2017 (9) TMI 1260 - AT - Service Tax

Reverse Charge Mechanism - manpower supply service - demand on the ground that they were not paying service tax on account of salary reimbursed to foreign national/expats working with them for the period June, 2005 to 2008-09 - Held that - it is nowhere coming out from the show cause notice or from the finding of the lower authorities that the foreign company, who have deputed its employees, is manpower supply or Recruitment Agency. Also, there is employer-employee relationship between the assessee and the deputed expatriate employees - reliance placed in the case of Computer Sciences Corp. India Pvt.Ltd. vs.CST 2014 (4) TMI 252 - CESTAT NEW DELHI , where it was held that There was no basis whatsoever to hold that in such a transaction, a taxable service involving the recruitment or supply of manpower was provided by a manpower recruitment or supply agency. Unless the critical requirements of clause (k) of Section 65(105) are fulfilled, the element of taxability would not arise. No taxable service involving recruitment or supply of manpower was provided - the amount reimbursed to foreign nationals/expats working with the assessee cannot be considered as the amount paid for rendition of manpower supply or recruitment agency - demand set aside - appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Liability of service tax on salary reimbursement to foreign nationals/expats.
2. Interpretation of agreements and establishment of employer-employee relationship.
3. Applicability of reverse charge mechanism under Section 66A of the Finance Act, 1994.
4. Judicial precedents supporting the appellant's position.
5. Rejection of penalties under Sections 76, 77, and 78 of the Finance Act, 1994.

Analysis:
1. The case involved the liability of service tax on salary reimbursement to foreign nationals/expats by the appellant. The Department issued show cause notices alleging non-payment of service tax on salary reimbursements. The appellant contended that the reimbursements were not for manpower supply but for an employer-employee relationship, citing various agreements and judicial precedents supporting their position.

2. The appellant presented a Salary Reimbursement Agreement (SRA) establishing an employer-employee relationship between the expats and the appellant. The agreement clarified that the expats worked under the direction of the appellant, and salary reimbursements were made for administrative convenience. The appellant also provided evidence of tax deductions and EPF contributions, further solidifying the employer-employee relationship.

3. The issue of reverse charge mechanism under Section 66A of the Finance Act, 1994 was examined. The Tribunal analyzed the agreements and found no indication of the foreign entity being involved in manpower supply. The reimbursements were made on a cost-to-cost basis, and the appellant bore income tax liabilities, emphasizing the absence of a recruitment or supply agency relationship.

4. The Tribunal referenced several judicial pronouncements, including judgments by the Gujarat High Court and Allahabad High Court, which supported the appellant's stance. These judgments emphasized the critical requirements for taxability under Section 65(105) and clarified that reimbursements to expats did not constitute taxable services related to recruitment or supply of manpower.

5. Penalties under Sections 76, 77, and 78 of the Finance Act, 1994 were imposed by the adjudicating authority but were ultimately dropped for the period before 18.4.2006. The Tribunal, after considering the agreements, employer-employee relationship, and judicial precedents, concluded that the impugned order was unsustainable and set it aside, allowing the appeals filed by the appellant.