GST on Secondment/Deputation of Expats: Key Considerations and Implications

After the advent of globalization, businesses started converting into corporate setups at a large scale and cleft out not just into their origin country but also internationally. With the snowballing competition in the Indian markets, MNCs have been setting up offices in India, and they require skilled personnel to manage and operate their Indian office affairs.

In order to do so, they usually hire from the large pool of talented and skilled personnel available locally, or sometimes they acquire/transfer their employees from their sister organizations or allied groups of companies, either locally or internationally.

Companies usually need these kinds of employees for a longer duration; therefore, in the case of expats, they relinquish their employees to the Indian offices for a temporary duration while preserving their original employment status with the foreign holding company. This kind of transfer is known as secondmenSecondmenthis blog; we will talk about GST on secondment/deputation of expats.

Issues in GST

It may be applicable to elaborate on the relevant necessities under the GST regime. The term supply is defined under Section 7 of the CGST Act in a very wide means to include all forms of supply of goods and services.

Further, the term ‘service’ is defined under Section 2(102) of the CGST Act as meaning whatsoever other than goods, money, and securities but includes doings relating to the use of money or its alteration by cash or by any other mode, from one form, currency or denomination to another form, currency, or denomination for which a discrete consideration is charged.

Further, Section 7 also includes, inter alia, the activities quantified in Schedule I, made or agreed to be completed without consideration. Entry 2 of the said schedule entails a supply of goods/services made between related peoples in the course or furtherance of business.

Further, Section 7(2) of the CGST Act offers that activities or transactions specified in Schedule III shall not be pickled as supply. It is a nonobstante clause and supersedes sub-section (1) of Section 1. Thus, if a business falls within the scope of Schedule III, it shall neither be treated as a supply of goods nor a supply of services. Entry 1 of Schedule III covers services provided by an employee to the employer through the course of employment.

Judicial Interpretation

Various courts have widely analyzed the employer-employee relationship under income tax law, as well as other laws such as means of insurance and labor laws, and have laid down tests for establishing it.

The Hon’ble Supreme Court, in the case of Dharangadhara Chemical Works, first laid down the principal test to regulate an employer-employee relationship by distinguishing between a ‘contract of service’ and a ‘contract for service.’ Employment cases fall in the former category, whereas professional services or independent contract amenities belong to the latter category.

It laid down that to govern whether the arrangement is a contract of provision, one must not only see if the employer can order the employee regarding what is to be done but also check if the employer grasps a right to control the manner in which the work is to be done by the employee.

This test was followed and established further by the Apex Court in D.C. Dewan, wherein it was held that the control test must be applied in light of the fluctuating nature or extent of control with respect to different industries. The Court opined that ‘the correct tactic was to consider whether, having regard to the flora of the work (and industry), there was due control and supervision by the employer.

OECD Model Tax Convention, 2014

Article 15 of the OECD Model Tax Convention 2014 has laid down convinced basic factors for determining the employer-employee relationship, such by way of authority to instruct the individual, control and responsibility of the place of work, provision of tools and materials to the member, right to select the individual to perform work and to terminate contractual agreements, right to impose corrective permissions related to the work, determination of holidays besides work schedules, etc.

However, these factors are major factors in assessing the degree of control of the employer over the employee and the organization. In addition, they miss out on the scope of the evolving dynamics of the employer-employee relationship.

Reversal of Trend of Judicial Interpretation

Considering the above head factual matrix, the Hon’ble Supreme Court held that even though the émigré employees were under the control and supervision of the Indian entity, the secondmenSecondmentount to service, thus, service tax would be leviable on such arrangements. The Supreme Court stretched to the above conclusion on the basis of the following crucial influences and reasonings:

There is no absolute test that the benches apply to decide whether a preparation falls under the category of a contract of provision or contract for service. The Hon’ble Court opined that a test of material over form must be applied by taking a close look at the evidence of the case at hand.

The overseas entity had an excess of highly trained and skilled personnel. The role of the Indian entity was to offer certain specialized services to the external entity.

As part of its group policy, a second agreement provided for the deployment of overseas employees to the Indian unit for a specified

Conclusion

In essence, while secondment agreements endure to play a crucial role in global business operations, their taxation, besides legal implications, necessitates a nuanced understanding and a flexible approach, balancing the interests of all stakeholders involved. The NOS judgment (supra), in addition to its application, has imposed trials for all multinational companies that rely on seconded employees to carry out their functions.

After the NOS judgment (supra), the Department issued high-show cause notices to the companies to recover GST along with interest besides penalty since the inception of GST. Thus, clarity is awaited on the issue of closing GST on secondmenSecondmentyees.

Suggested Read: GST on Services Exported but Consideration Not Received: What You Should Know

FAQs

What are the secondmenSecondments?

In a secondment arrangement, emigrants are deputed by the foreign parent company to an Indian junior company. The foreign entity and the Indian unit enter into a secondment agreement that oversees the terms of the secondmenSecondment and the Supreme Court decision on secondmenSecondmentees.

What are secondmenSecondmentyees in India?

Secondment is a temporary phase of the plan where an employee is transferred from one job to another, usually in the same cluster of company for a definite period of time for the mutual benefit of all parties complex in the arrangement.

What are the different types of secondment?

There are two main types of secondment: internal secondment, which comprises the temporary transfer of an employee to a different position in their organization, and external secondment, which involves the temporary situation of an employee to a different organisation.

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