C.C., C.E. & S.T.-Bangalore (Adjudication) etc. vs. M/s Northern Operating Systems Pvt. Ltd.
Background
Northern Operating Systems Pvt. Ltd. (NOS), an Indian company providing back-office support to its foreign group companies (in the US, UK, Ireland, Singapore, etc.), received managerial and technical employees "seconded" to it from these overseas entities. While seconded, the employees worked under NOS's control and direction and received an Indian employment letter, but continued to be paid their salary and social-security benefits by the overseas group company, which NOS then reimbursed without any mark-up. The tax authorities issued show-cause notices demanding service tax from NOS, treating this arrangement as receipt of "manpower recruitment or supply agency service" from the foreign companies; the CESTAT (tribunal) ruled in favour of NOS and against the tax demand, prompting the revenue's appeal to the Supreme Court.
Decision Breakdown
The Supreme Court held that, despite NOS's day-to-day control over the seconded employees, the real, substantive employer for the duration of secondment remained the overseas group company, since it selected and seconded the employees, continued to bear the salary cost (merely reimbursed by NOS), and retained an overarching right of control reflected in the seconded employees' terms of employment. On this basis, the arrangement amounted to the foreign company supplying manpower to NOS, making NOS liable to pay service tax, on a reverse-charge basis, as the recipient of a taxable "manpower supply" service: the mere fact that reimbursement was without profit mark-up did not mean there was no taxable consideration. The Court nonetheless ruled against the revenue on the extended (larger) limitation period, holding there was no wilful suppression of facts by NOS given that its position had genuine, non-frivolous legal support; the appeals were therefore only partly allowed, restoring tax liability for the normal limitation period only.
Lesson Learnt
In cross-border employee secondment arrangements, tax liability turns on the real substance of who controls and economically bears the employment relationship, not merely on which entity issues day-to-day work instructions: a company receiving seconded staff from an overseas parent/group entity may still be treated as receiving a taxable "manpower supply" service and be liable to pay service tax/GST on a reverse-charge basis.