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August 1, 2022

India's Supreme Court holds secondment of employees between group entities is a taxable service

  • The Indian Supreme Court (SC) recently held that an arrangement involving the secondment of employees constitutes manpower supply services or a taxable service.
  • Overseas entities seconding employees to Indian group entities will need to carefully review the impact of this ruling not only from an indirect tax perspective but also from Indian income-tax perspective.

Executive summary

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.

Detailed discussion


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.

SC Ruling

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:

  • The decision of whether an arrangement between group entities is in nature of manpower supply services or not requires evaluation of who is the "real employer." If it is concluded that the overseas entities are the employers, the arrangement qualifies as manpower supply services and in-turn is subject to service tax. On the other hand, if it is concluded that the Indian entity is the employer, the arrangement is outside the purview of service tax.
  • There is not one single seminal factor to determine the real employer-employee relationship. The key is to follow a substance over form approach which requires a close look at the terms of the contract or the agreements.
  • Important factors considered by the SC in rendering its judgment:
  • Employees were seconded to the Indian entity for the purpose of enabling the Indian entity to render services outsourced to it by overseas entities.
  • Legal employment and payroll of employees continued with the overseas entities.
  • Employment was to continue with the overseas entities for social security benefits and the employees were to go back to overseas entities post secondment.
  • The terms of employment, even during the secondment, were in accordance with the global policy and remuneration was paid by the overseas entities in foreign currency.

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


1 2022-TIOL-48-SC-ST-LB

2 Service tax / Goods and Services Tax