2025 (11) TMI 1702 - AT - Service Tax

Manpower supply tax demand quashed as Revenue fails to prove contractor-employee relationship for reverse charge liability

Tractors and Farm Equipment Ltd. Versus Commissioner of GST & Central Excise, Madurai

CESTAT Chennai allowed the appeal, holding that the disputed services rendered by independent contractors in the appellant's factory could not be ... Classification of the service - services rendered by independent contractors in the appellant's factory involving manpower utilized by appellant in their factory - partial reverse charge mechanism - matter decided based on assumptions and presumptions - burden of prove - HELD THAT:- It is found that the dispute relates to the classification of the service involving manpower utilized by appellant in their factory. In a situation like this the matter cannot be decided by assumptions and presumptions more so when the Hon’ble Supreme Court has formulated a series of tests, which if applied in this case would have helped determine the classification of the service. In Diamond Flush Doors [2024 (6) TMI 847 - CESTAT CHENNAI], this Tribunal had examined the issue. The Bench observed that '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.' Further as stated by the appellant this Tribunal had set aside Service tax demands on these contractors for 'manpower supply services' prior to 01.07.2012. The principles involved in identifying the relationship are the same and we find no reason to deviate from them - Revenue has hence failed to discharge its burden on merits. The payment of tax by M/s. Sigma Enterprises, Madurai, as cited by revenue, is based on the setting of its own facts which involved supply of manpower and is not relevant in determining the classification of a service in the case of independent contractors. Once an order cannot be sustained on merits the connected issues relating to interest and penalty etc. also do not survive. The impugned order is set aside - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether services rendered by independent contractors in the appellant's factory could be classified as 'manpower recruitment or supply agency' services so as to attract liability under the partial reverse charge mechanism with effect from 01.07.2012. 1.2 Whether the Department discharged its burden of proof to establish taxability under partial reverse charge, in the face of existing Tribunal decisions and Board's circular treating similar arrangements as contracts for services and not manpower supply. 1.3 Consequentially, whether the demands of service tax, interest and penalties under sections 76 and 77 of the Finance Act, 1994 were sustainable. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification of services rendered by independent contractors and applicability of reverse charge Interpretation and reasoning 2.1 The Tribunal noted that the dispute turned on the true nature and classification of services involving manpower engaged by the appellant in its factory, and that this cannot be decided on assumptions and presumptions. 2.2 The Tribunal referred to the multifactor tests laid down by the Supreme Court, and reiterated in its own earlier decision, for discerning whether there exists a relationship of employer and employee or a contract of service versus a contract for service. It highlighted, inter alia, the following tests: (i) control and supervision over how work is done; (ii) degree of integration of workers into the employer's business; (iii) power to select, appoint, dismiss and provision of typical employee benefits; (iv) provision of equipment; and (v) obligation to work at employer's place and under its rules and timings. 2.3 The Tribunal emphasized that no single test is conclusive and that a variety of circumstances must be examined; mere reference to invoices or payment terms cannot, by itself, establish an employer-employee relationship or 'manpower supply'. A proper examination of contractual terms and the working arrangement is essential. 2.4 The Tribunal took note that in the present case: (i) contractors were engaged to execute specific jobs/work under purchase orders; (ii) consideration was paid on a piece-rate basis, not per man-hour or per person supplied; (iii) the number of workers to be deployed was not dictated by the appellant; (iv) contractors bore responsibility for quality, defects, and compensation for non-conforming work; (v) contractors indemnified the appellant for loss or damage in the premises; and (vi) workers were under the control and responsibility of the contractors, not the appellant. 2.5 The Tribunal further noted that in earlier proceedings involving the same type of agreements with the same contractors for the pre-01.07.2012 period, it had already held that such arrangements did not constitute 'supply of manpower', and that the demands raised on the contractors under 'manpower supply services' had been set aside. Those findings had attained finality in the absence of any appeal. 2.6 The Tribunal also noted the Board's Circular which clarified that where contractors are engaged for specific jobs, are free to decide manpower, are paid on piece-rate basis, bear responsibility for work quality and consequential losses, and retain control/supervision over workers, such arrangements are not taxable as 'manpower supply'. The clauses in the appellant's agreements were found to be in line with the parameters in the Circular. 2.7 Applying these tests and materials, the Tribunal concluded that the contractors were independent service providers executing works on a contract for service and not supplying manpower to the appellant. Conclusions 2.8 Services rendered by the independent contractors in the appellant's factory could not be classified as 'manpower recruitment or supply agency' services. 2.9 Consequently, liability under the partial reverse charge mechanism on the appellant as service recipient did not arise on these services. Issue 2 - Burden of proof on Revenue and effect of prior decisions and payment by contractors Interpretation and reasoning 2.10 The Tribunal held that tax liability cannot be fastened on the basis of assumptions and presumptions and that the burden of proving taxability and proper classification rests on the Revenue. 2.11 It observed that Revenue had not examined or established the true nature of the relationship between the appellant, the contractors and the workers by applying the multifactor tests. No evidence was adduced to show that the arrangements were, in substance, manpower supply. 2.12 The Tribunal noted that the independent contractors had already discharged service tax as service providers under 'other taxable services', and this was recorded and not disputed in the impugned order. It also took note of the appellant's plea of revenue neutrality. 2.13 The Tribunal rejected the Revenue's reliance on the appellant's payment of partial reverse charge in respect of one contractor (M/s Sigma Enterprises) as proving knowledge or liability in all cases, holding that such payment was based on that contractor's own factual setting which did involve supply of manpower, and could not be used to classify services rendered by other independent contractors under different factual circumstances. Conclusions 2.14 Revenue failed to discharge its burden of establishing that the services in question were taxable as 'manpower supply' under partial reverse charge. 2.15 The demands raised on the appellant as service recipient, when contractors had already paid service tax as service providers and when classification as manpower supply was not proved, were unsustainable on merits. Issue 3 - Sustainability of service tax demand, interest and penalties Interpretation and reasoning 2.16 Having found that the classification as manpower supply was not established and that reverse charge liability did not arise, the Tribunal held that the impugned order could not be sustained on merits. 2.17 It held that once the primary demand fails on merits, consequential demands for interest and imposition of penalties under sections 76 and 77 of the Finance Act, 1994 also cannot survive. Conclusions 2.18 The service tax demands raised on the appellant, along with interest and penalties under sections 76 and 77, were set aside. 2.19 The appeal was allowed and the appellant was held entitled to consequential relief in accordance with law.