Karnataka High Court Sets Aside Rs. 85.51 Crore IGST Demand On Huawei India, Holds Salaries To Foreign Staff Not Taxable As ‘Import of Services’

Karnataka High Court Sets Aside Rs. 85.51 Crore IGST Demand On Huawei India, Holds Salaries To Foreign Staff Not Taxable As ‘Import of Services’

Introduction

The Karnataka High Court has quashed a show cause notice demanding ₹85.51 crore in Integrated Goods and Services Tax (IGST), along with interest and penalty, from Huawei Technologies India Private Limited on salaries paid to foreign national employees. Justice S. R. Krishna Kumar held that the case did not involve secondment but a direct employer–employee relationship, thereby excluding the transaction from the ambit of GST.

Factual Background

The department issued a show cause notice dated December 23, 2023, alleging that salaries paid by Huawei India to foreign nationals constituted consideration for “Manpower Recruitment and Supply Services” and amounted to import of services liable to IGST under the reverse charge mechanism. The demand aggregated to ₹85.51 crore, together with interest and penalty.

Huawei India contended that the foreign nationals were directly employed by it, were on its payroll, received salaries and employment benefits in India, and had tax deducted at source under the Income-tax Act. They were treated identically to Indian employees and were not deployed through any secondment arrangement.

Procedural Background

Huawei challenged the show cause notice before the Karnataka High Court, arguing that the transaction was squarely covered under Entry 1 of Schedule III of the CGST Act, 2017, which excludes “services by an employee to the employer in the course of or in relation to his employment” from the definition of supply.

Issues

1. Whether salaries paid to foreign nationals constituted consideration for import of services liable to IGST.

2. Whether the arrangement amounted to secondment or reflected a direct employer–employee relationship.

3. Whether the foreign nationals qualified as “non-resident taxable persons” under the CGST Act.

Contentions

The department argued that the payments to foreign nationals amounted to manpower supply services and constituted import of services under the IGST Act, thereby attracting tax under the reverse charge mechanism.

Huawei submitted that the individuals were its direct employees, and once an employer–employee relationship exists, the transaction is excluded from GST by virtue of Entry 1 of Schedule III read with Section 7(2)(a) of the CGST Act. It further contended that the foreign nationals did not qualify as “non-resident taxable persons” under Section 2(77) of the Act and that the statutory requirements for “import of services” were not satisfied.

Reasoning and Analysis

The Court held that the material on record clearly established a direct employer–employee relationship between Huawei India and the foreign nationals. Since the salaries were paid in the course of employment, they fell squarely within Entry 1 of Schedule III of the CGST Act and were outside the scope of supply.

The Court rejected the department’s contention that the arrangement amounted to manpower supply services. It further held that the foreign nationals did not meet the statutory definition of “non-resident taxable persons,” and therefore the essential conditions for import of services under the IGST Act were not fulfilled.

Relying on a CBIC circular, the Court observed that in related-party transactions where the recipient is eligible for full input tax credit and no invoice is raised, the taxable value is deemed to be Nil. Since Huawei had not raised any invoice and was eligible for full input tax credit, the taxable value, if any, would stand deemed Nil.

The Court referred to its earlier decision in Alstom Transport India Limited v Commissioner of Commercial Taxes, which held that where an employer–employee relationship exists, GST is not attracted. It also relied on the Delhi High Court’s ruling in Metal One Corporation v Union of India, which clarified that in certain related-party arrangements without invoicing and with full ITC eligibility, the value may be treated as Nil.

Decision

Holding that IGST was not leviable on salaries paid to foreign nationals in the present case, the Karnataka High Court quashed the show cause notice dated December 23, 2023, along with all consequential proceedings. The Court also ruled that Huawei was not liable to pay interest or penalty.

In this case the petitioner was represented by Mr. Ravi Raghavan, Ms. Meghna Lal and Ms. Vani Dwevedi, Advocates. Meanwhile the respondent was represented by HCGP Jyoti M. Maradi, Advocate.