C.C., C.E. & S.T. – Bangalore (adjudication) Etc. v. M/S Northern Operating Systems Pvt Ltd.
S. RAVINDRA BHAT, J.
1. The Commissioner of Central Excise and Service Tax (hereafter
variously described as “the revenue” or “the appellant”) has p referred
appeals1, directed against the impugned orders of the Customs, Excise
and Service Tax Appellate Tribunal (hereafter “CESTAT”)2 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”).
1 Under Section 35L (b) of the Central Excise Act, 1944.
2 Dated 23.12.2020 in Service Tax Appeal (STA) Nos. 22573-74/2014; STA No. 21502/
2017, Service Tax/CROSS/21077/2017 and Service Tax/CROSS/20255/2018.
911
Facts of the case
2. The assessee was registered with the revenue, as a s ervice
provider under the categories of “Manpower Recruitmen t Agency
Service”, “Business Auxiliary Service”, “Commercial Tr aining and
Coaching Service”, “TTSS”, “Telecommunication and Legal Consultancy
Service” etc., under the Finance Act, 1994 (hereaft er “the Act”).
Following an audit of the records by the revenue’s officials, proceedings
were initiated against the assessee alleging non-payment of service tax
concerning agreements entered into by it with its group companies located
in USA, UK, Dublin (Ireland), Singapore, etc. to provide general back-
office and operational support to such group companies.
3. The nature and contents of the agreements, are discernible in
their description, extracted from the impugned order - where the assessee
has been referred to as “the appellant” by the CESTAT- w hich is as
follows:
“The relevant terms of the agreement to understand the activity
are as follows:
a) When required Appellants requests the group comp anies
for managerial and technical personnel to assist in its business
and accordingly the employees are selected by the g roup
company and they would be transferred to Appellants.
b) The employees shall act in accordance with the instruc tions
and directions of Appellants. The employees would d evote
their entire time and work to the employer seconded to.
c) The seconded employees would continue to be on the payroll
of the group company (foreign entity) for the purpo se of
continuation of social security/retirement benefits, but for all
practical purposes, Appellants shall be the employer. Duri ng
the term of transfer or secondment the personnel shall be the
employee of Appellants. Appellants issue an employment let ter
to the seconded personnel stipulating all the terms of the
employment.
d) The employees so seconded would receive their sa lary,
bonus, social benefits, out of pocket expenses and other
expenses from the group company.
e) The group company shall raise a debit note on Appellants
to recover the expenses of salary, bonus etc. and the Appellants
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
shall reimburse the group company for all these expenses and
there shall be no mark-up on such reimbursement.”
As a matter of fact, the assessee issues the prescribed forms to
the seconded employees, in terms of the Income Tax Act, 1961 (hereafter
“IT Act”). Those individuals too file income tax returns and contribute
to the provident fund. Furthermore, NOS remits the above am ounts in
foreign exchange, which are reflected in its financial st atements. The
assessee is reimbursed (by the foreign entity, Northern Trust Company
- hereafter described as such) for the amounts it pays as s alaries, to
these seconded employees. The assessee pays for cert ain services
received from the group companies. The assessee used to di scharge
service tax on payments for such services in terms of Sec tion 66A of
the Act. The appropriate major expense heads were ‘ Salaries &
Allowances’, ‘Relocation expenses’, ‘Consultancy Ch arges’,
‘Communication Expenses’ and ‘Computer Maintenance and repairs.’
4. The revenue issued four show cause notices 3 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 comp anies.
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 orders4
the commissioner confirmed the proposals in the notice (e xcept the
demand for the period from April 2006 to September 2006) acc epting
the fact that part of the demand has been raised @ 12.3% inste ad of
10.3%. The Commissioner confirmed the demand, holding that firstly,
providing skilled manpower, on secondment basis, is manpower
recruitment or supply agency service in the meaning of Section 65(68)
read with Section 65(105) (k) of the Act. Secondly, the group companies
and their various branches abroad, would be the service providers a nd
the assessee, who receives skilled manpower, on secondme nt basis, is
the service recipient. Thirdly, the definition of manpower recruitment or
supply agency, under Section 65(68) has no exclusion clause, requiring
3 Dated 23.04.2012; (for the period October 2006 - Ma rch 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).
4 Order-in-Original No. 29/2013-14 dated 03.03.2014 a nd No. 30/2013-14 dated
04.03.2014.
913
service providers to possess the status of certain specifi ed persons or
organizations, for the purpose of providing the taxa ble service of
manpower, recruitment or supply agency. It was held, fourthly, that in a
secondment arrangement a secondee would continue to be employed by
the original employer during the secondment, and will, following its
termination return to the seconder/ original employer. As a consequence
of this, the secondee does not become integrated int o the host’s
organization. It was next concluded that the service provider’s obligation
ceases once employees were recruited and seconded. Hence the liability
of service tax under Section 65 (105) (k) would be triggered at that
event. Sixthly, it was held that there is no exclusive provision in law that
restricts taxability of service of manpower recruitment or supply agency,
when salaries are drawn by the assessee for manpower so supplied and
TDS under the Income Tax Act had been affected. Regarding differential
service tax liability, mere worksheets without documentary proof would
be insufficient to grant relief as against the service tax of
41,11,473/-
for the period 2008-2009.
5. It was also ruled that the assessee had not separately disclosed
details of the gross receipts (as receiver of service) of the said services
in the taxable value in the half-yearly ST-3 Returns filed by them with
the department, with intent to evade payment of service tax. On the
eligibility of CENVAT Credit, the onus of furnishing the ev idence or
documents indicating factual eligibility of CENVAT credit within the scope
of Rule 3(1) of the CENVAT Credit Rules, 2004 (hereafter “CENVAT
Rules”) had not been discharged by the assessee. The Comm issioner
was of the view that the assessee was aware of the prov isions 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 wa s therefore,
warranted.
6. Aggrieved by the impugned order, the assessee filed two appeals
before the CESTAT. As far as the third appeal5 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 6
demanding service tax of
4,36,75,590/- and
7,55,48,448/- for the
period April 2012 to April 2013, and April 2013 to September 2014
respectively, along with interest and penalty.
5 Service Tax Appeal No. 21502/2017
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
7. The assessee filed detailed replies on 02.07.2014 and 31.12.2015,
mainly arguing that service tax cannot be demanded as the se rvices
provided by foreign affiliates do not fall under manpower recruitment or
supply agency services for the period prior to negative list. Further, for
the period after the introduction of the negative list, the definition of the
term ‘service’ under the Finance Act, specifically excluded service
provided by the employee to the employer. Therefore, the amount paid
to the foreign entity as reimbursement of salary of the seconded
employees cannot be construed as consideration for supply of manpower
services.
8. The Commissioner, Bangalore by order7 dropped the proposals
in the SCN for the period April 2012 to March 2013 and April 2013 to
September 2014, thereby setting aside demands for service tax of
4,36,75,590/- and
7,55,48,448/- respectively (total
11,92,24,038/-).
However, based on a reading of the Secondment Agreem ent, the
Commissioner by order dated 27.02.2017/16.06.20178 held that firstly,
seconded employees continued on their foreign employer’s payroll only
for continuing social security benefits and for all practical purposes the
asseesee was the employer of such seconded employee. Secondly, during
secondment, those employees had to entirely devote their ski ll and
knowledge towards achieving the purpose of their secondment. Thirdly,
each employee had to report to and be responsible to the assessee.
