Taxable value excludes direct EPF and ESI contributions, while labour-supply packing work remains service taxable.

Amounts directly contributed by the principal employer to EPF and ESI, and not received by the service provider, were held outside the taxable value of manpower recruitment agency service, so that component of service tax demand was deleted. Packing and branding work relating to toilet soap was treated, on the facts, as a labour supply arrangement rather than a manufacture-linked activity exempt from service tax; the Tribunal found no basis to interfere with the demand, and that liability was upheld. The appeal thus succeeded only in part, with relief limited to the welfare fund contribution issue.

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Issues: (i) Whether the service tax demand relating to contributions towards EPF and ESI was includible in the taxable value of the manpower recruitment agency service. (ii) Whether packing and branding activity in relation to toilet soap was liable to service tax.

Issue (i): Whether the service tax demand relating to contributions towards EPF and ESI was includible in the taxable value of the manpower recruitment agency service.

Analysis: The demand was based on amounts deposited towards EPF and ESI in respect of deployed workers. The Tribunal followed its earlier view that where the principal employer directly contributes to such statutory funds and the amount is not received by the service provider, the same does not form part of the gross value for service tax computation.

Conclusion: The demand of service tax on EPF and ESI contributions was not sustainable and was deleted.

Issue (ii): Whether packing and branding activity in relation to toilet soap was liable to service tax.

Analysis: The activity was claimed to be packaging amounting to manufacture and reliance was placed on the statutory definition of manufacture and a departmental circular. The Tribunal held, on the facts, that the activity undertaken by the appellant was essentially a labour supply contract for packing work, while the excise duty on the final product had been paid by the manufacturer and not by the appellant. On that basis, no interference with the impugned order was warranted.

Conclusion: The service tax demand on packing and branding activity was upheld.

Final Conclusion: The appeal succeeded only to the extent of deletion of the EPF and ESI-related demand, while the remaining substantive demand was sustained.

Ratio Decidendi: Amounts contributed directly by the principal employer to statutory welfare funds and not received by the service provider do not form part of the taxable value, but packing work undertaken as a labour supply arrangement remains taxable where it is not shown to be a manufacture-linked activity exempt from service tax.

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