In the complex world of global employment, when employees from other countries work temporarily in India, it raises questions about taxes. This article dives into the details of how the Goods and Services Tax (GST) applies to these situations. We’ll explore the issues of control, supervision, and costs involved, helping businesses understand the challenges. Join us as we break down the complexities of GST rules for employees working temporarily in India, making it easier to grasp the legal aspects and how they affect real-life situations.
Also Read: GST & seconded employees: Conundrum of control supervision & costs – Part II
Part I – A Legal Understanding
Secondment of employees could be referred to as an arrangement wherein a group company located outside India sends its employees (“seconded employees”) to another group company located in India for a temporary period.
In such a situation, the salary and other entitlements of the seconded employees are paid by the foreign company and such costs are reimbursed to the foreign company by the Indian counterpart. In this arrangement, the GST department has recently found its curiosity in seeking GST on such reimbursements. This curiosity has finally resulted in an intervention from the CBIC. Therefore, in this article, an attempt has been made to discuss the tax implications from a multi-dimensional viewpoint.
At the outset, the crux of the dispute is that;
[1] GST is not leviable for services provided by an employee to an employer whereas
[2] GST is leviable on the supply of services between two related parties even if such a supply is made without consideration.
Thus, it is imperative to analyze whether the reimbursement of salaries made by the Indian company to its foreign counterpart would be considered a;
[1] consideration for services supplied by an employee to an employer, which is ousted from payment of GST; or
[2] the reimbursement would entail that the foreign counterpart is providing a service of supplying its employees to the Indian company which would lead to an import of services by the Indian company wherein it would be liable to pay GST under reverse charge.
Whether the reimbursement of salaries would fall in the [1] or the [2] category would depend upon the nature of the arrangement made between the Indian company and the seconded employees. If the arrangement is a “contract of service” or a “contract for service”.
In the former case, the relationship would be that of an employer and employee and GST is not leviable whereas in the later case, there is an import of service involved and GST under reverse charge is payable.
Based on the above paragraphs, it can be deduced that the fine thread for GST applicability on this transaction lies between the ascertainment of whether the agreement between the parties qualifies as a “contract of service” or is it a “contract for service”.
The agreements would qualify as a “contract of service” if the secondees become an employee of the Indian counterpart. However, if they remain the employees of the foreign counterpart then, the contract would be considered as a “contract for service”.
This nature is deduced from [1] the agreement between the foreign counterpart and the Indian company and [2] the agreement between the Indian company and the secondees.
Thankfully, the judiciary, in different contexts at different times, has provided necessary tests to decipher whether an agreement is a contract of service or is it a contract for service. The same is as discussed in the subsequent paragraphs;
Law under the Income tax laws
The Model Convention of 2010 issued by OECD provided some guidance as to who is considered as the employer of the seconded employees. The relevant extract is as follows;
8.14 Where a comparison of the nature of the services rendered by the individual with the business activities carried on by his formal employer and by the enterprise to which the services are provided points to an employment relationship that is different from the formal contractual relationship, the following additional factors may be relevant to determine whether this is the case:
— who has the authority to instruct the individual regarding the manner in which the work has to be performed;
— who controls and has responsibility for the place at which the work is performed;
— the remuneration of the individual is directly charged by the formal employer to the enterprise to which the services are provided (see paragraph 8.15 below);
— who puts the tools and materials necessary for the work at the individual’s disposal;
— who determines the number and qualifications of the individuals performing the work;
— who has the right to select the individual who will perform the work and to terminate the contractual arrangements entered into with that individual for that purpose;
— who has the right to impose disciplinary sanctions related to the work of that individual;
— who determines the holidays and work schedule of that individual.
As can be seen from above, the test for decided who was the real employer was who had the power to direct and supervise the secondees. However, this appeared to be a more traditional approach which has been a subject matter of change over some time.
Like, Article 10 of BEPS which replaced the OCED guidelines for Multinational Enterprises and Tax Administration (OCED Guidelines) for providing intra-group services has given guidance about the existence of services between group companies and the exception thereof.