Fourthly, a look at one sample agreement showed that it was between
the individual and the asseesee, and not between the overseas entity and
the asseesee. Fifthly, the obligation to honour the compensation agreement
was upon the assessee only. Sixthly, the facts were parallel to Volkswagen
India Pvt. Ltd9, in which the CESTAT decided the matter in favour of
the assessee. Seventhly, there was no supply of manpower rendered to
the assessee by the foreign holding company and the method of salary
disbursement is not determinative of the nature of the tr ansaction.
Eighthly, for the period post 2012, the remittance is a reimburseme nt
based on actuals and there is no amount which is payable in respect of
the activity in question and therefore there is no consideration involved.
6 Bearing C No. IV/16/153/2014- ST. Adjn. (SCH No. CA U/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
7 Order-in-Original No. 54-55/2016-17 dated 27.02.2017/16.06.2017
8 Order-in-Original No. 54-55/2016-17 dated 27.02.2017/16.06.2017
9 2014 (34) STR 135
915
9. Aggrieved by the Commissioner’s order dropping the demand,
the Revenue has filed an appeal challenging 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 r elation to
recruitment or supply of manpower temporarily or otherwis e. It was
noted that the scope of the term “manpower recruitmen t of supply
agency” was spelt out in Para 22.3 in the Circular of 27.07.200510. 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 t o be called as
manpower recruitment or supply agency was that it should be “any
person”, engaged in providing a specified service; the specifi c service
ought to be recruitment of manpower which should be provided
temporarily or otherwise; such service may be provided d irectly or
indirectly and in any manner – further that the service should be provided
to some other person. According to CESTAT, the definition of “manpower
recruitment or supply agencies” brought under its ambit tw o types of
activity, i.e., manpower recruitment and manpower s upply, and
furthermore, service became taxable only if provided by a m anpower
recruitment or supply agency. CESTAT reasoned that in the pr esent
case, it was concerned with supply of manpower after July 2012, when
definition of service specifically excluded certain transactions, such as
the one provided by an employee to an employer in r elation to
employment.
11. The CESTAT then, on an examination of the agreements,
interpretation of documents on record (including the agreements entered
by the respondent with its group company), held that the subject matter
of the contract was not supply of manpower. The group companies were
not engaged in supply of manpower. The CESTAT held tha t those
seconded to the assessee working in the capacity of employee s and
receiving salaries by group companies were only for disbu rsement
10 Circular F.No.B1/6/2005-TRU
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
purposes. The employee-employer relationship existed an d that the
activity, therefore, could not be termed as “manpower recruitment and
supply agency.” It was held that the assessee obtained from its group
companies directly or by transfer, service of expatriate employees who
were paid salaries by the assessee in India, for which tax was deducted
and paid to statutory benefits – such as provident fund. The assessee
also remitted contributions to be paid toward social security and othe r
benefits on account of the employees, under the laws applicable to the
group companies abroad. In these circumstances, it was held th at the
overseas group companies which had contracted with the assessee were
not in the business of supply of manpower and that the assessee was not
a service recipient. On the strength of this reasoning, the assessee’s
appeals were allowed and the revenue’s appeals were re jected.
Contentions of Revenue
12. Mr. Balbir Singh, learned ASG relied upon the materi als
produced before the CESTAT. He submitted that in terms of the Services
Agreement (dated 01.09.2006), by Clause 8, the assessee NOS agreed
to perform or provide to the foreign group company (Northern Trust
Company) various services which were enumerated in Attachment 1 or
such other services as would 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 asses see was
to provide “general back office and operational support” to the foreign
group company which included foreign investment, in vestment
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 th e 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 Tr ust
Management Services Ltd. (an overseas group company - also “NTMS”)
and the assessee. The ASG relied broadly on Article I by which parties
917
agreed that the assessee would request for the secondment of employees
to be remunerated through the payroll of their foreign employer. Reliance
was also placed upon Article III which stated that the ass essee had to
reimburse the expenses paid during the secondment period, in respect of
remuneration of the seconded employees, including the salary, incentive,
out of pocket expenses, etc. It was urged that this claus e specifically
stated that the payments by the assessee would be limited to actual
costs incurred, including administrative clause reasonably attributable to
services. The payment mechanism was spelt out in Article IV. The learned
ASG also referred to the independent letter of agreement between the
foreign group company and one of the seconded employees wh ich
specifically stated that secondment was a limited duration assignment in
terms of which the employee had the right to terminate the engagement.
It was submitted that a clause would clearly indicate that apart from the
remuneration normally paid, such seconded employees were entitled to
annual home leave allowance – including for members of the family; car
rental costs; and housing – monthly rent for which was fixed at
3,97,500.
Furthermore, allowances toward packing, shipment, storage, temporary
lodging, rest and recreation, trip allowance, etc. were fixed. It was
highlighted that in terms of this agreement, the base salary and bonus of
the employee clause read as follows:
“Effective with your assignment in Bangalore, India , your
base salary will be US$ 3,30,000/-.
In addition to the salary liability, servant allowa nce and
hardship allowance (fixed at 20% of the base salary duri ng
the assignment in Bangalore was payable..”
14. The revenue contended that looking at an overall reading of
the agreement, i.e. services agreement dated 01.09. 2006 and its
attachment, the master service agreement dated 12.02.2009 (wi th its
annexures), the secondment agreement dated 01.04.2007, and the
secondment assignment letter or agreement with the concerned employee
clearly showed that the overseas employer provided the services of its
employees to the assessee for the performance of agreed t asks. These
tasks were handed over to the assessee by the overseas group company.
It was not as if the assessee was free in regard to the manner of
performance of the jobs 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
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
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 t o, through
the seconded employees concerned. Yet, the fact remained that upon
the cessation of the assignment, the employees reverted b ack 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 t he
materials on record clearly establish that the arrangement be tween the
assessee and its overseas group companies – apparent through the various
conditions spelt out in different documents- was one of a contr act for
service. In other words, what was provided to the ass essee by the
overseas counterpart or group companies were services thr ough its
employees. These services directly pertained to the discharge of functions
of the assessee.
16. It was argued that CESTAT’s reasoning that the contra ct
between the parties was not one in which the overseas group company
supplied services, was erroneous. In this context, it was urged t hat the
mere fact that the temporary control over the manner of performance
of duties of the employees seconded did not take away or diminish the
fact that their real employer was none other than the overseas company.
The scale of payments made to such seconded employees was o f such
magnitude that they were regarded as highly skilled for the performance
of specific tasks by the assessee.
17. It was argued that the real reason or purpose f or the
secondment by the overseas companies to the assessee was to e nsure
that their expertise was utilized for the performance of tasks by the
assessee in terms of the service agreement and the ma ster services
agreement. Such secondment, it was contended, used their skill sets and
expertise, to ensure the quality required by the overseas employer.
18. The learned ASG relied upon the decision of the Supreme
Court in Commissioner of Income Tax v. M/s. Eli Lilly & Company
India Pvt. Ltd. 11. Reliance was also placed on Klaus Vogel’s Treatise
on Double Taxation12. He also placed reliance on the judgment of this
11 (2009) 15 SCC 1
12 Klaus Vogel on Double Tax Conventions , Den Haag: Wolters KLuwer, Law and
Business (2015).
