In this ruling, the Hon’ble Delhi High Court addressed the validity of the show cause notices issued to various companies demanding GST liability on supply of manpower service by the overseas group company to the Indian subsidiaries (petitioners).
While the contest was initially on the issue of whether of not there is secondment of employees during the pendency of the matter before the Court, the CBIC issued Circular No.210/4/2024-GST dated 26.06.2024 on this point. The petitioners later, sought to rely upon this clarification.
The main petitioner is registered in three states, under the CGST Act and entered into individual employment agreements with the employees of its parent entity in Japan, making such people the employees of the petitioner.
The respondents submitted that secondment of employees is a common global practice and the total consideration given to the persons on temporary deputation in India will be considered for valuation of taxable value. They submitted that the show cause notices and demand therein are valid because such persons are not in an employee-employer relationship. Hence GST shall be levied, along with interest and penalty under Section 73 of the CGST Act.
The petitioners submitted that this transaction does not attract levy of GST, replying upon the landmark judgment of the Hon’ble Supreme Court in CCE & Service Tax vs. Northern Operating Systems (P) Ltd.(2022) 17 SCC 90. As per the petitioners, the Supreme Court had held that transactions in which an overseas entity had seconded employees to an Indian entity and then charged the employees’ salaries borne by the Indian company in the form of reimbursement, then the same would qualify as manpower supply by the overseas group company and only then will be subject to levy of GST.
The petitioners further submitted that the show cause notices would not sustain based on the provisions of second proviso to Rule 28 read with para 3.7 of Circular No.210/4/2024-GST. The effect of this combined reading will be that value of import of services will be deemed to be ‘Nil’ when services have been received from a foreign related entity but no invoice has been raised by the domestic recipient entity.
The Court observed that while the payments have been made by the petitioners, as alleged in the counter affidavit of the respondents, the petitioners did not raise any invoices on such payments. Considering this, it cannot be argued that any tax is payable once the value of a supply has been deemed to be ‘Nil’. The Court touched upon the correctness of the Circular in respect of the intent of the Second Proviso to Rule 28, but observed that the Court has to deliver the judgment as per the Circular. The Court held the show cause notices to be futile and quashed the notices and also orders, if any, consequently passed. One of the petitioners, Sony India, had paid the tax but the department order imposed penalty and interest on Sony. The Court held that Sony India shall stand absolved of all tax liabilities, in light of such circular.
power of officers of the Directorate General of Intelligence (‘DRI’) to issue show cause notice under Customs Act, 1962.
W&B Comments: This judgment shall be a relief for those parties which are being relentlessly pursued by the DGGI for payment of GST by RCM on import of services. In this judgment, the Court did not go into the merits of the matter and the ruling of the Supreme Court in Northern Operating Systems was not relied upon by the Court. The Supreme Court judgment had ruled that taxability would depend upon the reading of the agreements to establish whether there is an employer-employee relationship or principal to principal relation between overseas company and the Indian company. The Delhi High Court rather than going into this question or the terms of the agreement, allowed the writ petition simply based upon the Circular coupled with the fact of non-issue of invoice by Indian entity, even while doubting its validity in relation to Rule 28.