This Tax Alert summarizes a recent ruling of Larger Bench of the Supreme Court (SC). The issue relates to the levy of service tax on secondment of employees by the foreign group company to the Indian entity wherein the salary is disbursed by the foreign company and the same is later reimbursed by the Indian entity at actuals.
SC observed that, while deciding whether an arrangement is a contract “of” service or a contract “for” service, the courts do not give primacy to any single determinative factor. It has consistently applied one test: substance over form, requiring a close look at the terms of the contract or the agreements.
The overall effect of the agreements clearly points to the fact that the foreign company has a pool of highly skilled employees, who are entitled to a certain salary structure as well as social security benefits. These employees, having regard to their expertise and specialization, are seconded (deputed) to the Indian entity for use of their skills.
While the seconded employee, for the duration of secondment, is under the control of the Indian entity and works under its direction, the fact remains that they are on the payrolls of their foreign employer. The secondment is a part of the global policy of the overseas employer loaning their services on a temporary basis. On the cessation of the secondment period, they must be repatriated in accordance with a global policy.
Accordingly, SC held that the Indian entity was the service recipient of the foreign company, which can be said to have provided manpower supply service or a taxable service.
Comments:
- The ruling is likely to impact taxpayers negatively even though the Indian entity has a temporary employment agreement with the seconded person.
- The industry may need to analyze the impact of the ruling in line with the contract clauses of the agreements entered between the group companies and the employee.
- The ruling may also impact the position taken by the taxpayers for domestic deputation of employees within the group entities.
- It may be important to evaluate the applicability of the ruling in cases where the employees are deputed to the group company and there is no contract for supply of any support services between the parties.
