Northern Operating Systems: secondment, and the notice that follows every expatriate
The Supreme Court decided one arrangement on its own documents. The department read it as a rule about all secondments. A CBIC instruction says otherwise.
In Commissioner of Customs, Central Excise and Service Tax v. Northern Operating Systems Private Limited (Supreme Court, 2022) the Court held that on the terms of the agreements before it, the secondment of employees by overseas group companies to an Indian company was a supply of manpower services by the overseas entity, taxable in the hands of the Indian company under reverse charge. The Court also declined to sustain the extended period of limitation, holding that the assessee's interpretation was not shown to be dishonest. CBIC Instruction 05/2023-GST dated 13 December 2023 directs officers not to apply the judgment mechanically to every secondment.
What the Court was looking at
The arrangement was a familiar one. Overseas group companies seconded employees to the Indian company. The employees worked under the Indian company's control, the Indian company reimbursed the salary cost, and the overseas entity remained the employer of record for social security and payroll purposes.
The revenue said this was a supply of manpower by the overseas entity. The assessee said the seconded employees were its own employees during the secondment, and that services by an employee to an employer are outside the tax net.
The Court examined the secondment agreements, the letters of understanding and the employment terms, and held that the overseas entity had a continuing employment relationship with the seconded personnel, that it had lent them to the Indian company for a defined period, and that what the Indian company received was therefore a service.
The two findings that are usually ignored
First, the Court expressly said the enquiry is a fact intensive one and that no single test is determinative. It looked at the totality of the arrangement. It did not lay down that every secondment is a service.
Second, on limitation, the Court set aside the demand for the extended period. It held that the assessee had a bona fide view supported by conflicting decisions, and that the revenue had not established suppression with intent to evade. That is a finding of considerable value in GST files, where Section 74 is invoked as a matter of habit.
CBIC Instruction 05/2023-GST records precisely this. It directs that the judgment should not be applied mechanically, that each case must be examined on its own agreements, and that invoking the extended period requires the ingredients to be established on the facts.
What the department demands, and on what value
The demand is usually IGST under reverse charge on the salary cost of seconded personnel, for every year within limitation, with interest and a Section 74 penalty.
The valuation argument is the second front. Where the recipient is entitled to full input tax credit, the second proviso to Rule 28 allows the value declared in the invoice to be treated as the open market value. Circular 210/4/2024-GST addresses the related question of import of services from a related person and the treatment where no invoice is issued and full credit is available.
In many files the tax is therefore revenue neutral in substance and the real exposure is interest and penalty. That changes the negotiation entirely, and it is the calculation to run before choosing to litigate.
How to distinguish your arrangement
The distinguishing exercise is documentary, not rhetorical. What the Court found decisive was the continuing employment relationship with the overseas entity and the temporary lending of personnel.
An arrangement stands on better ground where the Indian company issues its own employment contract for the secondment period, operates payroll in India, deducts tax at source as an employer, provides Indian social security or a certificate of coverage, exercises and documents supervision and appraisal, and bears the risk of the employee's work.
It stands on worse ground where the overseas entity invoices a mark up, where the assignment letter describes the employee as remaining an employee of the overseas entity throughout, where the Indian company merely reimburses a cost centre allocation, and where the employee returns to the overseas payroll at will.
Whatever the arrangement, the file must contain the assignment letter, the Indian employment contract, the payroll records, the social security position and the appraisal documents. A submission unsupported by these does not survive the first hearing.
Exhibit — The factors the enquiry turns on
| Factor | Points towards employment in India | Points towards manpower supply |
|---|---|---|
| Employment contract for the assignment period | Issued by the Indian entity | Only an overseas assignment letter exists |
| Payroll and tax withholding | Indian payroll, employer withholding in India | Overseas payroll with cost reimbursement |
| Social security | Indian contributions or a certificate of coverage | Continuing overseas contributions only |
| Control, supervision and appraisal | Documented by the Indian entity | Retained by the overseas entity |
| Consideration | Actual salary cost, no mark up | Cost plus a service fee or allocation mark up |
| Termination and repatriation | Indian entity decides | Overseas entity recalls at will |
No single row decides the case. The Supreme Court read the arrangement as a whole, and so will the Tribunal.
Authorities relied on
On the agreements before the Court, secondment by overseas group companies amounted to a supply of manpower services taxable under reverse charge; the extended period of limitation was not sustainable as no dishonest intent was established.
Invocation of the extended period requires positive evidence of suppression with intent; a bona fide interpretation does not attract it.
What to do on Monday
Assemble the secondment file for every expatriate for every year within limitation: assignment letter, Indian employment contract, payroll, withholding, social security and appraisal records.
Map your arrangement against the factor table and identify which documents can be corrected prospectively and which cannot be changed for past years.
Quantify the exposure as tax, interest and penalty separately, and test the revenue neutrality argument under the second proviso to Rule 28.
Cite CBIC Instruction 05/2023-GST and the limitation finding in Northern Operating Systems in the reply itself, not for the first time in appeal.
For future assignments, restructure the documentation before the assignment starts; nothing drafted after a notice carries the same weight.
This page states the general position. A reader with a specific question on their own facts may write to the GST practice at AMLEGALS.
Write to the GST practiceQuestions we are asked on this
Is every secondment now taxable?
No. The judgment turned on the agreements before the Court, and CBIC Instruction 05/2023-GST directs officers to examine each case on its own documents rather than apply the decision mechanically.
If we are entitled to full credit, why fight at all?
Because interest and penalty are not credit neutral. Run the arithmetic on tax, interest under Section 50 and penalty under Section 74 before deciding, and consider the Section 128A route for the covered years.
Does the judgment apply to secondment between two Indian companies?
The reverse charge analysis was specific to import of services. Domestic secondment raises a valuation and cross charge question instead, and the same employment versus manpower supply enquiry governs the taxability.
Can the department invoke Section 74 relying on Northern Operating Systems?
It routinely does, and the judgment itself is the best answer. The Supreme Court refused the extended period on the very arrangement it held taxable. Quote that paragraph in the reply.
What value should we adopt if we decide to pay?
Examine the second proviso to Rule 28 and Circular 210/4/2024-GST, which deal with the value declared where the recipient is eligible for full input tax credit.
In this cluster
- Valuation under Section 15: transaction value and its exceptions
- Rule 28 in practice: related party and distinct person supplies
- Corporate guarantees between group companies: the one percent rule
- Cross charge of common costs between branches
- Mandatory Input Service Distributor: the compliance rebuild
- Post sale discounts: the agreement requirement and the credit note trail
- Free of cost supplies, warranty replacements and moulds
- Reimbursements and the pure agent exclusion under Rule 33
- Liquidated damages, penalties and notice pay recovery
- Vouchers and gift cards: the amended treatment
GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.