2024 (6) TMI 847 - AT - Service Tax

Revenue fails to prove employer-employee relationship for service tax classification without examining actual contract terms and working arrangements

CESTAT Chennai held that revenue failed to prove the true nature of relationship between appellant and workers to establish employer-employee status for ... Classification of services - manpower recruitment or supply agency service or not - relationship of employer and an employee between the appellant - HELD THAT:- This question has come up before Constitutional courts in the past on how to determine whether a person is an employee or not. The Supreme Court in various cases have stated that no one test of universal application can be depended upon to give the correct result. This is not an exhaustive list of tests to discern the relationship between the parties. For example, from the textbook scenario of ‘complete control’ to ‘complete independence’ lies a variety of circumstances involving a wide range of initiative and discretion being enjoyed by the worker - Mere reference to invoices raised or payments made, without reference to the specific provisions of a contract or working arrangement, will not be indicative of employer-employee relationship. In the light of the non-examination of the true nature of relationship between the parties a conclusion of the appellant being the employer of the workers cannot be fastened by assumptions and presumptions. Revenue has not proved its case regarding the true nature of the disputed activity provided by workmen to the appellants customers. Hence the question of examining the correctness of the extended period invoked or imposition of penalty does not arise. There are no hesitation in setting aside the impugned order - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the activity of arranging carpenters to fix or alter doors at customers' premises falls within the definition of 'manpower recruitment or supply agency service' under Section 65(68) of the Finance Act, 1994. 2. Whether a relationship of employer and employee exists between the manufacturer-seller and the carpenters engaged for on-site fixing/alteration, such that the service recipient is liable to discharge service tax under Section 3(1). 3. Whether the extended period for issuance of show-cause notice and penalties under Sections 75, 76, 77 and 78 can be invoked when the departmental orders do not establish the true nature of the relationship or the factual foundation for charging service tax. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation as 'manpower recruitment or supply agency service' Legal framework: The definition of 'manpower recruitment or supply agency service' as contained in Section 65(68) of the Finance Act, 1994 governs whether activities of arranging labour amount to taxable manpower supply; service tax liability is claimed under Section 3(1). Precedent treatment: Department relied on Board circular(s) (including circular dated 27/07/2005) construing supply of temporary carpenters as falling within manpower supply; the appellant relied on later clarificatory Board circular (15.12.2015) and judicial authorities distinguishing reimbursable/incidental charges from taxable manpower supply. Interpretation and reasoning: The Tribunal found that the adjudicating and appellate orders merely concluded that carpentry/fixing work amounted to supply of manpower without examining contractual arrangements or applying tests for employer-employee relationship. The impugned orders were described as cryptic and non-speaking - they relied on invoices and circulars without factual analysis of the terms of engagement, control, selection, dismissal, integration or provision of equipment. Ratio vs. Obiter: Ratio - Characterisation as manpower supply cannot rest on invoices or departmental assumption; it requires factual proof of the nature of engagement consistent with the statutory definition. Obiter - reliance on specific Board circulars is insufficient without factual underpinning. Conclusion: The activity could not be treated as 'manpower recruitment or supply agency service' on the record before the authorities; revenue failed to establish that the appellant supplied manpower within the statutory meaning. Issue 2 - Existence of employer-employee relationship (tests and application) Legal framework: Determination of employer-employee relationship is a mixed question of fact and law; no single test is determinative. The Tribunal enumerated established tests applied by higher courts: Control and Supervision Test; Organisation/Integration Test; Mutual Obligation Test (selection/appointment/dismissal and benefits); Provision of Equipment Test; adherence to place/time of work and other indicia of subordination. Precedent treatment: The Tribunal relied on Supreme Court authorities laying down multiple factors/tests (control, integration, mutual obligation, provision of equipment and work conditions) and endorsed the approach that multiple factors must be weighed rather than a single universal test. Interpretation and reasoning: The Tribunal observed that the impugned orders did not apply any of the recognised tests or examine contracts/terms of engagement. Absent evidence of control, integration, selection/dismissal power, employer-provided equipment, or conditions akin to employment, the mere raising of labour-charge invoices did not demonstrate an employer-employee relationship. The Tribunal emphasised that circumstances may range from complete control to complete independence and that specific contract terms and factual matrix are essential to decide the relationship. Ratio vs. Obiter: Ratio - Determination of employer-employee relationship for levy of service tax requires application of multi-factor tests to the factual matrix; mere invoices and reimbursement-type charges are insufficient to establish employer status. Obiter - examples of factors are illustrative, not exhaustive. Conclusion: On the available record, revenue did not prove that the carpenters were employees or supplied as manpower by the appellant; therefore the activity could not be held taxable as manpower supply. Issue 3 - Validity of invoking extended limitation and imposing penalties Legal framework: Extended period for issuance of show-cause notice and imposition of penalties under Sections 75-78 require establishment of suppression of facts, wilful evasion or other statutory grounds justifying extended limitation and penal consequences. Precedent treatment: Department asserted the extended period and penalties were justified by non-filing of returns and hidden supply of manpower; appellant denied suppression and contended charges were incidental/reimbursable and non-taxable. Interpretation and reasoning: Because the departmental orders failed to establish the fundamental factual predicate (that the appellant supplied manpower or acted as employer), the Tribunal held that invoking the extended period and imposing penalties was unsustainable. The Tribunal treated the inability of the revenue to prove taxable activity as dispositive of the question whether extended limitation and penalties could be applied. Ratio vs. Obiter: Ratio - Extended limitation and penalties cannot be validly invoked where the revenue does not demonstrate the taxable nature of the activity; absence of proof on the core issue negates the foundation for penal consequences. Obiter - procedural non-compliance (e.g., non-filing of returns) alone, without proof of taxable activity, is insufficient to justify extended limitation. Conclusion: The extended limitation for issuance of show-cause notice and the penalties imposed cannot stand given the lack of proof regarding the nature of the relationship and the taxable nature of the service; those aspects were not examined properly by the authorities. Overall Disposition and Legal Conclusions The Tribunal set aside the impugned order in its entirety on the ground that revenue failed to establish that the appellant supplied manpower or acted as employer of the carpenters. The Tribunal held that factual and contractual inquiry using established multi-factor tests is essential before treating incidental on-site fixing/alteration charges as taxable manpower supply; mere invoices or circular references are insufficient. Consequently, the demand, interest, and penalties were not sustainable and the appeal was allowed with consequential relief as per law.