Tax Insights

(1)

Tax Insights

23 June 2023

Service tax demand on Indian salary component paid to secondees by relying on Supreme Court decision upheld – Chennai bench of the CESTAT

In brief

The Chennai bench of the Customs Excise and Service Tax Appellate Tribunal¹ (CESTAT) has upheld the service tax demand on the Indian salary component paid to expatriate employees seconded from a foreign af f iliate on the basis that it constitutes consideration for the manpower services received from the foreign af f iliate by the Indian entity. The CESTAT has also relied upon the landmark Supreme Court decision in the case of Northern Operating System Private Limited² (NOS decision) and observed that the facts are similar to that of the NOS decision. While the demand has been upheld for the normal period along with interest, the CESTAT has set aside the demand for the extended period on the basis that the case does not involve suppression of facts and that it was a revenue-neutral situation.

In detail

Facts

• The appellant is inter alia engaged in providing business auxiliary services etc.

• The appellant had entered into a secondment agreement with its foreign affiliate for obtaining foreign expatriate employees. The appellant had also entered into separate employment contracts with foreign expatriates.

• Salary was paid to the expatriates on a split formula, i.e., a part was paid by the appellant, and the other part was paid by the foreign affiliate in the form of social security obligations and employees’ retirement benef it plans. The part paid by the foreign affiliate was reimbursed by the appellant.

• The appellant had treated the secondees as its own employees and deducted tax at source on the salary paid to them and issued Form 16. The appellant had also accounted for expenditure in its financial statements as personnel expenses.

1 Service Tax Appeal No . 41736/2019

2 Commissioner of Customs, Central Excise & Service Tax, Bangalore (Adjudication) v. M/s. Northern Operating Systems Private Limited [2022 (61) G.S.T.L. 129 (S.C.)]

(2)

2 PwC

• During the secondment period, the expats would remain as employees of the foreign affiliate, which means that they were under the control of the foreign affiliate. Expats were supplied to the appellant on certain terms and conditions, for a specific period and to perform specified tasks.

• In terms of the secondment agreement, the secondee was required to carry out the work as set out as per the instructions of foreign entity under the guidance, direction and supervision of the appellant.

• The appellant had discharged service tax on the reimbursement of social security charges paid under the reverse charge mechanism (RCM).

• The Adjudicating authority issued show cause notices to demand service tax under reverse charge on the af orementioned transaction, as manpower supply services were received for the FYs 2008–09 to 2013–14 (i.e. both pre and post-negative list regime), by invoking the extended period of limitation.

• The Commissioner upheld that the demand for the entire period along with the applicable interest and penalty and similar orders were passed upholding the demand for period upto June 2017.

• The Commissioner primarily observed that the secondment agreement did not bring out any employer- employee relationship between the appellant and the expatriates. It rather enabled assigning of employees of the foreign affiliate to work for a specified period for the appellant.

• Against the aforesaid order, the appellant filed the present appeal wherein the issue decided by the CESTAT was ‘whether the salary and other benefits provided to the secondees by the appellant are includible as part of the assessable value within the meaning of Section 67 of the Finance Act’.

Appellant’s key contentions

Taxability

• The appellant had furnished documents such as employment visa, TDS Certificates and Provident Fund registration, which proved that the expats were on the payroll of the appellant.

• The expatriates had to carry out the assigned work as per the instructions of the foreign affiliate but under the guidance, direction and supervision of the appellant. Though pre-secondment events such as selection, negotiation of emoluments, etc. may not be within the scope of the appellant, during the entire period of secondment, the secondees were under the complete control of the appellant.

• Even if the portion of the demand order was to be accepted, the arrangement between the foreign affiliate and the appellant would only result in dual employment, meaning thereby that both the appellant and f oreign affiliate would become joint employers for the expatriates, in which event the cost of such employees would be shared by the joint employers. Hence, there would be no service provider-recipient relationship between the appellant and foreign affiliate.

• In the present facts, it was clear that the secondees were on the payroll of both, i.e. the appellant and the f oreign affiliate, while the same was not the case in NOS decision.

Valuation

• Given that the appellant had disclosed the amounts paid to the secondees as salary under the head

‘salaries, wages and bonus’, there was no service provider-service recipient relationship between the appellant and the foreign affiliate.

• Given the amendment to the definition of ‘consideration’ with effect from 14 May 2015, the demand on such reimbursements was contrary to the decision in the case of M/s. Intercontinental Consultants and

Technocrats Private Limited³, which held that reimbursements were not taxable prior to the aforesaid amendment.

• Other than the reimbursement of social security amount, the appellant did not pay any other amount to the f oreign affiliate.

3 Union of India & Anr. v. M/s. Intercontinental Consultants and Technocrats Private Limited [2018 (10) G.S.T.L. 401 (S.C.)]

(3)

• The appellant had complied with the principle laid down in the case of NOS decision by discharging the service tax on the reimbursement of social security charges paid under RCM; hence the ratio of the said judgement was in favour of the appellant.

