SECONDMENT/DEPUTATION OF EMPLOYEES SERVICE TAX IMPLICATIONS

Several issues have arisen as regards
service tax implications on secondment/deputation of employees within a
group (either based in India or abroad) resulting in extensive
litigation. The same is being discussed hereafter.

Relevant Statutory Provisions
a) Provisions Prior to 1/7/12

“
“manpower recruitment or supply agency” means any person engaged in
providing any service, directly or indirectly, in any manner for
recruitment or supply of manpower, temporarily or otherwise, to any
other person.”

Section 65(105)(k) of the Act

“taxable service means any service provided or to be provided –

to
any person, by a manpower recruitment or supply agency in relation to
the recruitment or supply of manpower, temporarily or otherwise, in any
manner.

Explanation

For the removal of doubts, it
is hereby declared that for the purposes of this sub-clauses,
recruitment or supply of manpower includes services in relation to
prerecruitment screening, verification of the credentials and
antecedents of the candidate and authenticity of documents submitted by
the candidate.”

b) Provisions with effect from 01/07/2012

Section 65B (44) of the Act

“
“Service” means any activity carried out by a person for another for
consideration, and include a declared service, but shall not include –

……..
(b) a provision of service by an employee to the employer in the course of or in relation to his employment.”

Rule 2(1) (g) of Service tax rules, 1994 (Rules)

“
“Supply of manpower” means supply of manpower, temporarily or
otherwise, to another person to work under his superintendence or
Control.”

Relevant Extracts from Draft CBEC Circular No. 354/127/2012 TRU dated 27-07-2012

A. Scope of Manpower Supply

2.
After the negative list coming into force, the erstwhile definition of
the manpower recruitment or supply agency is no more applicable. Thus,
the words manpower supply would have to be given their natural meaning.
The manpower supply is understood to mean when one person provides
another person with the use of one or more individuals who are
contractually employed or otherwise engaged by the first person. The
essence of the employment should be that the individuals should be
employed by the provider of the service and not by the recipient of the
service.

3. There could be certain contracts in which such
manpower is made available to execute another independent contract by
the service provider. For example, a person may agree to carry out
construction or a manufacture for another in which certain manpower may
be engaged. As long as such manpower is not placed operationally
under the superintendence or control of the recipient, it shall not be a
case of manpower supply, though it will continue to be judged
independently whether it comprises any other taxable service.

4. There
are also cases of secondment whereby certain staff belonging to an
organisation is placed at the disposal of a subsidiary company or any
other associate company. Such cases will be covered by the definition of
manpower supply as the contractual employment continues to be with the
parent company.

B. Joint Employment

5. T here
can also be cases where staff is employed by one or more employers who
normally share the cost of such employment. The services provided by
such employee will be covered by the exclusion provided in the
definition of service. However, if the staff has been engaged by one
employer and only made available to other for a consideration, it shall
not be a case of joint employment.

6. Another arrangement could
be where one entity pays the salary and other expenses of the staff on
behalf of other joint employers which are later recouped from the other
employers on an agreed basis on actuals. Such recoveries will not be
liable to service tax as it is merely a case of cost reimbursement.

Service tax implications
•
As regards the provisions applicable prior to 01-07-2012, most of the
litigation is centered around applicability under the taxable service
[section 65(68) /65(105)(k) of the Act] of “manpower recruitment or
supply agency service”. Under the said provisions the following
conditions had to be fulfilled so as to bring the subject activities
within the scope of taxable service viz.:

The service provider
should have been engaged in providing the service of recruitment or
supply of manpower, temporarily or otherwise to any other person; and

the
individuals had to be contractually employed by the manpower supply
agencies and there was no employee – employer relationship between the
individual and the service recipient.

• Under the negative list
regime, introduced with effect from 01-07-2012, service tax is payable
on all activities for consideration carried out by one person or another
for consideration, except those excluded from the definition of
‘service’ or specified in the negative list of services and the
exemption notifications. The services provided by an employee to the
employer, if provided in the course of or in relation to employment,
have been specifically excluded from the definition of ‘service’.

Further,
since the categorisation of taxable services has been done away with,
the condition of a person being engaged in the business of supply of
manpower is no more relevant. However, Rule 2(1)(g) of the Rules,
defines “supply of manpower” for the purpose of reverse change
provisions. .

Considering the specific exclusion from the
definition of service, the aspect of employer-employee relationship
assumes greater significance, insofar as the applicability of service
tax is concerned.