Accordingly, as per modern guidelines, the presence of a service would be subject to;
i. Benefits test: Services would be tested on the principles as to the validity of services received; the service recipient should therefore be able to prove the economic value of services received and that they will be willing to pay an independent party for the provision of such services.
ii. Shareholder activities: A service performed by a parent company solely because of its ownership interest in one or more group members would not be considered to be an intragroup service. These types of activities are referred to as shareholder activities and the group members do not require the activity (and would not be willing to pay for it were they independent enterprises thereby failing the benefits test). Such activities include [1] costs relating to the juridical structure of the parent company itself [2] costs relating to reporting requirements and [3] costs that are ancillary to the corporate governance of the group as a whole, etc.
iii. Duplication: Duplication occurs where the intra-group service provided already exists in the group entity. The entity may be performing such service for itself or may have employed the services of a third party. Duplicated services do not qualify as intragroup services.
iv. Incidental benefits: There are cases where an intragroup service performed by a group member relates only to some group members but incidentally provides benefits to other group members.
Thus, once a service is said to be present, the issues that would arise under the Income tax laws are [1] tax on the amount paid/received towards reimbursement of salary, [2] permanent Establishment implications, and [3] withholding tax compliances. In light of these, the following principles have been developed by the judiciary;
- If the secondees have a lien with the foreign employer then, the foreign employer retains the control over the secondees. See Morgan Stanley & Co[1].
- As the Indian company possesses the defecto control to direct and supervise, the Indian company is the real employer. See Toyota Boshoku Automotive India Pvt. Ltd vs. DCIT, Bangalore[2].
- As the Indian company had a right to terminate the employment of the secondees and the secondees had no right to sue the foreign counterpart, the Indian company had complete control and it was the employer. See Serco India Pvt. Ltd. vs DCIT[3]
- As the expact had left the employment with the foreign employer and the Indian counterpart had the control and supervising rights, the Indian company was the employer. See Ernst & Young U.S. LLP vs. A.C.I.T[4].
- Last but not least, in Centrica India Offshore (P.) Ltd.[5], it was held that the foreign counterpart is the employer since although supervision and control were with the Indian counterpart, the seconded employees retained their rights to participate in the foreign company’s retirement benefits. Further, the Indian company did not have any legal employment with the secondees and it could not terminate the original employment of the secondees. Thus, employment relation was beyond the Indian counterpart as the lien was of the foreign company.
On a conjoint reading, it could be construed that while the traditional approach has been the sole test of supervision and control whilst the changing principles hint at the test of lien, legal employment, etc.
Civil laws
Under civil laws, the Supreme Court in its earlier judgments had held that the sole test of supervision and control determines the actual employer. See Dharangadhara Chemical Works Ltd vs State of Saurashtra [1957 AIR 264]. However, in the most recent jurisprudence, these tests have been modified.
In a recent order, the Supreme Court in Sushilaben Indravardan Gandhi vs New India Insurance Company[6] summarized the modern tests of considering the actual employer. The Supreme Court held that the results of the below conglomerate of tests would determine whether the contract is for service or whether it is of service;
- Who is liable to control and supervise the employees;
- Whether the employee is integrated into the employer’s business or is a mere accessory to it;
- Who is paying the wages to the employer?
- How owns the asset with which the work is to be done by the employee.
- Who ultimately makes the profit or loss from the employee’s activities?
- Economic reality i.e. who has the economic control over the worker’s subsistence, skill, and continued employment.
- Whether the employer has a right to terminate employment.
Erstwhile Service tax laws
The development of jurisprudence under the erstwhile service tax regime has been similar to the development of the jurisprudence in the civil laws, which is as discussed below;
Initially, during the erstwhile positive regime, CBIC vide Circular No. 137/35/2011-ST dated 13 July 2011 had clarified that the act of deputing the staff to another person qualifies as a manpower supply service whether or not the reimbursement is at profit or is at cost.
As far judiciary is concerned, the initial legal principle was that the employer is the person who supervises and controls the activities of the seconded employees. This principle has been upheld in the below cases;
- Volkswagen India Private Limited vs CCE, Pune[7], confirmed in Supreme Court[8],
- Goldman Sachs Services vs Commissioner of Central Taxes[9],
- Lowe’s Services India Private Limited vs Commissioner[10]
However, the drift of the judicial precedence changed with the pronouncement of Northern Operating System Private Limited[11].
