What is Secondment Arrangement?
A secondment is an arrangement where a company temporarily assigns an employee to a new position. The new position may be within the organization or with a separate business, such as a client or supplier. Even if the position is at a separate business, the original company usually retains the employee and pays their salary. Employees, known as secondees, work on a project during their secondment and return to their original position once they complete their responsibilities. While many secondments occur domestically, a company can transfer the secondee to an international assignment.
Facts of the Case before the Supreme Court
The case Northern Operating Systems (NOS) is relating to the provisions of the Service Tax Act. The facts of the case are that the NOS has secondment agreement with the overseas company. According to the agreement the overseas company deputed his employees (Secondees) with the NOS. The Secondees would work under the supervision, instructions and control of the NOS. The seconded employees would devote their entire time and work to NOS. The seconded employees would continue to be on the payroll of the overseas company for purpose of continuation of social security/retirement benefits, but for all practical purposes, NOS is the employer. The seconded employees would receive the salary, bonus, social benefits, out of pocket expenses and other expenses from overseas company and the overseas company raises a debit note on NOS to recover the said expenses without any mark-up. The NOS would be responsible and liable for compliance towards laws of land relating to the secondees. Such laws such as income tax, labour laws etc…
The tax authorities alleged that NOS has failed to pay service tax under reverse charge for the services of manpower supply received from the group entities which are located outside India. The tax authorities contention was that the seconded employee would revert to the overseas entity once the requirement with NOS is met. Hence, the seconded employee cannot be called as employee of NOS. On the other hand, NOS argued that the overseas entities cannot be called as entities falling under the manpower recruitment or supply agency. Since seconded employee is employee and NOS is the employer, their cannot be any tax either under pre or post negative list of the law of Service Tax.
The NOS succeeded before the CESTAT. The CESTAT held that the overseas entities cannot be said to be engaged in supply of manpower. The seconded employees were receiving salaries from the overseas companies only for disbursement purposes and the employer – employee relationship existed and the activity, therefore, could not be termed as ‘manpower recruitment and supply agency’. The CESTAT further held that in the above circumstances, the overseas companies which had contracted with NOS were not in the business of supply of manpower and NOS was not a service recipient and accordingly rejected the stand taken by the tax authorities. The Revenue appealed the CESTAT’s order before the Supreme Court.
Analysis and Conclusion of the Supreme Court
The issue which this court has to decide is whether the overseas group company or companies, with whom the assessee has entered into agreements, provide it manpower services, for the discharge of its functions through seconded employees.
In simple way the Hon’ble Court said that If the Indian company is treated as an employer, the payment would in effect be reimbursement and not chargeable to tax in the hands of the overseas entity. However, in the event the overseas entity is treated as the employer, the arrangement would be treated as service by the overseas entity and taxed.
The Court stated that this court is not concerned with unravelling the nature of relationship between the overseas company and the assessee. However, what it has to decide, is whether the secondment, for the purpose of completion of the assessee’s job, amounts to manpower supply.
The Hon’ble Court said that facially, or to put it differently, for all appearances, the seconded employee, for the duration of her or his secondment, is under the control of the assessee, and works under its direction. Yet, the fact remains that they are on the pay rolls of their overseas employer. What is left unsaid- and perhaps crucial, is that this is a legal requirement, since they are entitled to social security benefits in the country of their origin. It is doubtful whether without the comfort of this assurance, they would agree to the secondment. Furthermore, the reality is that the secondment is a part of the global policy – of the overseas employer loaning their services, on temporary basis. On the cessation of the secondment period, they have to be repatriated in accordance with a global repatriation policy (of the overseas entity).
The Court discussed that the letter of understanding between the assessee and the seconded employee nowhere states that the latter would be treated as the former’s employees after the seconded period (which is usually 12-18 months). On the contrary, they revert to their overseas employer and may in fact, be sent elsewhere on secondment. The salary package, with allowances, etc., are all expressed in foreign currency. Furthermore, the allowances include a separate hardship allowance of 20% of the basic salary for working in India. The monthly housing allowance and utility allowance are also assured. These are substantial amounts, and could have been only by resorting to a standardized policy, of the overseas employer.
The overall effect of the four agreements entered into by the assessee, at various periods, with NTS or other group companies, clearly points to the fact that the overseas company has a pool of highly skilled employees, who are entitled to a certain salary structure- as well as social security benefits. These employees, having regard to their expertise and specialization, are seconded (a term synonymous with the commonly used term in India, deputation) to the concerned local municipal entity (in this case, the assessee) for the use of their skills. Upon the cessation of the term of secondment, they return to their overseas employer, or are deployed on some other secondment.
Taking a cue from the above observations, while the control (over performance of the seconded employees’ work) and the right to ask them to return, if their functioning is not as is desired, is with the assessee, the fact remains that their overseas employer in relation to its business, deploys them to the assessee, on secondment. Secondly, the overseas employer- for whatever reason, pays them their salaries. Their terms of employment – even during the secondment – are in accord with the policy of the overseas company, who is their employer. Upon the end of the period of secondment, they return to their original places, to await deployment or extension of secondment.
The Court also rejected the argument of the NOS that there was no any element of consideration to be paid to the overseas group. The court said in this regard that the mere payment in the form of remittances or amounts, by whatever manner, either for the duration of the secondment, or per employee seconded, is just one method of reckoning if there is consideration. The other way of looking at the arrangement is the economic benefit derived by the assessee, which also secures specific jobs or assignments, from the overseas group companies, which result in its revenues. The quid pro quo for the secondment agreement, where the assessee has the benefit of experts for limited periods, is implicit in the overall scheme of things.
It is held, for the foregoing reasons, that the assessee was the service recipient for service (of manpower recruitment and supply services) by the overseas entity, in regard to the employees it seconded to the assessee, for the duration of their deputation or secondment.
Implication under GST
Considering the above decision relating to erstwhile Service Tax Law it will impact under the present GST regime. According to the said decision in the case of Secondment Arrangement Agreement unless it is demonstrated that a secondment arrangement is significantly distinguishable from the one considered by the Supreme Court in the above decision, shall attract the GST liability under the provisions of the GST.
It is also debatable that the Indian Company is a facilitator between the overseas company and seconded employee. Why the such services should not be treated as intermediary services under the GST?
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