Employer – Employee relationship and Joint Employment
In
case of secondment/deputation of employees of an overseas based company
to an Indian company, the concept of joint employment becomes relevant,
provided the expatriate is also employed by the Indian company, in
terms of the relevant Indian laws are concerned. The issue which is
being deliberated is, whether the concept of joint employment can help
MNCs to arrange their affairs in a lawful manner so as to get the
benefit of exclusion from the definition of service. Hence, it is very
important to analyse and understand the concept of employment and
thereafter the concept of joint employment.

The Honorable
Supreme Court has from time to time expressed a view that the test of
supervision and control is a crucial point for determining the employer –
employee relationship. [Refer Shivanandan Sharma vs. Punjab National
Bank AIR 1955 SC 404]. However, it needs to be noted that the Honorable
Supreme Court has also held that since the nature of supervision and
control varies from business to business, it becomes difficult to
precisely define the degree of such supervision and control & lay
down a single formula or test for the same.

The Gujarat High Court in Satish Plastics vs. Regional Provident Fund Commissioner – 44 FLR 207 (Guj.) has summarised the tests for ascertaining master-servant relationship as under:

i) Was he doing the work for monetary payment?

ii)    Was the work done by him the work of the establishment or had a nexus with such work?

iii)    Was the payment made as wages, in the sense of being remuneration for the physical or mental effort in connection with such work?

iv)    Was the work such that it had to be done as directed by the establishment or under its supervision and control to the extent that supervision and control are possible having regard to the specialised nature of the work or the skill needed for its performance?

v)    Was the work of such a nature and character that ordinarily a master–  servant  relationship  could  exist and, but for the agreement styling it as a contract, common sense would suggest a master– servant bond?

vi)    Was the relation indicative of master–servant status in substance having regard to the economic realities irrespective of the nomenclature devised by the parties?

vii)    Was he required to do the work personally without the liberty to get it done through someone else?

The above can serve as a useful guide for ascertainment of employer–employee relationship.

In overseas jurisdictions, the test is that of the economic reality rather than various factors discussed above. however, no single or uniform test has been laid down by the Courts to determine the economic reality. Many factors such as the extent of the skill and initiative of an employee being an  integral  part  of  the  employees  business,  the permanency of their relationship, the nature and degree of employer’s control, etc., have been considered by the Courts in the peculiar facts and circumstances of a given case.

The absence of defined principles for the application of the test of economic reality has posed challenges before the Courts in determining the existence of employment relationship. Apart from the principle of economic reality, the Courts have also considered the principle of mutuality of obligation for determining the presence of a contract of service.

The  concept  of  joint  employment  has  been  recognized and given effect to in many overseas jurisdictions including US & UK in particular. However, the concept of joint employment and economic reality is comparatively new in india. further, the variety of tests propounded for establishing the employer- employee relationship has brought in more uncertainty. draft CBeC Circular referred above does briefly cover the concept. However, it does not provide any finality as to the Government’s perspective on the concept & service tax implications arising therefrom. the joint employment concern is necessarily an application of the principle of “substance over form”. But how far such relationships can actually sustain in employment laws is a difficult question for which there are no ready answers.

Analysis of some decisions:

•    Ruling in Volkswagen India (Pvt.) Ltd. vs. CCE (2014) 34 STR 135 (Tri – Mumbai)

The brief facts of the case were that the appellant was a manufacturer of passenger vehicles and was registered under service tax for various taxable services like, management or business consultant’s service, consulting engineer’s service, etc.

Due to nature of the business, the appellant required people with specialised skill and experience and accordingly, the appellant employed many foreign nationals (called as global employees), who were previously employed with other group entity. there was an “inter Company employment agreement” between the appellant and its holding company namely Volkswagen AG, a company registered in Germany, which facilitatesd employment of personnel from other group companies. The  said  personnel  were  relieved  by  the  other  group company and were put at the disposal of the appellant and they function as whole time employees of the appellant– indian company and worked solely under the control, direction or supervision of the appellant in accordance with its policies, rules and guidelines generally applicable to the employees of the appellant company during the period  of  such  employment.  The  terms,  conditions  and place of employment of such global employee and their designation was in accordance with the terms and conditions agreed between indian company and the respective global employee. In particular, following agreement terms need to be noted:

•    The employment of such global employee shall be in his personal capacity only and not for and on behalf of the foreign company. the appellant also have a right to promote/discipline/suspend/take any action/terminate the services of such global employee at any point of time in accordance with its applicable policies without seeking any permission from the foreign company;

