TaxTMI 
TaxTMI 
TaxTMI 
2022 (5) TMI 967
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....e Tax Appeal (STA) Nos. 22573-74/2014; STA No. 21502/2017, Service Tax/CROSS/21077/2017 and Service Tax/CROSS/20255/2018 which set aside two orders dated 03.03.2014 and 04.03.2014 by the Commissioner of Service Tax (hereafter "the Commissioner"). The Commissioner had confirmed demands, made through show cause notices, for service tax along with interest and penalty. The commissioner had discharged, by an order (dated 27.02.2017/16.06.2017) the proceedings arising from another show cause notice (hereafter "SCN") in respect of a similar demand. That led to the revenue's appeal to CESTAT, challenging that order, discharging proceedings initiated by the revenue for the subsequent period. The CESTAT, by its common order, rejected the revenue's appeals, and allowed that of the respondent, Northern Operating Systems (Pvt.) Ltd. (hereafter "the assessee" or "NOS"). Facts of the case 2. The assessee was registered with the revenue, as a service provider under the categories of "Manpower Recruitment Agency Service", "Business Auxiliary Service", "Commercial Training and Coaching Service", "TTSS", "Telecommunication and Legal Consultancy Service" etc., under the Finance Act, 1994 (hereafter....
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....seconded employees. The assessee pays for certain services received from the group companies. The assessee used to discharge service tax on payments for such services in terms of Section 66A of the Act. The appropriate major expense heads were 'Salaries & Allowances', 'Relocation expenses', 'Consultancy Charges', 'Communication Expenses' and 'Computer Maintenance and repairs.' 4. The revenue issued four show cause notices Dated 23.04.2012; (for the period October 2006 - March 2011), 19.10.2012 (for the period April 2011 to March 2012), 07.05.2014 & 26.11.2015 (for the period April 2012 to September 2014) alleging that the assessee failed to discharge service tax under the category of "manpower recruitment or supply agency service" with regard to certain employees who were seconded to the assessee by the foreign group companies. The first two of these notices also invoked the proviso to Section 73 (1) read with Section 66A of the Act, proposing to demand service tax for the extended period. The assessee resisted these notices, refuting the allegations in the four SCNs. It was also given a hearing. By two orders Order-in-Original No. 29/2013-14 dated 03.03.2014 and No. 30/2013-14 da....
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....edit Rules, 2004 (hereafter "CENVAT Rules") had not been discharged by the assessee. The Commissioner was of the view that the assessee was aware of the provisions of law and had placed nothing on record to indicate the circumstances that prevented it from approaching the department or accessing the CBEC website available on public domain. It led no evidence to show reasonable cause. The extended period assessment and penalty was therefore, warranted. 6. Aggrieved by the impugned order, the assessee filed two appeals before the CESTAT. As far as the third appeal Service Tax Appeal No. 21502/2017 by the department was concerned, the period involved was from April 2012 to September 2014. As a sequel to the earlier SCNs, the assessee was issued two SCNs Bearing C No. IV/16/153/2014- ST. Adjn. (SCH No. CAU/153/Div. III/Gr 29 dated 07.05.2014 and C. No. IV/16/293/2015 ST II Adjn./2043/15 dated 26.11.2015 demanding service tax of Rs. 4,36,75,590/- and Rs. 7,55,48,448/- for the period April 2012 to April 2013, and April 2013 to September 2014 respectively, along with interest and penalty. 7. The assessee filed detailed replies on 02.07.2014 and 31.12.2015, mainly arguing that service ta....
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....allenging it, in which the assessee too filed its cross objection. The impugned order 10. The CESTAT, by its order noted the position in law - that earlier, the definition of taxable services under Section 65(105) (k) included service by a manpower recruitment or supply agency in relation to recruitment or supply of manpower temporarily or otherwise. It was noted that the scope of the term "manpower recruitment of supply agency" was spelt out in Para 22.3 in the Circular of 27.07.2005 Circular F.No.B1/6/2005-TRU. Next, the CESTAT noted that the position in law changed in that manpower and recruitment services was per se included since it did not form part of the negative list. In this regard, it noticed Section 65B (44) in which by clause (b), provision of service by an employee or employer by or in relation to employment is an excluded service. CESTAT, therefore, reasoned that the essential ingredients for any activity to be called as manpower recruitment or supply agency was that it should be "any person", engaged in providing a specified service; the specific service ought to be recruitment of manpower which should be provided temporarily or otherwise; such service may be prov....
