Summary: Tax authorities have long sought to levy GST on cross-border secondment arrangements by characterising them as “import of manpower supply services” under the reverse-charge mechanism. The Karnataka HC’s ruling in Huawei offers significant relief by holding that where expatriate employees are genuinely integrated into the Indian entity’s operations, the arrangement constitutes an employer–employee relationship excluded from the definition of “supply” under the CGST Act. Unlike NOS, where economic control over the employees never truly migrated to the Indian entity, Huawei demonstrates that substance must prevail over structure.
For years, tax authorities have attempted to treat secondment arrangements as “import of manpower supply services,” invoking the reverse-charge mechanism to levy Goods and Services Tax (“GST”). The argument possesses a mechanical appeal: a foreign entity, employees of such foreign entity work in India, and costs are borne in India, consequently, a service must have been rendered. This approach was upheld by the Hon’ble Supreme Court (“SC”) in 2022 in Northern Operating Systems Pvt. Ltd. v. Commissioner of Central Excise & Service Tax (“NOS”),[1] where the foreign entity retained economic substance of the employment relationship: control, payroll, and crucially, a mark-up on reimbursements. The arrangement was construed as “manpower recruitment and supply services”, making it taxable under the previous regime.
The Revenue threatened to use NOS as the blunt instrument, indiscriminately applying it to all secondment structures. But jurisprudence, like good lawyering, resists overgeneralisation. The recent ruling of the Hon’ble Karnataka High Court (“HC”) in Huawei Technologies India Private Limited v. State of Karnataka[2] (“Huawei”) illustrates one such issue. Here, the HC addressed a demand of approximately INR 850 million of Integrated Goods and Services Tax (“IGST”) raised on salaries paid to foreign employees working in India through 2018–2023.
The Illusion of Import broken by the HC
Huawei dismantles this syllogism with surgical precision. Refusing to be seduced by labels, the HC instead examined the anatomy of the relationship: employment contracts, payroll structures, withholding tax, and organisational integration. The expatriates were not temporary representatives of the foreign enterprise but were integrated into the Indian company’s operations. The HC emphasised that foreign nationals were treated on par with Indian employees in terms of salary and social security benefits. This parity in treatment, according to the HC, evidenced genuine integration into the company’s organisational structure rather than an external service provision, particularly as the employees resided in India for a substantial period.
Once this factual truth is acknowledged, the legal consequence follows inexorably. Entry 1 of Schedule III of the Central Goods and Services Tax Act, 2017 (“CGST Act”) excludes services rendered by an employee to an employer from the definition of “supply.” Under GST law, what is not a supply cannot be taxed. The Revenue’s edifice collapses under its own conceptual weight if these individuals were residents in India, operating under the command and control of the Indian entity, the supposed foreign supplier becomes a legal fiction that the statute does not recognise.
The HC further held that qualifying as a “non-resident taxable person” under Section 2(77) of the CGST Act requires making “occasional supplies”. Since the services were rendered in the course of employment and not as a supply at all, this threshold precondition was not met.
In Alstom Transport India Limited[3] (“Alstom”) and Metal One Corporation,[4] the Courts had insisted that secondment is not a rigid legal category but a factual spectrum. Huawei draws a decisive line, where the employer–employee relationship is genuine and demonstrable, the transaction exits the GST universe altogether. NOS is not overruled, but distinguished and confined to its facts, where economic control over the employees never truly migrated to the Indian entity.
The Business Consequence: Relief with a Caveat
For multinational enterprises, the ruling offers a long-sought but cautiously granted reprieve. For entities with fact patterns resembling Huawei’s, it helps neutralise substantial exposures in the form of demands of IGST on expatriate remuneration, often accompanied by penal consequences that multiple the impact of underlying tax liability. However, the judgment is not a carte blanche; it is an invitation to discipline. The HC’s reasoning rewards coherence between legal form and operational reality. Relief is assured where documentation is robust and the employment relationship is authentic, but protection may dissipate where control is bifurcated or costs are artificially structured.
The lesson for businesses is to have their arrangements duly analysed and ratified by experts. Employment contracts must unambiguously establish control, supervision, and integration into the Indian entity. Payroll practices should align with salaries paid locally and subjected to Indian tax regimes. Organisational reporting lines must reinforce, not contradict, the employment construct.
Equally, the presence of a mark-up on cost allocations or continued economic allegiance to the foreign entity may prove fatal, reviving the very tax exposure the judgment seeks to resolve.
Concluding remarks
The Huawei judgment affirms that only arrangements lacking genuine employer–employee characteristics risk GST liability. While authorities retain the power to tax disguised manpower supply arrangements, they cannot disregard those that substantively fall within the statutory exclusions.
[1] 2022 (5) TMI 967-SUPREME COURT
[2] TS-1074-HC(KAR)-2025-GST
[3] 2025-VIL-756-KAR
[4] 2024-VIL-1161-DEL