CA Gaurav Gupta
Employment is one of the simplest version of supply of a service for consideration. The employee undertakes the tasks under the instructions of the employer and in return, gets his salary and other perquisites from such employer. He is not responsible for performance of a particular task but for performance of tasks under the control and supervision of his employer. With growing economies, business entities have grown multifold and their relations inter-se have also gone complicated over time.
Services of employee to employer is considered as neither supply of goods nor supply of services as per the Schedule III of the Central Goods and Services Tax Act, 2017 (“CGST Act, 2017”). However, when services of such employee transactions spreads between multiple companies, the implications under GST may differ. Transactions which are often in dispute with authorities are in relation to deputation of employee and that of sharing of employee costs. While there can be multiple elements to such costs, this article focuses on one aspect – the nature of services of employee and its treatment under GST statutes?
Understanding the employer and employee concept
Hon’ble Supreme Court decision in Ram Prashad v. CIT  42 Comp Cas 544 ; 86 ITR 122 observed that whether a Managing Director is an employee of the Company or not can be determined only by the articles of association and the terms of employment. Hon’ble Supreme Court cited a passage from the judgment of the Scottish Court of Session in Anderson v. James Sutherland (Peterhead) Ltd.  SC 203 at 218, where Lord Normand stated:
“‘…the managing director has two functions and two capacities. qua managing director he is a party to a contract with the company, and this contract is a contract of employment; more specifically I am of opinion that is a contract of service and not a contract for service.’”
The Supreme Court in ESI Corporation Vs. Apex Engineering (Pvt.) Ltd. (1998) 1 SCC 86 has held that a Managing Director by himself cannot be said to be the owner of the factory which belongs to the company and particularly when the Managing Director was to work under the directions of the entire body of Directors. Hon’ble Allahabad High Court in the case of Sardar Harpreet Singh v. Commissioner of Income Tax – 1990 SCC Online All 929, submitted that merely on deduction of Income Tax at source cannot be considered that the Director and the Company has employer and employee relationship. It is the agreement between the employer i.e. company and the Director would reveal the exact relationship between them.
Thus, a “contract for services” is where the supplier delivers services to the customer. A “contract of services” is where the contract is for the supply of services of an employee and the contractor exercises control over the employees. While the latter is excluded being an employer-employee relationship, the former is under the purview of levy of GST.
On employer-employee relationship, Organization of Economic Cooperation and Development [OECD] Commentary on the Model Tax Convention 2010 provides as follows:
“The nature of the services rendered by the individual will be an important factor since it is logical to assume that an employee provides services which are an integral part of the business activities carried on by his employer. It will therefore be important to determine whether the services rendered by the individual constitute an integral part of the business of the enterprise to which these services are provided. For that purpose, a key consideration will be which enterprise bears the responsibility or risk for the results produced by the individual’s work. Clearly, however, this analysis will only be relevant if the services of an individual are rendered directly to an enterprise. Where, for example, an individual provides services to a contract manufacturer or to an enterprise to which business is outsourced, the services of that individual are not rendered to enterprises that will obtain the products or services in question.”
The OECD Commentary has also laid down the following key factors for determining an employer-employee relationship:
Thus, having understood the relationship, we now proceed to examine the transactions under examination.
Deputation of Employees
The OECD has expanded the concept of employer to include two categories of employers – real and economic employer and the engaging employer (one who has given the offer letter). In the following cases it has been held that a person under whose control and supervision the deputed employees work should be considered as the real and economic employer and not the person who has deputed the employees under the deputation agreement:
Thus, this is well accepted that the employment of a person can change hands between different companies of a group whereby the real control and supervision of an employee can be handed over to another company and thus, the controlling company steps into the shoes of real and economic employer. Thus, such company shall be responsible for bearing the salary of such employee and also be responsible for all of his actions. Once the status of real and economic employer changes, the engaging company cannot be held responsible for any of the actions of the employee.
Thus, in the humble opinion of the author, once the employee is deputed, the receiving company becomes the real and economic employer and supply of services of employee to such company shall be covered within the ambit of Schedule III of CGST Act, 2017 and shall not be exigible to GST.
Reference is also required to be made to the judgement of IDS Software solution  122 TTJ 410 (ITAT-Bang), wherein it was held that where legal employment remains with one employer while supervision and control remains with the other employer, the latter is considered as real or economic employer. In the said case, Hon’ble Tribunal held that IDS India would be considered as the “economic employer” of the deputed employee. The Hon’ble Tribunal observed that the Indian company was the economic employer of the deputed employee who was to report to its management and was to be replaced by the US parent company on its request. The Tribunal also observed that the Indian company was required to indemnify the US parent company from all claims, demands, etc., consequent to any act or omission by the deputed employee and that the US company did not warranty the quality of the deputed employee. The Tribunal thus, concluded that the deputed employee was an employee of the Indian company.
The decision was followed in the case of Abbey Business Services (India) (P.) Ltd. v. Deputy Commissioner of Income-tax [IT Appeal Nos. 1141 (BANG.) OF 2010 and 41 & 42 (BANG.) OF 2011] wherein Hon’ble Tribunal has held that the assessee can be regarded as the real and economic employer of the deputed employees. The decision was based on the facts that the recipients shall be under the direct management, supervision, instructions and control of Abbey India and Abbey UK shall not instruct recipients, be not responsible for any loss or damage occasioned by the recipients work.
In the case of HCL Info systems Ltd. vs. DCIT [76 TTJ 505 (Delhi)], the Tribunal observed that when the command and control of the deputed employees (technicians) remain with the Indian company, then the technicians were the actual employees of the assessee. The Hon’ble Delhi High Court in DIT vs. HCL Info systems Ltd. [274 ITR 261 (Del)] upheld the order of the Tribunal and dismissed the appeal filed by the income-tax authorities. Thus, in cases where the effective control is not passed and the command of the employees remain with the contractual employer, the above decisions would not be of resource.
