Central Board of Indirect Taxes & Customs (CBIC) has instructed its field officer not to mechanically apply the Northern Operating System (NOS) judgment by the Supreme Court on secondment arrangements. This instruction came at a time when many notices were issued to companies with expats working for them.

The issue involves judgment in Northern Operating System (NOS), pronounced on May 19, 2022. The apex court took note of the various facts of the case, like the agreement between NOS and overseas group companies, and held that the secondment of employees by the overseas group company to NOS was a taxable service of ‘manpower supply’ and Service Tax was applicable on the same. It is noted that secondment as a practice is not restricted to service tax, and the issue of taxability on secondment shall also arise in GST.

“A careful reading of the NOS judgment indicates that the Supreme Court’s emphasis is on a nuanced examination based on the unique characteristics of each specific arrangement, rather than relying on any singular test,” instruction issued by the CBIC said.

According to EY, in the current business environment, the secondment of employees from one group entity to another is a common practice. In many instances, 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.

According to CBIC, it may be relevant to note that there may be multiple types of arrangements about the secondment of employees of the overseas group company in the Indian entity. In each arrangement, the tax implications may be different, depending upon the specific nature of the contract and other terms and conditions attached to it. Therefore, “the decision of the Hon’ble Supreme Court in the NOS judgment should not be applied mechanically in all the cases. Investigation in each case requires careful consideration of its distinct factual matrix, including the terms of the contract between the overseas company and an Indian entity, to determine taxability or its extent under GST and applicability of the principles laid down by the Supreme Court’s judgment in NOS case,” the board said.

The industry also alleged that tax officials are mechanically invoking extended periods of limitation under GST law. Here, the board said that the relevant section i.e., 74(1) of GST Law can be invoked only in cases where there is a fraud or wilful mis- statement or suppression of facts to evade tax on the part of the said taxpayer and not just on account of non-payment of tax.

Commenting on the ruling, Rajat Mohan, Senior Partner with AMRG, said that While this clarification represents a commendable step forward, urging tax officers to approach secondment arrangements with due diligence and in adherence to legal principles, it is notable that the Board has deliberately refrained from offering specific illustrative cases. “Litigation on this account is not expected to settle unless a clarification is issued on other related aspects of the eligibility of input tax credit, levy of interest and penalty,” he said