2025 (6) TMI 1266 - AT - Service Tax

Driver salary and allowances not liable for service tax under Manpower Recruitment Agency Service category

M/s. AMB Travels Versus The Commissioner of Service Tax, Bangalore

The Tribunal allowed the appeal, ruling that the appellant was not liable for service tax under 'Manpower Recruitment or Supply Agency Service' for driver ... Levy of service tax - manpower supply service - consideration received as driver’s salary and bhatta - HELD THAT:- It is evident from the agreement entered into by the appellant with their client, the appellant is obliged to carry out the activities including providing and maintaining vehicles as per the conditions specified in the contract. Fact being so, the said agreement cannot be bifurcated to ascertain the element of manpower in the said agreement. As per the judgment of the Hon’ble Supreme Court in the matter of DLF Universal Ltd. [2010 (11) TMI 1086 - SUPREME COURT], their Lordships observed 'The purpose of a contract is the interests, objectives, values, policy that the contract is designed to actualise. It comprises the joint intent of the parties. Every such contract expresses the autonomy of the contractual parties private will. It creates reasonable, legally protected expectations between the parties and reliance on its results. Consistent with the character of purposive interpretation, the court is required to determine the ultimate purpose of a contract primarily by the joint intent of the parties at the time the contract so formed. It is not the intent of a single party; it is the joint intent of both the parties and the joint intent of the parties is to be discovered from the entirety of the contract and the circumstances surrounding its formation.' Conclusion - The activities cannot be bifurcated to confirm demand under ‘Manpower Recruitment or Supply Agency Service’. The impugned order is set aside - appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal were:Whether the appellant is liable to pay service tax under the category of 'Manpower Recruitment or Supply Agency Service' for the amounts received as driver's salary and bhatta.Whether the contract entered into by the appellant with the clients, which involves operation and maintenance of vehicles including provision of drivers, can be bifurcated to segregate the element of manpower supply for the purpose of service tax liability.Whether the demand and penalties imposed by the adjudicating authority and upheld by the Commissioner (Appeals) on the basis that part of the service falls under manpower supply are sustainable in law.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Liability to pay service tax under 'Manpower Recruitment or Supply Agency Service' for driver's salary and bhattaRelevant legal framework and precedents: The adjudicating authority relied on the classification of services under the category of 'Manpower Recruitment or Supply Agency Service' to demand service tax on the driver's salary and bhatta portion of the consideration received by the appellant. The appellant referred to the Supreme Court judgment in DLF Universal Ltd. vs. Director, T&C Planning (AIR 2011 SC 1463), which established the principle of purposive interpretation of contracts. Additionally, the appellant relied on the Tribunal's decision in S.S. Associates vs. CCE (2010 (19) STR 438 (Tri.-Bang.)), which distinguished between supply of manpower and execution of a lump-sum work contract.Court's interpretation and reasoning: The Tribunal examined the nature of the agreement between the appellant and the clients, which was for operation and maintenance of vehicles. The appellant's responsibility included providing and maintaining vehicles as per contractual terms, with supply of drivers being an integral part to fulfill these obligations. The Tribunal emphasized that the contract's purpose was to provide a composite service rather than merely supply manpower.Key evidence and findings: The agreement specified consideration on a variable cost per vehicle per kilometre and a fixed cost per vehicle per driver. The appellant's billing statements showed deduction of driver's salary and bhatta from the total invoice amount, but the Tribunal noted that such bifurcation was artificial and did not reflect the true nature of the contract.Application of law to facts: Applying the principle from DLF Universal Ltd., the Tribunal held that the contract must be interpreted according to its overall purpose and joint intent of the parties. The contract was for operation and maintenance services and not for supply of manpower as a standalone service. Thus, the demand for service tax under the category of manpower supply was unsustainable.Treatment of competing arguments: The Revenue's argument rested on the contractual stipulation of driver supply and quantification of drivers, asserting that the major part of the contract was manpower supply. The Tribunal rejected this, holding that the driver's supply was ancillary to the main service of vehicle operation and maintenance and could not be segregated for separate tax liability.Conclusions: The appellant was not liable to pay service tax under 'Manpower Recruitment or Supply Agency Service' for the amounts paid as driver's salary and bhatta.Issue 2: Whether the contract can be bifurcated to separate manpower supply element for service tax demandRelevant legal framework and precedents: The Tribunal relied heavily on the Supreme Court's ruling in DLF Universal Ltd., which stressed purposive interpretation and the inadmissibility of dissecting a contract to create separate tax liabilities where the contract's overall purpose is unified. The Tribunal also referred to the S.S. Associates decision, which clarified that supply of manpower service applies only when there is an agreement for utilization of an individual's services, not where a lump-sum work contract is involved.Court's interpretation and reasoning: The Tribunal held that the contract could not be artificially bifurcated to isolate the manpower component. The driver supply was embedded within the broader contractual obligations of vehicle operation and maintenance. The Tribunal underscored that the joint intent of the parties, as discerned from the contract and surrounding circumstances, was to enter into a composite service agreement.Key evidence and findings: The contractual terms, billing structure, and the nature of services rendered demonstrated a single integrated contract rather than separate contracts for manpower supply and vehicle operation.Application of law to facts: Following the principle of purposive interpretation, the Tribunal concluded that dissecting the contract to impose service tax on the manpower element alone was legally impermissible.Treatment of competing arguments: The Revenue's insistence on bifurcation was rejected as inconsistent with established legal principles and the factual matrix of the contract.Conclusions: The contract could not be bifurcated for the purpose of imposing service tax on the manpower supply element.3. SIGNIFICANT HOLDINGSThe Tribunal held:'Interpretation of contract13. It is a settled principle in law that a contract is interpreted according to its purpose. The purpose of a contract is the interests, objectives, values, policy that the contract is designed to actualise. It comprises the joint intent of the parties. Every such contract expresses the autonomy of the contractual parties private will. It creates reasonable, legally protected expectations between the parties and reliance on its results. Consistent with the character of purposive interpretation, the court is required to determine the ultimate purpose of a contract primarily by the joint intent of the parties at the time the contract so formed. It is not the intent of a single party; it is the joint intent of both the parties and the joint intent of the parties is to be discovered from the entirety of the contract and the circumstances surrounding its formation.'Following the above principle, the Tribunal concluded that the activities cannot be bifurcated to confirm demand under 'Manpower Recruitment or Supply Agency Service'.'Core principles established:A contract must be interpreted purposively, focusing on the joint intent of the parties and the overall purpose rather than dissecting it into isolated components.Supply of manpower service applies only where there is an agreement for utilization of manpower as a distinct service, not where manpower is incidental to a composite service contract.Artificial bifurcation of contract consideration to impose service tax on a portion of the contract is impermissible.Final determinations:The appellant was not liable to pay service tax under 'Manpower Recruitment or Supply Agency Service' for the amounts paid as driver's salary and bhatta.The impugned order demanding service tax and imposing penalties on this basis was set aside.The appeal was allowed with consequential relief in accordance with law.