Reimbursement to joint venture partner not taxable as manpower supply where no service relationship existed; demand also time-barred.

Reimbursement of actual salary and overhead costs to a lead joint venture partner was held not to constitute taxable consideration for manpower supply service under the Finance Act, 1994, because the personnel remained the partner's employees and the arrangement did not create a real service provider-service recipient relationship. The demand was also held time-barred, as the department had prior knowledge of the same transaction matrix from an earlier notice, so the extended period of limitation could not be invoked. On both issues, the demand, together with consequential interest and penalty, was set aside.

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Issues: (i) Whether reimbursements of salary and overhead costs received by a lead joint venture partner from the joint venture constituted consideration for a taxable manpower supply service under the Finance Act, 1994; (ii) Whether the extended period of limitation could be invoked for the demand.

Issue (i): Whether reimbursements of salary and overhead costs received by a lead joint venture partner from the joint venture constituted consideration for a taxable manpower supply service under the Finance Act, 1994.

Analysis: The reimbursement was found to be on actual basis for personnel engaged by the appellant as lead JV partner in execution of the project. The personnel were employees of the appellant, salary was paid by the appellant, and the arrangement was held not to create a service provider-service recipient relationship. The reimbursement therefore did not amount to consideration for manpower supply service. The view was supported by the principle that reimbursable expenditure was not includible in valuation for the relevant period and by the inapplicability of the cited contrary authority on its facts.

Conclusion: The issue was answered in favour of the appellant and against the Revenue; the reimbursement was not taxable as consideration for manpower supply service.

Issue (ii): Whether the extended period of limitation could be invoked for the demand.

Analysis: The show cause notice was issued invoking the extended period, although the department was already aware of the activity from an earlier notice on the same transaction matrix. On that footing, the later demand was held to be time-barred.

Conclusion: The issue was answered in favour of the appellant and against the Revenue; the demand was barred by limitation.

Final Conclusion: The demand of service tax, together with the consequential interest and penalty, was unsustainable and the impugned order was set aside.

Ratio Decidendi: Reimbursement of actual salary and related costs to a lead joint venture partner, without a real service provider-service recipient relationship, does not constitute taxable consideration; where the department had prior knowledge of the transaction, the extended period of limitation cannot be invoked.

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