Secondment of Employees Under Schedule III CGST Act Deemed Genuine Employment, No GST Liability Imposed

The HC held that the secondment of employees by the foreign parent to the petitioner constituted a genuine employer-employee relationship under Schedule III of the CGST Act, exempting it from GST. Despite prior rulings treating secondment as a taxable supply, the court found the facts here showed exclusive control and integration of expatriates by the petitioner, with salary paid and taxed in India. No invoices were issued by the foreign entity, and per the CBIC Circular, the taxable value is deemed 'Nil,' precluding further tax liability. The court rejected Revenue's invocation of Rule 28 provisos to impose tax. Consequently, the HC set aside the GST demand, holding no tax liability arose from the secondment arrangement. Petition allowed.

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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.

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