clearly record in agreements that operational control rests with the Indian entity.
– Retain proof of reliance on Circular No. 210/4/2024-GST to demonstrate legitimate expectation.
– Maintain detailed records of reimbursements to overseas entities, highlighting that they are regulatory compliance payments, not consideration for services.
10. Conclusion
The ruling in Alstom Transport India Ltd. marks a crucial course correction in the GST jurisprudence on secondments. By affirming that expatriates integrated into the Indian entity’s workforce are employees, not outsourced manpower, the Karnataka High Court has restored balance to a debate skewed by an overbroad reading of Northern Operating Systems.
Still, uncertainty persists until the Supreme Court provides definitive guidance. In the meantime, businesses must adopt robust contractual and payroll practices, while remaining prepared to assert their rights under Schedule III and Article 265. What emerges clearly is that form without substance will not suffice, only when the factual reality reflects true employment will taxpayers be shielded from unwarranted GST demands.
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