In that case, the facts were that the assessee was registered with the revenue, as a service provider inter alia under the categories of “Manpower Recruitment Agency Service” and “Business Auxiliary Service. The assessee had contracted with its overseas group entities for rendering back-office support and information technology support services.
The Seconded Employees were required to act under the instructions, directions, and control of the Assessee wherein they would devote their entire time and work to the Assessee. The control over the performance of the seconded employees’ work and the right to ask them to return, if their functioning is not as desired, is with the assessee.
They would continue to be on the payroll of the foreign entity for the purpose of continuation of social security/retirement benefits, but for all practical purposes, the assessee claimed to be the employer wherein the assessee issues an employment letter to the seconded personnel stipulating all the terms of the employment.
TDS under Section 192B of the Income Tax Act 1961 under the head of salaries was deducted by the assessee from the expats’ salary. Expats filed their tax returns and contributed to the provident fund.
In light of the above facts, the issue was whether Service Tax under reverse charge is required to be paid by the assessee on reimbursements. In this regard, the Supreme Court’s Observations were as below:
i. Test of control is not conclusive to decide if an employer-employee relationship subsists. There is not one single determinative factor and is a conglomerate of all applicable tests and their weightage in the fact situation that helps to construe whether it is a contract of service (employment services) or a contract for service.
ii. During the secondment arrangement, the seconded employees are working for the benefit of the foreign company by extending their services to the assessee.
iii. The assessee is responsible for the work of the seconded employee, i.e., the overseas employer, during the secondment period, is absolved of any liability for the work of seconded employees.
iv. The letter of understanding between the assessee and the seconded employee nowhere states that the ex-pats would be treated as the assessee’s employees after the seconded period
v. On the cessation of the secondment, expats have to be repatriated. The letter of understanding issued to the seconded employee also specifies that the tenure with the assessee is an assignment.
vi. The Seconded Employees continued to be on the foreign entity’s payroll. All salary payments and social security benefits were paid by the foreign entity and later reimbursed by the assessee.
vii. The Assessee was not empowered to terminate the employment of the Seconded Employees or even amend their terms of employment in an adverse manner.
viii. The fact that salary packages, allowances, etc., were all expressed in foreign currency and separate allowances were granted for working in India further supported the fact that the Seconded Employees were the employees of the overseas entity.
GST laws
It is noteworthy that the above case of the Northern Operating System has been challenged under GST before Delhi, Karnataka, and the Punjab and Haryana High Court. Thus, until such cases are pronounced, the law of land would be the principles pronounced in the above case.
Additionally, the CBIC recently issued Instructions No. 05/2023-GST wherein the CGST officers are asked to not apply the above Northern Operating case mechanically and that the facts of every case should be analyzed separately.
Conclusion
Since there has been a change in the tests that would distinguish a contract of service from a contract for service, the businesses are expected to thoroughly review their secondment agreements with the foreign counterparts and the seconded employees to analyze the GST implications.
It is also noteworthy that internationally, the contracts of secondment of employees are considered as a supply of service and are taxed accordingly. See Italian Tax Authorities v. San Domenico Vetraria S.p.a., C-94/19 pronounced by ECJ.
In Part II of this article, we shall discuss the practical application of the above legal principles in various scenarios.
[1]2006 (284) ITR 260 (SC)
[2][2022] IT(TP)A No. 1646/Bang/2017 (Bang-Trib.)
[3]ITA No. 1432/Del/2016
[4][TS-335-ITAT-2023(DEL)]
[5]Centrica India Offshore Pvt. Ltd. vs CIT, Order issued in WP 6807/2012 which has been confirmed in the Supreme Court
[6][Order issued in Civil Appeal No. 2235 of 2020]
[7]2014 (34) STR 135 (Tri.-Mumbai)
[8]2016 (42) STR J145 (SC)
[9]2020 (10) TMI 292
[10]2021 (2) TMI 1022 – CESTAT Bangalore
[11][2022 (61) G.S.T.L. 129 (S.C.)]
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(Authors: CA Ashish Chaudhary and CA Pooja Jajwani, can be reached at [email protected] and [email protected], respectively)
(The authors extend their thanks to CA Roopa Nayak for vetting this article).
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