Analysis of Secondment Agreements in Taxation Case

In a recent legal case, the court conducted a detailed analysis of secondment agreements in the context of taxation. The emphasis was on delving into the court’s legal understanding of various factors such as control, economic benefits, and contractual relationships to ascertain the tax liability. This case sheds light on the importance of the court’s legal analysis in complex taxation matters involving cross-border arrangements and employment relationships.

Facts

• The revenue initiated proceedings against the assessee for non-payment of service tax in agreements with its group companies located in various countries.
• The Commissioner discharged proceedings from a previous show cause notice but appealed to CESTAT for a subsequent period.
• CESTAT rejected the revenue’s appeals and allowed the respondent, Northern Operating Systems (Pvt.) Ltd., to proceed.
• The assessee was registered under multiple service categories under the Finance Act, 1994.
• Agreements’ nature and contents were described in the impugned order, detailing the activities and terms.

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Arguments

• The petitioner argued that the seconded employees had the right to terminate the engagement as per the letter of agreement.
• The payments made by the assessee were limited to actual costs incurred, including administrative costs attributable to services.
• The seconded employees were operationally under the control of the assessee during the temporary period.
• The agreement specified the base salary, bonus, servant allowance, and hardship allowance payable to the employees during the assignment in Bangalore.
• The revenue contended that the overseas employer provided services of its employees to the assessee for agreed tasks, which were under the control of the overseas group company.
• The petitioner disputed CESTAT’s reasoning that the overseas group company did not supply services, arguing that the services directly pertained to the functions of the assessee.
• The consideration provided to the assessee was fixed and included a markup over actual costs incurred.
• Upon cessation of the assignment, the employees reverted back to their original positions in the overseas companies.
• The purpose of secondment was to utilize expertise for tasks in accordance with the service agreements.
• The arrangement between the assessee and overseas group companies was viewed as a contract for service.
• The scale of payments to seconded employees indicated highly skilled individuals were provided to the assessee for specific tasks.
• Services received from foreign group companies claimed as input services eligible for credit of service tax paid.
• Argument that services of employee to employer were never subject to service tax in India.
• Debit notes show amounts paid were towards reimbursement of salaries and allowances to employees.
• Establishment of specific secondment agreements for employees to work in assessee’s establishment.
• Services by employees to employer kept beyond the definition of ‘service’ under the Negative List Regime.
• No country levies VAT/GST on employment services or services rendered by an employee to the employer.
• Agreements with group companies were for specialized services with no mark-up charged.
• No decisive factor such as control over duties in determining the employees’ status.
• Bona fide belief that seconded employees were assessee’s employees, not covered under manpower supply services.
• Entitlement to refund of service tax paid on input services under CENVAT Rules.
• Adjudicating Authority dropped demand for subsequent period, strengthening the belief.
• Seconded personnel contractually hired as assessee’s employees.
• Demand for a specific period should be set aside, indicating no intention to evade tax.

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Analysis

• The court analyzed the various agreements and contracts between the parties to determine the taxability of the cross charge in relation to the secondees.
• It was pointed out that the control, if any, exerted by the assessee over the secondees was limited in nature and did not extend to the ability to impose sanctions or cuts in salary.
• The arrangement was examined from an economic benefit perspective, highlighting the revenue secured by the assessee from specific jobs obtained through the overseas group companies.
• The court discussed the payment mechanism, remittances, and economic benefits derived by the assessee as key factors in determining the nature of the transaction.
• It was emphasized that the services agreement was primarily for the supply of services by the overseas company to the assessee.
• The nature of the overseas group company’s business, focusing on securing contracts performed by skilled personnel, was highlighted as a factor in understanding the transaction.
• The court took note of the fact that the control test postulated a combination of managerial and technical functions in the employer.
• The judgement highlighted the importance of analyzing substance over form in contractual arrangements to determine the tax implications.
• Overall, the analysis delved into the economic benefits, control mechanisms, and contractual relationships between the parties to ascertain the tax liability in the given context.
• The judgment discusses the issue of liability to income tax in the context of arrangements involving secondment
• Various principles and tests are considered to determine whether a contract is one for service or one of service
• The ruling in Silver Jubilee case regarding flexibility in deciding the nature of a contract is highlighted
• The economic reality test and the test of employer’s economic control over workers are mentioned in relation to determining the nature of work
• The judgment emphasizes that salaries cannot be considered as consideration for the provision of service
• The court reviews previous rulings and tests from US decisions and English judgments to assess the facts of each case
• The judgment examines the nature of secondment agreements and the control over seconded employees
• Various agreements and documents are analyzed to determine the employer-employee relationships and the nature of services provided
• The court highlights the importance of the totality of facts in determining whether a contract is for service or of service
• The issue of service tax on expenses reimbursed for seconded employees is discussed
• The judgment emphasizes that the gross amount charged for services should determine the value of taxable services for service tax
• Various tests including control, integration into business, and intent to evade duty are considered in determining the nature of contracts
• The court emphasizes that the real nature of a contract should not be based solely on the nomenclature
• Transaction in money does not include activities related to the conversion of money from one form to another for a separate consideration.
• Manpower recruitment or supply agencies provide services for recruitment or supply of manpower in any manner, temporarily or otherwise.
• An unincorporated association or body of persons and its members are treated as distinct persons.
• Establishments of a person in both taxable and non-taxable territories are considered establishments of distinct persons.
• Services provided to the assessee may include recruitment or supply of manpower.
• Service is defined as any activity carried out by a person for another for consideration.
• The assessee is liable to pay service tax for the periods mentioned in the Show Cause Notices (SCNs).
• The assessee was the service recipient for manpower recruitment and supply services by the overseas entity for the duration of the employees’ deputation or secondment.
• The invocation of the extended period of limitation by the revenue was deemed unjustified and unreasonable in this case.

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Decision

• Extension letter to be entered into between NOS and the individual if needed.
• Commissioner’s orders in original to be restored, except for recovery of amounts for extended period of limitation.
• Assessee held liable to discharge service tax liability for normal period covered by SCNs issued.
• Possibility of mutual agreement for extension of assignment with NOS.
• Services to be performed in accordance with policies and procedures of TNTC Chicago.
• Modification of demand against the assessee, excluding liability for extended period of limitation.
• Selection of property for assignment taking into account schools/location.
• Monthly rent limited to INR 366,700 with annual utility allowance.
• Housing arrangements to be made directly with landlord/owner in Bangalore, India.
• Appeals partly allowed with no order on costs.
• All accommodation and car rental costs during home leave are personal responsibility.
• Additional 2 travel days granted for home leave trips in a year.
• Right to terminate employment at any time.
• Possibility of home leave allowance for immediate family to Chicago.
• Fees for services payable by TNTC Chicago with markup of 15% on Total Service Costs.
• Home Leave Options provided during assignment.
• Observance of U.S. public holidays with vacation days.
• Effective date of international assignment and expected duration of 12 months with home leave entitlement in final year if on assignment for at least six months.
• Entitlement to local public holidays observed by NOS.

Case Title: C.C. C.E. AND S.T. BANGALORE (ADJUDICATION) Vs. M/S NORTHERN OPERATING SYSTEMS PVT. LTD. (2022 INSC 598)

Case Number: C.A. No.-002289-002293 / 2021

Click here to read/download original judgement