Extended period and revenue neutrality

• Various audit teams conducted periodic visits; therefore, the entire activities including the alleged manpower supply service were well known to the Department officials. Thus, due to periodic audits and revenue neutrality, there was no question of suppression of any facts, to justify invoking the extended period of limitation.

CESTAT’s ruling

The CESTAT observed that there was no dispute as to the provision of manpower recruitment or supply agency service, for which service tax was paid by the appellant. Accordingly, the CESTAT upheld the service tax demand for the normal period along with interest on the basis that salary paid to expatriates by the appellant constituted consideration and set aside penalty. Moreover, the demand pertaining to the extended period of limitation was set aside based on the NOS decision and on the basis that it was a revenue neutral situation.

The detailed observations of the CESTAT are summarised below.

Observations on valuation

• In terms of the agreement between the parties, it was clear that the appellant had to pay the salary, bonus, perks, etc. to the secondees working for it in India, which were not reimbursements of any expenditure. It was clear that what was paid was towards the cost incurred for making available the service which the appellant had received.

• In terms of the definition of ‘consideration’ under section 67 of the Finance Act, 1994, it includes any amount payable for the taxable services provided or to be provided; thus, there was no doubt that manpower services were received by the appellant.

Observations on applicability of NOS decision and other Supreme Court decisions

• In the context of the NOS decision, the terms and conditions and the scope of the secondment agreement in the present case were more or less identical to that of the facts in the NOS decision.

• The Supreme Court has also held⁴ that the definition of ‘manpower recruitment’ or ‘supply agency’ is wide enough to include ‘recruitment’ as well as ‘supply of manpower’, and the expression ‘supply’ is of a wider connotation than recruitment.

• Given that the ratio of the aforesaid Supreme Court decisions are squarely applicable to the present case, there was no escape for the appellant from service tax liability in respect of manpower recruitment or supply agency service.

Observations on invocation of extended period

• The f act remains that the whole of the activities were within the knowledge of the Revenue/ officials of the Department; hence, there was no scope to allege suppression of any facts.

• What was paid by the appellant to the expats was nothing but salary, which was not amenable to service tax according to them, and Revenue only sought to interpret the same differently to ensure the tax liability.

Thus, the issue involved classification and interpretation of the taxing statue, due to which, suppression of f acts could not be alleged.

• In the NOS decision, the Supreme Court did not go into the issue of revenue neutrality by holding that it was called upon to adjudicate on the nature of the transaction and whether incidence of service tax arises by virtue of provision of secondment services. However, the said decision was held to be exhaustive, which the Supreme Court has dealt with from both the revenue neutral situation as well as limitation perspectives, and theref ore, is squarely applicable to the present case.

4 M/s. International Merchandising Company, LLC v. Commissioner of Service Tax, New Delhi [2022 (67) G.S.T.L. 129 (S.C.)]

(4)

4 PwC

• Reliance was also placed on another Supreme Court decision⁵ wherein it has been held that when a unit of the taxpayer was subjected to audit several times and physical inspections were done by the department, there cannot be any case of suppression.

• In view of the guiding principles laid down by the Supreme Court in the aforesaid decisions, it is a case of a revenue-neutral situation, and by suppressing the same, the appellant could not have achieved any benef it.

The takeaways

This is a significant decision in the context of taxability of secondment arrangements where the CESTAT has relied upon the NOS decision and drawn similarities in the secondment agreements to apply the decision to the present f acts. It is also important to note that the appellant in this case had already discharged service tax on the reimbursement of social security contribution; therefore, the CESTAT has probably limited its discussion to the applicability of service tax on the salary payments made to the secondees which has been held to constitute

‘consideration’.

Given the widespread investigations initiated on secondment transactions post the NOS decision, the industry is eagerly awaiting CESTAT decisions seeking to distinguish NOS decision on facts. Earlier, in the case of Dell International, the CESTAT considered the NOS decision and upheld the taxability and there was no discussion on valuation or inclusion of reimbursements to constitute consideration. The NOS decision was also referred to in the case of Boeing in the context of taxability, though the bench held that costs incurred towards other f acilities of accommodation, hotel stay, education, etc. were no t includible in the gross value for levy of service tax. It is also pertinent to note that the decision pertaining to the issue of taxability of secondment is pending in the case of Komatsu India along with other matters before the Supreme Court. Any development on this issue is being keenly watched by the industry and representations have also been made to redress the interest impact.

5 Commissioner of Central Excise, Bangalore v. M/s. Pragathi Concrete Products Private Limited [2015 (8) TMI 1053 – Supreme Court]

(5)

pwc.in

In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.

About PwC

At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 156 countries with over 295,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.

PwC ref ers to the PwC network and/or one or more of its member f irms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

Follow us on

Facebook, LinkedIn, Twitter and YouTube.