•    The other group company/foreign company will not have any obligation towards the appellant with regard to the performance of the global employee nor the foreign company shall enjoy any right, title to or interest in or be responsible for the work of global employee or assume any risk for the results produced from the work performed by the global employees while under employment with the appellant;

•    During the period of employment with the appellant, the holding company shall not in any way interfere with the working and/or the terms and conditions of such employee nor such employee shall be subject to any instruction or control of the foreign holding company;

•    The salary (including other entitlements) of such global employee shall be the liability of and decided and paid by the indian company i.e. the appellant based on its policies and guidelines and in case of default by the appellant, the foreign/global company will not be liable towards such global employee;

•    If the foreign/global company makes any payment to any third party (salary, etc.) in the home country of the global employee on behalf of the indian company, the foreign company will be entitled to be reimbursed by the indian company to the extent of such payment;

•    The foreign company will not be under any obligation to replace any of the global employees in the event the employment of any of the global employees is terminated by the global employee or the indian company, for any reason, nor the foreign company    is responsible for any loss or damage caused to the appellant or any action of such global employee;

•    The agreement does not create any service provider and client relationship between the foreign company and the appellant nor it would be construed that the foreign company is providing any type of  services with regard to employment of the global employees with the appellant;

•    Clearly provided that there is no direct or indirect consideration/charges (in cash or kind) payable by the indian company to the foreign company or vice-versa in this connection;

•    The remuneration clause provided is as follows:-
Your remuneration will be paid as follows:-
F Part of your net salary will be paid by the company into your valid account in Germany (through the disbursing agent, (VW aG) at the end of each calendar month).

F The  balance  part  of  your  net  salary  as  mutually agreed upon between you and company will be paid by the company into your valid account in india at the end of the calendar month.

Details of your remuneration will be communicated to you separately. your salary to be paid to Germany as above, would be paid subject to approvals as may be required under the indian exchange control regulations. the gross remuneration is subject to statutory withholding/indian income taxes as applicable.

The   company   shall   deduct   the   applicable   individual income-tax payable at source and make payment of the same.  The  company  shall  furnish  you  with  necessary certificates and any other documents evidencing the payment of this tax to the authorities as may be required by law.

…………..

•    The Visa clause of the agreement shows that such global employees are in the control and disposal and also command of the appellant and there is employer– employee relationship between them.

The revenue treated the aforementioned arrangement as “supply of manpower” by the foreign holding company to the appellant and issued show cause notice demanding service tax etc.

For  the  appellants,  it  was  submitted  that  there  was  no supply of labour or manpower, and/or recruitment service provided by the holding company of the appellant. as  per the requirement and request of the appellant, for skilled personnel, the holding company  facilitated  in  the identifying such foreign personnel, who were then employed by the appellant under separate agreement with each employee as aforementioned. Such global employees worked under the control and supervision of the appellant as its employees. Salary for such work done by the global employees was directly paid by the appellant and such income earned by the global employees was taxable as salary under the provisions of the income-tax act, 1961. Further, the appellant deducted income-tax at source from the salary of such global employee of the appellant as per the provisions of the income-tax act. the appellant had also issued necessary TDS certificate in capacity of employer.

Further,  a  part  of  the  salary  of  such  global  employees was remitted abroad in their home country, the same was done using the services of the holding company or other group companies as applicable and such amounts were reimbursed to the other company. It was further contended that apart from the part salary of the global employees (by way of reimbursement), the appellant had not paid any amount to their holding/foreign company. Merely because a part of the salary of such global employee was paid in their home country through the holding/foreign company, it could be said that the foreign/ holding company rendered supply of manpower or labour to  the  appellant. Reliance  was  placed  on  the  decisions in the case of ITC Ltd. vs. (2013) 29 STR 387 (Tribunal) and Paramount Communication Ltd. vs. (2013) 29 STR 317 (Tribunal).

It was further contended that the holding/foreign company was not a “manpower recruitment or supply agency service” as required u/s. 65(105)(k) of the Finance Act, 1994. Further, reliance was placed on C.B.E & C Circular No. 96/7/2007-S.T. dated 23-08-2007, wherein it has been clarified that in the case of supply of manpower, individuals are contractually employed by the manpower recruitment  or  supply  agency.  The  agency  agrees  for use of the services of an individual, employed by him, to another person, for a consideration. Employer–employee relationship in such case exists between the agency and the individual and not between the individual and the person who uses the services of the individual.