919
Court in Smt. Savita Garg v. The Director, National Heart Institute 13;
Workmen of Nilgiri Cooperative Marketing Limited v. State of Tamil
Nadu & Ors. 14; Silver Jubilee Tailoring House v. Chief Inspector of
Shops15; Hussain Bhai Calicut v. Alath Factory Thozhilali 16 and
Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd .17.
19. It was submitted that whether a particular contract is one for
providing services or not is to be decided on the facts of an indi vidual
case. Further, the fact of control over the manner of perform ance of
duties or any one such singular factor cannot be decisive. It was submitted
that the facts of the present case clearly establish tha t the overseas
company entered into specific secondment agreements by whic h its
employees were deputed to work in the assessee’s establi shment. The
tasks performed by them were in aid of the assessee’s work which was
undertaken by it in the service agreement with the oversea s company.
The salary, allowances the duration of the secondme nt, were all
determined by the overseas employer and not by the assessee . Upon
completion of the assignment, the seconded employees were t o 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 he r or his
original position with the foreign employer. Upon an overview of all these
circumstances, it was clear that the contract between t he 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 S ection
65(105)(k) of the Finance Act, 1994 makes it clear that the ‘manpower
recruitment and supply agency service’ seeks to bring under its ambit
two types of activities i.e. recruitment of manpower and supply of
manpower. Further the service becomes a taxableservice only if provided
by a manpower recruitment or supply agency. In the prese nt case, the
13 (2004) 8 SCC 56
14 (2004) 3 SCC 514
15 (1974) 3 SCC 498
16 (1978) 4 SCC 257
17 (2021) 7 SCC 151
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
dispute pertains to whether the secondment of emplo yees by the
groupcompanies to the Respondent will be regarded as supply of
manpower.
21. It was argued that Circular F. No. B1/6/2005-TRU dated
27.07.2005 clarified the scope of ‘Manpower Recruitment or Supply
Agency’ service to include staff who are not contractually employed by
the recipient but come under his direction. This vie w is further
strengthened by Master Circular No. 96/7/2007-ST, dated 23.08.2007.
It was contended that post July 2012, under the Negative List Regime,
by Section 65 (44) of the Finance Act, 1994, the services provided by an
employee to the employer in the course of employment are kept beyond
the ambit of the definition of ‘service’. Thus, the positio n of law both
prior to as well as post July 2012 is same. Employee-employer relationship
is outside the scope of the said service. The categ ory of supply
ofmanpower by an agency covers those cases where the manpow er so
supplied, comes under the direction and control of the recipient without
contractual employment.
22. Learned counsel argued that, ever since the introduction of
service tax in India, service by an employee to anemployer w as never
subject to service tax. There is no country in the world which leviesVAT/
GST on employment service, or any services rendered by an employee
to theemployer.
23. Counsel urged that the agreements entered by the assess ee
with its group companies were to provide certain specialized servi ces.
The seconded personnel are contractually hiredas th e assessee’s
employees. Control over them is exercised by theass essee. Such
employees devote all their time and efforts under the direction of the
assessee; their remuneration is also fixed by it. The employees seconded
to India are required to report to the assessee’s designated offices. They
are accountable for their performance to the assessee; the process of
dispersal of the salaries and allowances is solely for the sake of
convenience and continual of the social security benefits in the exp ats
home county.
24. It was urged that in Collector of Central Excise & Service
Tax v. Nissin Brake India (P) Ltd18, this court while considering similar
set of facts dismissed the revenue’s appeal, which had chall enged the
18 Civil Appeal Diary No(s). 45344/2018 (C.A. No. 2408 / 2019)
921
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 a re
engaged in providing personal financial services (PFS) and Corporate
and Institutional services along with investment products. The for eign
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 is placed on the judgment of
the Delhi High Court in Intercontinental Consultants and Technocrats
Pvt. Ltd. v. Union of India19, which held that Rule 5(1) of Service Tax
(Determination of Value) Rules, 2006 goes beyond the mandate of Section
67 of the Finance Act, 1994 as quantification of the value of the service
can never exceed the gross amount charged by the service provider for
the service provided by him. This position was upheld by t his court in
Intercontinental Consultants and Technocrats Pvt. L td20. In the
present case, the demand of the service tax is being computed on the
salaries and allowances paid to the employees. The salar ies cannot be
said to be consideration paid to group companies for provision of service
and thus such demand (of service tax in lieu of salaries), is untenable.
Therefore, any cost or expense reimbursed does not represent the gross
value of taxable service and cannot be a consideration for charging service
tax.
27. Counsel argued that debit notes raised by the overseas entity
upon the assessee show that amounts paid were towards reimbursement
of salaries and other allowances to employees. There was no mark-up
charged by the foreign company.
28. It was next submitted that the demand to the extent of
8,12,62,382/- for the period October 2006 to September 2010, should be
set aside. The assessee was underthe bona fide belief that the seconded
19 2013 (29) S.T.R. 9 (Del.)
20 (2018) 4 SCC 669.
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
employees were its employees and therefore, not covered under the
ambit of manpower supply services. Further, in anycase, the assessee is
entitled to avail refund of the service tax paid on input servicesunder
Rule 5 of the CENVAT Rules read with Rule 6A of the Se rvice Tax
Rules, 1994. Therefore, there can be no intention to evade tax. Counsel
also urged that the bona fide belief was further strengthened by the
fact that for the subsequent period (April 2012 to September 2014), the
Adjudicating Authority itself dropped the demand by recording favourable
findings.
29. It was lastly urged that services received by the asse ssee
from foreign group companies would qualify as input services and that it
is eligible to avail credit of service tax paid on such in put services.
Therefore, even if the said demand of service tax is paid, t he entire
amount is available as input credit and is refunded to the Respondent in
cash by virtue of Rule 5 of the CENVAT 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
dated17.08.2021 before this court. It is also on record that all the refund
claims filed by the assessee had largely been granted b arring small
amounts which were paid against input services such as Cl earing and
Forwarding Agent Services, Courier Services, Information Technology
Software Services. In this regard, reliance is placed on SRF Ltd. v.
Commissioner21 and Commissioner of Central Excise v. Coca Cola
India Pvt. Ltd 22.
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:
Old provisions of the
Act
“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
21 2016 (331) ELT A 138 (S.C.)
22 2007 (213) ELT 490 (S.C)
923
any advice, consultancy or technical assistance, in relation
to financial management, human resources management ,
marketing management, production management, logist ics
management, procurement and management of informati on
technology resources or other similar areas of management; ]
xxxxxx xxxxxx xxxxxx
23(68) “manpower recruitment or supply agency” means a ny
[person) engaged in providing any service, directly or
indirectly, in any manner for recruitment or supply of
manpower, temporarily or otherwise, ‘’[to any other person) ;]
xxxxxx xxxxxx xxxxxx
(105) “taxable service” means any service provided 24[or to
be provided],-
xxxxxx xxxxxx xxxxxx
25[(k) 26[to any person], by a manpower recruitment or
supply agency in relation to the recruitment or sup ply of
manpower, temporarily or otherwise, in anymanner.]
