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Indian Company Liable To Service Tax On Secondment Of Employees From Overseas Group Entities As Recipient Of Manpower Supply

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Brief summary of the case

Court: IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 2289-2293 OF 2021
APPELLANT: C.C., C.E.& S.T. – BANGALORE (ADJUDICATION) ETC.
Date of desision: 23.12.2020
RESPONDENT:  M/S NORTHERN OPERATING SYSTEMS PVT LTD.
Judge: Honourable Mr. Ravindra Bhat, J

Facts

  1. The assessee was registered with the revenue, as a service provider under the categories of Manpower Recruitment Agency Service”, “Business Auxiliary Service”, “Commercial Training and Coaching Service”, “TTSS”, “Telecommunication and Legal Consultancy Service” etc., under the Finance Act, 1994 (hereafter “the Act”).
  2. An audit of the records by the revenue’s officials, proceedings were initiated against the assessee alleging non-payment of service tax concerning agreements entered into by it with its group companies located in USA, UK, Dublin (Ireland), Singapore, etc. to provide general backoffice and operational support to such group companies
  3. The nature and contents of the agreements as follow
  4. When required Appellants requests the group companies for managerial and technical personnel to assist in its business and accordingly the employees are selected by the group company and they would be transferred to Appellants.
  5. The employees shall act in accordance with the instructions and directions of Appellants. The employees would devote their entire time and work to the employer seconded to.
  6. The seconded employees would continue to be on the payroll of the group company (foreign entity) for the purpose of continuation of social security/retirement benefits, but for all practical purposes, Appellants shall be the employer. During the term of transfer or secondment the personnel shall be the employee of Appellants. Appellants issue an employment letter to the seconded personnel stipulating all the terms of the employment
  7. The employees so seconded would receive their salary, bonus, social benefits, out of pocket expenses and other expenses from the group company.
  8. The group company shall raise a debit note on Appellants to recover the expenses of salary, bonus etc. and the Appellants shall reimburse the group 3 company for all these expenses and there shall be no mark-up on such reimbursement.”
  9. The revenue had issued four show cause notices for not paying service tax under the category of “manpower recruitment or supply agency service” with respect to some seconded employees of the foreign group companies.
  10. The two of the notices invoked Section 73(1) read with Section 66A of the Act to demand service tax for the extended period. Appeals were filed before the CESTAT. In the meanwhile, revenue issued 2 more show cause notices demanding service tax for the period of April 2012 to September 2014.

 Held by commissioner

  1. Providing skilled manpower, on secondment basis, is manpower recruitment or supply agency service in the meaning of Section 65(68) read with Section 65(105) (k) of the Act.
  2. The group companies and their various branches abroad, would be the service providers and the assessee, who receives skilled manpower, on secondment basis, is the service recipient.
  3. The definition of manpower recruitment or supply agency, under Section 65(68) has no exclusion clause, requiring service providers to possess the status of certain specified persons or organizations, for the purpose of providing the taxable service of manpower, recruitment or supply agency.
  4. It was next concluded that the service provider’s obligation ceases once employees were recruited and seconded.
  5. It was held that there is no exclusive provision in law that restricts taxability of service of manpower recruitment or supply agency, when salaries are drawn by the assessee for manpower so supplied and TDS under the Income Tax Act had been affected.
  6. Regarding differential service tax liability, mere worksheets without documentary proof would be insufficient to grant relief as against the service tax of 41,11,473/- for the period 2008-2009.

The assessee filed two appeals before the CESTAT.

The assessee was issued two SCNs demanding service tax of  4,36,75,590 /- and 7,55,48,448/- for the period April 2012 to April 2013, and April 2013 to September 2014 respectively, along with interest and penalty.

Argument by APPELLANT

  1. Service tax cannot be demanded as the services provided by foreign affiliates do not fall under manpower recruitment or supply agency services for the period prior to negative list.
  2. The term ‘service’ under the Finance Act, specifically excluded service provided by the employee to the employer. Therefore, the amount paid to the foreign entity as reimbursement of salary of the seconded employees cannot be construed as consideration for supply of manpower services.

The Commissioner, Bangalore by order No. 54-55/2016-17 dated 27.02.2017/16.06.2017 was dropped the proposals in the SCN for the period April 2012 to March 2013 and April 2013 to September 2014, thereby setting aside demands for service tax of 4,36,75,590/- and 7,55,48,448/- respectively (total 11,92,24,038/-).

The Commissioner by order dated 27.02.2017/16.06.20178 held that

  1. Seconded employees continued on their foreign employer’s payroll only for continuing social security benefits and for all practical purposes the asseesee was the employer of such seconded employee.
  2. During secondment, those employees had to entirely devote their skill and knowledge towards achieving the purpose of their secondment.
  3. Each employee had to report to and be responsible to the assessee.
  4. Fourthly, a look at one sample agreement showed that it was between the individual and the asseesee, and not between the overseas entity and the asseesee.
  5. The obligation to honour the compensation agreement was upon the assessee only.
  6. The facts were parallel to Volkswagen India Pvt. Ltd9 , in which the CESTAT decided the matter in favour of the assessee.
  7. There was no supply of manpower rendered to the assessee by the foreign holding company and the method of salary disbursement is not determinative of the nature of the transaction.
  8. For the period post 2012, the remittance is a reimbursement based on actuals and there is no amount which is payable in respect of the activity in question and therefore there is no consideration involved.

