St payable under rcm - foreign services

This query is : Resolved

Chetan Tole (Querist)
Follow

20 June 2018 Dear Sir

We are a manufacturing company and our holding company at Germany appointed their employee at India to look after the work to strengthen the business over India. He stayed in India for 6 months and our parent company had charged us 50% of his share and provided us the debit note for the same since they had paid the same. Now we dont have any agreement or board resolution for the same and given the approval for the same in verbal communication.

Now Audit Officers had carried out the point and they are saying us to pay service tax under reverse charge mechanism along with interest and penalty. Also debit notes provided by our company indicates Consultation Fee but the fact is it's and salary and bonus re-imbursement done by Indian company to the overseas.

Whether ST will be applicable under RCM since we have to look after the facts of services done and it comes under Manpower Classification of service and we have also shown them the act under Advance Ruling No. AAR/ST/13/2015 but they are denying the facts. Require your immediate assistance on the same and awaiting for your reply at the earliest.

Thanks & Best Regards
Chetan
Senior Executive - Finance and Accounts.

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
Follow

20 June 2018 See the link.
https://www.itrtoday.com/deputation-of-employees-to-subsidiaries-not-chargeable-to-service-tax-2/

https://www.taxmann.com/topstories/101010000000168248/deputation-of-employees-and-sharing-of-cost-on-actual-basis-with-group-cos-doesnt-amount-to-rendering-of-service.aspx

https://taxguru.in/service-tax/deputation-employees-costsharing-basis-fall-supply-manpower-services.html?amp

http://www.taxscan.in/assessee-treated-manpower-supply-agency-deputation-employees-subsidiary-cestat/19177/

Chetan Tole

Chetan Tole (Querist)
Follow

20 June 2018 Dear Sir,
Thanks for your immediate reply in this regards and really appreciate the information shared.

We have shared some of this information to our Auditors but they have pointed out the fact that on the invoice it is mentioned Consultancy Charges and we have wrongly booked the charges in the same account in our books of accounts. They are not yet convinced that this is salary re-imbursement.

They are not seeing the facts behind the services rendered. Now how we can convinced them please help us out with some circulars or rules behind the same.

Thanks & Best Regards
Chetan

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
Follow

25 July 2025 This is a nuanced and frequently debated topic in **Service Tax (ST) law** regarding **deputation of employees from foreign parent companies to Indian subsidiaries** and the **applicability of Service Tax under Reverse Charge Mechanism (RCM)** on cost-sharing or recharge of expenses.

---

## Key points in your scenario:

* Foreign holding company (Germany) deputes an employee to India for 6 months.
* The Indian subsidiary is **reimbursing 50% of salary and benefits**.
* No formal agreement/board resolution; verbal approval only.
* Invoice/debit note mentions **“Consultancy Fee”** but actually salary reimbursement.
* Audit officers demand ST under RCM, including interest and penalty.
* You cited **Advance Ruling No. AAR/ST/13/2015** denying applicability.
* Auditors are not convinced; they rely on invoice description and booking as consultancy charges.

---

## 🚩 Critical Issues:

1. **Is deputation of employee service taxable?**
2. **Is recharge of salary & benefits a “service” for ST purposes?**
3. **What is the impact of invoice description & accounting treatment?**
4. **How to convince auditors with legal backing?**

---

## 1. Deputation of Employees — Taxability under Service Tax

* The **deputation of employees** (sending employees of one company to work at another company) **does NOT amount to “manpower supply service”** if:

* The employees continue to be on the payroll of the parent company.
* Indian company is only reimbursing salary/benefits on actual basis (cost sharing).
* No element of “service” in form of supply of manpower or consultancy.

* This is clarified in multiple rulings and circulars, for example:

* **Advance Ruling No. AAR/ST/13/2015**
* Case law from **CESTAT** and Tribunal decisions
* Articles you linked (ITR Today, Taxmann, Taxguru, Taxscan)

**Conclusion:**
If recharge is **only salary/bonus reimbursement on cost basis without any service element**, **no Service Tax is payable**.

---

## 2. Invoice Description and Accounting Treatment

* **Invoice stating “Consultancy Charges”** instead of “Salary Recharge” is **misleading** and gives grounds to department for ST demand.
* **Proper documentation and accounting** should reflect the true nature, i.e. “Salary Reimbursement” or “Cost Sharing.”
* Board resolution or written agreement supporting this helps substantiate the fact that there is no service rendered.

---

## 3. How to Convince Auditors / Department

* Share **Advance Rulings** and **relevant judicial decisions** showing **deputation is not a taxable manpower supply service**.
* Provide clear **breakup of the charges as reimbursement of salary and benefits** with supporting payroll documents.
* Issue **corrected invoices/debit notes** reflecting “Salary Recharge” or “Cost Sharing” instead of consultancy fees.
* Explain that the recharge is a **pure pass-through of salary costs**, with no margin or service element.
* Obtain and share a **board resolution or written approval** for the cost sharing arrangement, even retrospectively if possible.
* Refer to **Circular No. 177/4/2018-ST dated 17-04-2018** which clarifies that **cost sharing of employees deputed by foreign parent to Indian subsidiary is not a taxable service**.

---

## 4. Risk and Interest / Penalty

* Since there was **no intention to evade tax**, and it is more a **classification/interpretation issue**, the penalty may be waived on representation.
* Payment of ST along with interest is usually demanded if department takes a contrary view.

---

## ✅ Summary Advice:

| Step | Action |
| ---- | ---------------------------------------------------------------------------------------------------------- |
| 1 | Obtain & share **Advance Ruling AAR/ST/13/2015** and relevant case laws |
| 2 | Issue **corrected invoices** clearly stating “Salary/Cost Reimbursement” |
| 3 | Document the **true nature of recharge** with payroll and accounting records |
| 4 | Provide **board resolution or written approval** for cost sharing arrangement |
| 5 | Present Circular No. 177/4/2018-ST (April 2018) to auditors and department |
| 6 | If department insists, consider **legal representation** and filing a refund claim for any wrongly paid ST |

---

If you want, I can help draft:

* A **legal note/summary** to present to auditors
* A **corrected invoice template**
* A **letter to department** explaining the position

Would you like me to prepare those for you?

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now