24 March 2018
Dear Expert, My company is a service providing entity. It provide E platform to various publishers who are willing to provide their content to their customers in E format Which is interactive and user friendly. We are subsidary of a company which is a company encorporated outside india(US). we provide them technical services and they sell the whole finished product as a complete package outside india. basically we provide them with a service which is a very small part of the huge product which parent company sells outside india in US. our major market is in US. As per the agreement bitween my company and its parent company There are some expenditures which Parent company incurres on behalf of our indian company they are in the nature of: marketing expenses, Salary to the employees who came from US and performed certain services here. Our parent company Pays those expenditure. Later our company reimburses those expenditure to our parent company as a part of agreement. Does this Reimbursement made attracts service tax is my question. ST auditor is of the openion that it does ammount to import of service. but we are of the openion that it is purely in nature of reimbursment and that we are not incurring any expenditure there is no invoicing made in name of our company hence it does not attract ST. Kindly advice. Regards, Ankur anand.
25 March 2018
Service tax not applicable on marketing services provided outside India. Service tax also not applicable on employees deputation services.
THE department has been continuously striving to levy service tax on the deputation of employees, a common phenomenon amongst group entities whereby the employees of one Group Company are deputed to another Group Company and the salary/cost of such employees are reimbursed at actuals to the Group Company deputing the employee. Such attempt of the department has given rise to a number of disputes and consequently the judicial pronouncements on the subject. Still, the taxability of the transaction is not very clear particularly given the fact that all the judgements pertain to the pre-negative list based service tax regime.
In order to effectually analyze the taxability of the said transaction under the current negative list based service tax regime, it would be pertinent to refer to the relevant provisions of the service tax statute. In the current regime, service tax is payable on all the services except those which are covered under the negative list or are specifically exempted from the levy of service tax. The term ‘service' has been defined in Section 65B(44) of the Finance Act, 1994 as any activity carried out by a person for another for consideration but excluding certain specified activities. Provision of service by an employee to the employer in the course of or in relation to his employment has been stipulated as one such exclusion. Further, the term "supply of manpower" is defined under Rule 2(1)(g) of the Service Tax Rules, 1994 as supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control.
While there would be no confusion in holding that deputation of employees by one Group Company to other Group Company would constitute an activity undertaken by one person for another, the other issues regarding consideration, coverage of activity in the exclusion clause etc. are dealt with in the subsequent paragraphs.
Given the above framework of provisions, let us analyze the judgements pronounced on the said subject to understand their relevance in the present context.
Recently, the Hon'ble Gujarat High Court in the case of CST vs. Arvind Mills Ltd. - 2014-TIOL-441-HC-AHM-ST had an occasion to consider the taxability of deputation of employees in Group Company. In the said case, the respondent had deputed its employees in its group companies for undertaking some stipulated work for limited period, after which the employees were to be repatriated to the respondent. All throughout, the control and supervision over the deputed employees remained with the respondent. The actual cost incurred by the respondent in terms of salary, remuneration and perquisites was only reimbursed by the group companies on which service tax was demanded by the department under the category of 'manpower recruitment or supply agency service'.
The Hon'ble High Court mainly relied on the definition of 'Manpower Recruitment or Supply Agency' as existed during the impugned period and held that the respondent cannot be said to be a 'commercial concern' engaged in providing the specified services and the subsidiary companies cannot be said to be its 'client'. Accordingly, in absence of the agency-client relationship, it was held that service tax would not be payable by the respondent on deputation of employees in the group companies.
Ratio of the above judgement may not come as an aid in the present context to take such transaction out of the purview of service tax where the service provider need not be a commercial concern and service recipient need not be his client.
Let us now refer to some other judgements wherein the leviability of such transaction was under challenge. In the case of Volkswagen India Pvt. Ltd. vs. Commissioner of Central Excise, Pune-I - 2013-TIOL-1640-CESTAT-MUM, the Appellant had employed some foreign nationals (called 'Global Employees') who were previously employed with other group entities. On their deputation in the Appellant Company, the said personnel were relieved by the other group companies and worked as whole time employees of the Appellant and were put at the disposal and exclusive control of the Appellant. However, the social security liability was discharged by the foreign company in the home country of the Global Employees which was reimbursed by the Appellant. The revenue argued that the same constitutes rendition of 'manpower supply or recruitment agency service' by the foreign holding company to the Appellant. To support its contention, the revenue submitted that after a period of 3-4 years, such global employees go back to the foreign company. The revenue further contended that the Appellant should have paid full salary directly to its employees rather than routing a part through the foreign company.
However, the Appellant objected to the levy and submitted that the income earned by the global employees is treated as salary under the provisions of the Income Tax Act and that the Appellant has also issued necessary TDS Certificate in the capacity of an employer. The Appellant also submitted that merely because a part of the salary of global employees was paid in their home country through the holding company, it cannot be said that the foreign company has rendered services of supply of manpower to the Appellant. The Appellant also placed reliance on Circular No. 96/7/2007 wherein it has been clarified that in the case of supply of manpower, individuals are contractually employed by the manpower recruitment or supply agency and that the Employer-employee relationship in such cases exists between the agency and the individual and not between the individual and the person who uses the services of the individual.
The Tribunal accepted the submission of the Appellant and held that the global employees are working with the Appellant as their employees and accordingly, there is no supply of manpower service to the Appellant by the foreign company and that the method of disbursement of salary cannot determine the nature of transaction.
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