According to experts, this judgment is a substantial relief for businesses navigating the complexities of GST compliance, particularly in the wake of the Supreme Court's judgment in the Northern Operating System case. The clarity provided by this ruling is expected to encourage smoother operations for domestic entities engaged with foreign partners.
The Delhi High Court (HC) has quashed show cause notices and orders demanding GST on salaries paid to seconded employees of foreign entities by Indian firms This decision is anchored in the Central Board of Indirect Taxes and Customs (CBIC) Circular No. 210/4/2024-GST, which clarifies the valuation of services between foreign affiliates and domestic entities.
The CBIC had clearly specified in its Circular No. 210/4/2024-GST that where a foreign affiliate provides certain services to a 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 domestic entity may be deemed as open market value in terms of the second proviso to rule 28(1) of the CGST Rules.
Furthermore, in cases where full input tax credit is available to the recipient, if the invoice is not issued by the related domestic entity for any service provided by the foreign affiliate, the value of such services may be deemed as Nil and treated as open market value according to the second proviso to rule 28 (1) of the CGST Rules.
Considering these provisions, the HC quashed the Show Cause Notices and Orders raising demand on salaries paid to seconded employees of foreign entities by Indian entities.
CBIC Circular Clarifies GST Valuation
Parag Mehta, a partner at N.A. Shah Associates LLP, stated, “The CBIC has clearly specified that where a foreign affiliate provides services to a related domestic entity that qualifies for full input tax credit, the value of these services can be deemed as open market value according to the second proviso to rule 28(1) of the CGST Rules. This ruling from the HC aligns perfectly with this guidance, offering much-needed clarity.”
The circular also notes that if the domestic entity does not issue an invoice for services rendered by the foreign affiliate, the value of such services may be treated as Nil, ensuring compliance with GST regulations.
Experts Call for Further Clarity
While the ruling has been welcomed, experts emphasise the need for further clarity on certain aspects of the circular and its implementation. Abhishek Jain, Indirect Tax Head & Partner at KPMG, noted, , “This recent judgment is a promising development. Businesses should review their facts to assess how this decision applies to them. Additionally, it will be interesting to observe how tax officers interpret this ruling in practice, as consistent application is crucial for compliance.”
Rajat Mohan, Senior Partner at AMRG & Associates, echoed this sentiment, “The court’s ruling underscores the importance of CBIC clarifications as binding, but ongoing communication and and guidance from the CBIC will be vital to ensure all stakeholders understand the implications of this ruling.”
Significant Clarity on GST Liability
Rajat Mohan added, “The Delhi High Court's ruling on GST applicability for seconded employees brings significant clarity and relief to businesses. By endorsing a 'Nil' valuation approach under Rule 28 of the CGST Rules, the court has confirmed that there is no GST liability on seconded services without specific monetary consideration. This decision empowers companies to rely on official guidance for compliance.”
Mohan also highlighted, “The court's decision to quash related notices showcases a pragmatic approach, streamlining the process and avoiding unnecessary tax burdens. This ruling sets an important precedent on GST valuation for low or non-monetary transactions.”
Entities Advised to Reassess Taxability
Sandeep Sehgal, Partner-Tax at AKM Global, emphasised the significance of the ruling: “Aligning with the CBIC Circular 210/4/2024- GST, the Delhi High Court quashed Show Cause Notices and orders demanding GST on expatriates' salaries paid by Indian entities in secondment arrangements. The Court held that as per the circular, the GST value can be deemed NIL if no invoices have been raised and full input tax credit is available. Entities with secondment arrangements facing similar issues will benefit from this ruling and should reconsider the circular and its implications when assessing valuation and analyzing taxability.”
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