C.C.,C.E. & S.T. – BANGALORE (ADJUDICATION) ETC VS M/S NORTHERN OPERATING SYSTEMS PVT LTD Case

C.C.,C.E. & S.T. – BANGALORE (ADJUDICATION) ETC VS M/S NORTHERN OPERATING SYSTEMS PVT LTD Case

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले



REPORTABLE

IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 2289-2293 OF 2021
C.C.,C.E. & S.T. – BANGALORE
(ADJUDICATION) ETC. ...APPELLANT(S)
VERSUS
M/S NORTHERN OPERATING SYSTEMS
PVT LTD. ...RESPONDENT(S)
J U D G M E N T
S. RAVINDRA BHAT, J.
1. The Commissioner of Central Excise and Service Tax (hereafter variously
described as “the revenue” or “the appellant”) has preferred 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
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.
2
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 “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 backoffice 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 - which is as follows:
“The relevant terms of the agreement to understand the activity are as follows:
a) When required Appellants requests the group companies for managerial and
technical personnel to assist in its business and accordingly the employees are
selected by the group company and they would be transferred to Appellants.
b) The employees shall act in accordance with the instructions and directions
of Appellants. The employees would devote 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 purpose of continuation of social
security/retirement benefits, but for all practical purposes, Appellants shall be
the employer. During the term of transfer or secondment the personnel shall be
the employee of Appellants. Appellants issue an employment letter to the
seconded personnel stipulating all the terms of the employment.
d) The employees so seconded would receive their salary, 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 shall reimburse the group
3
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 amounts in foreign exchange, which are
reflected in its financial statements. The assessee is reimbursed (by the foreign
entity, Northern Trust Company - hereafter described as such) for the amounts it
pays as salaries, to these 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 notices3
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 orders4
the
commissioner confirmed the proposals in the notice (except the demand for the
period from April 2006 to September 2006) accepting the fact that part of the
demand has been raised @ 12.3% instead 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
3 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).
4 Order-in-Original No. 29/2013-14 dated 03.03.2014 and No. 30/2013-14 dated 04.03.2014.
4
various branches abroad, would be the service providers and the assessee, who
receives skilled manpower, on secondment basis, is the service recipient. Thirdly,
the definition of manpower recruitment or supply agency, under Section 65(68) has
no exclusion clause, requiring service providers to possess the status of certain
specified persons or organizations, for the purpose of providing the taxable 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 into 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 evidence 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 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
5
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 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 SCNs6 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.
7. The assessee filed detailed replies on 02.07.2014 and 31.12.2015, mainly
arguing that service tax cannot be demanded as the services 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 demandsforservice 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 Agreement, 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 skill
5 Service Tax Appeal No. 21502/2017
6 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
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
6
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 transaction. Eighthly, for the
period post 2012, the remittance is a reimbursement 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.
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 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 27.07.200510. 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 to be called as manpower recruitment or supply agency
9 2014 (34) STR 135
10 Circular F.No.B1/6/2005-TRU
7
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 provided directly 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 two types of activity, i.e., manpower recruitment
and manpower supply, and furthermore, service became taxable only if provided
by a manpower recruitment or supply agency. CESTAT reasoned that in the present
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 relation 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 that those seconded to the assessee working in the capacity of
employees and receiving salaries by group companies were only for disbursement
purposes. The employee-employer relationship existed and 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
other benefits on account of the employees, under the laws applicable to the group
companies abroad. In these circumstances, it was held that 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 rejected.
8
Contentions of Revenue
12. Mr. Balbir Singh, learned ASG relied upon the materials 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 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 ASG relied
broadly on Article I by which parties 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 assessee
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 clause specifically stated that the
9
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 which 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 allowance and hardship allowance
(fixed at 20% of the base salary during 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 (with 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 tasks. 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 employee. Further, those were reimbursed. For a temporary period,
the seconded employee was only operationally under the control of the assessee. It
10
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 its employees. These services directly pertained to the discharge of
functions of the assessee.
16. It was argued that CESTAT’s reasoning that the contract between the parties
was not one in which the overseas group company supplied services, was
erroneous. In this context, it was urged that 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 of 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 for the secondment by the
overseas companies to the assessee was to ensure that their expertise was utilized
for the performance of tasks by the assessee in terms of the service agreement and
the master services agreement. Such secondment, it was contended, used their skill
sets and expertise, to ensure the quality required by the overseas employer.
