Secondment Payments Challenge: Tax Authority's RCM Interpretation Questioned Under Inter-Company Employee Transfer Mechanism

HC reviewed tax department's show cause notices challenging Reverse Charge Mechanism (RCM) for inter-company employee secondment. Court preliminarily opined that employee salary payments cannot be automatically classified as manpower services subject to IGST. Proceedings were stayed pending further arguments, with directions for counter-affidavits to be filed by both parties.

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Issues involved:
The judgment involves issues related to show cause notices issued by the tax department to a petitioner for an aggregate demand on the ground of liability to pay tax on Reverse Charge Mechanism (RCM) for supplies received from its holding company.

Details of the Judgment:
The petitioner challenged show cause notices (SCNs) issued by the tax department proposing a demand on the petitioner for tax on Reverse Charge Mechanism (RCM) due to supplies received from its holding company. The notices were issued to the petitioner's offices in Delhi, Bombay, and Chennai. The department claimed that payments made to seconded employees from the holding company were chargeable to IGST on RCM, considering them as payment for manpower services. The petitioner argued that the payments to expatriate employees were based on separate employment contracts and not for services provided by the holding company.

The respondents relied on a Supreme Court decision regarding a similar issue with a foreign company reimbursing payments to its employees seconded to India. The petitioner distinguished this case, stating that the foreign company was the employer in that situation, unlike in their case. They also highlighted that other High Courts had stayed proceedings in similar circumstances involving payments to seconded employees for service charges on manpower services.

The respondents contended that the present case was akin to the Supreme Court decision mentioned earlier, as payments were made by the petitioner to the holding company for relocating employees repatriated to Japan. The court directed the filing of counter-affidavits and set a date for the next hearing. It preliminarily opined that salaries paid to employees, even if seconded by a foreign affiliate, based on employment agreements, could not be automatically considered as payment for manpower services by the foreign affiliate.

The court stayed proceedings related to the impugned show cause notices until the next hearing date.

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