Mansimran Kaur

New Delhi, May 23, 2022: Observing that there is not one single determinative factor which the courts give primacy to, while deciding whether an arrangement is a contract of service or a contract for service, the Supreme Court has emphasized on the consistently applied test of substance over form which requires a close look at the terms of the contract or the agreements.

A Larger Bench of Justice Uday Umesh Lalit, Justice Ravindra Bhat and Justice Pamidighantram Sri Narasimha opined that in the instant case the assessee was the service recipient for service (of manpower recruitment and supply services) by the overseas entity, in regard to the employees it seconded to the assessee, for the duration of their deputation or secondment.The Bench said, “Furthermore, the reality is that the secondment is a part of the global policy – of the overseas employer loaning their services, on temporary basis. On the cessation of the secondment period, they have to be repatriated in accordance with a global repatriation policy (of the overseas entity)”

Facts of the case in brief were such that the assessee was registered with the revenue, as a service provider under various categories of Manpower Recruitment Agency Service, Business Auxiliary Service etc., under the Finance Act, 1994. Following an audit of the records, proceedings were initiated against the assessee alleging non-payment of service tax concerning agreements entered into by it with its group companies located in USA, UK, Dublin (Ireland), Singapore, etc. to provide general back-office and operational support to such group companies. The revenue issued four show cause notices alleging that the assesse failed to discharge the service tax under the category of manpower recruitment or supply agency service with regard to service employees who were seconded to the assessee by the foreign group companies. The commissioner confirmed the proposals in the notice. 

Aggrieved by the same, the assessee filed two appeals before the CESTAT. It was the case of the assessee that the service tax cannot be demanded as the services provided by foreign affiliates do not fall under manpower recruitment or supply agency services for the period prior to negative list. Thereafter, the Commissioner Banglore dropped the proposals in the SCN for the period of April 2012 to March 2013 and April 2013 to September 2014, thereby setting aside demands for service tax of Rs. 4,36,75,590 and Rs. 7,55,48,448.  Aggrieved by the same, the revenue filed an appeal wherein the assesse also filed cross objection. The Tribunal ruled that the overseas group companies which had contracted with the assessee were not in the business of supply of manpower and that the assessee was not a service recipient. On the strength of this reasoning, the assesses’ appeals were allowed and the revenues appeals were rejected. Hence, the present appeals were preferred.  

The Court took into consideration relevant portions of the Finance Act, 1994 with amendments and analyzed Section 65 (68) of the unamended Act.The Court noted that after July 1, 2012, the definition service underwent a change. According to Section 65 (44) service means any activity carried out by a person for another for consideration and includes a declared service (the term declared service is defined in Section 66E).  It was further stated that after July 2012, all activities that were carried out by one person for another, for consideration were deemed services, except certain specified excluded categories. The Bench observed that the assessee had operational or functional control over the seconded employees and was potentially liable for the performance of the tasks assigned to them.

It was further observed by this Court that as per the agreement, the nature of the overseas group companies business appeared to be to secure contracts, which could be performed by its highly trained and skilled personnel. Thereafter as a part of the aforesaid agreement, a secondment contract was entered into, whereby the overseas company’s employee or employees, possessing the specific required skill, are deployed for the duration the task is estimated to be completed in. 

On the question whether the secondment, for the purpose of completion of the assessees job amounts to manpower supply, the Court observed that the seconded employee, for the duration of her or his secondment, was under the control of the assessee, and worked under its direction. Yet, the fact remained that they were on the pay rolls of their overseas employer. It was further observed by the Court that the same was a legal requirement, since they were entitled to social security benefits in the country of their origin.

Thus, from the aforesaid observations, the Court culled out that while the control and the right to ask them to return was with the assessee, the fact remained that their overseas employer in relation to its business deploys them to the assessee, on secondment. Also, their terms of employment were in accordance with the policy of the overseas company, who was their employer, the Court noted.  In light of the aforesaid observations, the Court held that the assessee was the service recipient for service (of manpower recruitment and supply services) by the overseas entity, in regard to the employees it seconded to the assessee, for the duration of their deputation or secondment. Furthermore, in view of the above discussion, the invocation of the extended period of limitation in both cases, by the revenue was not tenable, the Court observed. 

Thus, the appeal was partly allowed and it was held that the assessee was liable to pay service tax for the periods spelt out in the SCNs. However, the invocation of the extended period of limitation, in the opinion of this Court was unjustified and the impugned order of the CESTAT was set aside and accordingly the order passed by the Commissioner was restored. 

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