Japanese multinational companies often second their nationals to connected companies in different jurisdictions. The group learns about internal cultural differences, employees gain valuable experience and relationships are strengthened within the group.
In a secondment, the employee has a relationship both with the seconding and host companies. The Japanese multinational may second an employee to an India subsidiary or group company. During the secondment, the employee’s status with the Japanese company is dormant, as if the employee is on long leave and that with the India host company is active. The employee remains on th e payroll of the company in Japan and receives its salary in Japan. The India host company reimburses the company in Japan the whole or part of the salary of the employee. The seconded employee works under the direction and supervision of the host company. On completion of the secondment, the employee returns to the Japanese company.
The service tax authorities have long contended that the host company receives manpower services, for which it pays consideration in the form of reimbursement of the salary to the overseas group company. The Customs, Excise and Service Tax Appellate Tribunal, however, has ruled that, in a secondment, an employer-employee relationship exists between the seconded employee and the host and there is no supply of manpower.
The Supreme Court in the recent case of Commissioner of Customs, Central Excise and Service Tax-Bangalore (Adjudication) v M/s Northern Operating Systems Pvt Ltd departed from this settled legal position. The court held that service tax was applicable on the secondment of employees by an overseas company to an Indian company where the salary is paid by the overseas company and reimbursed by the Indian company. In this case, the Indian host company provided back-office support services to the overseas group company and the seconded employees worked in connection with such services.
The court held that the crux of the case was the taxability of the cross charge, which centred on which company was considered the employer of the seconded person. The critical fact was that the overseas group’s business was to secure contracts, which would be performed by its highly trained and skilled personnel. Accordingly, the overseas group company would enter into contracts with host companies, for providing such services, by seconding its employees.
The court noted that the overseas employer sent its employees on secondment to the host company in relation to its own business. Further, the overseas employer paid their salaries. Their terms of employment, even during the secondment, were in line with those of the overseas company, their employer. At the end of the secondment, they returned to their original locations, to await deployment or to be offered further secondment.
The Supreme Court held that the equal exchange of advantages was implicit, as both parties derived economic benefit from the arrangement. The overseas company had the benefit of quality work from the Indian company, which acquired business due to the presence of the seconded expert employees. In these facts, the court held that the secondment of employees was a taxable service of manpower supply.
This decision is significant as it upset the previous jurisprudence on the issue of taxability of reimbursements for seconded employees. The Supreme Court has treated secondment as a manpower supply only where the seconded employees were involved in the provision of a service by the Indian host company to the overseas company. While the ruling may thus not apply to all cases of secondment, it will open such transactions to scrutiny as to the overall arrangement between the parties. This is particularly so as the tax authorities are likely to apply this ruling to current transactions and issue demands for the payment of goods and services tax.
Japanese companies should re-examine the provisions of their intercompany services agreements, the secondment agreements, and employee secondment terms. This is particularly important when the Indian host company is providing a service to the overseas company, and the seconded employees are working in relation to such service. Companies will also need to maintain the necessary documentation to prove the exact nature of the secondment.
Reena Asthana Khair is a senior partner and head of international trade and indirect taxation practice at Kochhar & Co.
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