In the case of ITC [2012-TIOL-855-CESTAT-DEL], the appellants were sending their manager/ employees to hotels run by the subsidiary/ associate companies on deputation. They were recovering costs on actual basis and were not retaining any amount out of the payment made by the hotels run by the subsidiary/ associate companies. The contention of the Department is that the appellants were engaged in manpower supply service as they were supplying their manpower to hotels run by associate companies on a cost recovery basis. The Government through Instruction F. No. 137/35/2011-ST dated 13.7.2011 has clarified that activity of ONGC for providing their staffs on deputation to DGHC for remuneration in the form of reimbursement from DGHC is chargeable to service tax. The Board in its clarification has stated that organization making available their staff to another entity would be covered under the said definition and the motive for providing such manpower is of no consequence. Further, the Board has stated that the volume of activity undertaken or the presence or absence of profit motive is irrelevant. It was held that the appellant were not engaged in manpower recruitment or supply service.
In case of Volkswagen India (Pvt.) Ltd. Versus Commissioner of C. Ex., Pune-I [2014 (34) S.T.R. 135 (Tri. – Mumbai)] held that the foreign employees were seconded on Indian entity payroll and part of the salary was paid by the Indian Entity in India and part of the salary was paid by the foreign holding entity in overseas bank account of the seconded employee. The said payment of salary in the overseas bank account of the seconded employee was subsequently reimbursed from Indian entity. The contention was that the reimbursement made by the Indian entity to foreign entity was liable to Service tax. However, the Hon’ble Tribunal held that method of disbursement of salary cannot determine the nature of transaction. The relevant extract of the said case is reproduced as under:
“5. We have carefully considered the submissions made by both sides and also perused the entire company agreements (Annexure-B) as well as the clauses of agreement with the global employee (Annexure-A).
5.1 In view of the clauses of agreements noticed herein above and other facts, we hold that the global employees working under the appellant are working as their employees and having employee-employer relationship. It is further held that there is no supply of manpower service rendered to the appellant by the foreign/holding company. The method of disbursement of salary cannot determine the nature of transaction.
5.2 Further, in view of the rulings relied upon by the appellant as aforementioned, we find that the facts are covered on all four corners and accordingly, the appeals are allowed and Orders-in-Original are set aside.”
In case of Commissioner of Central Central Excise vs. M/s Computer Sciences Corporation Private Limited, where the Tribunal held that where there is a distinct employment contract and the assessee has remitted certain social security benefits outside India, the same would not be subject to Service tax and in no way can the transaction be equated with providing manpower supply service.
In the case of Vidarbha Iron & Steel Co. Ltd. [ 63 taxmann.com 358 (Mumbai – CESTAT)] reimbursement of actual salary by real and economic employer was held as not a consideration for rendering any services.
In the case of Punj Lloyd Ltd.  92 taxmann.com 35 (New Delhi – CESTAT)], it was held that deputing employees to group company cannot be considered as supply of manpower when they continued to control the deputed employees and have only got reimbursement of actual cost for such deputation.
Thus, only one employer can enjoy the benefit of employee services when deputed and such company shall be considered as real and economic employer and any payment by such company will not be exigible to GST. It is important to mention in these cases, the TDS is also deducted under Section 192B on payments made to or for the employee.
Sharing of Employee Cost
In another set of arrangements, the employee performs services of multiple companies of the group. The employee costs is then appropriated amongst such group companies. In such cases the payment to employee is made by one company while the other companies pay their respective share of employee costs to the said company. Sharing of costs for any services is not considered as supply of service from one person to another.
Sharing of costs are a common feature in most of the companies. Sharing is different from making available the infrastructure of one company to other group companies. To ensure that cost sharing agreements do not qualify as provision of services, there are certain pertinent features identified by the Apex Court in the case of Gujarat State Fertilizers & Chemicals Ltd v CCE [2016 (45) S.T.R. 489 (S.C.)] which are as under:
Similarly, sharing of employee cost amongst group companies is not considered as service and is not exigible to GST. In case any employees are engaged by either of the part for this common procurements, the engagement letters of such employees should clearly state the reason of their engagement as part of shared costs amongst companies. This would be mainly joint employment.
In the case of Glaxo Smithkline Pharmaceuticals Ltd. Versus Commr. of S.T., Mumbai-I [2014 (36) S.T.R. 349 (Tri. – Mumbai)], wherein it was held that Joint carrying out of day to day functions of business by Glaxo India and Burroughs Welcome India Ltd. as per agreement of merger between them, cannot be construed as ‘Management Consultancy service’ provided by Glaxo India.
In the case of Mahindra & Mahindra Contech Ltd. Versus Commr. of S.T., Mumbai-I [2014 (35) S.T.R. 634 (Tri. – Mumbai)], it was held that Deputation of personnel such as executives, secretaries, receptionists, etc., to group companies and recovery of 15% of wages/salaries as service charges, such services not classifiable under ‘Management Consultant service’. Also, in light of Sterlite Optical Technologies Ltd. [2009 (13) S.T.R. 582 (Tribunal)] and Carborandum Universal Ltd. [2010 (18) S.T.R. 473 (Tribunal)] impugned activities covered under ‘Manpower Supply Agency Service’ and was not taxable.
The true nature of rendering of services by an individual to another person shall determine his relationship with that person. If the person is under the control and supervision of such person and the contract is that of service and not for service, the relation per se shall be that of employer and employee and any remuneration paid to or for such services shall not be exigible to GST. However, where the engagement of services of an individual is through another person, then such contract shall be that of provision of services and shall be exigible to GST.