Alstom Transport India Limited Vs State of Karnataka (Karnataka High Court)

Karnataka HC granted ad-interim stay on adjudication proceedings on levying IGST on secondment of manpower

Summary: The Karnataka High Court granted an ad-interim stay on adjudication proceedings involving Integrated Goods and Services Tax (IGST) on seconded employees’ salaries in the case of Alstom Transport India Ltd. v. State of Karnataka. The issue arose after a Show Cause Notice (SCN) demanded IGST of ₹59.57 crore based on a Supreme Court ruling in the Northern Operating Systems Pvt Ltd. case, which treated secondment of manpower from overseas entities as a taxable service. Alstom, however, argued that the payments made to expatriate employees were part of their regular salary and did not qualify as manpower supply services, thus should not attract IGST. The petitioner referred to Circular No. 210/4/2024-GST issued by the Central Board of Indirect Taxes and Customs (CBIC), which clarified that where full input tax credit (ITC) is available, the value declared in the invoice by the related domestic entity can be deemed as the open market value. The court, without addressing the merits of the case, directed the petitioner to respond to the SCN while allowing the authorities to consider the recent circular during adjudication. The stay ensures that no further legal actions are taken until a proper review of the circular’s implications is completed.

The Hon’ble Karnataka High Court in the case of M/s Alstom Transport India Ltd. v. State of Karnataka [Writ Petition No. 23915 of 2023 dated July 09, 2024] passed an ad-interim stay order on the adjudication proceedings seeking the levy of the Integrated Goods and Service Tax (“IGST”) on the salaries paid directly to expatriates and held that that Circular No. 210/4/2024-GST dated June 26, 2024 (“the Circular”) might have bearing on stand of Assessee insofar show cause notice (“SCN”) is concerned. Therefore, without getting into merits of matter, the Assessee was to be relegated to stage of reply to SCN and authorities concerned could take note of applicability of Circular to facts on hand.

Facts:

M/s Alstom Transport India Ltd. (“the Petitioner”) was engaged in the business of designing, manufacturing, supplying, installing and commissioning of goods relating to railways and metro projects. The Petitioner received the Show Cause Notice dated September 26, 2023 (“the Impugned SCN”) issued by the Revenue Department (“the Respondent”) demanding IGST of Rs.59,57,19,228/- along with interest and penalty in accordance with the case of the Supreme Court, in the case of M/s. Northern Operating Systems Private Limited [CA No. 2289-2293/2021], and held that the secondment of employees by the overseas entity qualifies as ‘manpower supply services’ provided to the Indian entity, and therefore, the salaries and other expenses recovered from the Indian entity is exigible to service tax on a reverse charge basis.

During the period from July 2017 and March 2023, employees of overseas group entities (expats) were on the payroll of the Petitioner in India. Hence, the Petitioner had entered into employment agreement with the expats.

Further, during the period of employment with the Petitioner, the salary was paid directly by the Petitioner. On parallel, the overseas group entity continued to provide social service benefits available at home country to the expats employees and the cost incurred in respect of such benefits were recovered as reimbursements from the Petitioner.

The Petitioner contented that the payment of salary made to the expats does not attract IGST as the same does not amount to manpower and recruitment supply of services from the overseas group entities. The value of supply and services by the overseas entities is to be determined by taking the value prevalent in the invoices, which would be open market value terms of Section 15(4) of the Central Goods and Services Tax Act, 2017 (“the CGST Act”).

Hence, aggrieved by the Impugned Notice, the Petitioner filed present the writ petition before the Hon’ble High Court of Karnataka.

Issue:

Whether the services from the Expats qualify as supply of manpower and attract GST?

Held:

The Hon’ble Karnataka High Court in Writ Petition No. 23915 of 2023 held as under:

• Observed that, as per the Circular, where the foreign affiliate is providing certain services to the related domestic entity, and where full Input Tax Credit (“ITC”) is available to the said related domestic entity, the value of such supply of services declared in the invoice by the said related domestic entity may be deemed as open market value in terms of second proviso to Rule 28(1) of Central Goods and Services Tax Rules, 2017 (“the CGST Rules”). The relevant para of the circular is quoted below:

“3.6 In case of import of services by a registered person in India from a related person located outside India, the tax is required to be paid by the registered person in India under reverse charge mechanism. In such cases, the registered person in India, is required to issue self-invoice under Section 31(3)(f) of CGST Act and pay tax on reverse charge basis.

3.7 In view of the above, it is clarified that in cases where the foreign affiliate is providing certain services to the related domestic entity, and where full input tax credit is available to the said related domestic entity, the value of such supply of services declared in the invoice by the said related domestic entity may be deemed as open market value in terms of second proviso to rule 28(1) of CGST Rules. Further, in cases where full input tax credit is available to the recipient, if the invoice is not issued by the related domestic entity with respect to any service provided by the foreign affiliate to it, the value of such services may be deemed to be declared as Nil, and may be deemed as open market value in terms of second proviso to rule 28(1) of CGST Rules.”

• Further, in cases where full ITC is available to the recipient, if the invoice is not issued by the related domestic entity with respect to any service provided by the foreign affiliate to it, the value of such services may be deemed to be declared as Nil and may be deemed as open market value in terms of second proviso to Rule 28(1) of CGST Rules.
• Held that, the Petitioner was referred to the stage of reply to the SCN without even considering the merits and permitted to reply within period of three weeks. Thereafter, the Respondent can adjudicate regarding the reply within the period of eight weeks.

