2021 (1) TMI 712 - AT - Service Tax

Manpower Recruitment and Supply of Manpower Agency Service or not - secondment charge - amount reimbursed or reimbursable by the applicant to Target Corporation, USA under the terms of the secondment agreement - whether in the nature of income accruing to Target USA in respect of which, tax is liable to be deducted at source by the applicant under the provisions of Income Tax Act, 1961? - payroll processing charges - payment proposed to be made by the applicant towards payroll processing charges - applicability of provisions of Double Taxation Avoidance Agreement (DTAA) entered into between India and USA. HELD THAT - It is found from 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, we find that post July 2012, the definition of service specifically incorporated 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. We also note that 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 persons seconded to the appellant working in the capacity of employees and payment of salaries etc is made to such employees by group companies 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. We also find that there is no service provider-recipient relationship in the present case, as required by Section 65(105)(k). The Division Bench of this Tribunal recently in the case of Northern Operating Services Pvt. Ltd. 2020 (12) TMI 1018 - 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. Further, the charge of service tax @ 15 dollar per employee per pay role cycle for processing pay role of the seconded employee by the 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, 1994. Further the ruling given by advance ruling authority was under the Income Tax Act, 1961 and the said ruling is not having any binding precedent under the Service Tax Laws. We also note that in the advance authority ruling, there is no finding to the extent of pay role processing. Appeal allowed - decided in favor of appellant.

Issues Involved:
1. Classification of services provided under the agreement.
2. Employer-employee relationship between the appellant and seconded employees.
3. Taxability under 'Manpower Recruitment or Supply Agency Service'.
4. Applicability of service tax on reimbursements and payroll processing charges.
5. Validity of the demand for differential service tax, interest, and penalties.
6. Applicability of rulings by the Authority for Advance Rulings (Income Tax).

Issue-wise Detailed Analysis:

1. Classification of Services Provided Under the Agreement:
The appellant entered into an agreement with Target Corporation, USA, for the secondment of employees. The agreement specified that the seconded employees would remain on the payroll of Target, USA, but would work under the direction of the appellant. The appellant reimbursed Target, USA, for the salaries and other expenses of the seconded employees and paid a service charge for payroll processing.

2. Employer-Employee Relationship:
The appellant argued that an employer-employee relationship existed between them and the seconded employees. The employees reported to the appellant, and the appellant issued Form-16 and deposited provident fund contributions on their behalf. Therefore, the appellant contended that the arrangement did not fall under 'Manpower Recruitment or Supply Agency Service'.

3. Taxability Under 'Manpower Recruitment or Supply Agency Service':
The Department contended that the appellant had evaded service tax on 'Manpower Recruitment or Supply Agency Service'. The Commissioner confirmed the demand based on the foreign currency expenditure under various heads, including salaries and reimbursements. However, the Tribunal found that the arrangement between the appellant and Target, USA, did not constitute 'Manpower Recruitment or Supply Agency Service' as defined under Section 65(68) of the Finance Act, 1994. The Tribunal noted that the seconded employees were under the control and direction of the appellant, establishing an employer-employee relationship.

4. Applicability of Service Tax on Reimbursements and Payroll Processing Charges:
The appellant had paid service tax on the salaries of the seconded employees under protest and later claimed a refund. The Tribunal held that the reimbursement of salaries and the service charge for payroll processing did not constitute consideration for 'Manpower Recruitment or Supply Agency Service'. The Tribunal also noted that Target, USA, acted as a pure agent in processing payroll.

5. Validity of the Demand for Differential Service Tax, Interest, and Penalties:
The Tribunal found that the demand for differential service tax was not sustainable. The appellant had disclosed all relevant information in their financial statements, and there was no suppression of facts. Therefore, the extended period of limitation and the imposition of penalties were not justified.

6. Applicability of Rulings by the Authority for Advance Rulings (Income Tax):
The Tribunal held that the rulings by the Authority for Advance Rulings (Income Tax) were not binding under service tax laws. The Tribunal noted that the advance ruling did not address the issue of payroll processing charges.

Conclusion:
The Tribunal set aside the impugned order, holding that the arrangement between the appellant and Target, USA, did not constitute 'Manpower Recruitment or Supply Agency Service'. The Tribunal found that an employer-employee relationship existed between the appellant and the seconded employees, and the reimbursement of salaries and payroll processing charges did not attract service tax. The demand for differential service tax, interest, and penalties was not sustainable, and the appeal was allowed in favor of the appellant.

← Previous Next →