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

The Supreme Court has held that when the Overseas group companies providing skilled employees, on secondment basis, to its Indian counterparts amounts to supply of manpower services, the Indian company would be considered as service recipient. Therefore, the Indian company is liable to pay service tax on the salaries of the seconded employees reimbursed to the overseas company.While the judgment related to the service tax regime, it can have impact on the GST regime as well in view of the similarity of the relevant provisions. Upon perusal of the agreements entered between the Overseas group companies and the assessee (Indian counterpart), a Bench comprising Justices U.U. Lalit, S. Ravindra Bhat and P.S. Narasimha determined the assessee to be a service recipient and liable to be taxed, but the invocation of the extended period of limitation by the revenue was held to be untenable. In the light of the same, the Court set aside the orders of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), which ruled in favour of the assessee, and affirmed the decision of the Commissioner of Service Tax (Commissioner) confirming demand and penalty, except for the demand for the extended period(C.C., C.E. & S.T. - Bangalore (Adjudication) Etc. v. M/s. Northern Operating Systems Pvt. Ltd). Factual Background The assessee was registered with revenue as a service provider under various categories under the Finance Act, 1994 (Act). Pursuant to an audit, proceedings were initiated against it for non-payment of service tax with respect to agreements entered into by it with its group companies located in USA, UK, Dublin (Ireland), Singapore, etc. to provide general back- office and operational support to such group companies. 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. Two of the notices invoked Section 73(1) read with Section 66A of the Act to demand service tax for the extended period. The demand including that for the extended period was confirmed by the Commissioner. Appeals were filed before the CESTAT. In the meanwhile revenue issued 2 more show cause notices demanding service tax for the period - April 2012 to September 2014. The Commissioner Bangalore dropped the demands under these two show cause notices. Assailing the same the revenue also approached the CESTAT, which opined that neither the subject matter of contract between the assessee and the group companies were for supply of manpower nor the group companies were engaged in supply of manpower. Therefore, it held that the assessee was not a service recipient. Contentions raised by the parties Additional Solicitor General, Mr. Balbir Singh argued that the agreements between the assessee and its group companies, namely, the service agreement dated 01.09.2006, the master agreement dated 12.02.2009, the secondment agreement dated 01.04.2007 and the secondment assignment letter and agreement with concerned employees reflect that the overseas entities provided service of its employees to the assessee for the performance of certain tasks. A consideration of 15% markup over the actual cost was paid to the assessee. Though the assessee had control over the employees for the duration of the assigned task, after cessation of such assignment the employees reverted back to the overseas companies. It was argued that 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. Senior Advocate, Mr. V. Sridharan, appearing for the assessee, contended that the service would become taxable only when it is provided by a manpower recruitment or supply agency. In the present case the group companies are not engaged in the business of supplying manpower. It was averred that post July 2012, by virtue of Section 65(44) of the Act, the services provided by an employee to an employer in the course of employment was kept out of the ambit of 'service'. It was asserted that the seconded employees are contractually hired by the assessee and are under its control and supervision. He submitted that in order to determine the value of taxable services for charging service tax, the gross amount charged for providing the services is to be determined. However, in the present case the demand of the service tax is being computed on the salaries and allowances paid to the employees. Relying on SRF Ltd. v. Commissioner and Commissioner of Central Excise v. Coca Cola India Pvt. Ltd., he 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. Analysis by the Supreme Court The...

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

Sohini Chowdhury

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