27[Explanation.—For the removal of doubts, it is here by
declared that for the purposes of this sub-clause, recrui tment
or supply of manpower includes services in relation to pre-
recruitment screening, verification of the credenti als and
antecedents of the candidate and authenticity of do cuments
submitted by the candidate;..”
The provisions, post amendment in 2012 (w.e.f. 01.07.2012), read
as follows:
Amended provisions
of the Act
“Interpretations.
65B.In this Chapter, unless the context otherwise requi res, -
xxxxxx xxxxxx xxxxxx
23 Substituted by the Finance Act, 2005, w.e.f. 16.06.2005.
24 Inserted by the Finance Act, 2005, w.e.f. 16.06.2005.
25 Substituted by the Finance Act, 2005, w.e.f. 16.06.2005.
26 Substituted for “to a client” by the Finance Act, 2008, w.e.f. 16.05.2008.
27 Inserted by the Finance Act, 2007, w.e.f. 01.06.2007.
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
(44) “service” means any activity carried out by a person fo r
another for consideration, and includes a declared se rvice,
but shall not include-
(a) an activity which constitutes merely, -
(i) a transfer of title in goods or immovable property, by way
of sale, gift or in any other manner; or
(ii) such transfer, delivery or supply of any goods which is
deemed to be a sale within the meaning of clause (2 9A) of
article 366 of the Constitution; or
(iii) a transaction in money or actionable claim;
(b) a provision of service by an employee to the employ er in
the course of or in relation to his employment;
(c) fees taken in any Court or tribunal established under any
law for the time being in force.
Explanation 1.- For the removal of doubts, it is hereby declared
that nothing contained in this clause shall apply to,-
(A) the functions performed by the Members of Parlia ment,
Members of State Legislative, Members of Panchayats ,
Members of Municipalities and Members of other loca l
authorities who receive any consideration in performing th e
functions of that office as such member; or
(B) the duties performed by any person who holds any p ost
in pursuance of the provisions of the Constitution in that
capacity; or
(C) the duties performed by any person as a Chairperson o r
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.
925
Explanation 3.- For the purposes of this Chapter —
(a) an unincorporated association or a body of pers ons, as
the case may be, and a member thereof shall be treat ed as
distinct persons;
(b) an establishment of a person in the taxable territory and
any of his other establishment in a non-taxable territory shall
be treated as establishments of distinct persons.
Explanation 4.- A person carrying on a business through a
branch or agency or representational office in any ter ritory
shall be treated as having an establishment in that territ ory;”
The agreements and their relevant stipulations
31. The first in the series of relevant documents, is the Services
Agreement. It was entered into between Northern Trust Company (the
overseas group entity, known hereafter as “NTC”) and the assessee. In
terms of the services agreement (dated 01.09.2006), it was acknowledged
that the assessee was engaged in providing “incidental back-office
support services” which it agreed to provide to NTC. By c lause 2, it
was agreed that:
“2. Consideration: The consideration for performance of the
services shall be paid on a mutually agreed basis as descri bed
in Attachment 1 ”
By clause 8, the services to be performed by the assessee were
also set out in Attachment 1. Their description reads as follows:
“Service: IT enabled services supporting back-office bankin g
and related operations”
The part relating to consideration, i.e., fee (payable to the assessee)
reads as follows:
“Beginning September 1 2006, NOS shall charge North ern
Trust for all actual costs incurred in providing th e agreed
services, plus a mark up of 15.0%. …”
32. The provisions of the secondment agreement, entered between
NTMS and the assessee, to the extent relevant read as follows :
“SECONDMENT AGREEMENT
This SECONDMENT AGREEMENT (this “Agreement”) is
entered into and effective April 1, 2007 byand between :
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
Northern Trust Management Services Ltd a company
incorporated under the laws of the UnitedKingdom with its
principal office located at 50 Bank Street, London, E14 5NT,
(hereinafter referred toas “NTMS’),
and
Northern Operating Services Private Limited, a comp any
organised and existing under the laws ofIndia and having its
principal office at RMZ Ecospace Campus 1C, Sarjapur Outer
Ring Road,Bangalore-5600037, India (hereinafter ref erred
to as “NOS”).
WITNESSETH:
xxxxxx xxxxxx xxxxxx
ARTICLE I
SECONDMENT
NOS shall request NTMS to provide employees (“the
Employees) who have the expertise required byNOS. In order
to help NTMS make the selection, NOS shall provide NTM S
with a description of theskills and competencies requir ed by
NOS. Based on the list provided by ÒOS, 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”) withcommencemen t
dates and completion dates, as reflected in Appendix I and
Appendix II of thisagreement. Appendix I and Append ix II
will be updated from time to time to reflect any changes m ade
asa result of Article II (E) or Article II (G) or Artic le II (H).
The employees seconded to NOS shall continue to be
remunerated through the payroll of NTMS only forthe 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:
927
(A) The Employee shall act in accordance with the instru ctions
and directions of NOS.
(B) During the Secondment Period, the Employees shall devote
the whole of their time, attention andskills to the duties of
their secondment.
(C) The employees shall be reportable and responsible to NO S.
(D) All the responsibility and risk for work undert aken by
the Employees will remain with NOSduring the Secondm ent
Period.
(E) NOS shall have the right, at any time, to approve or rejec t
the Employee selected for secondmentand to request from
NTMS the replacement of any Employees who, in the opinion
of NOS, arenot qualified or do not meet the require ments
necessary to fulfil their Secondment,
xxxxxx xxxxxx xxxxxx
(H) All terms and conditions of employment with NTMS wi ll
cease during the Secondment Period.The terms and conditions
of employment with NOS, as stated in the employment
agreementsbetween the Employees and NOS will remain in
force during the Secondment Period.
xxxxxx xxxxxx xxxxxx
ARTICLE III
DUTIES AND OBLIGATIONS OF NOS
NOS reimburse expenses paid by NTMS as follows:
During the Secondment Period, as defined in Appendix I and
Appendix II hereto, NOS shall reimburseNTMS for the
following amounts (collectively the “Reimbursable
Expenses”):
(1) All remuneration of the Employees, including but not limited
to, salary, incentives and employmentbenefits of the Empl oyees
paid by NTMS; and
(2) All out-of-pocket expenses incurred by the seco nded
Employees and reimbursed by NTMS,including but not limit ed
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
to, business travel expenses and other miscellaneous expenses ,
directlyrelated to the secondment of the Employee.
It is specifically agreed that the payments by NOS to NTMS
shall be limited to actual costs incurred,including
administrative costs, as may be reasonably attribut able to
payroll services provided by NTMS.Administrative co st for
this purpose would be 1% of actual cost incurred. The parties
agree that during the Secondment Period, the role of NTMS
is restricted to that of a payroll services provider only.
ARTICLE VII
INDEMNIFICATION
NTMS will endeavor to provide appropriate qualified
Employees for secondment under this Agreement.Nothi ng in
this Agreement, shall be construed as a warranty of the qual ity
of the seconded Employees.
Further NOS shall hold NTMS harmless and shall indemnify
NTMS from all claims, demands, suits,actions, loss, d amage,
costs and expenses (excluding consequential loss or damage)
to which NTMS maybecome liable in respect to any and a ll
loss, damage or injury as a result of any act or omission by
theseconded Employee.
