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India: Deputed employee salaries not subject to service tax

India: Deputed employee salaries not subject to service

The Supreme Court of India dismissed an appeal filed by the tax authorities, thereby effectively upholding a decision of a tribunal finding that an Indian company (taxpayer) did not owe service tax on the salaries paid to employees deputed (assigned) by a foreign parent company to work for the taxpayer in India.


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The case is: Nissin Brake India Pvt. Ltd. [TS-230-SC-2019-ST]


The taxpayer was engaged in the manufacture of automobile parts, and entered into a “dispatch agreement” with its foreign parent company for the payment of salary and benefits to certain employees who were deputed from the parent company to perform work for the taxpayer. The tax authorities asserted that this arrangement was in the nature of “manpower recruitment” or a supply-agency service and, as such, was subject to service tax under the reverse-charge mechanism.

A tribunal found that the “deployed” employees worked under the control of the taxpayer; that the taxpayer withheld (deducted) tax from the salary and benefits paid to these employees; and that no additional consideration was paid to the parent company for the deployment of the employees; and, thus, that there was no agency-client relationship. Accordingly, the tribunal found that there was no taxable service that would be subject to service tax.

On appeal by the tax authorities, the Supreme Court of India dismissed on the merits.

KPMG observation

This Supreme Court case may not be directly applicable under the goods and services tax (GST) regime, and must be analyzed in light of the “schedule 1” entry on the free supply between distinct or related parties.

Read an April 2019 report [PDF 812 KB] prepared by the KPMG member firm in India

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