Manpower supply classification upheld for deputed personnel under client control, while overlapping TDS demand and penalties were set aside.

Where skilled personnel are deputed to work under the client's control and allocation on a man-day basis, the arrangement is taxable as manpower supply or recruitment agency service, even if the contracts refer to deliverables or quality standards. The SEZ-related service tax claim required factual verification under the SEZ framework and exemption notification, so that issue was remanded for de novo consideration on the documents produced and any permitted additional material. A later demand on the TDS component for an overlapping period was not sustainable because it could have been raised earlier, and the penalties were deleted as the dispute was essentially interpretational.

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Issues: (i) Whether the appellant's activities amounted to manpower supply or recruitment agency service under the service tax law. (ii) Whether the demand relating to services said to have been provided to SEZ units was liable to be excluded or reconsidered. (iii) Whether the demand raised through the later show cause notice on the TDS component was barred by limitation and whether penalties could survive.

Issue (i): Whether the appellant's activities amounted to manpower supply or recruitment agency service under the service tax law.

Analysis: The contracts and surrounding conduct showed that the appellant deputed skilled personnel to work under the control and allocation of TCS, Infosys and similar entities. The software development or IT work was undertaken by those client organizations, while the appellant supplied the personnel on a man-day basis. The existence of clauses relating to deliverables or quality did not alter the essential character of the arrangement, because the appellant itself was not undertaking the software projects on its own account.

Conclusion: The activities were correctly classified as manpower supply or recruitment agency service, and the service tax liability on that count was upheld.

Issue (ii): Whether the appellant's activities amounted to manpower supply or recruitment agency service under the service tax law.

Analysis: For services stated to have been rendered to SEZ units, the statutory scheme under the Special Economic Zones Act and Rules, together with the exemption notification, could confer relief. The adjudicating authority had rejected the claim mainly for want of adequate supporting documents, but the record required a factual verification of the exemption claim on the basis of materials produced and any additional documents permitted in de novo proceedings.

Conclusion: The exemption claim relating to SEZ services was remanded for fresh consideration in de novo adjudication.

Issue (iii): Whether the appellant's activities amounted to manpower supply or recruitment agency service under the service tax law.

Analysis: The later show cause notice sought to raise a demand on the TDS component for a period substantially overlapping the earlier notice. The department could have included that component in the earlier proceeding, and the subsequent demand for the same period was therefore not sustainable. Since the dispute was essentially interpretational, the penalties were also not warranted.

Conclusion: The TDS demand for the overlapping period was set aside, and all penalties were deleted.

Final Conclusion: The classification as manpower supply service was affirmed, the overlapping TDS demand was annulled, the SEZ exemption issue was sent back for reconsideration, and the penalty component did not survive.

Ratio Decidendi: Where the substance of the arrangement is deputation of skilled personnel under the client's control and allocation, the service is taxable as manpower supply rather than as independent software or IT service.

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