CBIC issues Instruction w.r.t. applicability of SC ruling on secondment of employees under GST

This Tax Alert summarizes a recent Instruction[1] issued by the Central Board of Indirect Taxes and Customs (CBIC) with respect to applicability of Supreme Court (SC) ruling in case of Northern Operating System[2] (NOS) to secondment of employees under Goods and Services Tax (GST).

SC had earlier held that the secondment of employees by the overseas group company to NOS was a taxable service of 'manpower supply'. 

In the Instruction addressed to tax department, CBIC notes as follows: 

A careful reading of the decision indicates that SC’s emphasis was on a nuanced examination based on the unique characteristics of each specific arrangement, rather than relying on any singular test.

SC in case of Fiat India (P) Ltd.[3]  had observed that each case depends on its own facts and a close similarity between one case and another is not enough because a single significant detail may alter the entire aspect. 

There may be multiple types of arrangement for secondment of employees and each of them may have different tax implications depending upon the specific nature of the contract and other terms and conditions attached to it.Therefore, SC judgement in case of NOS should not be applied mechanically in all the cases.

Thus, investigation in each case requires a careful consideration of its distinct factual matrix, including the terms of contract, to determine taxability under GST and applicability of the principles laid down by the SC. 

Further, only in cases where the investigation indicates that there is material evidence of fraud or wilful mis-statement or suppression of facts to evade tax on the part of the taxpayer, provisions of section 74(1) of the Central Goods and Services Tax Act, 2017 may be invoked for issuance of show cause notice, and such evidence should also be made a part of the show cause notice.

Comments

The instruction is likely to provide much needed relief to the taxpayers receiving notices under section 74(1) even in absence of any specific element of fraud. 

It is relevant to note that there are many writs pending before various High Courts on the ground that their facts are different from NOS case and thus, there is no manpower supply service.

Under Service Tax, in similar matter there is an appeal filed against the decision of Chennai Tribunal before the SC (Civil Appeal Diary No. 38335/2023). 

^{_{[1]  Instruction No. 05/2023-GST
[2]  2022-VIL-31-SC-ST
[3]  2012-VIL-01-SC-CE}}