Salary payment to foreign national employees when does not attract IGST

The Karnataka High Court has recently overruled the Revenue Department’s contention that the assessee (a multi-national company) was liable to pay IGST under reverse charge mechanism (‘RCM’) based on the remuneration paid to the foreign national employees for the period 2018-19 to 2022-23 as the same tantamounts to import of Manpower Recruitment and Supply Services. The assessee was represented by Lakshmikumaran & Sridharan Attorneys here in Huawei Technologies India Private Limited v. State of Karnataka. Allowing assessee’s petition, the Court quashed the show cause notice while it observed the following:

Employer-employee relation

It was held that there was no secondment of employees from other entities in the group and there existed a direct employer-employee relationship between the assessee and the foreign nationals. It was thus held that entire transaction was outside the ambit of GST as was covered under Entry 1 of the Schedule III of the CGST Act, 2017, excluding services provided by an employee to the employer. The Court for this purpose took note of the following:
 

• Presence of employment contract stipulating fixed period of employment, reporting authority, working hours, cost to company and other terms and conditions of employment. 
• Employees were on the pay-rolls of the assessee and salaries along with annual performance bonus, house rent allowance, provident fund, etc., were paid to the foreign nationals in their Indian bank accounts.
• Income Tax was deducted by the assessee while making payment of salaries and IT returns were also filed by expats being employees of the assessee in India.
• Foreign nationals were treated at par with the Indian employees of the assessee, in terms of salary, social security benefit, etc.
   

Expats not non-resident taxable person

The High Court also consented with the submission of the assessee that foreign national employees are residents of India and thus cannot be considered as non-resident taxable persons under Section 2(77) of the CGST Act. It was noted that the foreign nationals were not making any supplies to the assessee (as excluded under Schedule III), and qualified as ‘residents’ (as were residing in India for majority of years during the disputed period). 

Also, it was observed that since foreign nationals were in India, the location of alleged supplier was in India, and hence the transaction was not of import as per Section 2(11) of the IGST Act, 2017. 

No liability for supply between related parties if full ITC available and no invoice raised

The High Court for this purpose also relied upon CBIC Circular No. 210/4/2024-GST, dated 26 June 2024 and held that even if such secondment arrangement is assumed to be a supply, the deeming fiction under the Circular neutralises any scope for further tax liability. According to the Circular, if the related domestic entity does not raise an invoice in respect of services received from its foreign affiliate, the value of such services may be deemed to be ‘Nil’ which shall be treated as the open market value under Rule 28(1) of the CGST Rules.

Earlier decisions in Alstom Transport India Limited and Metal One Corporation were also relied upon.