2019 (1) TMI 512 - AT - Service Tax

Valuation - eligibility for deduction - expenditure incurred on salary and wages, provident fund etc. for providing the taxable service from October 2010 - pure agent - rule 5(2) of Service Tax (Determination of Value) Rules, 2006 - Held that - It is clear from the job order that appellant is responsible for discharge of all statutory requirements devolving on an employer. In this situation, the requirements enumerated in rule 5(2) of Service Tax (Determination of Value) Rules, 2006 have not been complied with as found in the order of first appellate authority. The proposition that rule 5(2) has no existence except in conjunction with rule 5(1) of Service Tax (Determination of Value) Rules, 2006 is not convincing as the condition precedent, i.e. subject to does not reduce one to that of dependent of the other. In the absence of rule 5(1), the expression subject to in rule 5(2) is rendered superfluous and the rest standing on their own - The claim of the assessee does not find merit in the absence of any justification to be compliant with the description of pure agent as defined in the Rules. The appeal of M/s Swarupananda Enterprises is allowed on the substitution of penalty under section 78 with that under section 76 - deduction of expenses not allowed - demand of tax and imposition of penalties, as upheld by first appellate authority, is sustained except that penalty under section 76 for the period from October 2010 to March 2011 is set aside - appeal allowed in part.

Summary

Issues:
1. Disputed recovery of service tax for 2007-11 and 2011-12 on manpower recruitment services.
2. Penalty imposition under sections 76 and 78 of Finance Act, 1994 challenged.
3. Exclusion of payments to employees and penalty imposition under section 76 contested.
4. Legality of dropping demand for the period up to September 2010.
5. Eligibility for deduction of expenses incurred for providing taxable service from October 2010.

Analysis:

1. The judgment addressed the recovery of service tax for 2007-11 and 2011-12 on manpower recruitment services provided by M/s Swarupanand Enterprises to specific clients. The first appellate authority differentiated between activities pre and post-September 2010, ruling that post-October 2010 activities fell under taxable 'manpower recruitment or supply service.' The imposition of penalties under sections 76 and 78 of the Finance Act, 1994 was also contested.

2. The issue of penalty imposition under section 76 was extensively discussed. The appellate authority substituted the penalty under section 78 with that under section 76 for the period between October 2010 and March 2011. However, it was noted that the imposition of penalty under section 76 without adherence to principles of natural justice was deemed unlawful. The judgment highlighted the necessity of conforming to procedural fairness in penalty imposition.

3. The judgment evaluated the exclusion of payments made to employees and the challenge against the penalty under section 76. It emphasized the need for adherence to legal principles in penalty imposition and the importance of justifiably interfering with concessions related to tax computation. The appellate tribunal dismissed the appeal of the Revenue while allowing the appeal of M/s Swarupanand Enterprises on the penalty substitution issue.

4. The legality of dropping the demand for the period up to September 2010 was thoroughly examined. The judgment cited various Tribunal decisions supporting the exclusion of lumpsum activities from taxation under section 65(105)(k) of the Finance Act, 1994. The consistent stand of the Tribunal on the scope of taxation for 'manpower recruitment and supply service' was a crucial factor in the decision to drop the demand for the specified period.

5. Lastly, the eligibility for deduction of expenses incurred for providing taxable services from October 2010 was deliberated. The judgment analyzed the arguments regarding the reimbursement of out-of-pocket expenses by the client and the compliance with rule 5(2) of the Service Tax (Determination of Value) Rules, 2006. The tribunal concluded that the appellant's claim for expense deduction lacked merit due to non-compliance with the 'pure agent' description in the rules.

This comprehensive analysis of the judgment highlights the key issues addressed, legal interpretations made, and the final decisions rendered by the appellate tribunal.