Our Comments:

Reliance is place on a pari materia case of the Hon’ble Supreme Court CC, CE & ST, Bangalore (Adj.) v. Northern Operating Systems Private Limited (NOS) [ Civil Appeal No. 2289-2293 of 2021 dated May 19, 2022] held that the assessee was, for the relevant period, service recipient of the overseas group company concerned, which can be said to have provided manpower supply service, or a taxable service, for the two different periods in question in relation to which show cause notices (“SCN”) were issued. Hence, the Hon’ble Supreme Court held that the Indian branch was the recipient of services in cases of secondment agreements, and would be liable to pay service tax on the same.

The Central Board of Indirect Taxes and Customs (CBIC) issued an important Instruction No. 05/2023-GST dated December 13, 2023, in accordance with the judgment of the Hon’ble Supreme Court in the case of Northern Operating Systems Private Limited (NOS) (supra). The instruction pertains to the nature of the secondment of employees by overseas entities to Indian firms and its Services Tax implications.

It has been emphasised that there may be a difference in arrangements with respect to the secondment transaction, resulting in a difference in tax implication. Accordingly, the NOS decision should not be applied mechanically or without application of mind. Each and every case shall be carefully evaluated, taking into consideration the different factuals, especially the contractual terms, to determine taxability under GST in consonance with the principles laid down by the Supreme Court.

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. Therefore, from the perusal of wording of section 74(1) of CGST Act, it is evident that section 74(1) can be invoked only in cases where there is a fraud or wilful mis- statement or suppression of facts to evade tax on the part of the said taxpayer. 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 misstatement 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 SCN, and such evidence should also be made a part of the SCN. Hence, the extended period of limitation, as prescribed under Section 74 of the CGST Act, cannot be applied in the absence of fraud or wilful misstatement or suppression of facts to evade tax. Accordingly, the evidence for the invocation of the extended period shall form part of the SCN.

The above aspects may be kept in consideration while investigating such cases and issuing show cause notices.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

The petitioner has sought for issuance of writ in the nature of certiorari seeking to quash the impugned show-cause notice dated 26.09.2023 issued by respondent no.4 at Annexure-A demanding IGST of Rs.59,57,19,228/-along with interest and penalty.

2. The petitioner has also sought for declaration that payment of salary made to expats by the petitioner does not attract IGST as the same does not amount to manpower and recruitment supply of services from the overseas group entities to the petitioner.

3. The learned counsel for petitioner would point out that the petitioner is engaged in the business of designing, manufacturing, supplying, installing and commissioning of goods relating to railways and metro projects and during the period from July, 2017 and March, 2023 employees of overseas group entities (expats) were on the payroll of the petitioner in India. It is submitted that in connection with the same, the petitioner had entered into employment agreement with the respective expats.

4. It is further submitted that during the period of employment with the petitioner salary was paid to them directly by the petitioner. It is further submitted that overseas group entity continued to provide social service benefits available at home country to the expats employees and the cost incurred in respect of such benefits is recovered as reimbursements from the petitioner.

5. It is submitted that respondent no.4 has sought to initiate proceedings and sought for details on the amounts paid to expats deputed from overseas group entities along with the payment details.

6. It is the contention of the learned counsel for petitioner that the value of supply and services by the overseas entities is to be determined by taking the value of supply and the services by overseas entities is to be determined by taking the value prevalent in the invoices, which would be open market value in terms of Section 15 (4) of the CGST Act, 2017 read with Second Proviso to Rule 28 of the CGST Rules, 2017. Reference is also placed by the learned counsel for petitioner to Circular No.199/11/2023-GST dated 17.07.2023.

7. It is further submitted that the latest Circular bearing No.210/4/2024-GST dated 26.06.2024 issued after the petition was filed reiterates clear position of law which if taken note of would result in show-cause notice being dropped to that extent.

8. Sri. K. Hema Kumar, learned AGA submits that the purport of Circular needs to be examined in the facts of the case and even otherwise, the applicability of the Circular requires adjudication and accordingly the matter may be relegated back to the stage of reply to the show-cause notice.

9. After hearing the matter and noticing the contention raised by the petitioner as referred to above, it must be noticed that Circular dated 26.06.2024 referred to above may have bearing on the stand of the petitioner insofar as show-cause notice is concerned.

Para 3.6 to Para 4 of Circular dated 26.06.2024 reads as hereunder:

“3.6 In case of import of services by a registered person in India from a related person located outside India, the tax is required to be paid by the registered person in India under reverse charge mechanism. In such cases, the registered person in India, is required to issue self-invoice under Section 31(3)(f) of CGST Act and pay tax on reverse charge basis.

3.7 In view of the above, it is clarified that in cases where the foreign affiliate is providing certain services to the related domestic entity, and where full input tax credit is available to the said related domestic entity, the value of such supply of services declared in the invoice by the said related domestic entity may be deemed as open market value in terms of second proviso to rule 28(1) of CGST Rules. Further, in cases where full input tax credit is available to the recipient, if the invoice is not issued by the related domestic entity with respect to any service provided by the foreign affiliate to it, the value of such services may be deemed to be declared as Nil, and may be deemed as open market value in terms of second proviso to rule 28(1) of CGST Rules.

4. It is requested that suitable trade notices may be issued to publicize the contents of this Circular”

10. In view of the above, without entering into the merits of the matter, the petitioner is relegated to the stage of reply to the show-cause notice. The authorities while considering the reply to the show-cause notice ought to take note of the Circular bearing No.210/4/2024-GST dated 26.06.2024, part of which has been extracted above. Insofar as other points for consideration are concerned, no observation is made regarding the same and it is open to the authority to take considered decision regarding other contentions not referred to above.

11. With the above observations, the matter is relegated to the stage of reply to the show-cause notice. Needless to state the authorities concerned can take note of applicability of the Circular to the facts on hand. Reply of the petitioner to be made within a period of three weeks from the date of receipt of certified copy of the order. After the reply to show-cause notice is made out, authorities concerned to adjudicate regarding reply within eight weeks thereafter. All contentions are kept open.

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