Reverse charge under manpower supply

[Kaustubh Karandikar]

XYZ (Manufacturer) is procuring material and giving it to a outside contractor for carrying out various fabrication, repair and maintenance jobs within the factory premises. The contractor is charging labour charges bill for the same on lumpsum basis depending upon the nature of work and not on man hour basis but not charging service tax being within the threshold exemption. EA-2000 audit team is demanding service tax from XYZ under reverse charge under ‘Manpower supply’ for the period 14-15, 15-16 and 16-17. Is the demand sustainable under the service tax provisions?

[KASTURI SETHI]

Dear Sir,. In my view , the department is on right track. It is a clear- cut case of manpower supply under RCM. The Contractor has supplied manpower for various types of work. It makes no difference whether it is on hour basis or output basis. The Contractor has supplied manpower to the manufacturer and now even manpower supplied sits idle in the factory even then Service Tax is applicable under RCM. The manufacturer has to pay ST under RCM. Also peruse the definition of job-work word for word. The situation does not conform to the definition of job work. Have you ever found job work within the factory of the principal (manufacturer) ? Otherwise also activities (fabrication, repair & maintenance) fall under Service Tax net. Regarding the admissibility of threshold exemption limit, there are so many factors to be studied. In my view it is a modus operandi practised by the party.

[CASeetharaman KC]

I fully agree with Sethiji

The very idea of covering manpower supply under RCM was to ensure that the employer pays service tax on behalf of the manpower supplier who in most cases would be small time operators

The demand made by the department is quite justified.

AI Summary

Reverse charge on manpower supply: recipient employer bears service tax liability even where supplier claims threshold exemption.
The manufacturer's receipt of manpower-based fabrication, repair and maintenance services from a contractor who invoices lump-sum and claims threshold exemption attracts liability under the Reverse Charge Mechanism. Supply of manpower for on-premises work is treated as a taxable service to the recipient regardless of billing method or temporary idleness of personnel; threshold exemption of the supplier does not absolve the recipient from reverse charge responsibility. The arrangement is viewed as outside the job-work definition and within the service tax net, placing compliance and tax payment duty on the employer/recipient.