Dear Professional Colleagues,

Greetings of the Day !

The Central Board of Indirect Taxes and Customs (GST Policy Wing) issued Instruction No. 05/2023-GST dated December 13, 2023, regarding the Judgment of the Honourable Supreme Court in the case of Northern Operating Systems Private Limited (NOS).

Background

Hon’ble Supreme Court’s judgment dated 19.5.2022 in the case of CC, CE & ST, Bangalore (Adj.) etc. Vs. Northern Operating Systems Private Limited  (“NOS”)  on the issue of nature of secondment of employees by overseas entities to Indian firms and its Service Tax implications.

First Issue

Many field formations have initiated proceedings for the alleged evasion of GST on the issue of secondment under section 74(1) of the Central Goods and Services Tax Act, 2017.

It has also been represented by the industry that in many cases involving secondment, the field formations are mechanically invoking extended period of limitation under section 74(1) of the CGST Act.

Clarification

Hon’ble Supreme Court’s emphased is on a nuanced examination based on the unique characteristics of each specific arrangement, rather than relying on any singular test.

It may also be relevant to note that there may be multiple types of arrangements in relation to secondment of employees of overseas group company in the Indian entity. In each arrangement, the tax implications may be different, depending upon the specific nature of the contract and other terms and conditions attached to it. Therefore, the decision of the Hon’ble Supreme Court in the NOS judgment should not be applied mechanically in all the cases. Investigation in each case requires a careful consideration of its distinct factual matrix, including the terms of contract between overseas company and Indian entity, to determine taxability  or  its  extent under GST and applicability of the principles laid down by the Hon’ble Supreme Court’s judgment in NOS case.

Boardc also clarified that Section 74(1) cannot be invoked merely on account of non-payment of GST, without specific element of fraud or wilful mis-statement or suppression of facts to evade tax. Therefore, only in the cases where the investigation indicates that there is material evidence of fraud or wilful mis-statement or suppression of fact to evade tax on the part of the taxpayer, provisions of section 74(1) of CGST Act may be invoked for issuance of show cause notice, and such evidence should also be made a part of the show cause notice.