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....be agreed to by the parties in future. In terms of Attachment 1, the assessee was to provide "IT enabled services" supporting back-up and office related operations. It was submitted that the remuneration to be provided for the service was fixed at the actual cost plus a mark-up of 15%. The ASG then referred to the master services agreement between the assessee and Northern Trust Company dated 12.02.2009. In terms of this master agreement the assessee was to provide "general back office and operational support" to the foreign group company which included foreign investment, investment management liaison group cash, evaluations and reporting, IRAS fund accounting, securities, lending operations; tax related operations, including tax reclaimed, etc. It was pointed out that in terms of Clause 2.1, though the assessee was to perform and provide services to the foreign group company, such services could be delivered to other parties nominated by the Northern Trust Company. 13. The third document referred was the secondment agreement entered into with effect from 01.04.2007 between the Northern Trust Management Services Ltd. (an overseas group company - also "NTMS") and the assessee. The....
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....obs assigned to it. The consideration provided to it was fixed (15% markup over the actual costs incurred); the costs included the remuneration nominally paid by the assessee to the seconded employee. Further, those were reimbursed. For a temporary period, the seconded employee was only operationally under the control of the assessee. It was submitted that this arrangement was essential because without such control, it would not have been practicable for the assessee to have ensured performance of the tasks, it was expected to, through the seconded employees concerned. Yet, the fact remained that upon the cessation of the assignment, the employees reverted back to their original position in the overseas companies to work there or to be deployed elsewhere in terms of the global policy. 15. Learned counsel submitted that a combined reading of the materials on record clearly establish that the arrangement between the assessee and its overseas group companies - apparent through the various conditions spelt out in different documents- was one of a contract for service. In other words, what was provided to the assessee by the overseas counterpart or group companies were services through....
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....'s work which was undertaken by it in the service agreement with the overseas company. The salary, allowances the duration of the secondment, were all determined by the overseas employer and not by the assessee. Upon completion of the assignment, the seconded employees were to return to their original positions and in the overseas company. The control if any, which was with the assessee was for a limited duration - it was not enabled to impose sanctions, such as cut in salary, etc. In case it was dissatisfied, it could only ask for return of the employee to her or his original position with the foreign employer. Upon an overview of all these circumstances, it was clear that the contract between the parties was essential for the supply of services by the concerned overseas company to the assessee. Therefore, it was a taxable service and not excluded by virtue of amended Section 65 of the Finance Act, 1994. Contentions of the assessee 20. Mr. V. Sridharan, learned senior counsel appearing for the assessee urged that a conjoint reading of Section 65(68) with Section 65(105)(k) of the Finance Act, 1994 makes it clear that the 'manpower recruitment and supply agency service' ....
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....vil Appeal Diary No(s). 45344/2018 (C.A. No. 2408 / 2019), this court while considering similar set of facts dismissed the revenue's appeal, which had challenged the CESTAT's ruling that expenses reimbursed by the Indian companies to the foreign group companies in relation to seconded employees cannot be subject to service tax under Manpower Recruitment or Supply Agency Service. 25. It was also urged that the group companies are not in the business of supplying manpower. The foreign group companies are engaged in providing personal financial services (PFS) and Corporate and Institutional services along with investment products. The foreign group companies cannot be considered as "Manpower Supply Agency'. 26. It was next urged that service tax is leviable only on the gross amount charged for the provision of service. It was argued that assuming but not admitting that service is provided by the group companies to the assessee, it cannot be said that the value of consideration for that service is the amount of salaries paid to the expats. To determine value of taxable services for charging Service Tax, gross amount charged for providing the services is to be determined. Reliance....
