2025 (10) TMI 456 - AT - Service Tax

Service tax demand dropped for 2012-2015 on group cross-charges; debit entries treated as internal chargebacks, not manpower supply

Principal Commissioner of CGST & Appellant Central Excise, Delhi East Versus M/s. Oriental Consultant Company Ltd.

CESTAT dismissed the revenue's appeal and upheld the impugned order, thereby dropping the service tax demand for the post-negative list period ... Dropping the demand pertaining to post-negative list period i.e. 1.7.2012 to 31.03.2015 in respect of “Manpower Supply Service” provided by Overseas Group Company to its group company in India - service to self or not - HELD THAT:- In the case of SNC Lavalin Inc. [2018 (2) TMI 1679 - CESTAT NEW DELHI], where the appellant was a Project Office of M/s. SNC Lavalin Inc, Canada and the dispute related to service tax liability with reference to certain debit entries made in their books of accounts, which related to deployment of certain offices by GNC, Canada. The debit entries related to such expenses of salary, travelling etc of the officers deployed in India was sought to be charged towards service tax under the category of “Manpower Recruitment or Supply Agency Service”. Referring to the decision of the Tribunal in the case of Lea International Ltd. and Others [2018 (2) TMI 1407 - CESTAT NEW DELHI] and line of decisions on the issue, it was held that the debit entries are for maintaining complete financial transactions on behalf of SNC, Canada and SNC, Canada cannot be categorized as a manpower recruitment or supply agency by deputing their own staff to execute their own contract in India. The Allahabad High Court in Computer Science Corporation India Pvt. Ltd. [2014 (11) TMI 125 - ALLAHABAD HIGH COURT],where similar dispute was raised, held that in such arrangement the deputation of employee for executing the work cannot be considered as a “Manpower Supply” . It was held that the empower cannot be considered as a manpower supply agency. The Apex Court in Northern Operating Systems Pvt. Ltd. [2022 (5) TMI 967 - SUPREME COURT], accordingly, concluded that the assessee was the service recipient of the overseas group company, which provided manpower supply service or a taxable service with regard to the employees it seconded to the assessee for the duration of the deputation or secondment. In view thereof, the decision of the Apex Court in Northern Operating Systems is factually distinguishable and hence no reliance can be placed thereon. The impugned order upheld. The appeal filed by the revenue is, therefore, dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether services rendered by an overseas parent/head office to its Indian project office constitute taxable 'Manpower Recruitment or Supply Agency Service' such that the Indian project office is liable to pay service tax under the Reverse Charge Mechanism (RCM) for the period 1.7.2012 to 31.3.2015. 2. Whether a foreign company's permanent establishment/project office in India and its head office abroad are to be treated as distinct persons for the purpose of levy of service tax under Section 66A and related rules, thereby permitting taxation of services 'provided' by the head office to the project office. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of services rendered by overseas head office to its Indian project office as 'Manpower Recruitment or Supply Agency Service' and RCM liability Legal framework: Service tax liability under the Finance Act read with Rule 3(iii) of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 (Import Rules) and the Place of Provision of Services Rules, 2012; category 'Manpower Recruitment or Supply Agency Service' under the charging provisions. Precedent treatment: The Tribunal's prior decisions (e.g., Lea International; SNC Lavalin) and various High Court/Tribunal authorities have addressed whether deputation/secondment/debit entries for salaries constitute taxable manpower supply. The Apex Court decision on secondment (Northern Operating Systems) treats certain secondment arrangements as taxable manpower supply where facts support an outsourced/secondment model. Interpretation and reasoning: The Tribunal distinguished factual matrices where (i) debit entries in the project office books represent bookkeeping of expenses incurred at head office for execution of the same contract, and (ii) the project office functions as an extension/permanent establishment of the same single enterprise executing the contract in India. The Tribunal reasoned that deputation of employees by the head office to execute the same contractual obligations of the enterprise does not convert such movement into a commercial supply of manpower; it is instead internal deployment to perform one integrated contract. Charging service tax on such intra-entity deployment would amount to taxing 'service to self,' which is impermissible. The Tribunal applied the principle that Section 66A(2) and its explanation serve clarificatory purposes to identify whether a service has been provided/consumed in India, but do not convert an intra-enterprise internal arrangement into a taxable supply where