CESTAT Bengaluru Upholds Service Tax On Employee Secondment From Foreign Parent Company

The Bangalore Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 24 April held that employees seconded by a UK-based parent company to its Indian subsidiary under a salary reimbursement arrangement would constitute “Manpower Recruitment or Supply Agency Service” and would attract service tax under the reverse charge mechanism.

Judicial Member P.A. Augustian and Technical Member R. Bhagya Devi partly allowed the appeal filed by ARM Embedded Technologies Pvt. Ltd, and upheld the service tax demand for the normal period but set aside penalties imposed under Sections 77 and 78 of the Finance Act, 1994. They observed:

"Clause 1 and Clause 2 of the Agreement clearly establishes the fact that the employees belong to the parent-company ARM Embedded Technologies Pvt. Ltd. wishes to recruit certain employees of ARM Limited, for the purposes of its Software Development and Commercial operations. The parent-company sends such employees on secondment for facilitating the operations of ARM Embedded Technologies Private Limited. Salary paid is home country salary in foreign currency as per the international assignment policy which is later reimbursed by the appellant."

ARM Embedded Technologies Pvt. Ltd., a 100% Export Oriented Unit registered with the Software Technology Parks of India, was engaged in the export of information technology services. For its Indian operations, it entered into a Salary Cost Reimbursement Agreement with its UK-based parent company, ARM Ltd.

Under the arrangement, employees of the foreign parent possessing specialised technical expertise were seconded to India for specific assignments. During the secondment period, they worked under the operational control of the Indian entity, while their salaries and expatriate benefits continued to be paid by the foreign parent and later reimbursed by the appellant in foreign currency.

The Department alleged that this arrangement amounted to supply of manpower services by the foreign parent to the Indian entity and issued a show cause notice proposing service tax under the reverse charge mechanism on the reimbursement amounts.

The appellant contended that the secondees effectively functioned as its own employees during the assignment, that reimbursements could not be treated as consideration for manpower supply. Further that the arrangement was distinguishable from the Supreme Court ruling in CC, CE & ST, Bangalore (Adjudication) v. Northern Operating Systems Pvt. Ltd. It also relied on Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India to argue that reimbursable expenses were not taxable, and challenged invocation of the extended limitation period.

The Tribunal examined the secondment agreement and noted that the employees were recruited and deputed by the parent company under an international assignment policy, with salaries paid by the foreign entity and later reimbursed by the Indian company.

It further observed that although the employees worked under the control of the Indian entity during the assignment period, they remained on the payroll of the foreign parent and returned after completion of their tenure.

The Bench relied heavily on the Supreme Court's decision in Northern Operating Systems Pvt. Ltd. and held that functional control during secondment does not alter the essential nature of the arrangement as manpower supply.

It noted that the services fell within the scope of “Manpower Recruitment or Supply Agency Service” and upheld the taxability under the reverse charge mechanism for the normal period.

On limitation and penalty, the Tribunal found no evidence of mala fide intent to evade tax, particularly since any tax paid would have been available as CENVAT credit. It therefore restricted the demand to the normal limitation period and set aside all penalties.

Accordingly, the CESTAT partly allowed the appeal.

For Appellant(s): Shri G. Shivadass, Senior Advocate

For Respondent(s): Shri M. A. Jithendra, Assistant Commissioner, Authorised Representative