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....NVAT Rules read with Rule 6A of the Service Tax Rules, 1994 ("1994 Rules"). The assessee relied on detailed facts in this regard through affidavit on record by its affidavit dated 17.08.2021 before this court. It is also on record that all the refund claims filed by the assessee had largely been granted barring small amounts which were paid against input services such as Clearing and Forwarding Agent Services, Courier Services, Information Technology Software Services. In this regard, reliance is placed on SRF Ltd. v. Commissioner 2016 (331) ELT A 138 (S.C.) and Commissioner of Central Excise v. Coca Cola India Pvt. Ltd 2007 (213) ELT 490 (S.C). Relevant provisions of the Finance Act, 1994 with amendments 30. Before amendment of the Finance Act, its provisions, to the extent they are relevant, are extracted hereunder. The definition of "manpower recruitment or supply agency" and "Taxable service" under the definition clause, in Section 65 are extracted below: "Definitions. 65. In this Chapter, unless the context otherwise requires, - (1) "actuary" has the meaning assigned to it in clause (1) of section 2 of the Insurance Act, 1938 (4 of 1938); who renders any advice, consultan....
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....hereby declared that nothing contained in this clause shall apply to,- Amended provisions of the Act (A) the functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities who receive any consideration in performing the functions of that office as such member; or (B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or (C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section. Explanation 2.- For the purposes of this clause, transaction in money shall not include any activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged. Explanation 3.- For the purposes of this Chapter -- (a) an unincorporated association or a body of persons, as the case may be, a....
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....In order to help NTMS make the selection, NOS shall provide NTMS with a description of the skills and competencies required by NOS. Based on the list provided by ŅOS, NTMS shall identify the people and select the employees. NTMS hereby agrees to second the employees to NOS for time period(s) ("the Secondment Period") with commencement dates and completion dates, as reflected in Appendix I and Appendix II of this agreement. Appendix I and Appendix II will be updated from time to time to reflect any changes made as a result of Article II (E) or Article II (G) or Article II (H). The employees seconded to NOS shall continue to be remunerated through the payroll of NTMS only for the purpose of continuation of social security, retirement and health benefits but for all practical purposes, NOS shall be the employer. ARTICLE II DUTIES AND OBLIGATIONS NTMS shall ensure that: (A) The Employee shall act in accordance with the instructions and directions of NOS. (B) During the Secondment Period, the Employees shall devote the whole of their time, attention and skills to the duties of their secondment. (C) The employees shall be reportable and responsible to NOS. (D) A....
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....any) and the assessee, reads as follows: "THIS MASTER SERVICES AGREEMENT ("this Agreement") is dated February 12th, 2009 and made BETWEEN: (1) THE NORTHERN TRUST COMPANY, a company established under the laws of the State of Illinois in the United States of America, whose principal place of business in the U.S.A. is at 50 South LaSalle Street, Chicago 60603, Illinois, U.S.A. ("TNTC Chicago"); and (2) NORTHERN OPERATING SERVICES PRIVATE LIMITED, a company established under the laws of India, whose principal place of business in India is at 2nd Floor, RMZ Ecospace Campus 10, Sarjapur Outer Ring Road, Bangalore 560037, India ("NOS"). TNTC Chicago and NOS are hereinafter collectively referred to as "Parties" and individually as "Party". 3. Duties of NOS 3.1 NOS agrees that it will use reasonable efforts to ensure that the Services contemplated under this Agreement are performed by NOS promptly and to the best of its ability and in accordance with the Standard of Care. TNTC Chicago agrees that it will provide proper information and assistance to NOS by making reasonable efforts in order for NOS to have access to the data and assistance required in order to properly carry ou....
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....may be found on My Place. Home Leave During your assignment, you will be provided the following Home Leave Options: You may elect to receive an annual home leave allowance for each member of your immediate family to Chicago for two home leave trips. This allowance is non-accountable and is intended to cover airfare and ground transportation to and from the airports in your home and at Bangalore, India. If you prefer, you may book your travel directly through BCD Travel for direct reimbursement according to Northern's Travel Policy. In the final year of your assignment, home leave entitlement will continue if you are on assignment at least six months from your assignment anniversary date. You will be granted an additional 2 travel days (round trip) in any year in which you are entitled to home leave You should plan to address all of your repatriation matters during your final annual home leave visit. All accommodation and car rental costs during home leave are your personal responsibility. xxxxxx xxxxxx xxxxxx Housing Northern Trust will make arrangements directly with the landlord/owner of the property of your choice in Bangalore, India. Do not enter into....
