2025 (7) TMI 1611 - HC - GST

Levy of GST - secondment of employees by the foreign parent or affiliated entities - seeking declaration that the taxable value of the supply if any made by the overseas entities/expats to the petitioner is Nil in terms of Section 15(4) of the Central Goods and Service Tax Act 2017 - levy of IGST on payment of salary made to the expats by the petitioner - manpower and recruitment supply of services or not - HELD THAT - Based on the specific facts before it the Hon ble Supreme Court in Northern Operating Systems Pvt. Ltd. 2022 (5) TMI 967 - SUPREME COURT held that the secondment arrangement amounted to a supply of manpower services by the foreign entity to its Indian subsidiary and was therefore liable to Service Tax under the Reverse Charge Mechanism (RCM). Crucially the Hon ble Apex Court clarified that its ruling was fact-specific and should not be treated as a blanket precedent for all secondment arrangements. Given the conceptual alignment between the Service Tax and GST frameworks the NOS decision prompted heightened scrutiny of secondment structures under GST. The central question remains whether a secondment constitutes a taxable supply of manpower services or a non-taxable employer-employee relationship exempt under Schedule III of the CGST Act. In the present case the petitioner contends that the expatriate employees were seconded by the foreign parent solely to render services to the petitioner in India. Throughout the period of secondment these employees were under the exclusive administrative and functional control of the petitioner were integrated into its organizational framework and adhered to its internal policies code of conduct and disciplinary rules. Their salaries were paid directly by the petitioner and subjected to Indian income tax including deduction of TDS and they were extended statutory employment benefits under Indian labour laws. Collectively these facts establish the existence of a genuine employer-employee relationship between the petitioner and the seconded personnel falling squarely within the exclusion under Schedule III of the CGST Act and thereby not constituting a taxable supply. In the present case it is not in dispute that no invoices were raised by the petitioner in respect of the services allegedly rendered by the foreign affiliate through seconded employees. Following the clarification in Para 3.7 the value of such services must be deemed to be Nil and treated as the open market value. Even if arguendo such secondment arrangement is assumed to be a supply the deeming fiction under the Circular neutralises any scope for further tax liability. This Court is in agreement with the view of the Delhi High Court that the Circular being binding on the authorities leaves little room for the Revenue to allege a taxable value in the absence of an invoice. Further the second proviso to Rule 28 cannot be invoked to displace the legal effect of a Nil value where the legislative framework itself permits such a deeming fiction especially when full input tax credit is available. In light of the statutory exclusion under Schedule III and the clarificatory Circular issued by the CBIC this Court holds that the secondment arrangement does not give rise to any tax liability and the impugned demand raised by the Revenue is liable to be set aside - Petition allowed.

Summary

ISSUES:

Whether secondment of expatriate employees by foreign group entities to an Indian company constitutes a taxable supply of manpower services under the GST regime.Whether salary payments made by the Indian company to seconded expatriates attract Integrated Goods and Services Tax (IGST) under the reverse charge mechanism.Whether the taxable value of supply made by overseas entities/expats to the Indian company can be deemed 'Nil' under Section 15(4) of the CGST Act, 2017 read with Rule 28 of the CGST Rules, 2017, in the absence of invoices.Whether the arrangement falls within the exclusion under Entry 1 of Schedule III to the CGST Act, 2017, i.e., services by an employer to its employee.Whether the CBIC Circular dated 26.06.2024 clarifies valuation and input tax credit (ITC) treatment in related party secondment arrangements.Whether the demand of IGST along with interest and penalty on the alleged import of manpower supply services is sustainable.

RULINGS / HOLDINGS:

The secondment of employees in the present case does not amount to a taxable supply of manpower services under the GST regime and is therefore not amenable to IGST under the reverse charge mechanism.Salary payments made by the Indian company to expatriates, who are on its payroll and under its exclusive administrative and functional control, do not constitute consideration for supply of manpower services and hence do not attract IGST.In the absence of invoices raised by the Indian company for services rendered by the foreign affiliate, the value of such services is deemed to be 'Nil' and treated as the open market value under the second proviso to Rule 28(1) of the CGST Rules, 2017, as clarified by CBIC Circular No. 210/4/2024-GST dated 26.06.2024.The arrangement falls within the exclusion under Entry 1 of Schedule III to the CGST Act, 2017, which excludes services by an employer to its employee from taxable supply.The impugned orders confirming demand of IGST along with interest and penalty on the alleged manpower supply service are quashed and set aside.

RATIONALE:

The Court applied the legal framework under the CGST Act, 2017, particularly Section 15(4), Rule 28 of the CGST Rules, and Entry 1 of Schedule III, alongside the CBIC Circular dated 26.06.2024.The Court relied on the substance-over-form approach established in the Supreme Court's decision in CC, CE & ST v. Northern Operating Systems Pvt. Ltd., which held that secondment arrangements may constitute taxable supply depending on factual control and economic employer status; however, this ruling is fact-specific and does not apply universally.The Court emphasized the dual-contractual framework of secondment arrangements, highlighting that the secondees were fully integrated into the Indian company's workforce, under its control, on its payroll, and subject to Indian tax laws, establishing an employer-employee relationship exempt under Schedule III.The CBIC Circular No. 210/4/2024-GST clarified valuation issues in related party transactions where full ITC is available, providing that in the absence of an invoice, the value may be deemed 'Nil', thus neutralizing tax liability.The Court noted the GST Council's recommendations and CBIC instructions aimed at consistent assessment of secondment cases and conditional waiver of interest and penalties, reflecting a doctrinal shift towards case-by-case evaluation and relief measures.The Court found the Circular binding on authorities, limiting their ability to impose tax demands where the invoice is not raised and full ITC is claimed, reinforcing the legal effect of the 'Nil' value deeming fiction under Rule 28.