Aggrieved by the Commissioner’s order dropping the demand, the Revenue has filed an appeal challenging it, in which the assessee too filed its cross objection.

Contentions of Revenue

  1. In terms of the Services Agreement (dated 01.09.2006), by Clause 8, the assessee NOS (NORTHERN OPERATING SYSTEMS PVT LTD) agreed to perform or provide to the foreign group company (Northern Trust Company) various services which were enumerated in Attachment 1.
  2. In terms of Attachment 1 the remuneration to be provided for the service was fixed at the actual cost plus a mark-up of 15%.
  3. The master services agreement between the assessee and Northern Trust Company dated 12.02.2009. the contract between the parties were essentially for supply of manpower services and it is a taxable service not excluded by the amended Section 65 of the Finance Act, 1994.
  4. Services agreement dated 01.09.2006 and its attachment, the master service agreement dated 12.02.2009 (with its annexures), the secondment agreement dated 01.04.2007, and the secondment assignment letter or agreement with the concerned employee clearly showed that the overseas employer provided the services of its employees to the assessee for the performance of agreed tasks.The seconded employee was only operationally under the control of the assessee.
  5. The temporary control over the manner of performance of duties of the employees seconded did not take away or diminish the fact that their real employer was none other than the overseas company.

Contentions of the assessee

  1. A conjoint reading of Section 65(68) with Section 65(105)(k) of the Finance Act, 1994 makes it clear that the ‘manpower recruitment and supply agency service’ seeks to bring under its ambit two types of activities i.e. recruitment of manpower and supply of manpower
  2. Circular F. No. B1/6/2005-TRU dated 27.07.2005 and Master Circular No. 96/7/2007-ST, dated 23.08.2007, the services provided by an employee to the employer in the course of employment are kept beyond the ambit of the definition of ‘service’. Thus, the position of law both prior to as well as post July 2012 is same.
  3. Ever since the introduction of service tax in India, service by an employee to an employer was never subject to service tax.
  4. There is no country in the world which levies VAT/GST on employment service, or any services rendered by an employee to the employer
  5. The agreements entered by the assessee with its group companies were to provide certain specialized services. The seconded personnel are contractually hired as the assessee’s employees. Control over them is exercised by the assessee. Such employees devote all their time and efforts under the direction of the assessee; their remuneration is also fixed by it.
  • The process of dispersal of the salaries and allowances is solely for the sake of convenience and continual of the social security benefits in the expats home county. There was no mark-up chargedby the foreign company.
  • In SRF Ltd. v. Commissioner and Commissioner of Central Excise v. Coca Cola India Pvt. Ltd., learned counsel argued that even if the service tax is paid, the entire amount would be refunded as input credit to the assessee, in cash, as per Rule 5 of the CENVAT Rules read with Rule 6A of the Service Tax Rules, 1994.

Judgement- Supreme court.

  1. The issue is the taxability of the cross charge, which is primarily based on who should be reckoned as an employer of the secondee. If the Indian company is treated as an employer, the payment would in effect be reimbursement and not chargeable to tax in the hands of the overseas entity. However, in the event the overseas entity is treated as the employer, the arrangement would be treated as service by the overseas entity and taxed.
  2. The secondment is a part of the global policy of the overseas employer loaning their services, on temporary basis. On the cessation of the secondment period, they have to be repatriated in accordance with a global repatriation policy (of the overseas entity).
  3. In Silver Jubilee Tailoring House v. Chief Inspector of Shops & Establishments this court remarked how the test of control, or manner of performance of a task, by an employee by another is not conclusive to decide if an employer employee relationship subsists:
  4. “This distinction (viz., between telling a servant what to do and telling him how to do it) was based upon the social conditions of an earlier age;
  5. The court, upon a review of the previous judgment in Sushilaben Indravadan held that there no one single determinative test, but that what is applicable is “a conglomerate of all applicable tests taken on the totality of the fact situation in a given case that would ultimately yield, particularly in a complex hybrid situation, whether the contract to be construed is a contract of service or a contract for service. Depending on the fact of situation of each case, all the aforesaid factors would not necessarily be relevant, or, if relevant, be given the same weight.”
  6. The CESTAT relied upon two of its previous orders, which were pressed into service, and also that in the present case itself, the revenue discharged the later two show cause notices, evidences that the view held by the assessee about its liability was neither untenable, nor malafide. This is sufficient to turn down the revenue’s contention about the existence of “wilful suppression” of facts, or deliberate misstatement. For these reasons, the revenue was not justified in invoking the extended period of limitation to fasten liability on the assessee.
  7. The assessee was the service recipient for service (of manpower recruitment and supply services) by the overseas entity, in regard to the employees it seconded to the assessee, for the duration of their deputation or secondment.
  8. The assessee is liable to pay service tax for the periods spelt out in the SCNs.
  9. The impugned common order of the CESTAT is accordingly set aside. The commissioner’s orders in original are accordingly restored, except to the extent they seek to recover amounts for the extended period of limitation.

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