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....USD $330,000. Mobility Allowance You will be paid a one-time sum of USD $7,500 prior to your departure by deposit to your checking account. The Mobility Allowance is specifically compensating you for any incidental additional expenses incurred as a result of your assignment. Hardship Allowance You will be paid a hardship allowance of 20% of your base salary during your assignment to Bangalore, India. This amount may be adjusted during your assignment as independent data is updated. Any changes will be communicated prior to implementation. This amount will be paid semi-monthly along with your normal salary. Servant Allowance While on assignment in Bangalore, India, it may be necessary to have the use of household servants to maintain a household, ship for groceries, perform daily living duties, etc. An allowance of $2,000/yr. will be paid to you by Brookfield Global Relocation Services to facilitate this." Analysis and Conclusions 33. The issue which this court has to decide is whether the overseas group company or companies, with whom the assessee has entered into agreements, provide it manpower services, for the discharge of its functions through seconded empl....
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....r lien on their jobs with the multinational enterprise, a service PE can emerge. 18. Applying the above tests to the facts of this case we find that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCo as he retains his lien.." 36. In Eli Lilly (supra) the appellant was incorporated in India under the Companies Act, 1956 and was a joint venture between M/s Eli Lilly, Netherlands B.V. and Ranbaxy Laboratories (Ltd.). The foreign partner had seconded four expatriates to the Indian joint venture. The employees, however, continued to remain on the rolls of the foreign company. They received home salary outside India from the foreign partner. The joint venture company deducted tax under Section 192(1) in r....
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.... employer: "...There is in our opinion little doubt that this system has been evolved to avoid Regulations under the Factories Act. Further there is also no doubt from whatever terms of agreement are available on the record that the so-called independent contractors have really no independence at all. As the appeal court has pointed out they are impecunious persons who could hardly afford to have factories of their own. Some of them are even ex-employees of the Appellants. The contract is practically one-sided in that the proprietor can at his choice supply the raw materials or refuse to do so, the so-called contractor having no right to insist upon the supply of raw materials to him. The so-called independent contractor is even bound not to employ more than nine persons in his so-called factory. The sale of raw materials to the so-called independent contractor and resale by him of the manufactured bidis is also a mere camouflage, the nature of which is apparent from the fact that the so-called contractor never paid for the materials. All that happens is that when the manufactured bidis are delivered by him to the Appellants, amounts due for the so-called sale of raw materials is....
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....reund in (1951), 14 Modern Law Review, at p. 505] 27. It is, therefore, not surprising that in recent years the control test as traditionally formulated has not been treated as an exclusive test. 28. It is exceedingly doubtful today whether the search for a formula in the nature of a single test to tell a contract of service from a contract for service will serve any useful purpose. The most that profitably can be done is to examine all the factors that have been referred to in the cases on the topic. Clearly, not all of these factors would be relevant in all these cases or have the same weight in all cases. It is equally clear that no magic formula can be propounded, which factors should in any case be treated as determining ones. The plain fact is that in a large number of cases, the Court can only perform a balancing operation weighing up the factors which point in one direction and balancing them against those pointing in the opposite direction [See Atiyah, PS. "Vicarious Liability in the Law of Torts", pp. 37-38]." 41. The ruling in Silver Jubilee (supra) about the flexibility in regard to deciding the question of whether a contract is one for service or one of service,....
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....h which the work is to be done and/or who ultimately makes a profit or a loss so that one may determine whether a business is being run for the employer or on one's own account, is another important test when it comes to work to be performed by independent contractors as against piece-rated labourers. Also, the economic reality test laid down by the U.S. decisions and the test of whether the employer has economic control over the workers' subsistence, skill and continued employment can also be applied when it comes to whether a particular worker works for himself or for his employer. The test laid down by the Privy Council in Lee Ting Sang v. Chung Chi-Keung [1990] 2 A.C. 374, namely, is the person who has engaged himself to perform services performing them as a person in business on his own account, is also an important test, this time from the point of view of the person employed, in order to arrive at the correct solution. No one test of universal application can ever yield the correct result. It is a conglomerate of all applicable tests taken on the totality of the fact situation in a given case that would ultimately yield, particularly in a complex hybrid situation, wh....
