2020 (8) TMI 695 - AT - Service Tax

Reverse Charge Mechanism - appellant engaged in providing software services to their customers abroad - amount paid to their subsidiaries located abroad namely M/s IEII, M/s IEEL, M/s IEG and M/s IEJ - manpower recruitment and supply agency services - business auxiliary services - management or business consultancy services - demand aongwith interest and penalties - HELD THAT - There is nothing in the agreements to show that the subsidiary is required provide manpower to the appellant in those countries. If that was the case, the services had to be performed by the appellant themselves at the customers end. Instead, the entire delivery of software service has been out sourced by the appellant to the subsidiary and the subsidiary got paid for these services. The argument of the Department is that the billing is done by the subsidiary in terms of number of manpower or man days of different persons required / utilised for performing the services. It is a common practice in business for consultancy firms to bill the clients in terms of number of man hours of the personnel required at different levels required. Even, advocates may charge their clients for the number of hours spent on their case. Merely because the total amount has been billed using the number of man hours / man days as a measure, it does not become a manpower supply service. If this logic is accepted, every case where the billing is done based on the number of man hours / man days should be treated as a manpower supply service. The real test of determining the nature of service is to go through the agreement to understand what is the deliverable which the service provider has to deliver to the service recipient. In this case, this deliverable service is the delivery of software services to the clients of the service recipients i.e., the appellant. The demand made by the Revenue upon the appellant in the two show cause notices under the head manpower recruitment and supply service under reverse charge mechanism needs to be set aside along with interest - penalties imposed upon the appellants under Section 76, 77 and 78 also need to be set aside - Appeal allowed - decided in favor of appellant.

Summary

Issues:
Appeal against impugned order on service tax demands under reverse charge mechanism for services provided by subsidiaries abroad, specifically contesting demands related to manpower recruitment services, interest, and penalties.

Analysis:

Issue 1: Manpower Recruitment Services Demand
The appellant contested demands under show cause notices for service tax on manpower recruitment services provided by their subsidiaries. The appellant argued that the agreements were for software services, not manpower supply, as the subsidiaries were responsible for delivering software services as per the agreements. The Tribunal noted that the agreements focused on software service delivery, with subsidiaries being paid for these services, not for manpower supply. The Department's argument based on billing by man hours/days was rejected, emphasizing the nature of the service provided. The Tribunal set aside the demands under manpower recruitment services, interest, and penalties, as the services were for software delivery, not manpower supply.

Issue 2: Interest and Penalties
The Tribunal found that the demands for manpower recruitment services were unfounded, leading to the setting aside of interest and penalties imposed on the appellant. The appellant had paid amounts related to other service heads, such as business auxiliary services and management consultancy, without contesting them. Consequently, the Tribunal disposed of the appeal by setting aside the demands for manpower recruitment services, interest, and penalties, while upholding the payments made for other services.

In conclusion, the Tribunal ruled in favor of the appellant, setting aside the demands for manpower recruitment services, interest, and penalties, emphasizing the nature of the services provided by subsidiaries abroad as software delivery, not manpower supply. The detailed analysis of the agreements and the nature of services formed the basis for the Tribunal's decision, highlighting the importance of understanding the deliverables in service agreements to determine the taxable nature of services provided.