The master services adverted to earlier, between NTC (gr oup
company) 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 i n 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, whos e
929
principal place of business in India is at 2nd Floo r, RMZ
Ecospace Campus 10, Sarjapur Outer Ring Road, Bangalore
560037, India (“NOS”). TNTC Chicago and NOS are
hereinafter collectively referred to as “Parties” a nd
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 Chicag o
agrees that it will provide proper information and assistan ce
to NOS by making reasonable efforts in order for NO S to
have access to the data and assistance required in or der to
properly carry out the duties contemplated by this Agreeme nt
to be performed by it.
3.2 It is understood and agreed that the Services perf ormed
hereunder by NOS for TNTC Chicago shall be carried out
in accordance with policies, authorities, and proced ures as
are or may be established and authorized by TNTC Chicago.
xxxxxx xxxxxx xxxxxx
SCHEDULE 3 — FEES & DETERMINATION THEREOF
1. The fees for the Services shall be payable by TNTC Chicago
for the Services rendered by NOS for TNTC Chicago.
2. The fees for the Services performed by NOS unde r the
Agreement shall be the Total Service Costs (as defined belo w)
incurred by NOS for rendering the Services plus a m ark-up
on the Total Service Cost. Mark-up shall be 15% on Total
Service Costs for the period of agreement. This shall be revised
from time to time depending upon the market conditions and
transfer pricing requirements.
xxxxxx xxxxxx xxxxxx”
The letter of understanding issued to one of the se conded
employees, to the extent it is relevant, reads as follows:
“LETTER OF UNDERSTANDING
August 6, 2012
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
Dear Brian Ovaert,
This letter of agreement between Northern Operating Servi ces
Private Limited (NOS) and Brian Ovaert confirms our mutual
understanding of the terms and conditions applying to your
employment with the Company while on international
assignment to Northern Operating Services Pvt. Ltd. in the
position of Regional Executive reporting directly to NOS Board
of Directors.
xxxxxx xxxxxx xxxxxx
Duration
The effective date of your international assignment is July 1,
2012, and it is expected that your assignment to an d
employment with NOS will be 12 months in duration. At its
conclusion, repatriation will be in accordance with the Global
Mobility Repatriation Policy. Alternatively, by mut ual
agreement, your assignment to and employment with NOS may
be extended. Should this be the case, an extension letter wil l
be entered into between NOS and yourself.
However, you have the right to terminate your employment at
any time
for any reason and the Company has the same right.
xxxxxx xxxxxx xxxxxx
Vacation/Local Public Holidays Your annual vacation
entitlement is currently 20 days. You will be entit led to all
local public holidays observed by NOS. However, you must
use vacation days to observe any United States publ ic
observed holiday that is not observed in NOS. A list of NOS’
public holidays maybe foundon My Place.
Home Leave During your assignment, you will be prov ided
the following HomeLeave Options:
You may elect to receive an annual home leave allowance for
each member of your immediate family to Chicago for t wo
home leave trips.
This allowance is non-accountable and is intended t o cover
airfare and ground transportation to and from the airports in
your home and at Bangalore, India.
931
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 entit lement
will continue if you are on assignment at least six months
from your assignment anniversary date. You will be g ranted
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 annu al home
leave visit.
All accommodation and car rental costs during home lea ve
are your
personal responsibility.
xxxxxx xxxxxx xxxxxx
Housing
Northern Trust willmake arrangements directly with the
landlord/owner of the property of your choice in Banga lore,
India. Do not enter into personal agreements. You should aim
to identify and select a property that will suit you and your
family for the duration of your assignment (taking into accou nt
schools/location). The monthly rent of your selecte d
accommodation should be limited to INR 366,700. In addition,
an annual utility allowance of (NR 397,500 will be pa id to
you. This allowance will cover water, sewer, gas, oil, electricity,
basic telephone service, basic satellite/cable TV ser vice and
initial set-up for broadband service, but will exclude th e cost
of monthly premium satellite/cable TV, monthly telephone calls,
and monthly broadband service.
Packing/Shipping/Storage
A moving firm designated by Northern Trust will ship your
household goods via air and ocean freight. Insuranc e at a
reasonable value amount on both of these shipments will also
be covered by the Company. Household goods that are not
shipped to Bangalore, India will be stored if required for the
duration of your assignment and the costs of storag e and
Insurance premiums will be met. You should note that certain
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
items may be excluded from shipment and storage. Yo u will
be advised if this is the case. Your air shipment allotment Is
600 lbs. for you and your spouse.
Furniture Allowance in Lieu of Shipment
In lieu of shipping some or all of your current hou sehold
furnishings via ocean freight to Bangalore, India, you can
receive a “furniture allowance” which would be an amo unt
based on country norms. Your furniture allowance is USD
$9,000.
xxxxxx xxxxxx xxxxxx
Personal Vehicle Disposal
You will be reimbursed for a loss you incur when selling your
personal vehicle(s), upon initial transfer to Bangalore , India
up to a maximum of US$5,000 for each car. Details of the car
losson-sale policy are described in the Global Mobility Policy .
R&R Trips
You will be provided two (2) R & R trips in a 12 month per iod
for you and your spouse to leave Bangalore, India. These
trips are in addition to your two annual home leave trips. The
R & R allowance is non- accountable and is intended to assist
with hotel and airfare costs. Providing an allowance al lows
you the flexibility to choose the length and destination of your
R & R trips. The allowance per trip for your family size of 2 is
USD$2,100.
xxxxxx xxxxxx xxxxxx
Base Salary and Bonus
Effective with your assignment in Bangalore, India your bas e
salary will be 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 Mobili ty
Allowance is specifically compensating you for any incidental
additional expenses incurred as a result of your assignm ent.
933
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 wi ll 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, et c. An
allowance of $2,000/yr. will be paid to you by Broo kfield
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 disch arge of its
functions through seconded employees.
34. The contemporary global economy has witnessed rapid cross-
border arrangements for which dynamic mobile workforces are optimal.
To leverage talent within a transnational group, employees are frequently
seconded to affiliated or group companies based on business
considerations. In a typical secondment arrangement, em ployees of
overseas entities are deputed to the host entity (Indian associate) on the
latter’s request to meet its specific needs and requirements of the Indian
associate. During the arrangement, the secondees work under the control
and supervision of the Indian company and in relation to the work
responsibilities of the Indian affiliate. Social security laws of the home
country (of the secondees) and business considerations result in payroll
retention and salary payment by the foreign entity, which is claimed as
reimbursement from the host entity. The crux of the issue is the taxability
of the cross charge, which is primarily based on who should be reckoned
as an employer of the secondee. If the Indian company is treated as an
employer, the payment would in effect be reimbursement and not
chargeable to tax in the hands of the overseas entity. How ever, in the
event the overseas entity is treated as the employer, the a rrangement
would be treated as service by the overseas entity and ta xed.
