Whether Salary Paid On Secondment Of Employees Is A Taxable Service Under Finance Act?Supreme Court To Consider

A Bench comprising Justices Sanjiv Khanna and J.K. Maheshwari directed the Registry to list and tag the plea with another petition titled Commissioner of Service Tax, Delhi-IV v. M/s. Nortel Networks India Pvt. Ltd., which raises the same issue and is pending adjudication.

In the present petition, the respondents (M/s. Komatsu India Pvt. Ltd.) are engaged in manufacture of Dump Trucks and are a wholly owned subsidiary of Komatsu Asia Pacific Limited (KAP). It appears that the respondents have not paid service tax on various services received from abroad, in terms of Section 66A of the Finance Act, 1994. Show cause notices were issued to it for demand of service tax under the categories of 'Manpower Recruitment or Supply Agency Service', 'Online Information and Database Access and Retrieval Service', 'Consulting Engineering Service' and 'Maintenance and Repair Services' and upon confirmation of the demand the original authority imposed penalties.

Before the Customs Excise And Service Tax Appellate Tribunal, Chennai (CESTAT), Komatsu India Pvt. Ltd. did not contest the demand on Online Information Database Access and Retrieval Service and Consulting Engineer Services, but challenged the penalties imposed under Section 78 of the Finance Act, 1994. The demand under the said categories was upheld by the CESTAT. Considering that Komatsu had paid service tax and was eligible for credit, the penalties in this regard were set aside.

With respect to the demand of service tax on 'Manpower Recruitment or Supply Agency Service, CESTAT observed that the agreement executed between the respondent and its parent company (KAP) is for secondment of service engineers from the foreign companies. Employees from KAP were deputed to work in the factory of the respondent for after-sales and other related work. According to the CESTAT, once employees are deputed to the respondent it would enter into individual contracts for employment with each employee. It noted that there was no payment of consideration towards rendering of Manpower Recruitment or Supply Agency Service. Citing Nortel Network (I) Pvt. Ltd. v. CST Delhi, the CESTAT stated that secondment of employees from abroad for serving in India does not constitute rendering of 'Manpower Supply or Recruitment Service'. It held that the payment made to the foreign company which had been subjected to service tax under 'Manpower Recruitment or Supply Agency' is not sustainable. It further held that the concerned services would be classifiable under "Business Auxiliary Service' and not 'Maintenance and Repair Services'. CESTAT observed that, being 'Business Auxiliary service' it would qualify as 'Export Service' according to Rule 3(1)(ii) of Export of Service Rules, 2005, as the service recipient is situated outside India. Considering that the services are exported, and therefore, not taxable in India, the demand was set aside.

It is pertinent to note that in a judgment dated 19.05.2022, a Bench comprising Justices U.U. Lalit, S. Ravindra Bhat and P.S. Narasimha has held that when 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.

[Case Title: Commissioner of GST And Central Excise Chennai v. M/s. Komatsu India Pvt. Ltd. Diary no. 24354/2022]