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....of the service tax regime. 46. From the above discussion, it is evident, that prior to July 2012, what had to be seen was whether a (a) person provided service (b) directly or indirectly, (c) in any manner for recruitment or supply of manpower (d) temporarily or otherwise. After the amendment, all activities carried out by one person for another, for a consideration, are deemed services, except certain specified excluded categories. One of the excluded category is the provision of service by an employee to the employer in relation to his employment. 47. One of the cardinal principles of interpretation of documents, is that the nomenclature of any contract, or document, is not decisive of its nature. An overall reading of the document, and its effect, is to be seen by the courts. Thus, in State of Orissa v. Titaghur Paper Mills Co. Ltd 1985 Supp SCC 280 it was held as follows: "120. It is true that the nomenclature and description given to a contract is not determinative of the real nature of the document or of the transaction thereunder. These, however, have to be determined from all the terms and clauses of the document and all the rights and results flowing therefrom an....
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....as well as other allowances, such as hardship allowance, vehicle allowance, servant allowance, paid leave, housing allowance, etc. The nature of salary and other perks underscore the fact that the seconded employees are of a certain skill and possess the expertise, which the assessee requires. 50. The above features show that the assessee had operational or functional control over the seconded employees; it was potentially liable for the performance of the tasks assigned to them. That it paid (through reimbursement) the amounts equivalent to the salaries of the seconded employees - because of the obligation of the overseas employer to maintain them on its payroll, has two consequences: one, that the seconded employees continued on the rolls of the overseas employer; two, since they were not performing jobs in relation to that employer's business, but that of the assessee, the latter had to ultimately bear the burden. There is nothing unusual in this arrangement, given that the seconded employees were performing the tasks relating to the assessee's activities and not in relation to the overseas employer. To put it differently, it would be unnatural to expect the overseas employer t....
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....hout the comfort of this assurance, they would agree to the secondment. Furthermore, the reality is that the secondment is a part of the global policy - of the overseas employer loaning their services, on temporary basis. On the cessation of the secondment period, they have to be repatriated in accordance with a global repatriation policy (of the overseas entity). 54. The letter of understanding between the assessee and the seconded employee nowhere states that the latter would be treated as the former's employees after the seconded period (which is usually 12-18 months). On the contrary, they revert to their overseas employer and may in fact, be sent elsewhere on secondment. The salary package, with allowances, etc., are all expressed in foreign currency (e.g., US $ 330,000/- per annum in the letter produced before court, extracted above). Furthermore, the allowances include a separate hardship allowance of 20% of the basic salary for working in India. The monthly housing allowance in the specific case was Rs. 366,700. In addition, an annual utility allowance of Rs.3,97,500/- is also assured. These are substantial amounts, and could have been only by resorting to a standardized p....
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....ed, is just one method of reckoning if there is consideration. The other way of looking at the arrangement is the economic benefit derived by the assessee, which also secures specific jobs or assignments, from the overseas group companies, which result in its revenues. The quid pro quo for the secondment agreement, where the assessee has the benefit of experts for limited periods, is implicit in the overall scheme of things. 59. As regards the question of revenue neutrality is concerned, the assessee's principal contention was that assuming it is liable, on reverse charge basis, nevertheless, it would be entitled to refund; it is noticeable that the two orders relied on by it (in SRF and Coca Cola) by this court, merely affirmed the rulings of the CESTAT, without any independent reasoning. Their precedential value is of a limited nature. This court has been, in the present case, called upon to adjudicate about the nature of the transaction, and whether the incidence of service tax arises by virtue of provision of secondment services. That a particular rate of tax- or no tax, is payable, or that if and when liability arises, the assessee, can through a certain existing arrangement,....