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
35. In Director Income Tax v. M/S Morgan Stanley & Co. Inc 28
this court had to consider whether an arrangement involving secondment,
in the context of liability to income tax. The court had observed:
“17. As regards the question of deputation, we are of the
view that an employee of MSCo when deputed to MSAS does
not become an employee of MSAS. A deputationist has a lien
on his employment with MSCo. As long as the lien rema ins
with MSCo the said company retains control over the
deputationist’s terms and employment. The concept o f a
service PE finds place in the UN Convention. It is constit uted
if the multinational enterprise renders services th rough its
employees in India provided the services are rendered for a
specified period. In this case, it extends to two years on the
request of MSAS. It is important to note that where the
activities of the multinational enterprise entails it being
responsible for the work of deputationists and the employe es
continue to be on the payroll of the multinational enter prise
or they continue to have their lien on their jobs w ith the
multinational enterprise, a service PE can emerge.
18. Applying the above tests to the facts of this case w e find
that on request/requisition from MSAS the applicant dep utes
its staff. The request comes from MSAS depending up on its
requirement. Generally, occasions do arise when MSAS needs
the expertise of the staff of MSCo. In such circums tances,
generally, MSAS makes a request to MSCo. A deputati onist
under such circumstances is expected to be experien ced 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 vent ure. The
employees, however, continued to remain on the rolls of the for eign
company. They received home salary outside India from the fore ign
partner. The joint venture company deducted tax under Section 192(1)
28 (2007) 7 SCC 1
935
in respect of the salary paid by it to the expatriates in India, and did not
deduct tax in respect of the home salary paid by the f oreign company.
This court held that the provisions of the tax deduction at source (TDS)
under the Income Tax Act, were applicable in relation to the salary paid
by the foreign employer.
37. The CESTAT, in this case, relied on its previous rul ings in
Honeywell Technology Solutions Pvt. Ltd. v. CST, Bangalore 29. It
held that that the method of disbursement of salary cannot deter mine
the nature of the transaction, based on the ruling in Volkswagen India
Pvt. Ltd. v. CCE, Pune-I 30 which was affirmed by this court by an
order31. Another order, in Computer Sciences Corporation India Pvt.
Ltd. v. Commissioner of Service Tax, Noida32 similarly affirmed by this
court by another order, was relied on.
38. Questions that have repeatedly arisen, in different cont exts,
and at different times, is whether the facts of a given case re veal, who
is the employer, and whether the relationship between an employee and
another, is one of master servant, or whether there is a n underlying
contract for service, by which the real employer, lends the s ervices of
his employee to another. In Dharangadhara Chemical Works Ltd. v.
State of Saurashtra33 this court observed as follows:
“The principle which emerges from these authorities is that
the prima facie test for the determination of the relati onship
between master and servant is the existence of the right in the
master to supervise and control the work done by the servant
not only in the matter of directing what work the servant i s to
do but also the manner in which he shall do his work, or to
borrow the words of Lord Uthwatt at p. 23 in Mersey Docks
and Harbour Board v. Coggins & Griffith (Liverpool) Ltd.
[(1952) SCR 696, 702] “The proper test is whether or not the
hirer had authority to control the manner of execution of the
act in question.”
39. In D.C. Dewan Mohideen Sahib and Sons v. Secretary,
United Beedi Workers’ Union 34, the court analysed the sample
29 2020-TIOL-1277-CESTAT-BANG
30 2014 (34) S.T.R. 135 (Tri. - Mumbai)
31 Commissioner v. Volkswagen India (Pvt.) Ltd. - 2016 (42) S.T.R. J145 (S.C.).
32 2014-TIOL-434-CESTAT DEL
33 1957 SCR 158
34 1964 (7) SCR 646
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
agreement which disclosed the facts of the case before it, and, for the
first time, held that the “control” test is not necessarily determinative to
discern the real employer:
“…There is in our opinion little doubt that this syst em 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-c alled
independent contractors have really no independence at all.
As the appeal court has pointed out they are impecu nious
persons who could hardly afford to have factories o f their
own. Some of them are even ex-employees of the Appella nts.
The contract is practically one-sided in that the pr oprietor
can at his choice supply the raw materials or refuse to do s o,
the so-called contractor having no right to insist upon the
supply of raw materials to him. The so-called indep endent
contractor is even bound not to employ more than nine perso ns
in his so-called factory. The sale of raw materials to t he 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 t hat when
the manufactured bidis are delivered by him to the Appellants,
amounts due for the so-called sale of raw materials is
deducted from the so-called price fixed for the bidis. In effe ct
all that happened is that the so-called independent contractor
is supplied with tobacco and leaves and is paid cer tain
amounts for the wages of the workers employed and fo r his
own trouble. We can therefore see no difficulty in holding
that the so-called contractor is merely an employee or an agent
of the Appellants as held by the appeal court and a s such
employee or agent he employs workers to roll bidis on behalf
of the Appellants. The work is distributed between a number
of so-called independent contractors who are told n ot to
employ more than nine persons at one place to avoid
Regulations under the Factories Act.”
40. In Silver Jubilee Tailoring House v. Chief Inspector o f
Shops & Establishments35 this court remarked how the test of control,
35 1974 (1) SCR 747
937
or manner of performance of a task, by an employee by another i s not
conclusive to decide if an employer employee relationship subsists:
“This distinction (viz., between telling a servant wha t to do
and telling him how to do it) was based upon the so cial
conditions of an earlier age; it assumed that the employer of
labour was able to direct and instruct the labourer as to t he
technical methods he should use in performing his work. In a
mainly agricultural society and even in the earlier sta ges of
the Industrial Revolution the master could be expected to be
superior to the servant in the knowledge, skill and experie nce
which had to be brought to bear upon the choice and handling
of the tools. The control test was well suited to g overn
relationships like those between a farmer and an agricultural
labourer (prior to agricultural mechanization) a cr aftsman
and a journeyman, a householder and a domestic serv ant,
and even a factory owner and an unskilled ‘hand’. It reflects
a state of society in which the ownership of the me ans of
production coincided with the profession of technic al
knowledge and skill in which that knowledge and skil l was
largely acquired by being handed down from one generation
to the next by oral tradition and not by being systemati cally
imparted in institutions of learning from universities down t o
technical schools. The control test postulates a com bination
of managerial and technical functions in the person of the
employer i.e. what to modern eyes appears as an imper fect
division of labour. [See Prof. Kahn-Freund 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 co ntract 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 eq ually
clear that no magic formula can be propounded, which factors
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
should in any case be treated as determining ones. The plain
fact is that in a large number of cases, the Court ca n only
perform a balancing operation weighing up the factors which
point in one direction and balancing them against t hose
pointing in the opposite direction [See Atiyah, PS. “Vicariou s
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, has been followed in other decisions, such as Indian
Banks Association v. Workmen of Syndicate Bank 36and Indian
Overseas Bank v. Workmen 37. The recent decision in Sushilaben
Indravadan (supra) reviewed a large number of previous judgments,
and observed that:
“24. A conspectus of all the aforesaid judgments would show
that in a society which has moved away from being a simple
agrarian society to a complex modern society in the comput er
age, the earlier simple test of control, whether or not ac tually
exercised, has now yielded more complex tests in or der to
decide complex matters which would have factors bot h for
and against the contract being a contract of service as ag ainst
a contract for service. The early ‘control of the e mployer’
test in the sense of controlling not just the work that is given
but the manner in which it is to be done obviously breaks
down when it comes to professionals who may be employ ed.
