Secondment of employees to overseas entities amount to manpower recruitment or supply agency service

Case Title: C.C., C.E. & S.T. Bangalore vs Northern Operating Systems (P.) Ltd.

Court: Supreme Court of India

Petition No.: Civil Appeal Nos. 2289–2293 of 2021

Category of Dispute: Manpower Supply Services under Reverse Charge Mechanism

Date of Judgement: 19 May 2022

Relevant Sections: Section 65(68), Section 65(105)(k), Section 66A, Section 73 of Finance Act, 1994; Section 65B(44) (post-2012); Rule 3(1) & Rule 5 of CENVAT Credit Rules, 2004

Facts of the Case

1. Northern Operating Systems Pvt. Ltd. (NOS) entered into secondment agreements with its foreign group entities for deputing skilled personnel to India. The secondees were on the payroll of the foreign entity but worked under the control of NOS, with reimbursement of actual salary expenses to the foreign entity. [Para 2–4]
2. The Revenue alleged NOS was liable to pay service tax under “manpower recruitment or supply agency service” and issued four SCNs for the period 2006–2014. [Para 4]
3. The Commissioner confirmed part of the demand but dropped it for 2012–2014, concluding NOS was the employer and the secondees were not provided as a service. [Para 5, 8]
4. The CESTAT upheld NOS’s appeals and rejected Revenue’s appeal, holding that the seconded employees were employees of NOS and not manpower supply. [Para 10–11]

Question(s) in Consideration

1. Whether secondment of employees by foreign group companies to NOS amounts to “manpower supply service” under Finance Act, 1994? [Para 33]
2. Whether NOS was liable to pay service tax under reverse charge for such secondment arrangements? [Para 44–45]
3. Whether the extended period of limitation under Section 73 was validly invoked? [Para 62]

Observation of Court

1. The SC examined the nature of secondment, noting the foreign entity retained employment and social benefits, while NOS controlled the secondees operationally. [Para 49–50]
2. Applying substance-over-form principle and multifactor tests from previous rulings (Silver Jubilee, Sushilaben, Eli Lilly), the Court held that the secondment was for providing skilled manpower and constituted a service under pre and post-2012 law. [Para 56–57]
3. Economic benefit derived by NOS from secondees and reimbursement structure was held to amount to “consideration.” [Para 58]
4. CESTAT orders in earlier cases (Volkswagen, Computer Sciences) lacked precedential weight due to absence of reasoning. [Para 60]
5. On limitation, the SC held that NOS had a bonafide belief backed by Revenue’s own acceptance of non-taxability in later period; thus extended period could not be invoked. [Para 62–64]

Judgement of the Court

1. The Supreme Court partly allowed the Revenue’s appeals.
2. It held NOS liable for service tax under “manpower recruitment or supply agency” service for the normal period under the SCNs. [Para 65–66]
3. However, invocation of the extended period of limitation was disallowed. [Para 66–67]
4. Consequently, CESTAT’s common order was set aside, and Commissioner’s order was restored, excluding liability for the extended period. [Para 67–68]

Between Fine Lines

• Deputation of foreign employees to an Indian group company, even if reimbursed without markup, can be taxable as manpower supply.
• Control over secondees and reimbursement does not eliminate the element of service.
• Employee-employer relationship in form is not determinative—economic reality is key.
• Tax is payable on reverse charge but only for the normal limitation period.
• Extended limitation cannot be invoked in absence of wilful suppression or fraud.

Summary of Referred Cases

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