Karnataka High Court Quashes Rs 85.51 Crore IGST Demand On Salaries Paid To Foreign Nationals By Huawei India

The Karnataka High Court has recently quashed a show cause notice issued to Huawei Technologies India Private Limited demanding Rs. 85.51 crore in Integrated Goods and Services Tax (IGST), along with interest and penalty, on salaries paid to foreign national employees.

Justice S R Krishna Kumar held that this was not a case of secondment at all, but one where Huawei India had a direct employer-employee relationship with the foreign nationals working for it.

The Court made it clear that once such an employment relationship exists, the salaries paid to those employees fall squarely within Entry 1 of Schedule III of the CGST Act, 2017.

That provision specifically excludes “services by an employee to the employer in the course of or in relation to his employment” from the definition of supply, meaning they cannot be subjected to GST.

The department had attempted to levy IGST under the category of “Manpower Recruitment and Supply Services,” arguing that the salaries paid to the foreign nationals amounted to consideration for import of services under the reverse charge mechanism.

The Court, however, noted that these individuals were hired directly by Huawei India, were on its payroll, received their salaries and employment benefits in India, had tax deducted at source under the Income-tax Act, and were treated no differently from Indian employees.

The Court also rejected the department's contention that the foreign nationals qualified as “non-resident taxable persons.” It held that they did not satisfy the requirements under Section 2(77) of the CGST Act. Since the location of the supplier was in India and the statutory conditions for “import of services” under the IGST Act were not fulfilled, the transaction could not be treated as import of services.

Relying on a CBIC circular, the Court observed that where supply is between related parties and the recipient is eligible for full input tax credit, the taxable value shall be the open market value as declared in the invoice, and where no invoice is raised, such value is deemed to be 'Nil'.

Since no invoice was raised by the petitioner and it was eligible for full input tax credit, the taxable value, if any, stood deemed to be Nil.

The court referred to its co-ordinate bench decision in Alstom Transport India Limited v Commissioner of Commercial Taxes, which held that where there exists an employer-employee relationship, the transaction is excluded from GST under Entry 1 of Schedule III read with Section 7(2)(a) of the CGST Act.

It also relied on the Delhi High Court's ruling in Metal One Corporation v Union of India, which held that where no invoice is raised in related-party arrangements and full input tax credit is available, the value of such services may be treated as Nil.

Holding that IGST was not leviable, the Court ruled that Huawei was not liable to pay interest or penalty. Accordingly, the show cause notice dated December 23, 2023, and all consequential proceedings were quashed.