Indirect Tax

The previous quarter saw significant decisions of the Supreme Court on the secondment of employees by overseas entities to their Indian counterparts and levy of IGST on ocean freight. Other important developments in the indirect tax space include the recommendations made by the GST Council in its 47th meeting, some of which have been implemented through suitable amendments and notifications.

Himanshu SinhaPartner

Shashank ShekharCounsel

Tushar JoshiSenior Associate

The second quarter of 2022 saw some of the most awaited decisions of the year by the Supreme Court on wide-ranging issues with significant ramifications for taxpayers. The 47th meeting of the Goods and Services Tax (GST) Council was also held in June, where the Council made several important recommendations on the rates of GST and GST laws and procedures.

Key Developments

  • Service tax

    • Supreme Court holds that the secondment of employees by overseas entities to their Indian group companies is exigible to service tax

      The Supreme Court, in Commissioner of Customs, Central Excise and Service Tax, Bangalore v Northern Operating Systems, held that service tax is leviable on the secondment of employees by an overseas entity to its Indian group entity since the latter becomes a service recipient required to discharge service tax on a reverse charge basis.

      The Tax Department had approached the Supreme Court against the decisions of the Customs Excise and Service Tax Appellate Tribunal (CESTAT), holding that the secondment of employees by foreign group entities to their Indian counterparts is not subject to service tax. These decisions were based on the fact that such seconded employees qualify as employees of the Indian entities.

      In appeal, the Supreme Court held that the control exercised by the Indian entity over the seconded employees is not determinative of whether such seconded employees would be its employees. For this proposition, the Supreme Court relied on its earlier decisions in the cases of DC Dewan Mohideen Sahib and Sons, Silver Jubilee Tailoring House, and Sushilaben Indaravan. The Court concluded that to determine the relationship between the entity and the seconded employees, the substance of the arrangement would have to be analysed, over the form in which the agreement may be drafted.

      The Court analysed the agreements between the respondent and its foreign group entity and observed that the nature of the business of the overseas group companies was to secure contracts, the performance of which required highly trained and skilled personnel. Since the foreign group entity outsourced a portion of the performance of the contract to the Indian entity, the Indian entity required the skill and know-how of the seconded employees to be able to perform its portion of the contract. The Court further held that the seconded employees could not be said to be the employees of the Indian entities as they returned to their overseas employer or are deployed on another secondment upon the cessation of the term of secondment.

      On this basis, the Supreme Court held that the employees seconded by the foreign group entity of the respondent were not the employees of the respondent and that the respondent had received the supply of skilled manpower from its overseas group entity.

      This is a departure from the settled position that the secondment of employees from overseas entities to its Indian group entities does not amount to the provision of service. In any case, the negative list regime under service tax specifically excluded the provision of service by an employee to its employer in the course of or in relation to employment.

      This decision is likely to have a wide implication on various global businesses where such arrangements are commonplace. The impact of this decision is also likely to percolate into the Goods and Services Tax regime owing to the similarity of provisions on this aspect. It is important for taxpayers to analyse whether the nature of previous or existing arrangements between the Indian entities and the foreign counterparts is similar to the facts of this case. Similarly, taxpayers will have to review the terms of the arrangements with the foreign group companies as well as the seconded employees in light of the service tax implication on them.

  • Goods and Services Tax

    • Supreme Court rules against levy of IGST on ocean freight in case of Cost Insurance Freight imports

      The Supreme Court, in Union of India v Mohit Minerals, has held that Integrated Goods and Service Tax is not separately leviable on importers in respect of ocean freight services under Cost Insurance Freight contracts. It held that the supply of service of transportation by the foreign shipper forms a part of the bundle of supplies, i.e., composite supplies by the foreign exporter to the Indian importer. The levy of IGST separately on the services provided by the foreign shipper would be violative of the principle of composite supplies under Section 8 of the Central Goods and Services Tax Act, 2017 (CGST Act) and antithetical to the very scheme of the CGST Act. This decision is likely to bring closure to litigation in cases where demands against importers were pending due to non-payment of IGST on ocean freight.

      (To read more on this ruling, click here.)