A variety of cases come in between cases which are cr ystal
clear-for example, a master in a school who is employed li ke
other employees of the school and who gives music les sons
as part of his employment, as against an independen t
professional piano player who gives music lessons to per sons
who visit her premises. Equally, a variety of cases arise
between a ship’s master, a chauffeur and a staff report er, as
against a ship’s pilot, a taxi driver and a contrib utor to a
newspaper, in order to determine whether the person employed
could be said to be an employee or an independent
professional. The control test, after moving away from act ual
control of when and how work is to be performed to the right
to exercise control, is one in a series of factors w hich may
36 2001 (1) SCR 1011
37 (2006) 3 SCC 729
939
lead to an answer on the facts of a case slotting suc h case
either as a contract of service or a contract for servic e. The
test as to whether the person employed is integrated into t he
employer’s business or is a mere accessory thereof is another
important test in order to determine on which side of the line
the contract falls. The three-tier test laid down by some of the
English judgments, namely, whether wage or other
remuneration is paid by the employer; whether there is a
sufficient degree of control by the employer and other facto rs
would be a test elastic enough to apply to a large variety of
cases. The test of who owns the assets with which the wor k 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 importa nt
test when it comes to work to be performed by indepen dent
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 ove r the
workers’ subsistence, skill and continued employment can al so
be applied when it comes to whether a particular wo rker
works for himself or for his employer. The test laid d own by
the Privy Council in Lee Ting Sang v. Chung Chi-Keu ng
[1990] 2 A.C. 374, namely, is the person who has engag ed
himself to perform services performing them as a per son in
business on his own account, is also an important test, this
time from the point of view of the person employed, in ord er
to arrive at the correct solution. No one test of u niversal
application can ever yield the correct result. It i s a
conglomerate of all applicable tests taken on the tota lity of
the fact situation in a given case that would ultimately yie ld,
particularly in a complex hybrid situation, whether the
contract to be construed is a contract of service or a co ntract
for service. Depending on the fact situation of each cas e, all
the aforesaid factors would not necessarily be relevant, or, if
relevant, be given the same weight. Ultimately, the Court can
only perform a balancing act weighing all relevant factors
which point in one direction as against those which poin t in
the opposite direction to arrive at the correct conclus ion on
the facts of each case.”
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
42. The assessee’s contention before the CESTAT, inter alia,
was that apart from it having control over the nature of w ork of the
seconded employees, no consideration was charged by the foreign entities
from it for providing the supply of manpower as the revenue alleged.
43. A plain reading of the definition of “manpower recruitment
agency” (per Section 65 (68) of the unamended Act) requires that to fall
within that description,
(a) a person (the expression is not defined; however, by Section 3
(42) of the General Clauses Act, the term includes “any company
or association or body of individuals whether incor porated
or not”);
(b) provides service
(c) directly or indirectly,
(d) in any manner for recruitment or supply of manpower,
(e) temporarily or otherwise
44. The question is what are the services provided to the assessee,
and by whom? Do they include the provision of services, through
employees, by its overseas group companies or affil iates? After
01.07.2012, the definition of “service” underwent a change. Except listed
categories of activities excluded from, or kept out of the fold of the
definition, every activity virtually is “service”. Now, by Section 65 (44),
“service” means
(a) any activity
(b) carried out by a person for another
(c) for consideration, and
(d) includes a declared service (the term “declared servi ce” is
defined in Section 66E).
45. Section 65 (44), however, excludes from its sweep [by clause
(b)], “a provision of service by an employee to the employer in the
course of or in relation to his employment.” The assessee contends
that the secondment agreement has the effect of placing t he overseas
employees under its control, so to say, and enables it to require them to
perform the tasks for its purposes. It emphasizes that the real nature of
the relationship between it and the seconded employees is of employer
and employee, and outside the purview 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 servi ce (b)
941
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. O ne 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 effe ct, is to be
seen by the courts. Thus, in State of Orissa v. Titaghur Paper Mills
Co. Ltd38 it was held as follows:
“120. It is true that the nomenclature and description gi ven
to a contract is not determinative of the real natu re of the
document or of the transaction thereunder. These, h owever,
have to be determined from all the terms and clauses of the
document and all the rights and results flowing therefrom a nd
not by picking and choosing certain clauses and the ultimat e
effect or result as the Court did in the Orient Pap er Mills
case (1977) 2 SCR 149)” .
This principle was reiterated in Prakash Roadlines (P) Ltd. v.
Oriental Fire & General Insurance Co. Ltd. 39
48. The task of this court, therefore is to, upon an overall reading
of the materials presented by the parties, discern the true nature of the
relationship between the seconded employees and the assessee, and the
nature of the service provided – in that context - by the overseas group
company to the assessee.
49. A co-joint reading of the documents on record show that:
(i) Attachment 1 to the service agreement ensures that the overseas
group company assigns, inter alia, certain tasks to the assessee, including
back office operations of a certain kind, in relation to its activities, or
that of other group companies or entities;
(ii) The assessee is paid a mark up of 15% of the o verall
expenditure it incurs, by the overseas company (clause 2, read with
attachment 1 of the Service Agreement);
38 1985 Supp SCC 280
39 (2000) 10 SCC 64
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
(iii) By the Secondment Agreement, the parties agree tha t the
overseas employee is temporarily loaned to the assessee (Article I
read with the Schedule);
(iv) During the period of secondment, the assessee has control
over the employee, i.e. it can require the seconded employee to return,
and likewise, the employee has the discretion to terminate the relationship
(Article II);
(v) The overseas employer (group company) pays the seconded
employee, which is reimbursed to the overseas company, by the assessee
(Article III);
(vi) The assessee is responsible for the work of the seconde d
employee, i.e., the overseas employer, during the secondment period, is
absolved of any liability for the job or work of its seconded employees
(Article VII);
(vii) The secondment is for a specified duration, a nd the
employment with the assessee ceases upon the expiration of that period
(Article II of the secondment agreement and the “Duration” clause in
the letter of understanding with the seconded employee);
(viii) The letter of understanding issued to the seconded employee
specifies that the tenure with the assessee is an assignm ent (in one
place, the term used is “ At its conclusion, repatriation will be in
accordance with the Global Mobility Repatriation Policy ”);
(ix) The terms include the salary payable as well a s 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 ar e 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 the m. That it paid
(through reimbursement) the amounts equivalent to the salarie s of the
seconded employees – because of the obligation of the overseas employer
to maintain them on its payroll, has two consequences: one, t hat the
seconded employees continued on the rolls of the overseas employ er;
two, since they were not performing jobs in relation to that employer’s
business, but that of the assessee, the latter had to ult imately bear the
943
burden. There is nothing unusual in this arrangement, given t hat 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 o not seek
reimbursement of the employees’ salaries, since they w ere, for the
duration of secondment, not performing tasks in relation to its activities
or business.
51. As discussed previously, there is not one single determinative
factor, which the courts give primacy to, while deciding whet her an
arrangement is a contract of service (as the assess ee asserts the
arrangement to be) or a contract for service. The general drift of cases
which have been decided, are in the context of facts, where the employer
usually argues that the person claiming to be the e mployee is an
intermediary. This court has consistently applied one test: substance over
form, requiring a close look at the terms of the contract, or the agreements.