the entities are effectively the same enterprise carrying out a single contract through its project office. Ratio vs. Obiter: Ratio - where the project office is a permanent establishment of the overseas company and the overseas staff are deployed to perform the same contractual obligations, such deployment does not constitute taxable 'Manpower Recruitment or Supply Agency Service' and cannot be subjected to RCM as a service provided by a separate person. Obiter - general comments on accounting entries or repatriation of profits not essential to the core holding. Conclusion: The demand for service tax on alleged manpower supply by the overseas head office to its Indian project office was rightly dropped where the facts show internal deployment/secondment to execute the same contracts and the project office operates as an extension/permanent establishment rather than an independent service recipient purchasing manpower from a distinct provider. Issue 2: Whether Section 66A(2) treats foreign permanent establishments and Indian permanent establishments as distinct persons for the purpose of imposing service tax on intra-group services Legal framework: Section 66A(1) and (2) of the Finance Act, which defines 'person' and clarifies treatment of permanent establishments for RCM identification; principle that one cannot provide a service to oneself. Precedent treatment: The Tribunal relied on Torrent Pharmaceuticals and SNC Lavalin, which held that the statutory clarification in Section 66A(2) is aimed at identifying provider/recipient for determining place of provision and incidence, not to imply that intra-enterprise services necessarily amount to a taxable supply. The Apex Court's Northern Operating Systems decision was considered but treated as fact-specific. Interpretation and reasoning: The Tribunal reasoned that the statutory language recognizing permanent establishments as separate 'persons' is a tool to determine jurisdictional and incidence questions and to preclude manipulation of place of provision; it is not a blanket rule converting all transactions between a head office and its project office into taxable supplies. Where the relationship is essentially one enterprise executing a unified contract, recognizing PE as a separate person for technical identification does not override the basic proposition that one cannot supply a service to oneself. Therefore, Section 66A(2) does not automatically create RCM liabilities where the economic reality is internal deployment for the same contract. Ratio vs. Obiter: Ratio - Section 66A(2)'s classification of permanent establishments as separate persons is declaratory/clarificatory for identification of provision/place of service and does not mandate treating all intra-group transfers as taxable supplies; economic reality and substance determine whether a service was actually provided for consideration. Obiter - comparative remarks on potential VAT/GST avoidance hypotheticals. Conclusion: The technical characterization of permanent establishments as separate persons under Section 66A(2) is insufficient, by itself, to sustain an RCM demand against an Indian project office when facts demonstrate internal deployment/secondment in execution of the same contract (i.e., 'service to self'); therefore, the demand cannot be sustained on that basis. Treatment of Apex Court authority on secondment vs. factual distinguishability Legal framework: Precedent hierarchy requires respect for Apex Court rulings but permits factual distinction where material facts differ. Precedent treatment: The Tribunal considered the Apex Court's decision that secondment may constitute manpower supply where agreements and operational arrangements show a commercial supply of personnel. However, the Tribunal found the Apex Court's decision factually distinguishable from the present case, where the project office is executing contracts as part of the same enterprise and invoices/consideration flow show head office/project office integration. Interpretation and reasoning: The Tribunal emphasized that the presence of a secondment agreement and a commercial arrangement supplying personnel for use by a distinct legal entity are critical to the Apex Court's outcome. Absent such commercial features and where deployment is to execute the employer's own contract through its project office, the Apex Court's reasoning does not apply. Ratio vs. Obiter: Ratio - Apex Court authority applies where the factual matrix establishes a commercial secondment/supply of manpower to a distinct recipient; not applicable where facts show internal deployment within the same enterprise. Obiter - remarks on contractual labels versus substance. Conclusion: The Apex Court's ruling on secondment is inapplicable on the facts of this case; it is distinguished rather than overruled, and reliance on it by Revenue is rejected insofar as the factual matrices differ. Final Disposition On the above legal and factual analysis, the Tribunal upheld the adjudicating authority's order dropping the service tax demand for the period 1.7.2012 to 31.3.2015 and dismissed the Revenue's appeal limited to that demand.