Introduction
In multinational corporate setups, it is common for foreign group entities to depute employees to Indian subsidiaries or joint ventures. This arrangement is called Secondment. These seconded employees often perform managerial, technical, or operational roles in India while remaining on the payrolls of the foreign parent. Accordingly, the salaries and benefits are paid abroad by parent entity and subsequently these costs are reimbursed by the Indian entity—sometimes with an additional markup for administrative overheads. This arrangement has prompted an inquiry during service tax era as to whether the secondment of employees by a foreign group entity constitutes a supply of manpower service and taxable under the reverse charge mechanism.
Background: From Service Tax to GST
Northern Operating Systems Pvt. Ltd. (NOS) entered arrangements with its overseas group entities to second the employees for delivery of IT services in India. These employees worked under the Indian entity’s supervision but remained on the foreign company’s payroll. The Indian entity reimbursed the salaries and costs. The Department has raised an issue stating that service tax is to be paid on the said service since it is an Import of Manpower Supply Service.
The controversy was finally settled by the Hon’ble Supreme Court in C.C., C.E. & S.T., Bangalore Vs. Northern Operating Systems Pvt. Ltd. (NOS). After examining the agreements and other factual aspects, the Apex Court held that secondment of employees by the overseas group company to NOS constituted a taxable ‘manpower supply’ service and thus, liable to Service Tax.
Apex Court’s Ruling:
The Court ruled that:
- The overseas entity remained the substantive employer;
- The arrangement amounted to manpower supply service;
- Service tax was payable under reverse charge, even if costs were reimbursed at actuals;
- Substance over form – contractual labels don’t decide; the real nature of relationship matters;
- Multi-factor approach – payroll retention, employment lien, supervision, return expectations, and contract terms all weighed together; and
- Commercial substance prevails – if the Indian entity merely receives HR services, it is taxable even if employees work under its control.
Finally, In the NOS case, the Hon’ble Supreme Court held that such secondment constituted a taxable manpower supply service, since the foreign entity retained employer responsibilities and merely made personnel available to the Indian entity. The reimbursement of salary and costs, even without profit, was considered consideration for such supply. Though the case was decided under Service Tax law, the Apex Court’s decision has significantly influenced the secondment arrangements under the GST regime, given the similarity in statutory concepts.
GST Era:CBIC Clarifications
Recognizing that secondment arrangements would attract similar tax treatment under GST law, Post-NOS issue, the CBIC issued certain clarifications/guidelines on the issue of Secondment. To appreciate their full impact, we must delve into the specifics:
Instruction No. 5/2023-GST dt. 13.12.2023:
The CBIC, while referring to the judgment of the Apex Court, emphasized that the NOS ruling requires a nuanced examination of each arrangement based on its unique characteristics, rather than relying on any single test. However, referring to the Hon’ble Supreme Court’s decision in the case of Commissioner of Central Excise, Mumbai Versus M/s Fiat India(P) Ltd, CBIC has given directions that each case depends on its own facts and a close similarity between one case, and another is not enough because a single significant detail may alter the entire aspect. The instruction further clarified that there may be multiple types of arrangements in relation to secondment of employees and each arrangement may have different tax implications depending upon the specific nature of the contract and terms attached to it. Therefore, the NOS judgment should not be applied mechanically in all cases, and investigation in each case requires careful consideration of its distinct factual matrix.
Circular No. 210/4/2024-GST dated June 26, 2024:
As per S.No. 4 of Schedule I of CGST Act, 2017 , import of services by a person from a related person or from any of his other establishments outside India, in the course or furtherance of business, is to be treated as supply even if the same is made without any consideration. Further, Rule 28 of the CGST Rules specifies how to arrive at the valuation of supplies between related parties or distinct persons. It provides that the value shall be the open market value. However, the second proviso to Rule 28(1) states that in cases where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value.
Based on the above framework, the circular clarified that the same analogy is applicable even in the case of import of services from related persons. The Paragraph 3.7 of the circular, states as under:
“ In view of the above, it is clarified that in cases where the foreign affiliate is providing certain services to the related domestic entity, and where full input tax credit is available to the said related domestic entity, the value of such supply of services declared in the invoice by the said related domestic entity may be deemed as open market value in terms of second proviso to rule 28(1) of CGST Rules. Further, in cases where full input tax credit is available to the recipient, if the invoice is not issued by the related domestic entity with respect to any service provided by the foreign affiliate to it, the value of such services may be deemed to be declared as Nil, and may be deemed as open market value in terms of second proviso to rule 28(1) of CGST Rules“
This means that though import of service from a related person without consideration is deemed as a supply under Schedule I, in cases where the Indian importer is eligible for full ITC and chooses not to self-invoice the supply , the value can be treated as ‘Nil’ for GST purposes.
Secondment between Non-Related Parties:
Secondment arrangements are not confined to related group entities alone. Even between independent or unrelated parties, deputation of employees is possible. In such cases, the GST implications depend on the actual contractual terms and the real nature of the relationship. Unlike related-party cases, Paragraph 3.7 of CBIC Circular No. 210/4/2024-GST (which allows a deemed ‘Nil’ value where full ITC is available and no invoice is raised) does not apply. Therefore, taxability and valuation must be determined strictly based on the agreement and statutory provisions.
Key Takeaways:
i. Secondment is not automatically considered as manpower supply – the taxability depends on the actual terms and nature of the arrangement;
ii. Case-specific examination is essential – factors such as payroll ownership, employer control, supervision, cost reimbursement, and mark-up must all be evaluated;
iii. Where no invoice is issued, the value may be deemed ‘Nil’ – provided the taxpayer is eligible for full input tax credit and the supplier is a related party, as clarified under CBIC Circular No. 210/4/2024-GST; and
iv. Mechanical reliance on the NOS judgment is to be avoided – each secondment arrangement should be tested on its unique facts and documented carefully.
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Disclaimer: The author is a Superintendent in Central Taxes. The views expressed in this article are strictly personal.
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