52. A vital fact which is to be considered in this case, is that the
nature of the overseas group companies business appears to be to secure
contracts, which can be performed by its highly trained a nd skilled
personnel. This business is providing certain specialized services (back
office, IT, bank related services, inventories, etc.). Taking advantage of
the globalized economy, and having regard to locational advantages, the
overseas group company enters into agreements with its a ffiliates or
local companies, such as the assessee. The role of the as sessee is to
optimize the economic edge (be it manpower or other resources
availability) to perform the specific tasks given it, by the overseas company.
As part of this agreement, a secondment contract is entered into, whereby
the overseas company’s employee or employees, possessing the specific
required skill, are deployed for the duration the task is estimated to
be completed in. This court is not concerned with unravelling the nature
of relationship between the overseas company and th e assessee.
However, what it has to decide, is whether the secondment, for the
purpose of completion of the assessee’s job, amounts to manpower supply.
53. Facially, or to put it differently, for all appearances, the seconded
employee, for the duration of her or his secondment, is under the control
of the assessee, and works under its direction. Yet, the fact remains
that they are on the pay rolls of their overseas employer. What is left
unsaid- and perhaps crucial, is that this is a legal requirement, since
they are entitled to social security benefits in th e country of their
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
origin. It is doubtful whether without the comfort of this assur ance,
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 wi th 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 tr eated 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 allowa nce of
20% of the basic salary for working in India. The monthly housing
allowance in the specific case was
366,700. In addition, an annual
utility allowance of
3,97,500/- is also assured. These are substantial
amounts, and could have been only by resorting to a standardized policy,
of the overseas employer.
55. The overall effect of the four agreements entered into by the
assessee, at various periods, with NTS or other group companies, clearly
points to the fact that the overseas company has a pool of highly skilled
employees, who are entitled to a certain salary structure- as well as
social security benefits. These employees, having regard to their expertise
and specialization, are seconded (a term synonymous with the commonly
used term in India, deputation) to the concerned local municipal entity
(in this case, the assessee) for the use of their skills. Upon the cessation
of the term of secondment, they return to their overseas em ployer, or
are deployed on some other secondment.
56. This court, upon a review of the previous judgme nt in
Sushilaben Indravadan (supra) held that there no one single
determinative test, but that what is applicable 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 c omplex hybrid
situation, whether the contract to be construed is a contract of
service or a contract for service. Depending on the fact situation
of each case, all the aforesaid factors would not n ecessarily be
relevant, or, if relevant, be given the same weight.”
945
57. Taking a cue from the above observations, while the control
(over performance of the seconded employees’ work) and the right to
ask them to return, if their functioning is not as is desired, i s with the
assessee, the fact remains that their overseas employer in relation to
its business, deploys them to the assessee, on secondment. Secondly,
the overseas employer- for whatever reason, pays them their salaries.
Their terms of employment – even during the secondment – are in
accord with the policy of the overseas company, who is their employer.
Upon the end of the period of secondment, they return to their original
places, to await deployment or extension of secondment.
58. One of the arguments of the assessee was that arguendo,
the arrangement was “manpower supply” (under the unamended Act )
and a service [(not falling within exclusion (b) to Section 65 (44)] yet it
was not required to pay any consideration to the overseas group company.
The mere payment in the form of remittances or amounts, by whatever
manner, either for the duration of the secondment, or per employee
seconded, 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 th e
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 a ssessee, can
through a certain existing arrangement, claim the whole or part of the
duty as refund, is an irrelevant detail. The incidence of taxation, is entirely
removed from whether, when and to what extent, Parliament chooses to
recover the amount.
60. This court is also of the view, for similar reasons, th at the
orders of the CESTAT, affirmed by this court, in Volkswagen and
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
Computer Sciences Corporation, are unreasoned and of no precedential
value.
61. In view of the above discussion, it is held that the ass essee
was, for the relevant period, service recipient of the ov erseas group
company concerned, which can be said to have provided manpower
supply service, or a taxable service, for the two different periods in
question (in relation to which show cause notices were issued).
Invocation of the extended period of limitation
62. The revenue’s argument that the assessee had indulged in
wilful suppression, in this court’s considered view, is insubstantial. The
view of a previous three judge ruling, in Cosmic Dye
Chemical v. Collector of Central Excise 40 - in the context of Section
11A of the Central Excise Act, 1944, which is in identical terms with
Section 73 of the Finance Act, 1994 was that:
“Now so far as fraud and collusion are concerned, it is evident
that the requisite intent, i.e., intent to evade duty is buil t into
these very words. So far as misstatement or suppress ion of
facts are concerned, they are clearly qualified by t he word
“wilful” preceding the words “misstatement or suppres sion
of facts” which means with intent to evade duty. The next set
of words “contravention of any of the provisions of t his Act
or rules” are again qualified by the immediately fo llowing
words “with intent to evade payment of duty”. It is, theref ore,
not correct to say that there can be a suppression or
misstatement of fact, which is not wilful and yet const itute a
permissible ground for the purpose of the proviso to Sect ion
11-A. Misstatement or suppression of fact must be wilfu l.”
63. This decision was followed in Uniworth Textiles v.
Commissioner of Central Excise 41 where it was observed that “(t)he
conclusion that mere non-payment of duties is equivalent t o collusion
or willful misstatement or suppression of facts” is “untenable”. This
view was also followed in Escorts v. Commissioner of Central Excise42,
Commissioner of Customs v. Magus Metals 43 and other judgments.
40 (1995) 6 SCC 117
41 (2013) 9 SCC 753
42 (2015) 9 SCC 109
43 (2017) 16 SCC 491
947
64. The fact that the CESTAT in the present case, relied u pon
two of its previous orders, which were pressed into service , and also
that in the present case itself, the revenue discharged the later two show
cause notices, evidences that the view held by the assessee about its
liability was neither untenable, nor mala fide. This is sufficient to turn
down the revenue’s contention about the existence of “wilful suppression”
of facts, or deliberate misstatement. For these reasons, the revenue was
not justified in invoking the extended period of limitation to fasten liability
on the assessee.
Conclusions
65. It is held, for the foregoing reasons, that the assessee was the
service recipient for service (of manpower recruitment a nd supply
services) by the overseas entity, in regard to the employees it seconded
to the assessee, for the duration of their deputation or se condment.
Furthermore, in view of the above discussion, the invocation of the
extended period of limitation in both cases, by the revenue is not tenable.
66. In light of the above, the revenue’s appeals succeed in pa rt;
the assessee is liable to pay service tax for the periods s pelt out in the
SCNs. However, the invocation of the extended period of limitation, in
this court’s opinion, was unjustified and unreasonable. Resultantly, the
assessee is held liable to discharge its service tax liability for the normal
period or periods, covered by the four SCNs issued to it. The consequential
demands therefore, shall be recovered from the assessee.
67. The impugned common order of the CESTAT is accordingly
set aside. The commissioner’s orders in original are accordingly restored,
except to the extent they seek to recover amounts for the extended
period of limitation. The demand against the assessee, for the two
separate periods, shall now be modified, excluding any liability for the
extended period of limitation.
68. The appeals are partly allowed, to the above extent, with no
order on costs.
Divya Pandey and Amarendra Kumar Appeals partly allo wed.
(Assisted by : Ajay, LCRA)
C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]