August 1, 2022
India's Supreme Court holds secondment of employees between group entities is a taxable service
In May 2022, the SC held that foreign entities, seconding its employees to its Indian entity, provided manpower supply services or a taxable service.1
This Alert summarizes the SC ruling and relevant considerations for taxpayers.
In the current business environment, secondment of employees by one group entity to another is a common practice. In the present case, overseas group entities seconded several employees to its Indian entity. The employees continued on the payroll of the overseas entities for continuity of employment benefits but were operationally controlled, directed and supervised by the Indian entity in terms of its separate contract with seconded employees. The seconded employees received their salary, bonus, social benefits, out-of-pocket expenses and other expenses from the overseas entities. The overseas entities in-turn recovered these costs (without any markups) from the Indian entity.
The Indian revenue authorities alleged that the secondment constitutes manpower recruitment or supply agency services and hence the Indian entity should have discharged service tax on the same.
Following appeals, the issue was submitted to the SC for consideration.
The SC after consideration of the relevant tax provisions and agreements executed between the group entities ruled that the Indian entity was the service recipient of the overseas entities, which can be said to have provided manpower supply services or a taxable service.
Key findings from the SC ruling are:
Impact of the ruling
This is a significant ruling which is likely to impact several multinational groups which have entered into or plan to enter into secondment arrangements with their Indian entities. The SC did consider a "substance over form" approach for determining the employer-employee relationship. However, some of the 'negative' factors considered by the SC while pronouncing its ruling are likely to have a far-reaching impact in evaluating similar arrangements.
Further, while the present ruling was rendered under indirect tax,2 it is likely to also have an impact on evaluating these arrangements from a direct tax perspective (for e.g., creation of permanent establishment, taxability of amounts cross charged to the Indian entity, etc.).
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (India)
Ernst & Young LLP (United States), Indian Tax Desk
Ernst & Young Solutions LLP, Indian Tax Desk, Singapore
Ernst & Young LLP (United Kingdom), Indian Tax Desk, London
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago
2 Service tax / Goods and Services Tax