GST Cannot Be Applied Mechanically To Secondment Arrangements, Says CBIC

The Central Board of Indirect Taxes has clarified that the Supreme Court's judgement on the application of service tax should not be mechanically applied in all cases concerning the secondment of employees.

It should only be applied in cases of genuine fraud or willful evasion of taxes, it said. This comes after the CBIC received representations from businesses on the matter.

In 2022, a judgement of the Supreme Court imposed a service tax on secondment arrangements between multinationals deputing employees to their Indian affiliates. At the time, the court had said that this principle would apply to the goods and services tax regime too.

Employees are often temporarily sent to work for their Indian group companies by multinational corporations. This is called a secondment. The employee's salary is disbursed by the overseas company, which is then reimbursed to it by the Indian entity.

There could be multiple types of arrangements in relation to the secondment of employees. In each arrangement, the tax implications may be different, depending on the specific nature of the contract and other terms and conditions attached to it, the department said.

It has also been made clear that each case needs to be carefully looked into, based on its own set of facts, such as the terms of the contract between the foreign company and its Indian subsidiary, in order to figure out whether or not it is taxable under GST and whether the rules set by the apex court apply.

Prior to the clarification, GST officials issued notices to various multinationals, seeking details on secondment arrangements and demanding GST along with interest and penalties, based on the Nothern Operating Systems' case. In some cases, these notices were challenged at various high courts, which granted a stay on the proceedings as an interim measure.

This had also led to many tax payers depositing GST on a reverse charge basis and some raised concerns regarding the availability of credit on such payments and the interest due on such reverse charge GST payments.

The instruction would help mitigate litigation and the closure of ongoing proceedings, where businesses are able to distinguish their facts from the ruling of the SC, according to Saloni Roy, a partner at Deloitte India. But businesses should undertake an independent analysis to check the applicability of the ruling based on their own specific facts, she said.

Even though this judgement was very specific to the facts of that case and signified a change in legal position qua tax on secondments, unfortunately, this was being relied upon by GST authorities at the ground level blindly, qua all types of secondment arrangements and most surprisingly, also to allege ‘intentional tax evasion’ by the said Indian arms, said Sudipta Bhattacharjee, partner at Khaitan & Co.

A crucial aspect that has been addressed by the department is the invocation of Section 74 of the CGST Act by the officials. Section 74 deals with the initiation of proceedings in cases of tax evasion due to fraud, willful misstatement, or suppression of facts.

In the backdrop of numerous notices issued under this provision, the department has clarified that Section 74 cannot be invoked merely on account of non-payment of GST without a specific element of fraud, willful mis-statement or suppression of facts to evade tax.

This instruction finally clarifies that the top court’s 2022 judgement, being fact-specific, may not apply to all types of secondment arrangements and that ‘intention to evade tax’ cannot be automatically invoked in such cases, Bhattacharjee said.

This is a crucial acknowledgement from the GST department and will hopefully bring a degree of reasonability to the ongoing investigations in this regard, he said.