GST Cafe | Supreme Court rules service tax to be applicable on inter-company reimbursement of salary and other expenses in relation to secondment of expat personnel in India June 2, 2022
Published in: GST Cafe
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This update relates to a ruling of Supreme Court of India (CCE&ST vs. Northern Operating Systems Pvt. Ltd.) relating to applicability of Service Tax on inter-company payment of salary and other expenses in relation to seconded expatriate employees in India.
The Respondent, Northern Operating Systems Pvt. Ltd., had entered into agreements with its overseas group entities for rendering back-office support and information technology support services. Pursuant thereof, an overseas group entity was required to second its employees to the Indian company. The seconded employees were required to act under the directions of Indian company. The seconded employee would receive salary, bonus, social benefits and out of pocket expenses from its overseas group entity.
The Respondent raised the following contentions:
“Manpower Recruitment or Supply Agency” service to include staff who are not contractually employed by the recipient but work under the direction of the recipient. This view is further strengthened by Master Circular No. 96/7/2007-ST dated 23 August 2007.
Ruling by Hon’ble Supreme Court
The Apex court has ruled out there is no singular determinative test, which could be laid down to employer-employee relationship, the Supreme Court held that such examination must be based on a host of factors. Thus, adopting a ‘substance over form’ approach to identify the “real” employer, the SC undertook a detailed review of the agreements and concluded that an employer-employee relationship does not exist between the Indian entity and the personnel. Following reasons are highlighted:
The ruling of Supreme Court, though provided in relation to a factual backdrop, may have deep impact in relation to disputes on the issue pending before Tax authorities and Tribunal. The reasoning provided may also be applicable under the GST regime. The ruling effects a change in position earlier laid down by CESTAT in decisions of Volkswagen India Pvt. Ltd. and Franco Indian Pharmaceutical Pvt. Ltd.