On  behalf  of  the  revenue,  it  was  contended  that  the indian entity should have paid full salary directly to the employee of the appellant company and not routed through the foreign/holding company. It is also the contention of the revenue that after a period of 3-4 years such global employees go back to the foreign/holding company and even during the intervening period, during the employment in the appellant company, the social security liability was discharged in their home country. Accordingly, it was submitted that the transaction is one of supply of labour/manpower by the foreign company to the appellant – indian company.

The tribunal held, “in view of the clauses of agreements noticed herein above and other facts, the global employees working under the  appellant  are  working  as their employees and having employee-employer relationship.  Further  there  is  no  supply  of  manpower service rendered to the appellant by the foreign / holding company. the method of disbursement of salary cannot determine the nature of transaction. Further, in view of the rulings relied upon by the appellant as aforementioned, we find that the facts are covered on all four corners and accordingly, the appeals are allowed and orders–in– original are set aside.”

•    Ruling in CST vs. Arvind Mills Ltd (2014) 35 STR 496 (GUJ)

In this case, the issue in brief was whether the respondent is a manpower supply or recruitment agency.

The  brief  facts  were  that  respondent  had  a  composite textile mill and was engaged in manufacturing of fabrics and readymade garments. in order to reduce its cost, the respondent deputed some of its employees to its group company, who were also engaged in similar businesses. Reason for such deputation was also on certain occasions stipulated work arising for a limited period. The tribunal recorded that there was no allegation  of  finding  that the respondent had deputed employees to any other concerns outside its own subsidiary companies and also recorded that undisputedly the employees deputed do not work exclusively under the direction or supervision of the subsidiary company and upon completion of the work they were repatriated to the respondent company. On such basis, the tribunal held that the respondent could be said to be manpower supply recruitment agency and, therefore, not exigible to service tax.

The Revenue contended that the definition of manpower supply recruitment agency was very wide and would include range of activities of supply of manpower either temporarily or permanently and submitted that sizable manpower was required for the respondent from the group companies for deputation of the staff and also drew attention to the amendment of such definition to contend that after the amendment, the definition was widened.

The Court observed that the definition of manpower supply recruitment agency was wide and would cover within its sweep range of activities provided therein. However, in the present case, such definition would not cover the activity of the respondent as rightly held by the tribunal. to  court  observed,  “the  respondent  in  order  to  reduce his cost of manufacturing, deputed some of its staff to its subsidiaries or group companies for stipulated work or limited period. All throughout the control and supervision remained with the respondent. As pointed out by the respondent, company is not in the business of providing recruitment or supply of manpower. Actual cost incurred by the company in terms of salary, remuneration and perquisites is only reimbursed by the group companies.” There was no element of profit or finance benefit. The subsidiary companies could not be said to be their clients. deputation of the employees was only for and in the interest of the company. There was no relation of agency and client. it was pointed out that the employee deputed did not exclusively work under the direction of supervision or control of subsidiary company. All throughout he would be under the continuous control and direction of the company. The court further noted:
“We have to examine the definition of manpower supply recruitment agency in background of such undisputable facts. The definition though provides that manpower recruitment supply agency means any commercial concern engaged in providing any services directly or indirectly  in any manner for recruitment or supply of manpower temporarily or otherwise to a client, in the present case, the respondent cannot be said to be a commercial concern engaged in providing such specified services to a client. It is true that the definition is wide and would include  any such activity where it is carried out either directly or indirectly supplying recruitment or manpower temporarily or otherwise. However, fundamentally recruitment of the agency being a commercial concern engaged in providing any such service to client would have to be satisfied. In the present case, facts are to the contrary.”

In the result, the Court held that no question of law was involved.

Conclusion
•    For the period prior to 01-07-2012, as analyzed and held in judicial rulings, in order to be made liable to service tax, it would be essential to satisfy the test of existence of a manpower supply or recruitment agency as defined under the Act at the relevant time.

•    After introduction of negative list regime with effect from 01-07-2012, since the term ‘service’ has been very widely defined, it would be essential to satisfy  the test of employer – employee relationship so as    to be excluded from the definition of ‘service’. As discussed, the Courts have held that it is very difficult to lay down a single test or formula in this regard. hence, though guidance may be available from Court rulings, existence of employer–employee relationship would have to be determined considering the facts & circumstances of a given case.

•    It is  unfortunate  to  note  that  despite  the  fact  that a draft circular dated 27-07-2012 was issued by CBEC clarifying scope  of  Manpower  Supply  &  Joint Employment, CBEC has not issued a final Circular setting out Government’s perspective, in particular, as regards taxability of secondment/ deputation of employees. It is felt that issue of a CBeC Circular, would provide finality on the issue and avoid extensive litigation.