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

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 substratum of the issue for the consideration of the Court was whether the secondment, for the purpose of completion of the assessee's job, amounts to manpower supply.

The Court noted that in the contemporary global economy where cross-border arrangements have become rampant, employees are frequently seconded to group companies based on business considerations. Typically, in secondment arrangements, employees of overseas entities are deputed to the host entity to meet its specific needs. During the arrangement the seconded employees are under the supervision of the host entity and to meet statutory mandates, the salary is paid by the overseas entity which is claimed as reimbursement from the host. The Court observed that if the overseas entity is treated as the employer, the arrangement would be treated as service and be taxed.

After referring to a catena of judgments on the issue about the flexibility in deciding the question of whether a contract was one for service or one of service, the Court referred to the latest decision in Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd., wherein the Apex Court considered various relevant tests to reach the conclusion that no one test of universal application can yield correct result, therefore, a conglomerate of tests are to be applied to the fact and circumstances of each case to determine the nature of the contract. It was taken note of that after amendment to the Act in 2012, all activities carried out by an individual for another, for a consideration, were deemed as services, one of the excluded categories being service by employee to employer in reaction to their employment.

On perusal of the letter of understanding between the assessee and employees, the Court observed that nowhere in it was it mentioned that the seconded employees would be treated as employees of the assessee. Furthermore, the term of employment of the seconded employees is as per the policy of the overseas company and after completing specific assignments these employees are to return to their overseas employer. It also noted that apart from paying the basic salary, a hardship allowance of 20% of the basic salary was paid to these employees by the overseas employee for working in India.

The judgment authored by Justice Ravindra Bhat took note of the following circumstances to conclude that there was no employer-employee relationship between the Indian company and the seconded employees and that the Indian company was a service recipient of manpower supply -

1. The seconded employees continue to be in the payroll of the overseas company

2. The overseas company pays the salary to the seconded employees in relation to the services given to the Indian company.

3. They are highly skilled employees seconded to the Indian company for the use of their skills.

4. Their terms of employment, even during the period of secondment, is in accordance with the overseas company.

5. Upon the end of secondment, they return to the overseas company.

The Court held -

"…the assessee was, for the relevant period, service recipient of the overseas group company concerned, which can be said to have provided manpower supply service, or a taxable service, for the two different periods in question (in relation to which show cause notices were issued)."

With respect to the submission of the assessee that even if liable to pay the service tax, on reverse charge it would be entitled to refund, the Court noted that to argue the same reliance was placed on SRF and Coca Cola, which it opined had limited precedential value as in these judgments the Apex Court had merely affirmed the ruling of CESTAT without providing independent reasoning. However, it was of the view that the issue before it was whether the incidence of service tax arises by virtue of provision of secondment services and the issue of refund was irrelevant in this context. It noted that in the impugned order CESTAT had relied on its rulings in Volkswagen India Pvt. Ltd. v. CCE, Pune-I and Computer Sciences Corporation India Pvt. Ltd. v. Commissioner of Service Tax, NOIDA to hold that the method of disbursement of salary cannot determine the nature of transaction. The Court was of the view that the orders of the Apex Court in Volkswagen and Computer Science Corporation which also merely affirmed the CESTAT ruling was not reasoned and had no precedential value.

The Court refused to accept the argument of the revenue that the assessee had wilfully suppressed facts and made deliberate misstatements. Considering the claim of malafide was unsubstantial, it held that the revenue was not justified in invoking the extended period of limitation to fasten liability on the assessee.

Case Name: C.C., C.E. & S.T. - Bangalore (Adjudication) Etc. v. M/s. Northern Operating Systems Pvt. Ltd.

Citation: 2022 LiveLaw (SC) 533

Case No. and Date: Civil Appeal No. 2289-2293 of 2021 | 19 May 2022

Corum: Justices U.U. Lalit, S. Ravindra Bhat and P.S. Narasimha

Headnotes

Finance Act 1994 - Service Tax - Secondment agreement- Indian company employing services on employees seconded from overseas group companies can be said to be service recepient of manpower supply- Liable for service tax-The assessee was, for the relevant period, service recipient of the overseas group company concerned, which can be said to have provided manpower supply service, or a taxable service, for the two different periods in question (in relation to which show cause notices were issued) - Para 61

Secondment agreements - explained - Employees of overseas entities are deputed to the host entity (Indian associate) on the latter's request to meet its specific needs and requirements of the Indian associate - during the arrangement, the secondees work under the control and supervision of the Indian company and in relation to the work responsibilities of the Indian affiliate - social security laws of the home country (of the secondees) and business considerations result in payroll retention and salary payment by the foreign entity, which is claimed as reimbursement from the host entity - in the event the overseas entity is treated as the employer, the arrangement would be treated as service by the overseas entity and taxed. [Paragraph No. 34]

Contract of service or Contract for service - Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd. - flexibility in regard to deciding the question of whether a contract is one for service or one of service - no one test of universal application can ever yield the correct result - it 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 situation of each case, all the aforesaid factors would not necessarily be relevant, or, if relevant, be given the same weight. [Paragraph Nos. 41 and 56]

Finance Act, 1994; Section 65(44) - excludes from the sweep of service tax "a provision of service by an employee to the employer in the course of or in relation to his employment." - while the control (over performance of the seconded employees' work) and the right to ask them to return, if their functioning is not as is desired, is with the assessee, the fact remains that their overseas employer in relation to its business, deploys them to the assessee, on secondment. Secondly, the overseas employer- for whatever reason, pays them their salaries - their terms of employment, even during the secondment, are in accord with the policy of the overseas company, who is their employer - upon the end of the period of secondment, they return to their original places, to await deployment or extension of secondment. [Paragraph Nos. 45 and 57]

CETSTAT judgments overruled - Some judgments relied upon by the assessee and the CESTAT have limited precedential value - the Apex Court had merely affirmed the ruling of CESTAT in these judgements without providing independent reasoning - Overruled Volkswagen India Pvt. Ltd. v. CCE, Pune-I; Computer Sciences Corporation India Pvt. Ltd. v. Commissioner of Service Tax; SRF Ltd. v. Commissioner and Commissioner of Central Excise v. Coca Cola India Pvt. Ltd. [Paragraph No. 59]

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