CBIC asks GST officers to follow a more nuanced approach in employee secondment cases

It has also said that Section 74(1) of the GST Act for sending a notice should only be invoked in cases of genuine fraud or evasion of taxes.

“It may be relevant to note that there may be multiple types of arrangements in relation to secondment of employees of overseas group company in the Indian entity. In each arrangement, the tax implications may be different, depending upon the specific nature of the contract and other terms and conditions attached to it,” the CBIC said in a recent circular, adding that the decision of the Supreme Court in the NOS judgment should not be applied mechanically in all the cases.

“Investigation in each case requires a careful consideration of its distinct factual matrix, including the terms of contract between overseas company and Indian entity, to determine taxability or its extent under GST and applicability of the principles laid down by the Honourable Supreme Court’s judgment in NOS case,” the CBIC has further said.

Secondment refers to a temporary transfer by a company of some of its employees to another company and is a common practice in many multinational companies who often send employees to a subsidiary in another company. Following the Supreme Court ruling in the NOS case in May 2022, several MNCs had received GST notices for payment of taxes.

In its ruling, the Supreme Court had taken note of various facts of the case like the agreement between NOS and overseas group companies, and held that the secondment of employees by the overseas group company to NOS was a taxable service of ‘manpower supply’ and Service Tax was applicable on it. A similar issue has arisen in the case of GST.

“A careful reading of the NOS judgment indicates that Honourable Supreme Court’s emphasis is on a nuanced examination based on the unique characteristics of each specific arrangement, rather than relying on any singular test,” the CBIC circular said, which was issued after several representations from industry and companies.

It has also instructed officials that only in cases where the investigation indicates that there is material evidence of fraud or wilful mis-statement or suppression of fact to evade tax on the part of the taxpayer, provisions of section 74(1) of CGST Act should be invoked for issuance of show cause notice, and such evidence should also be made a part of the show cause notice

Experts welcomed the ruling and said it would help genuine cases of secondment of employees as well as payment of taxes.

“This circular could bring much-needed relief to taxpayers, as it potentially allows full input tax credit on paid tax when section 74 proceedings are not initiated. Nevertheless, the department recognises the existence of various types of secondment arrangements, highlighting the potential for different tax implications depending on the specific case,” said Saurabh Agarwal, Tax Partner at EY. This suggests a nuanced approach from the department, where the Supreme Court’s judgement will not be universally applied, he further said.

Abhishek Jain, Indirect Tax Head & Partner, KPMG noted that such proactive, timely and much-needed directions have played a significant role in successful implementation of GST. “Where the said instructions are judiciously followed at ground level, these could help closure of various show-cause notices issued on the matter,” he pointed out.