The Department has showered the Industries with Show Cause Notices, issued in Form DRC-01, as the last date of issuance of SCN was 30th September, 2023 for FY 2017-18 and 31st December, 2023 for FY 2018-19. One of the major grounds on which thousands of MNCs were served with Show Cause Notice was the taxability of Secondment of employees in Indian Company by Foreign Holding Company.

Show Cause Notice was issued pursuant to judgment of Hon’ble Supreme Court in the matter of M/s C.C., C.E. & S.T., Bangalore (Adjudication) Vs Northern Operating Systems Pvt. Ltd. [2022 (61) G.S.T.L. 129 (S.C)] wherein Hon’ble apex court analyzed whether the activity of secondment of employees from a foreign group company to an Indian entity amounted to manpower supply service and required Indian entities to pay GST under RCM.

Post judgment of Hon’ble Apex Court, Many Field Formations has issued Show Cause Notice asking Companies to Pay GST under Reverse Charge Mechanism on sceondment of Employees considering the same as Manpower supply. Further, Field formations have alleged that the companies are involved into Fraud and therefore, exercised extended period of limitation.

After considering the genuine hardship being faced by the MNCs, the CBIC has come up with instructions on manner of issuance of Show Cause Notice pursuant to NOS Judement vide Instruction No. 05/2023-GST dated 13th December, 2023. Summary of Instructions issued is as follows:

1. Representations have been received in the Board that subsequent to the NOS Judgment, many field formations have initiated the proceedings alleging GST evasion on issue of employee secondment under section 74(1) of the Central Goods and Services Tax Act, 2017 (“The CGST Act”).

2. CBIC has clarified that in the judgment, Hon’ble Supreme Court took note of the various facts of the case like the agreement between NOS and overseas group companies, who is required to make payment to the employees, what happens to employees after ending of secondment period and then held that the secondment of employees by the overseas group company to NOS was a ‘manpower supply’ and Service Tax was applicable on the same. 

3. Issue of Secondment of employees is not restricted to Service Tax. Same issue arises under GST as well.

4. As per NOS Judgment, The Hon’ble Apex court has emphasized on a nuanced examination based on the unique characteristics of each specific arrangement, rather than relying on any singular test.

5. Hon’ble Supreme Court in the case of Commissioner of Central Excise, Mumbai Versus M/s Fiat India(P) Ltd in Civil Appeal 1648-49 of 2004 has given the following observation –

“  66.   ………..Each case depends on its own facts and a close similarity between one case and another is not enough because either a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cardozo) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, the broad resemblance to another case is not at all decisive.”

6. CBIC has mentioned that there may be multiple types of arrangements in relation to secondment of employees of overseas group company in the Indian entity. In each arrangement, the tax implications may vary depending upon the specific nature of the contract and other terms and conditions attached to it. 

7. Therefore, the decision of the Hon’ble Supreme Court in the NOS judgment should not be applied mechanically in all the cases.

8. In every case, Assessing officer is required to careful consider the distinct factual matrix of the case, including the terms of contract between overseas company and Indian entity, to determine taxability or its extent under GST and applicability of the principles laid down by the Hon’ble Supreme Court’s judgment in NOS case. 

9. Invoking of extended period of Limitation:

1. In Many cases of secondment, the field formations has invoked the extended period of limitation under section 74(1) of the CGST Act.

2. As per section 74 (1) of CGST Act reads as follows:

“(1) Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilized by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax,

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3. As per Section 74(1) of CGST Act, section 74(1) can be invoked only when there is a fraud or wilful mis-statement or suppression of facts to evade tax on the part of the said taxpayer. Section 74(1) cannot be invoked merely on account of non-payment of GST, without having any element of fraud or wilful mis-statement or suppression of facts to evade tax. 

4. Therefore, only in the cases where the investigation indicates that case involves fraud or wilful mis-statement or suppression of fact to evade tax on the part of the taxpayer then only provisions of section 74(1) of CGST Act may be invoked. Assessing officer is also required to make evidence a part of the show cause notice.

Conclusion

Instructions issued by the CBIC is a big relief for the industry when department authorities are issuing SCNs in bulk without doing detailed analysis of the facts. Now, Field formations are required to carefully examine the facts before issuance of SCN and NOS Judgment can’t be invoked mechanically in all the cases. Further, extended periods of limitation can’t be invoked unless the case involves fraud or wilful misstatement or suppression of facts to evade tax. Department has nowhere mentioned that secondment of employees can’t be held as “manpower supply”. Rather, the same is required to be determined as per facts of each case.