Introduction
The treatment of seconded expatriates under the GST regime has long been a grey area for multinational corporations (MNCs) operating in India. Questions often arise whether reimbursement of salary by an Indian company to a foreign parent or group entity constitutes a “supply of manpower” and attracts GST.
In a significant development, the Karnataka High Court in the case of M/s Alstom Transport India Ltd v. The Assistant Commissioner of Central Taxes (2023) has provided welcome clarity. The Court ruled that seconded employees, who work under the control and supervision of the Indian entity and whose salaries are reimbursed on an actual cost basis, do not constitute a supply of manpower services.
This ruling has important implications for HR structuring, GST litigation, and inter-company agreements.
Factual Background
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Alstom Transport India Ltd engaged expatriate employees from its foreign group entities.
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These employees were seconded to work in India.
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While their salaries were paid by the overseas entity, the Indian entity reimbursed the exact cost of salaries (without markup).
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GST authorities treated this reimbursement as “supply of manpower” service under Section 7 of the CGST Act, 2017, read with Schedule I.
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Tax demand was raised under the reverse charge mechanism (RCM), citing employee of overseas entity as the supplier.
Key Legal Issue
Does the reimbursement of salary to a foreign group company for seconded employees amount to a 'supply of manpower' under GST law?
Karnataka High Court’s Ruling
1. Real Employer–Employee Relationship Matters
The Court examined who truly employed and controlled the seconded staff. It held:
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The Indian entity had full control over day-to-day work, supervision, appraisal, and disciplinary action.
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The seconded employees were working as employees of the Indian company during the secondment period.
This aligns with the test of control and integration, often applied in judicial precedents to determine the employer.
2. Reimbursement Not Consideration
The reimbursement of salary without any markup or profit element was held not to be “consideration for service.” The Court reiterated that for any “supply” under GST, there must be a quid pro quo — a clear service provider–recipient relationship.
The foreign entity was merely a paymaster, and not supplying manpower for commercial consideration.
3. No Independent Service Provider Role
The High Court held that the foreign group entity was not providing any independent manpower service to Alstom India. There was no contractual obligation for supplying skilled workforce.
Hence, Section 7 read with Schedule I was not attracted, and RCM liability was unsustainable.
Legal Interpretation and Framework
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Section 7(1)(a), CGST Act: Defines “supply” to include all forms of supply for consideration by a person in the course of business.
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Schedule I: Covers supplies between related persons or between establishments of the same person, even without consideration.
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Entry 1 of Schedule III: Clarifies that services by an employee to the employer in the course of employment are not a “supply”.
The Court interpreted this harmoniously to protect employer–employee relationships from being taxed as deemed services, unless there is a clear deviation.
Judicial Support
The Karnataka High Court drew upon previous rulings, including:
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CCE v. Volkswagen India Pvt. Ltd. [2013 (30) STR 190 (Tri-Mum)] – reimbursement of salaries without profit element not a taxable service.
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BSR & Co. LLP v. CCE [2018 (17) GSTL 429 (Tri.-Mum)] – secondment does not constitute manpower supply when employee is under control of Indian entity.
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Cognizant India case [Madras HC, 2020] – upheld similar principle under pre-GST service tax regime.
Practical Takeaways for Businesses
| Action Point | Guidance from the Judgment |
|---|---|
| Examine secondment contracts | Clearly show Indian entity has employment control, supervisory rights, and bears employer risks. |
| Avoid markups in reimbursements | Ensure salary reimbursements to foreign entities are at actual cost only. |
| Comply with PF and TDS | Indian entity must handle statutory employer obligations like PF, gratuity, and tax withholding. |
| Do not treat as manpower service | When seconded employees act as employees in substance, avoid RCM under manpower supply category. |
Caution Points
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Substance over form: Merely calling someone a “seconded employee” won’t help if control and supervision still lie with the foreign entity.
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Inter-company agreements must be consistent: HR, finance, and legal teams should align language across contracts, Form 15CA/CB declarations, and secondment letters.
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CBIC may issue clarifications: Since this is a High Court judgment, central circulars could impact broader applicability. Litigation risk still remains for past cases.
Conclusion
The Karnataka High Court’s judgment in the Alstom Transport India case is a landmark in clarifying GST applicability on secondment arrangements. It reinforces the principle that true employer–employee relationships are not a “supply”, even when salaries are reimbursed cross-border.
This ruling offers strategic relief to MNCs, provided they structure secondments carefully, ensure real control resides with the Indian entity, and avoid treating reimbursements as commercial transactions.