Service tax not applicable on salary cost recovery between group entities under manpower recruitment services

CESTAT Ahmedabad held that service tax is not applicable on salary cost recovery between group entities under manpower recruitment services. The appellant recovered actual salary costs for employees deputed to its subsidiary, not providing recruitment services. Following Gujarat HC precedent in Arvind Mills Ltd., the tribunal ruled that identical arrangements within group companies do not attract service tax liability. The impugned order was set aside and appeal allowed, establishing that mere cost recovery between related entities does not constitute taxable service.

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Issues:
Whether the recovery of the cost of employees deputed to a group entity is liable to service tax under the category of man-power recruitment or supply agency service.

Analysis:
The judgment by the Appellate Tribunal CESTAT Ahmedabad involved a case where the Gujarat Energy Training Research Institute (GETRI), an autonomous training and research facility promoted by the appellant and its subsidiaries, was under scrutiny for service tax liability on the cost of employees deputed to GETRI. The appellant, a government body, appointed members to GETRI for training employees of the appellant and its subsidiaries. The appellant bore all statutory liabilities for employees deputed to GETRI, including salary costs. The department argued that the salary cost recovered by the appellant from GETRI was liable to service tax under man-power recruitment or supply agency service. The appellant contended that similar issues had been addressed in previous judgments and cited relevant cases to support their position.

The Tribunal examined the facts and noted that GETRI was a subsidiary of the appellant, and the appellant recovered the actual cost of employee salaries deputed to GETRI. Referring to a judgment by the Hon'ble Gujarat High Court in a similar case, the Tribunal highlighted that in arrangements within group companies, no service tax could be charged. The Tribunal emphasized that the appellant was not a commercial concern engaged in providing recruitment or supply services to a client, as the deputation of employees was for the company's benefit, with control and supervision remaining with the appellant throughout. The Tribunal concluded that the appellant was not a Manpower Supply Recruitment Agency and, therefore, not liable for service tax on the recovered salary costs.

Based on the precedent set by the Gujarat High Court and the specific circumstances of the case, the Tribunal set aside the impugned order and allowed the appeal. The judgment reaffirmed that under similar arrangements within group companies, no service tax liability existed for the recovery of employee salary costs, as the appellant did not qualify as a Manpower Supply Recruitment Agency. The decision was pronounced on 06.11.2024.

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