Secondment looked like employment. The Supreme Court said it's a taxable supply.

When a Secondment Becomes a Taxable Supply: The Supreme Court Rewrites the Rules for Global Manpower

Northern Operating Systems Pvt. Ltd. (NOS), an Indian company and part of the global Northern Trust group, had a problem that many multinationals share: how to get skilled employees from overseas without the administrative headache of putting them on the local payroll. The solution was a secondment arrangement. Overseas group companies would send their employees to NOS. These secondees worked under NOS's supervision, but they stayed on the overseas company's payroll for social security reasons. NOS reimbursed the full salary costs. Simple, efficient, and—as the tax authorities saw it—a taxable supply of manpower services.

The stakes were enormous. The Revenue issued show cause notices covering the period from October 2006 to September 2014, demanding service tax on the entire salary reimbursement. For NOS, this wasn't just a tax bill—it was a challenge to the very structure of how global companies deploy talent across borders. The Supreme Court of India, in a judgment delivered on May 19, 2022, by a three-judge bench comprising Justice Uday Umesh Lalit, Justice S. Ravindra Bhat (who authored the opinion), and Justice Pamidighantam Sri Narasimha, settled the law. The answer: yes, secondment is a taxable manpower supply service.

The Arrangement That Looked Like Employment, But Wasn't

NOS entered into secondment agreements with its overseas group entities. The agreements were clear: the overseas entity selected the employee, paid the salary, retained the employee on its payroll, and the employee would return to the overseas entity after the secondment period. NOS had operational control—the secondee reported to NOS managers, worked on NOS projects, and was subject to NOS's day-to-day supervision. But the legal employer, for all purposes, remained the overseas company.

The Revenue's case was straightforward. Under Section 65(68) of the Finance Act, 1994, a "manpower recruitment or supply agency" means any person engaged in providing any service, directly or indirectly, for recruitment or supply of manpower, temporarily or otherwise, to any other person. The overseas entities were supplying manpower to NOS. NOS was paying for it by reimbursing salaries. That was a taxable service under Section 65(105)(k).

NOS argued the opposite. The secondees were its own employees. They worked under its control. NOS deducted tax at source (TDS) on their salaries and contributed to provident fund. There was no "supply" of manpower—it was simply an internal group arrangement to manage employment costs efficiently.

The Procedural Rollercoaster

The journey began on April 23, 2012, when the Commissioner of Service Tax, Bangalore, issued show cause notices for the period from October 2006 to September 2014. On March 3, 2014, the Commissioner confirmed the demands for the first two SCNs, holding that secondment was indeed manpower supply service and NOS was the service recipient liable for service tax.

But then came a twist. On February 27, 2017, the Commissioner dropped the proceedings for the later SCNs, relying on the CESTAT decision in Volkswagen India Pvt. Ltd. v. CCE, Pune-I (2014 (34) STR 135), which had held that secondment does not constitute manpower supply service. The Commissioner found that NOS was the employer.

Both sides appealed to CESTAT. On December 23, 2020, CESTAT allowed NOS's appeals and rejected the Revenue's appeals. CESTAT held that the overseas companies were not in the business of manpower supply, that NOS was the employer, and that no taxable service existed.

The Revenue appealed to the Supreme Court.

The Composite Test That Changed Everything

The Supreme Court did not accept CESTAT's reasoning. The Court applied a framework drawn from Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd. (2021) 7 SCC 151, which held that no single universal test determines whether a relationship is a contract of service (employment) or a contract for service (independent contractor). Instead, a composite test on the totality of facts must be applied.

The Court examined the secondment agreements in detail. The key factors were:

• The overseas entity selected the employee for secondment.
• The overseas entity paid the salary and retained the employee on its payroll.
• The employee had a right to return to the overseas entity after the secondment period.
• The overseas entity had the right to terminate the secondment and recall the employee.

These factors, the Court held, established that the overseas entity remained the employer. NOS's operational control was not enough to transform the relationship into an employer-employee one. The Court relied on Director Income Tax v. M/S Morgan Stanley & Co. Inc. (2007) 7 SCC 1, which held that a deputationist retains a lien on employment with the home entity and does not become an employee of the host entity.

The Court also rejected NOS's argument that the overseas entities were not in the business of manpower supply. The definition under Section 65(68) does not require that manpower supply be the principal business. It covers any person engaged in providing such service, directly or indirectly.

The Section 65B(44)(b) Trap

After July 1, 2012, the Finance Act introduced a negative list regime. Section 65B(44) defined "service" to exclude, among other things, "a provision of service by an employee to the employer in the course of or in relation to his employment." NOS argued that the secondees were its employees, so the exclusion applied.

The Supreme Court rejected this argument. The exclusion applies only where the service is provided by an employee to his or her own employer. Here, the overseas entity was the employer. The service was provided by the overseas entity (through its employees) to NOS. The exclusion did not apply.

The Court observed that service tax has never been levied on employee-to-employer services in India or globally, as VAT/GST on employment services is not the norm. But this observation was obiter—the Court was clear that the secondment arrangement did not fall within the exclusion.

Why the Old CESTAT Precedents Collapsed

NOS relied heavily on Volkswagen India and other CESTAT decisions that had held secondment not to be manpower supply. The Revenue had also relied on Commissioner of Income Tax v. M/s. Eli Lilly & Company India Pvt. Ltd. (2009) 15 SCC 1, which dealt with secondment in the income tax context and held that the overseas entity remains the true employer.

The Supreme Court held that the CESTAT decisions had limited precedential value. Where the Supreme Court had merely dismissed SLPs or affirmed CESTAT orders without independent reasoning, such affirmances do not constitute binding precedent. The Court overruled Volkswagen India, Computer Sciences Corporation India Pvt. Ltd. v. Commissioner of Service Tax, SRF Ltd. v. Commissioner (2016 (331) ELT A 138 (SC)), and Commissioner of Central Excise v. Coca Cola India Pvt. Ltd. (2007 (213) ELT 490 (SC)) to the extent they held otherwise.

The Valuation Question Left Open

The Court noted that valuation issues—whether salary reimbursements constitute consideration for the service—were left open for determination. This is a significant point. If the salary reimbursement is merely a pass-through without any markup, what is the value of the taxable service? The Court did not answer this question, leaving it for future adjudication.

THE PLAY: If your company uses secondment arrangements, you must now treat the salary reimbursement as consideration for a taxable manpower supply service and discharge service tax liability, unless you can demonstrate that the secondee is truly your employee under the composite test.

What This Means for Practitioners

This judgment changes the landscape for every multinational operating in India through secondment arrangements. The key takeaways are:

• Secondment is now presumptively taxable. Unless the Indian entity can demonstrate that it is the true employer under the composite test, the arrangement will be treated as a supply of manpower service.
• The composite test is everything. Factors like payroll retention, selection by the overseas entity, and reversion clauses are more important than operational control.
• Section 65B(44)(b) is not a safe harbor. The employee-to-employer exclusion applies only where the service provider is the employee of the service recipient. In secondment, the overseas entity is the service provider.
• Old CESTAT precedents are unreliable. Decisions like Volkswagen India have been overruled. Do not rely on them.
• Valuation is still open. If you are assessing your exposure, the question of how to value the service—whether at the full salary reimbursement or some other measure—remains unresolved.

The Bottom Line

If your company uses secondment arrangements, you are likely a service recipient of manpower supply and must discharge service tax liability—the Supreme Court has closed the door on the argument that secondment is merely an internal group cost-sharing mechanism.