HC rules secondment of employees not taxable under GST

This Tax Alert summarizes a recent ruling of the Karnataka High Court (HC) ^[1] regarding taxability under reverse charge on secondment of employees from overseas related entity.

The key observations of the HC are:

• In Northern Operating Systems Pvt Ltd ^[2], SC ruled that secondment arrangement was taxable manpower service since the foreign entity in that case retained control and added mark-ups in recovery of costs. It was also clarified that its decision was based on specific facts and should not be treated as a universal precedent for all secondment cases.
• Businesses must evaluate secondment cases individually, considering factors like control, nature of posting, salary payment method, and whether the secondee returns to the foreign entity.
• The facts of the present case clearly demonstrate a genuine employer-employee relationship between the petitioner and the seconded personnel, bringing the arrangement within the exclusion under Schedule III to the Central Goods and Services Tax Act, 2017 and outside the scope of taxable supply.
• Circular No. 210/4/2024-GST clarifies that if a domestic entity eligible for full ITC does not issue an invoice for services received from a foreign affiliate, the value of such services shall be deemed ‘Nil’ and treated as the open market value under Rule 28(1) of the Central Goods and Services Tax Rules, 2017. Thus, even if the secondment is considered a supply, the deeming provision effectively nullifies any tax liability.

Basis above, HC held that the arrangement in the given case does not give rise to any tax liability and the demand raised by Revenue was liable to be set aside.

Comments:

• HC ruling appears to suggest that, where full ITC is available, Indian component of salary and perquisites paid directly to the employees may not be included in taxable value of consideration, depending on the facts, even if social security of the seconded person is reimbursed to overseas entity and subjected to GST under reverse charge. 
• HC does not appear to have clearly distinguished in detail the present case from the SC’s decision in Northern Operating Systems. 
• This ruling supports the view taken by the Delhi HC that when the recipient can claim full ITC, even a zero value can be used for related party transactions if no invoice is issued.

^[1] TS-647-HC(KAR)-2025-GST
^[2] Civil Appeal Nos.2289-2293 of 2021