11
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 Court in Smt. Savita Garg v. The Director,
National Heart Institute13; 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 Thozhilali16 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 individual case. Further, the fact
of control over the manner of performance of duties or any one such singular factor
cannot be decisive. It was submitted that the facts of the present case clearly
establish that the overseas company entered into specific secondment agreements
by which its employees were deputed to work in the assessee’s establishment. The
tasks performed by them were in aid of the assessee’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
11
 (2009) 15 SCC 1
12 Klaus Vogel on Double Tax Conventions, Den Haag: Wolters KLuwer, Law and Business (2015).
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
12
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'
seeks to bring under its ambit two types of activities i.e. recruitment of manpower
and supply of manpower. Further the service becomes a taxable service only if
provided by a manpower recruitment or supply agency. In the present case, the
dispute pertains to whether the secondment of employees by the group companies
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 view 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 position 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 category of supply of manpower by an agency covers those cases
where the manpower 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 an employer was never subject to service tax.
There is no country in the world which levies VAT/GST on employment service,
or any services rendered by an employee to the employer.
13
23. Counsel urged that the agreements entered by the assessee with its group
companies were to provide certain specialized services. The seconded personnel
are contractually hired as the assessee’s employees. Control over them is exercised
by the assessee. 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 expats 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 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 is placed
on the judgment of the Delhi High Court in Intercontinental Consultants and
18 Civil Appeal Diary No(s). 45344/2018 (C.A. No. 2408 / 2019)
14
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 this court in Intercontinental Consultants and
Technocrats Pvt. Ltd20
. In the present case, the demand of the service tax is being
computed on the salaries and allowances paid to the employees. The salaries 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
under the bona fide belief that the seconded employees were its employees and
therefore, not covered under the ambit of manpower supply services. Further, in
any case, the assessee is entitled to avail refund of the service tax paid on input
services under Rule 5 of the CENVAT Rules read with Rule 6A of the Service 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 assessee from foreign group
companies would qualify as input services and that it is eligible to avail credit of
service tax paid on such input services. Therefore, even if the said demand of
19 2013 (29) S.T.R. 9 (Del.)
20 (2018) 4 SCC 669.
15
service tax is paid, the 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 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. Commissioner21 and Commissioner of Central Excise v. Coca Cola
India Pvt. Ltd22
.
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, consultancy or
technical assistance, in relation to financial management, human resources
management, marketing management, production management, logistics
management, procurement and management of information technology
resources or other similar areas of management;]
xxxxxx xxxxxx xxxxxx
23 (68) "manpower recruitment or supply agency" means any [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);]
21 2016 (331) ELT A 138 (S.C.)
22 2007 (213) ELT 490 (S.C)
23 Substituted by the Finance Act, 2005, w.e.f. 16.06.2005.
Old provisions of the
Act
16
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 supply of manpower, temporarily or otherwise, in any
manner.]
27[Explanation.—For the removal of doubts, it is hereby declared that for
the purposes of this sub-clause, recruitment or supply of manpower includes
services in relation to pre-recruitment screening, verification of the credentials
and antecedents of the candidate and authenticity of documents submitted by
the candidate;..”
The provisions, post amendment in 2012 (w.e.f. 01.07.2012), read as follows:
“Interpretations.
65B. In this Chapter, unless the context otherwise requires, -
xxxxxx xxxxxx xxxxxx
(44) “service” means any activity carried out by a person for another for
consideration, and includes a declared service, 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 (29A) 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 employer 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,-
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.
Amended provisions
of the Act
17
(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, and a member thereof shall be treated 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 territory shall be treated as having an
establishment in that territory;”
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 clause 2, it was agreed that:
“2. Consideration: The consideration for performance of the services shall be
paid on a mutually agreed basis as described 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 banking and related
operations”
18
The part relating to consideration, i.e., fee (payable to the assessee) reads as
follows:
“Beginning September 1 2006, NOS shall charge Northern Trust for all actual
costs incurred in providing the 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 by and between:
Northern Trust Management Services Ltd a company incorporated under the
laws of the United Kingdom with its principal office located at 50 Bank Street,
London, E14 5NT, (hereinafter referred to as "NTMS'),
and
Northern Operating Services Private Limited, a company organised and
existing under the laws of India and having its principal office at RMZ
Ecospace Campus 1C, Sarjapur Outer Ring Road, Bangalore-5600037, India
(hereinafter referred to as "NOS").
