1. It often happens that an individual is employed by let us say A Ltd. Under the terms of the employment contract (generally referred as “joint employment contract”), said employee can be deputed by A Ltd. to another group company B Ltd. Hence the concerned employee is deputed with his consent. Employment contract also provides that an employee has agreed to work in a group company under the direction, supervision and control of such group company. It further provides that such employee shall be deemed to be any employee of such group company during the tenure of work at such company.
2. When on deputation, given individual shall receive the salary and other benefits as per the policy of B Ltd. However, to avoid migration difficulties (under various labor laws) and to preserve the continuation of the employment benefits, entire salary of the said employee is processed and paid by A Ltd. The cost attributable to B Ltd. is recovered by A Ltd. Can the said recovery be subjected to tax is the subject matter of this article ?
Scope of supply
3. Sec. 9(1) of the CGST Act, 2017 provides that the tax shall be levied on supply of taxable goods or services. Scope of supply is given u/s 7 of the said Act which inter alia includes provision of services for a consideration. The definition of “service” u/s 2(102) of the said Act includes anything other than goods. Hence on plain reading of the above referred provisions, one may conclude that the recovery of proportionate salary by A Ltd. shall be towards provision of services (as it covers anything which is not in the nature of goods) and thus shall be taxable. The conclusion is erroneous due to the following discussion.
Scope of employer-employee services
4. Entry no. 1 of Schedule III to the CGST Act, 2017 provides that the services by an employee to the employer in the course of or in relation to his employment shall not be regarded as supply goods or supply of services. Can it thus be said that when an employee was on deputation at B Ltd., he was providing employment services to only B Ltd. and hence the same is covered by the referred Entry ?
5. Answer to the same can be found in the decision of the Service Tax regime. It may be noted that pre 2012, the dispute regarding the levy of tax on such recovery had more to do with the classification of services. Whether such recovery can be treated as provision of “manpower services” or not. However, Mumbai bench of CESTAT in the case of Franco Indian Pharmaceutical (P) Ltd. V. Comm. of ST 2016 (42) S.T.R. 1057 (Tri. – Mumbai) had an occasion to examine the levy even for the period post 2012 when the said levy of tax was based on the negative list and hence classification into “manpower service” was not relevant.
6. In this case the appellant entered into an agreement with the group companies to share expenses of salary of the employees deputed with such group companies. Department subjected the recovery of salary to service tax. Tribunal held as under:
“7. We can reach the same conclusion by viewing this matter from a different perspective. By legislative design, services rendered in the course of employment have been kept outside the purview of service tax levy. This is true not only for the period under consideration but even at present under the new Negative List Regime of taxation post-2012. Whether such service are rendered by an employee to one employer or to many, as in the case of joint employment, cannot make any difference to the tax treatment of the emoluments earned by the employee. We find support for this conclusion from a Draft Circular of the Board dated 27-7-2012 which deals with the cases of “joint employment”. Though a final Circular does not seem to have been issued till date, we find ourselves in total agreement with the reasons given in this Draft Circular, whose Paras 5 and 6 read thus:
There can also be cases where staff is employed by one or more employers who normally share the cost of such employment. The services provided by such employee will be covered by the exclusion provided in the definition of service. However, if the staff has been engaged by one employer and only made available to other for a consideration, it shall not be a case of joint employment.
Another arrangement could be where one entity pays the salary and other expenses of the staff on behalf of other joint employers which are later (sic) from the other employers on an agreed basis on actual. Such recoveries will not be liable to service tax as it is merely a case of cost reimbursement.”
7.1 We find that in the present case, the revenue would have had no objection if the contract of employment with the employees had been signed jointly by all the employer-companies, and if these employer- companies were paying their respective share of salary to the employees directly. The problem in the present case has arisen only because instead of the employer companies signing the appointment letter jointly, only one of them has signed the same and then shown the employees as lent or deputed to other companies for their work. The reason for entering into such an arrangement is not difficult to see as employees may not be willing to sign contracts with several employer-companies who collectively do not even constitute a separate legal entity. Not only for this reason, but even for the sake of convenience in contracting and accounting, contracts of such joint employment may be signed by only one employer-company and not by all. This, however, cannot make a difference to the taxability or otherwise of the employment contract. No doubt, an employee who signs a contract of employment with one company can legitimately refuse to work for another company, either on deputation or on secondment, if such employment contract is silent on the employer’s right to depute or second the employee. However, if such an employee consents to such deputation or secondment to another company and willingly works for other employer- companies for long periods of time, knowing fully well that his emoluments are being paid by such other companies, his contract of employment with a single employer will, by virtue of the parties conduct, transform itself into a contract of joint employment with several employers. In the present case too, employees have been working for many years with several group companies who have, in terms of a pre-existing understanding amongst themselves, been sharing the actual cost of employment on an agreed basis. The collective conduct of the employees and the employer- companies for long period of time has the effect of establishing that the contract of employment is one of the joint employment.
7.2 Even otherwise, by its very nature, a situation where employer- companies have a pre-existing agreement to hire employees on joint basis and agree to share the cost of employment on actual by dividing it amongst themselves in such a manner that each employer bears only his part of the cost indicates that there was no intention amongst the employer- companies to render any service to each other. It indeed the intention of the parties would have been otherwise, the employer-company which takes the trouble of hiring an employee in its own rolls would have insisted on some mark-up or margin being given to it, over and above the actual cost. In the absence of such a mark-up/margin, the payments received against debit notes by one employer-company upon the other employer- companies, will not partake the character of consideration for any service, but will merely represent reimbursement of shared costs.”
7. The ratio laid down by the above decision shall also apply under the GST regime. Even if the salary is processed by a single employer, in case of deputation by virtue of conduct of parties, single employment contract shall transform into a joint employment contract and any cost reimbursement under the said contract cannot tantamount to supply of services. Employer-employee relationship will persist with the group company where concerned employee has been deputed and such supply is covered by Entry No. 1 of Schedule III to the CGST Act, 2017 which regards the same as neither supply of goods nor supply of services.
Supply between related persons
8. Entry No. 2 of Schedule I to the CGST Act, 2017 provides that supply of goods or services between related persons (includes group companies) or distinct persons shall be liable to tax even if the said supply is made without consideration. Will such recovery of proportionate salary amount to supply under the said Entry ?
9. Answer again is no. This is because only supply of services between related persons is subjected to tax. Cost sharing done under the joint employment contract cannot be regarded as supply of services (as discussed above) and hence the same cannot be subjected to tax.
10. Seen from even another perspective, the intention behind Entry No. 1 of Schedule III will be defeated if joint employee cost sharing is treated as supply between the group companies.
11. Before we end we also suggest that such joint employment contracts must be drafted very carefully to preserve the employer-employee relationship.
(views are strictly personal)