Secondment arrangement does not give rise to any tax liability: Karnataka HC sets aside IGST Demand [Read Order]

The petitioner, Alstom Transport India Limited is engaged in the business of designing, manufacturing, supplying, installing, and commissioning goods pertaining to railway and metro infrastructure projects. In addition, the petitioner provides design and engineering services, including software upgradation and modification in metro projects. During the disputed period from July 2017 to March 2023, the petitioner avers that employees of its overseas group companies were seconded to work in India for a fixed tenure.

Complete Referencer of GSTR-1, GSTR-1A, GSTR-3B, GSTR-9 & GSTR-9C - Click Here

The petitioner asserts that it executed employment agreements with each of these expatriate employees, detailing their appointments,

salaries, and allowances. It is further submitted that during the term of their secondment, these expatriates were placed on the payroll of the petitioner in India, and their salaries were paid directly by the petitioner after deducting applicable Tax Deducted at Source (TDS) in accordance with the provisions of the Income Tax Act, 1961.

The petitioner contends that while the expatriate employees were on its payroll, the overseas group entities continued to provide social security and related benefits available in their home countries. From November 2020 onwards, the petitioner has been discharging Integrated Goods and Services Tax (IGST) on a reverse charge basis, periodically, on the amounts specified in debit notes raised by the overseas group entities, as reflected in its GSTR-3B returns. It is submitted that the IGST so paid was availed as Input Tax Credit (ITC), and no objections were raised by the authorities in this regard.

The petitioner’s grievance arises from the issuance of a show cause notice bearing No.ADCOM/ENF/SZ/Summons480/2023-24 dated 26.09.2023 by respondent No.3, proposing to demand IGST amounting to Rs.59,57,19,228/-, along with interest and penalty, for the period July 2017 to March 2023. The demand is premised on the allegation that the petitioner was liable to pay IGST on the import of ‘Manpower Supply Service’ from its overseas affiliates.

In response, the petitioner has relied on Circular No.210/4/2024-GST dated 26.06.2024 issued by the Central Board of Indirect Taxes and Customs (CBIC), which clarifies that in cases involving related party transactions where full input tax credit is available to the recipient, the value declared in the invoice may be deemed as the open market value under the second proviso to Rule 28 of the CGST Rules, 2017. The petitioner asserts that since no invoices were raised, the open market value must be deemed to be ‘Nil’.

Understand the complete process and tax nuances of GST refunds, Click here

Despite furnishing requisite documents and replying in Part B of Form DRC-01A, explaining that IGST had already been discharged under the reverse charge mechanism on the reimbursed amounts, and asserting that the seconded expatriates were on the petitioner’s payroll, respondent No.3 proceeded to issue a formal show cause notice on 26.09.2023. This was despite the petitioner having clearly submitted that the transaction is not a “supply” within the meaning of Entry 1 of Schedule III to the CGST Act, 2017. Prior to this, on 27.07.2023, Part A of Form DRC-01A was issued indicating a proposed liability of Rs.62,69,13,875/-, which was responded to by the petitioner with detailed submissions and supplementary documents.

Aggrieved, the petitioner approached this Court by filing W.P.No.23915/2023 challenging the show cause notice dated 26.09.2023. This Court, while disposing of the writ petition, relegated the petitioner to submit a detailed reply before the authorities, taking note of the thenrecently issued CBIC Circular dated 26.06.2024, which clarified that in the absence of an invoice, the taxable value is deemed to be ‘Nil’. Despite submission of additional documents and explanations in line with this clarification, the respondent No.4 proceeded to pass the impugned order confirming the IGST demand on alleged import of

manpower recruitment and supply services.

The petitioner company asserts that, under a typical secondment arrangement, expatriate employees are deputed by a foreign parent or affiliate company to work for its Indian subsidiary for a specified period. Such arrangements are governed by a dual-contractual framework comprising (i) a Secondment Agreement executed between the foreign and Indian entities, and (ii) an Employment Agreement entered into directly between the seconded employee (secondee) and the Indian entity.

The Secondment Agreement sets out the overarching terms of deputation, including the duration of the secondment, the general roles and responsibilities of the secondees, and the mechanism for reimbursement of costs, such as salaries and benefits paid by the foreign entity on behalf of the Indian company.

 Clear all Your Doubts on RCM, TCS, GTA, OIDAR, SEZ, ISD Etc... Click Here

In parallel, the Employment Agreement entered into with the Indian entity governs the specific terms of the secondee’s full-time engagement in India during the secondment period. This agreement contains stipulations regarding the tenure of employment, location of work, compensation structure, employment duties, benefits, termination and resignation clauses, and dispute

resolution mechanisms.

In light of the statutory exclusion under Schedule III and the clarificatory Circular issued by the CBIC, Justice Sachin Shankar Magadum held that the secondment arrangement does not give rise to any tax liability, and the demand raised by the Revenue is liable to be set aside.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates