No Service tax on secondment of employees by group companies as employer-employee relationship exists

The Hon'ble CESTAT Bangalore, in M/s Target Corporation India Pvt Ltd v. C.C.E., Bangalore [Service Tax Appeal No. 20459 of 2016 decided on January 19, 2021] set aside the order passed by the Commissioner for demand of differential Service tax amounting to INR 28,37,08,191/-, on secondment of the employees by the companies under agreement and held that such an activity cannot be termed as 'manpower recruitment or supply agency' where employee-employer relationship exists.

Facts

M/s Target Corporation India Pvt. Ltd. ('the Appellant') is engaged in providing software development and IT enabled services. The Appellant entered into an agreement with the M/s Target Corporation, USA ('Target, USA') for secondment of employees w.e.f. April 1, 2006 and as per the agreement, the Appellant shall pay Target, USA a service charge @ 15 dollar per employee per pay role cycle for processing pay role of the seconded employees. Target, USA raised debit notes on the Appellant towards salaries paid to the employees seconded from Target, USA and the Appellants have remitted the amount in foreign currency and disclosures were made in their financial statement based on relevant accounting standards and guidance notes issued by the Institute of Chartered Accountants of India. Further, as per the Appellant, the payments to expats are grouped and included as 'salaries, wages and bonus' under the head 'expenditure incurred in foreign exchange' and the same is also shown as 'reimbursement of expenses' under related party transaction as they form part of the transactions within the group entities.

The Appellant in order to avoid any future litigation approached the Hon'ble Authority for Advance Ruling ('AAR') (Income Tax, New Delhi). The Appellant being unsatisfied with the ruling, but to avoid further litigation and mounting interest in case of any liability, on their own account, calculated the Service tax liability on the salaries etc. relating to the expats for the period 2007-2008 to 2012-2013 and paid Service tax with interest, Subsequently, the Appellant availed credit of Service tax and claimed refund of the said amount in terms of Rule 5 of CCR, 2004, which was sanctioned in toto by the Deputy Commissioner, Bangalore vide Order dated June 6, 2020.

On gathering intelligence and subsequent examination of balance sheet of the Appellant, the Department found that the Appellant has incurred sizeable expenditure in foreign currency towards import of services but no Service tax amount has been paid. After investigation, Department was of the view that the assessee has evaded the payment of Service tax on 'Manpower Recruitment and Supply of Manpower Agency Service'. On completion of the investigation, a Show Cause Notice dated October 23, 2013 ('SCN') was issued to the Appellant proposing to demand differential Service tax amounting to INR 28,37,08,191/- alleged to not have been paid as recipient of services for having imported manpower recruitment or supply agency services from the persons located outside India for the period 2008-2009 to 2011-2012 along with interest and penalty. Later the Commissioner of Central Excise ('Respondent') passed the Order-in-Original No. BLR-EXCUS-0003-COM-21-15-16 dated December 23, 2015 ('OIO'), confirming the demand by disregarding all the submissions made by the Appellants.

Issue

Whether Service tax is leviable on the amount reimbursed or reimbursable by the Appellant to Target, USA under the terms of the secondment agreement and on the payment to be made towards payroll processing charges?

Held

The Hon'ble CESTAT Bangalore, in Service Tax Appeal No. 20459 of 2016, decided on January 19, 2021 held as under:

• The definition of 'Manpower Recruitment or Supply Agency' seeks to bring under its ambit, two types of activities i.e. recruitment of manpower and supply of manpower and further the service becomes the taxable service only if provided by a manpower recruitment or supply agency but in the present case, we are concerned only with the supply of manpower.
• Further, post July 2012, the definition of service specifically seeks to exclude certain transactions from the ambit of service and provision of service by an employee to the employer in the course of or in relation to his employment stands excluded from the definition of service.
• The legal position post negative list regime does not make any departure from the settled position of law as existed before 2012 with respect to the Service tax implications on deputation of employees. In fact, the above exclusion in the definition of service amplifies the position of law to keep employees providing service to the employer in the course of their employment out of the purview of Service tax.
• The Agreements entered into by the Appellant are specifically for provision of certain specialized services and are not related to 'supply of manpower' which is evident from various clauses in the Agreements and Target, USA is not in the business of supplying manpower.
• The persons seconded to the Appellant working in the capacity of employees and payment of salaries etc. is made to such employees by Target, USA only for disbursement purposes and hence employee-employer relationship exist and such an activity cannot be termed as 'manpower recruitment or supply agency' and the whole arrangement between the Appellant and its group companies does not fall under the taxable service of manpower recruitment or supply agency service as defined under the Finance Act, 1994 ('Finance Act'). Also, there is no service provider-recipient relationship in the present case, as required by Section 65(105)(k) of the Finance Act.
• The charge of Service tax @ 15 dollar per employee per pay role cycle for processing pay role of the seconded employee by Target, USA cannot fall under the category of manpower recruitment or supply of manpower agency service as per the definition provided in Section 65(68) of the Finance Act.
• The ruling given by AAR was under the Income Tax Act, 1961 does not have any binding precedent under the Service Tax Laws and the AAR did not state anything to the extent of pay role processing.
• Following the case of Northern Operating Services Pvt. Ltd. [Final Order No. 20852-20854/2020 dated December 23, 2020] wherein the Division Bench of CESTAT, Bangalore has allowed the appeal of the assessee and set aside the demand raised by the Department under the category of manpower recruitment or supply agency service, the tribunal was of the considered view that OIO passed by the Respondent is not sustainable in law and hence set aside the same by allowing the appeal of the Appellant.

Our comments

Even under the GST regime, services by an employee to the employer in the course of or in relation to his employment, is considered as neither supply of goods nor supply of services as per Para 1 of Schedule III of the Central Goods and Services Tax Act, 2017 ('CGST Act'). But the AAR Tamil Nadu in Re: Tamil Nadu Generation and Distribution Corporation Ltd. [2020 (38) G.S.T.L. 649 (A.A.R. - GST - T.N.)], has held that when the applicant extends the services of their employees to other subsidiary company TANTRANSCO, and collects the considerations payable to such employees from TANTRANSCO, the said activity is a 'supply of service' and GST is applicable, as applicant and TANTRANSCO are two different persons.

Thus, taxability of such transactions in GST is still facing the brunt of divergent rulings coming in the guise of wide ambit of the term 'supply' which includes all forms of supply if made for consideration in the course or furtherance of business. However, when an employee is seconded, the receiving company becomes the real and economic employer. Thus, it may be argued that the reimbursement of salary by the secondee company to the other company does not amount to supply but such amount is towards the employer-employee relationship which is covered within the ambit of Schedule III of CGST Act and may not be liable to GST. But the contractual terms will play an important role to determine taxability.

Relevant Provisions

Section 65(68) of the Finance Act

'(68) manpower recruitment or supply agency" means any person engaged in providing any service, directly or indirectly, in any manner for recruitment or supply of manpower, temporarily or otherwise, to any other person'

Section 65(105)(k) of the Finance Act

'(105) "taxable service" means any service provided or to be provided-

(k) to any person, by a manpower recruitment or supply agency in relation to the recruitment or supply of manpower, temporarily or otherwise, in any manner'