CESTAT: Foreign Employee Secondment To Indian Subsidiary Taxable As ‘Manpower Supply Service’; Demand Limited To Normal Period

April 24, 2026 : The Bangalore Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that employees seconded by a foreign parent company to its Indian subsidiary under a salary reimbursement arrangement would constitute “Manpower Recruitment or Supply Agency Service” and attract service tax under the reverse charge mechanism. However, the Tribunal restricted the demand to the normal limitation period and set aside penalties, holding that there was no mala fide intention to evade tax since any tax paid would have been available as CENVAT credit.

A Bench comprising Judicial Member P.A. Augustian and Technical Member R. Bhagya Devi partly allowed the appeal filed by ARM Embedded Technologies Private Limited against the order confirming service tax demand of Rs.1.76 crore along with interest and penalties under Sections 77 and 78 of the Finance Act, 1994.

The dispute arose from a “Salary Cost Reimbursement Agreement” entered into between ARM Embedded Technologies Private Limited, a 100% Export Oriented Unit registered with the Software Technology Parks of India (STPI), and its UK-based parent company, ARM Ltd., for secondment of specialised employees to India for software development and commercial operations during the period from August 1, 2006 to March 29, 2010.

Under the arrangement, employees possessing specialised technical expertise were deputed to the Indian entity for specified periods. Although the secondees worked under the operational and functional control of the Indian subsidiary, their salaries and expatriate benefits continued to be paid by the foreign parent company under its international assignment policy and were later reimbursed by the appellant.

The appellant argued that the secondees functioned as its own employees during the secondment period, taxes were deducted at source by the Indian entity, and social security obligations were also discharged by it. It further contended that the arrangement was distinguishable from the Supreme Court’s ruling in Commissioner of Customs, Central Excise and Service Tax v. Northern Operating Systems Pvt. Ltd. because the employees were engaged for establishing Indian operations and not for specific outsourced assignments.

Rejecting the contention, the Tribunal relied extensively on the Supreme Court judgment in Northern Operating Systems and examined the secondment agreement in detail. It noted that the agreement specifically recorded that ARM Ltd. had agreed to send its employees on secondment for facilitating the operations of the Indian subsidiary.

The Tribunal observed that the secondees continued to remain on the payroll of the foreign parent company, were paid home-country salaries in foreign currency, and were deputed only for temporary assignments after which they returned to the parent company. It held that these features clearly established that the arrangement amounted to manpower supply service.

The Bench observed: “Clause 1 and Clause 2 of the Agreement clearly establishes the fact that the employees belong to the parent-company… The parent-company sends such employees on secondment for facilitating the operations of ARM Embedded Technologies Private Limited. Salary paid is home country salary in foreign currency as per the international assignment policy which is later reimbursed by the appellant.”

While upholding the taxability of the arrangement, the Tribunal held that the extended period of limitation was not invocable since there was no suppression of facts or intention to evade tax. Observing that any service tax paid would have been eligible as CENVAT credit, the Bench restricted the demand only to the normal period and set aside penalties imposed under Sections 77 and 78 of the Finance Act, 1994.

Case Title: ARM Embedded Technologies Private Limited v. Commissioner of Central Excise
Case No.: Service Tax Appeal No. 900 of 2012
Coram: Justice P.A. Augustian (Judicial Member) and R. Bhagya Devi (Technical Member)