    • Recommendations made by the GST Council in its 47th Meeting

      The GST Council (Council), in its 47th meeting, made several recommendations on applicable rates on the supply of goods and services and also on GST laws and procedure. These include:

      • Waiver of mandatory registration of supplier supplying through e-commerce operations: The requirement of mandatory registration of a supplier supplying through e-commerce operations has been waived. The Council has given in-principal approval to waive the requirement of mandatory registration of suppliers making the supply of goods through E-Commerce Operators (ECOs). This relaxation will be subject to the following two conditions:

        • The aggregate turnover of the supplier does not exceed the amount specified under section 22(1) of the Central Goods and Services Tax Act, 2017 (CGST Act) and notifications issued thereunder. (While the threshold turnover is INR 20 lacs (approx. USD 25,000) under section 22(1), there are some exceptions listed in the provisos to the section.)
        • The supplier is not making any inter-state taxable supplies.

        With certain supplies made through ECOs already made taxable in their hands, this waiver should incentivise micro/small scale suppliers which lack the necessary understanding and infrastructure for GST compliance to provide their goods through ECOs. However, clarity will be required with respect to inter-state supplies made by such small-scale suppliers. The Council has also recommended that composition taxpayers be allowed to make intra-state supplies through ECOs on the same lines. The Composition Scheme allows small taxpayers to pay GST at a fixed rate of turnover.

      • Revised formula to calculate refund of unutilised Input Tax Credit: The Council has recommended that the formula to calculate refund of unutilised Input Tax Credit (ITC) on account of inverted duty structure provided under Rule 89 of the Central Goods and Service Tax Rules, 2017 (CGST Rules) be amended. Inverted duty structure refers to the accumulation of ITC where the rate of tax on inputs is higher than the rate of applicable tax on the outward supply. Accordingly, necessary amendments have also been made to Rule 89 of the CGST Rules.

        The earlier form of the formula made a presumption that the output tax payable on supplies was entirely discharged from the ITC accumulated on account of input goods and there was no utilisation of the ITC on input services. This anomaly was acknowledged by the Supreme Court in its judgement in VKC Footsteps. The Court had accordingly urged the GST Council to reconsider the formula.

        The Council therefore suggested that the formula be revised to take into account the utilisation of ITC in respect of input goods and input services to pay output tax on inverted rated supplies in the same ratio in which ITC has been availed of on input goods and input services during the said tax period. This suggestion has also now been implemented by a notification.

        This should help in reducing the accumulation of ITC availed on input services in cases of inverted duty structure.

      • Clarification on calculation of limitation period for filing claims for refund: The Council has recommended that the time period from 1 March 2020 to 28 February 2022 be excluded from calculation of the limitation period for filing a refund claim by an applicant under sections 54 and 55 of the CGST Act. A similar exclusion has also been recommended to issue of demand/order in respect of erroneous refunds under section 73 of the CGST Act. The recommendation has also been implemented by notification.

        These recommendations and subsequent notifications have been made in line with the decision of the Supreme Court in which the Court had directed the extension of the period of limitation in all proceedings before the courts and tribunals. This amendment should provide clarity and regularise the delayed refund claims filed by taxpayers due to the Covid-19 pandemic.

      • Extension of time limitation for issuance of order under section 73 of the CGST Act for FY 2017-18: The Council has recommended that the limitation period to issue orders in respect of demands under section 73 of the CGST Act for the Financial Year (FY) 2017-18 be extended till 30 September 2023. A notification implementing this suggestion has been issued.

        As the normal period of limitation, which is to be computed from the date of filing of annual return for FY 2017-18, had almost expired, this extension of time will provide a buffer for the tax department to issue notices to taxpayers.

    (To read our detailed update on the Council’s recommendations, click here.)

In the next quarter, it is expected that the Group of Ministers (GoM) will submit its report on issues related to the GST rate on casinos, race courses and online gaming. Further, in line with the announcement made in the 47th Meeting of the GST Council, a GoM is likely to be constituted to address concerns related to the constitution of GST Appellate Tribunal. On the customs front, the controversy around ‘proper officer’ and the retrospective amendments issued in this regard are likely to go through the test of judicial scrutiny.

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