2018 (5) TMI 1223 - AT - Service Tax

Classification of services - manpower recruitment or supply agency service - reverse charge mechanism - Held that - it cannot be said that there is any agency and client relationship between the parent company and the appellant. Rather, the terms of the agreement makes the position clear that the relationship between the appellant and the manpower deployed by the parent company is of employer/employee, and as such, it cannot be considered as the taxable service under the category of manpower recruitment or supply agency service - demand do not sustain - appeal allowed - decided in favor of appellant.

Summary

Issues:
Classification of services provided by parent company to appellant under service tax category of "manpower recruitment or supply agency service"; Liability of appellant to pay service tax under reverse charge mechanism; Applicability of penalties under Section 76, 77, and 78 of the Finance Act, 1994.

Analysis:
The appeal challenged an order by the Commissioner of Central Excise, Jaipur, regarding the classification of services provided by the parent company to the appellant under the taxable category of "manpower recruitment or supply agency service." The appellant, engaged in manufacturing automobile parts, had entered into an agreement with its parent company for payment of salary and perks to employees deputed from the foreign company. The Department alleged that the services provided by the parent company should be taxable under service tax laws, making the appellant liable to pay service tax under reverse charge mechanism. The Department issued a show cause notice leading to a demand of service tax, interest, and penalties under various sections of the Finance Act, 1994.

The appellant argued that the employees deputed by the parent company were under its control and direction, and the parent company was not a manpower supply agency. The appellant also highlighted that tax was deducted at source for salaries and perks paid to the employees. Citing relevant case laws, the appellant contended that the relationship between the appellant and the deputed employees was that of employer/employee, not a service provider and client. The appellant relied on decisions by the Tribunal and the Advance Ruling Authority to support their stance that the activities should not be taxed under the disputed service category.

Upon examination of the agreement between the appellant and its parent company, the Tribunal found that the employees were under the control and supervision of the appellant, with tax deductions made from their payments. The Tribunal noted that there was no direct/indirect consideration paid to the parent company for deploying the employees, indicating an employer/employee relationship. The Tribunal emphasized that the method of salary disbursement does not determine the nature of the transaction when an employee/employer relationship exists. Consequently, the Tribunal concluded that the demand for service tax against the appellant could not be upheld.

In the final judgment, the Tribunal found no merit in the impugned order and allowed the appeal in favor of the appellant, setting aside the service tax demand and associated penalties.