Indirect Tax Alert

In the NOS ruling² , while dealing with the applicability of service tax on the secondment arrangements, the Hon’ble Supreme Court had on review of the contractual agreements and other documents between NOS with its overseas group entities/seconded employees and other facts, held that secondment of employees by the overseas group entities to NOS constitutes manpower supply services and hence, is leviable to service tax.

Although the NOS ruling is issued in the context of the levy of service tax, the said ruling may also be applied in determining the taxability of secondment of employees under the GST regime. In this regard, CBIC has issued an instruction clarifying the following aspects:

• Applicability of NOS ruling:

  • There can be different types of arrangements in relation to the secondment of employees of the overseas group entity in the Indian entity and the tax implications thereof may be different depending on the specific nature of the contract and the terms and conditions attached to it. Thus, the NOS ruling should not be applied mechanically in all cases.

  • It is also clarified that to determine the taxability of such transactions, investigations in each case require a careful consideration of its distinct factual matrix including the terms of contract between the Indian entity and the overseas group entity.

• Invocation of an extended period of limitation (under Section 74 of the Central Goods and Services Tax Act, 2017 (CGST Act)):

  • It is also clarified that Section 74(1) of the CGST Act must be invoked only in cases where there is fraud or wilful misstatement or suppression of facts to evade tax on the part of the taxpayers. Absent such circumstances, Section 74(1) of the CGST Act cannot be invoked merely on account of non-payment of GST.

  • Thus, only in cases where the investigation indicates that there is material evidence of fraud or wilful misstatement or suppression of facts to evade tax, the Tax Authorities can invoke Section 74(1) of the CGST Act. Further, such evidence should also be made a part of the show cause notice.

[Source: Instruction no: 05/2023 – GST dated 13 December 2023]

BDO Comments

The instruction stipulating that the taxability of every secondment arrangement needs to be examined on the basis of facts involved in each case, is in line with the established judicial precedents. While the tax authorities have been seeking to demand tax by uniformly applying the NOS ruling, and the Taxpayers have been responding by differentiating the factual matrix in their case vis-à-vis the facts in the NOS ruling, this instruction directing the Tax Authorities to examine the factual matrix is welcome. This would ensure that the notices are issued only after appreciating the relevant facts and would also be relevant in the adjudication of these notices.

Further, the instruction also provides clear guidance on the applicability of the extended limitation period. This clarification would not only apply to the show cause notices (SCNs)/orders concerning the issue of taxability of secondment but should also apply to all other SCNs/orders.
 

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¹ C.C, CE & ST, Bangalore Vs. Northern Operating Systems, [TS-216-SC-2022-ST]
² Our summary of the judgement can be accessed here.