In recent years, several Indian subsidiaries of multinational corporations have received show cause notices (SCNs) from GST authorities seeking to levy tax on salaries paid to employees seconded from foreign group entities. These notices, typically issued under the reverse charge mechanism (RCM), proceed on the premise that secondment arrangements amount to a supply of manpower services by...
In recent years, several Indian subsidiaries of multinational corporations have received show cause notices (SCNs) from GST authorities seeking to levy tax on salaries paid to employees seconded from foreign group entities. These notices, typically issued under the reverse charge mechanism (RCM), proceed on the premise that secondment arrangements amount to a supply of manpower services by the foreign entity to the Indian company. In many instances, the tax demands involved run into several crores, despite the Indian entity being otherwise eligible to claim full input tax credit.
The resulting wave of litigation has brought secondment arrangements into sharp focus under the GST regime. While businesses continue to argue that secondment represents a continuation of the employer–employee relationship, tax authorities have increasingly relied on substance-based reasoning to characterise such arrangements as taxable services. Judicial intervention, particularly in disputes concerning salary reimbursements and valuation, has added further complexity to an already unsettled legal position.
Against this backdrop, this article examines the manner in which secondment arrangements are being scrutinised under GST, with specific reference to valuation under Rule 28 of the CGST Rules, administrative guidance issued by the Central Board of Indirect Taxes and Customs, and recent judicial decisions that have shaped the current understanding of taxability.
Concept and Commercial Reality of Secondment
In commercial practice, secondment refers to an arrangement under which an employee of one entity is temporarily assigned to work for another entity, usually within the same corporate group. During the period of secondment, the employee typically performs day-to-day functions under the supervision and operational control of the host entity, while the formal contract of employment continues with the original employer.
In cross-border group structures, it is common for employees of a foreign parent company to be seconded to an Indian subsidiary to provide managerial, technical, or specialised support. Although the Indian entity may bear the cost of remuneration, whether through reimbursement or direct payment, the secondee often continues to remain on the payroll of the foreign entity, with long-term employment benefits accruing outside India.
It is this duality - operational control vesting in one entity while legal employment subsists with another - that lies at the heart of the tax controversy surrounding secondment under GST.
Taxability of Secondment under GST
Under Schedule III of the Central Goods and Services Tax (CGST) Act, 2017, services provided by an employee to an employer in the course of employment are excluded from the scope of “supply”. However, where an arrangement is found to involve one entity providing the services of its employees to another entity for consideration, the transaction may fall within the ambit of taxable services.
In secondment cases, tax authorities have frequently taken the view that the foreign parent entity supplies manpower services to the Indian subsidiary, particularly where salary costs are reimbursed, and the employment relationship with the foreign entity is not fully severed. On this basis, GST liability is sought to be imposed on the Indian entity under the reverse charge mechanism applicable to services received from a related person or from outside India.
The determination of taxability, therefore, does not depend merely on the nomenclature of “secondment” but on a factual examination of control, payroll arrangements, and the flow of consideration.
Valuation under Rule 28 of the CGST Rules, 2017
Relevance of Rule 28
Secondment arrangements commonly involve related parties, such as a parent company and its subsidiary. Consequently, the valuation of the alleged supply becomes subject to Rule 28 of the CGST Rules, which governs transactions between related persons or distinct persons.
Rule 28 assumes particular significance in secondment disputes because the consideration charged often reflects internal cost allocations rather than pricing determined by market forces.
Valuation Mechanism
Rule 28 prescribes open market value as the primary basis for valuation. In practice, however, determining an open market value for secondment services is inherently difficult, as comparable transactions between unrelated parties are rarely available. This practical limitation has resulted in increased reliance on alternative valuation methods, including cost-based valuation under Rule 30 or valuation by reasonable means under Rule 31.
