2023 (8) TMI 1045 - AT - Service Tax

Appellant's Service Tax Dispute: Remand for Reassessment

M/s. BJ Service Company Middle East Ltd. Versus Commissioner of CGST, Navi Mumbai

The appellant, a holder of service tax registration, received invoices from a Texas company for salaries and benefits of personnel, leading to the belief ... Levy of service tax - manpower supply services or not - taking on loan employees of other company, secondment - receiving invoices from its group company, namely M/s. BJ Services Co., Huston, Texas (Texas company) for salaries and other benefits and the amounts stated in the said invoices were paid by the appellant in foreign currency - reverse charge mechanism - extended period of limitation. HELD THAT:- Both the sides agree that the ruling by Hon’ble Supreme Court in the case of C.C.,C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. VERSUS M/S NORTHERN OPERATING SYSTEMS PVT LTD. [2022 (5) TMI 967 - SUPREME COURT] is squarely applicable in the facts of the present case. It was held in the case that It is held that the assessee was, for the relevant period, service recipient of the overseas group company concerned, which can be said to have provided manpower supply service, or a taxable service, for the two different periods in question (in relation to which show cause notices were issued). It is also observed that the original authority did not have advantage of the ruling by Hon’ble Supreme Court while deciding the issue and passing the impugned order-in-original. The data in the appeal paper book does not throw light on the quantum of service tax that would be recoverable in case the present appeal succeeds in setting aside the demand for extended period of limitation. Thus, matter remanded to the original authority with a direction to follow and apply the ruling passed by Hon’ble Supreme Court in the cited case of Northern Operating Systems Pvt. Ltd. in its letter and spirit and redetermine service tax liability of the appellant, the interest payable by the appellant and penalties to be imposed. For the said purpose, the impugned order-in-original set aside. Appeal disposed off. ISSUES PRESENTED AND CONSIDERED 1. Whether payments made by an Indian entity to an overseas group company for salaries and related amounts of personnel seconded to the Indian entity constitute 'manpower supply service' such that service tax is exigible under the reverse charge mechanism. 2. Whether the arrangement of secondment/loan of employees (where foreign nationals remain on the payroll of the overseas entity and are under the control, direction and supervision of the Indian entity while working in India) negates characterization as manpower supply service or establishes the Indian entity as the 'real employer' for service tax purposes. 3. Whether the extended period of limitation (proviso to sub-section (1) of Section 73 of the Finance Act, 1994) was rightly invoked for demands raised for earlier assessment years in respect of alleged manpower supply services. 4. Whether penalties under Sections 76, 77 and 78 of the Finance Act, 1994 and interest under Section 75 are maintainable in light of the legal characterization of the transactions and applicable authority of law. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Exigibility of service tax under reverse charge for payments to an overseas entity supplying personnel Legal framework: Service tax under the Finance Act, 1994 is exigible on taxable services received, with specific provisions for reverse charge liability where the recipient is liable to discharge tax. 'Manpower supply service' as a taxable category encompasses supply/provision of personnel by one entity to another. Precedent treatment: The Tribunal recognized that a binding ruling of a higher Court (Northern Operating Systems) holds that supplies of manpower by an overseas entity to an Indian recipient attract service tax recoverable by reverse charge. The parties agreed that the higher court ruling is squarely applicable. Interpretation and reasoning: The Tribunal observed that the overseas company issued invoices for salaries and benefits and was reimbursed in foreign currency by the Indian recipient; personnel remained on the overseas payroll; and the arrangement included a markup. These factual features satisfy the functional description of manpower supply - the overseas entity continuing payroll responsibilities and invoicing the Indian recipient aligns with supplying manpower services. Given the higher court's authoritative interpretation that similar cross-border supplies of manpower attract service tax under reverse charge, the Tribunal directed redetermination in line with that ruling. Ratio vs. Obiter: The Tribunal's direction to apply the higher court's decision is ratio for the present remand (binding on the original authority to re-determine liability). The Tribunal did not add new precedent-distinguishing commentary beyond applying the higher court's holding. Conclusion: The Tribunal remanded for re-determination of service tax liability applying the higher court's ruling that supplies of manpower by an overseas entity to an Indian recipient are taxable under reverse charge; the impugned order was set aside for fresh adjudication consistent with that principle. Issue 2 - Characterization of secondment/loaned employees and the 'real