Rule 28's proviso further provides that where the recipient of the service is eligible for full input tax credit, the value declared in the invoice may be accepted as the open market value. This proviso has assumed central importance in secondment disputes, particularly where the Indian subsidiary is entitled to claim complete credit of the tax paid under reverse charge.
CBIC Circular No. 210/4/2024-GST and Its Impact
In an attempt to address persistent uncertainty and litigation, the Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 210/4/2024-GST dated 24th July 2024, clarifying the tax treatment of secondment arrangements involving related parties.
The Circular reiterates that where a related entity provides manpower services in the form of secondment, GST is payable under the reverse charge mechanism by the recipient entity. At the same time, it provides significant relief on valuation by confirming that, where the recipient is eligible for full input tax credit, the invoice value may be accepted as the open market value in terms of Rule 28.
Importantly, the Circular further clarifies that in cases where no invoice is raised, and the recipient is fully eligible for input tax credit, the value of the supply may be treated as nil. This clarification reflects an acknowledgement that, where there is no net revenue loss to the exchequer, insistence on notional valuation serves little practical purpose.
Judicial Approach to Secondment
The Supreme Court in the case of CCE & Service Tax v. Northern Operating Systems Pvt. Ltd., (2022) 17 SCC 90, examined secondment arrangements in the context of service tax. The Court noted that although the secondees worked under the operational control of the Indian entity, the foreign entities continued to be the legal employers, as the employment relationship was not fully transferred.
The Court held that reimbursement of salary costs constituted consideration for the supply of manpower services by the foreign entity to the Indian company. On this basis, the arrangement was held to be taxable under the reverse charge mechanism. The judgment emphasised that the substance of the transaction, rather than its form, must guide tax characterisation.
Although the decision arose under the service tax regime, it has since been relied upon by tax authorities to justify GST demands in secondment cases.
The Delhi High Court in the case of Metal One Corporation India Pvt. Ltd. v. Union of India and Others, (2024) SCC OnLine Del 7499, considered GST demands raised on salaries paid to seconded employees. The Court took note of Circular No. 210/4/2024-GST and held that tax authorities could not ignore binding administrative instructions while initiating proceedings.
The Court quashed the SCNs, observing that where the recipient entity is entitled to full input tax credit, valuation disputes lose practical relevance in light of Rule 28 and the Circular. The decision underscored the need for tax authorities to align enforcement action with contemporaneous policy clarifications and signals judicial reluctance to sustain revenue-neutral demands that disregard binding administrative guidance.
Analysis and Findings
The legal treatment of secondment under GST reflects a clear shift towards fact-driven evaluation rather than formal classification. Where secondees remain on the payroll of the original employer and salary costs are reimbursed, authorities are likely to characterise the arrangement as manpower supply, thereby attracting GST under the reverse charge mechanism.
At the same time, the valuation framework under Rule 28, particularly its proviso, assumes critical importance in limiting tax exposure where full input tax credit is available. The CBIC Circular further reinforces this position by permitting nil valuation in appropriate cases, thereby reducing the scope for revenue-neutral disputes.
Judicial decisions indicate that while taxability may arise in principle, valuation and credit eligibility play a decisive role in determining the sustainability of tax demands. In this context, careful structuring of secondment agreements, clear delineation of employment responsibilities, and robust documentation remain essential to mitigate litigation risk.
Secondment arrangements under the GST regime occupy a complex intersection of employment law, indirect taxation, and corporate structuring. While judicial precedent confirms that such arrangements may constitute taxable supplies in certain circumstances, recent administrative clarifications suggest a more pragmatic approach focused on revenue impact rather than formalistic valuation.
For businesses, the solution lies not in avoiding secondment structures altogether, but in designing them with legal clarity, commercial substance, and tax compliance in mind. As GST enforcement increasingly targets internal group arrangements, secondment disputes are likely to remain a recurring site of conflict unless further legislative or judicial clarity emerges on the treatment of employer–employee continuity.
Author is a Law Student at National University of Study & Research in Law, Ranchi. Views are personal