employer' question Legal framework: Characterization depends on legal and commercial realities: which entity exercises control, who bears employer obligations, who retains payroll and statutory responsibilities, and invoicing/payment arrangements. Manpower supply is determined by functional reality, not merely contractual labels. Precedent treatment: The Tribunal accepted the higher court's approach that operational facts control characterization; labels such as 'secondment' or 'loan' do not automatically negate manpower supply if the overseas entity invoices and is remunerated for personnel supplied. Interpretation and reasoning: The Tribunal noted the appellant's factual stance that foreign nationals remained employees of the overseas company to preserve social security benefits and were under the Indian entity's direction while in India. The Tribunal did not accept that such secondment per se precludes finding a manpower supply service; rather, it recognized that when the overseas entity raises invoices and the Indian entity reimburses salaries plus markup, the arrangement satisfies criteria for manpower supply as interpreted by the higher court. Ratio vs. Obiter: The Tribunal's view that secondment labels do not determine taxability (and that factual elements govern) is applied ratio in remanding the matter; it follows the higher court's ratio that substance over form governs characterization. Conclusion: The Tribunal required the original authority to apply the higher court's factual-substance test in re-assessing whether the arrangement constituted manpower supply service, noting that mere secondment and continuation on overseas payroll do not preclude taxation if other indicia of supply exist. Issue 3 - Validity of invoking extended period of limitation Legal framework: The proviso to sub-section (1) of Section 73 of the Finance Act, 1994 allows extended period of limitation under specified circumstances (e.g., when tax is not disclosed or there is fraud or suppression). Invocation requires satisfaction of statutory conditions on the record. Precedent treatment: The appellant relied on the higher court ruling (Northern Operating Systems) where the higher court found no grounds for invoking the extended period of limitation in similar circumstances. The Tribunal acknowledged that ruling as binding and applicable. Interpretation and reasoning: The Tribunal observed that the original authority did not have the benefit of the higher court's decision when invoking extended limitation. Because the higher court held that extended limitation was not warranted in comparable facts, the Tribunal remanded for fresh adjudication to apply that precedent in determining whether extended limitation is sustainable here. Ratio vs. Obiter: The Tribunal's order to reassess extended limitation in light of binding higher court authority is ratio for the remand; no novel limitation jurisprudence was laid down by the Tribunal itself. Conclusion: The Tribunal set aside the impugned order and remanded for the original authority to decide the question of extended limitation by applying the higher court's guidance; extended limitation may not be sustainble if the higher court's reasoning controls. Issue 4 - Maintainability of penalties (Sections 76, 77, 78) and interest (Section 75) Legal framework: Penalties under Sections 76-78 and interest under Section 75 are contingent on adjudged tax liability, the nature of default, and whether there was wilful suppression, false declaration or bona fide belief. Quantum and applicability depend on re-determined tax liability and whether conditions for penalties are satisfied. Precedent treatment: The Tribunal noted that the original authority imposed penalties without the benefit of the higher court's ruling. The appellant relied on the higher court's findings which affected both tax liability and the basis for extended limitation and penalties. Interpretation and reasoning: Because the Tribunal remanded the substantive tax liability and limitations question to the original authority to apply the higher court ruling, the question of penalties and interest becomes consequential. The Tribunal directed a fresh determination of penalties and interest after re-assessing liability in accordance with precedent, implying that penalties imposed earlier may not survive if tax demands are altered or if extended limitation is found improper. Ratio vs. Obiter: The direction to re-determine penalties and interest is ratio to the remand; the Tribunal did not pre-emptively decide on the existence or quantum of penalties or interest. Conclusion: Penalties and interest imposed in the impugned order were vacated for reassessment; the original authority is directed to re-determine penalty and interest liability consistently with the higher court's ruling and re-assessed tax demand. Remand instruction and final disposition The Tribunal set aside the impugned order-in-original and remanded all four show cause notices to the original authority with directions to follow and apply the higher court's ruling in letter and spirit in redetermining (a) service tax liability recoverable under reverse charge for manpower supply by an overseas entity, (b) interest payable under Section 75, and (c) penalties under Sections 76-78, for the relevant periods. The appeal was disposed of on that basis.