WITNESSETH:
xxxxxx xxxxxx xxxxxx
ARTICLE I
SECONDMENT
NOS shall request NTMS to provide employees ("the Employees) who have the
expertise required by NOS. 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
19
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) All the responsibility and risk for work undertaken by the Employees will
remain with NOS during the Secondment Period.
(E) NOS shall have the right, at any time, to approve or reject the Employee
selected for secondment and to request from NTMS the replacement of any
Employees who, in the opinion of NOS, are not qualified or do not meet the
requirements necessary to fulfil their Secondment,
xxxxxx xxxxxx xxxxxx
(H) All terms and conditions of employment with NTMS will cease during the
Secondment Period. The terms and conditions of employment with NOS, as
stated in the employment agreements between 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 reimburse NTMS for the following amounts (collectively the
"Reimbursable Expenses"):
(1) All remuneration of the Employees, including but not limited to, salary,
incentives and employment benefits of the Employees paid by NTMS; and
(2) All out-of-pocket expenses incurred by the seconded Employees and
reimbursed by NTMS, including but not limited to, business travel expenses and
other miscellaneous expenses, directly related 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
attributable to payroll services provided by NTMS. Administrative cost 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
20
NTMS will endeavor to provide appropriate qualified Employees for
secondment under this Agreement. Nothing in this Agreement, shall be
construed as a warranty of the quality of the seconded Employees.
Further NOS shall hold NTMS harmless and shall indemnify NTMS from all
claims, demands, suits, actions, loss, damage, costs and expenses (excluding
consequential loss or damage) to which NTMS may become liable in respect to
any and all loss, damage or injury as a result of any act or omission by the
seconded Employee.
The master services adverted to earlier, between NTC (group 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 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 out the duties contemplated by this Agreement
to be performed by it.
3.2 It is understood and agreed that the Services performed
hereunder by NOS for TNTC Chicago shall be carried out in accordance with
policies, authorities, and procedures as are or may be established and
authorized by TNTC Chicago.
xxxxxx xxxxxx xxxxxx
21
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 under the Agreement
shall be the Total Service Costs (as defined below) incurred by NOS
for rendering the Services plus a mark-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 seconded employees, to the extent
it is relevant, reads as follows:
“LETTER OF UNDERSTANDING
August 6, 2012
Dear Brian Ovaert,
This letter of agreement between Northern Operating Services 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 and 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 mutual agreement, your assignment to and employment with NOS
may be extended. Should this be the case, an extension letter will 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
entitled to all local public holidays observed by NOS. However, you
must use vacation days to observe any United States public observed
holiday that is not observed in NOS. A list of NOS' public holidays may be found
on My Place.
22
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 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 account schools/location). The monthly
rent of your selected accommodation should be limited to INR
366,700. In addition, an annual utility allowance of (NR 397,500 will be
paid to you. This allowance will cover water, sewer, gas, oil, electricity,
basic telephone service, basic satellite/cable TV service and initial set-up for
broadband service, but will exclude the 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. Insurance 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 storage and Insurance premiums will be met. You should note
that certain items may be excluded from shipment and storage. You
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 household furnishings
via ocean freight to Bangalore, India, you can receive a "furniture
allowance" which would be an amount based on country norms. Your
furniture allowance is USD $9,000.
xxxxxx xxxxxx xxxxxx
23
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 period 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 nonaccountable and is intended to assist with hotel and airfare costs.
Providing an allowance allows 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 base 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 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,
24
provide it manpower services, for the discharge 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, employees 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. However, in the event the
overseas entity is treated as the employer, the arrangement would be treated as
service by the overseas entity and taxed.
35. In Director Income Tax v. M/S Morgan Stanley & Co. Inc28 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
remains with MSCo the said company retains control over the deputationist’s
terms and employment. The concept of a service PE finds place in the UN
Convention. It is constituted if the multinational enterprise renders services
through 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
28 (2007) 7 SCC 1
25
it being responsible for the work of deputationists and the employees continue
to be on the payroll of the multinational enterprise or they continue to have their
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 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 foreign 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 rulings in Honeywell
Technology Solutions Pvt. Ltd. v. CST, Bangalore29
. It held that that the method of
disbursement of salary cannot determine 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.
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
26
38. Questions that have repeatedly arisen, in different contexts, and at different
times, is whether the facts of a given case reveal, who is the employer, and whether
the relationship between an employee and another, is one of master servant, or
whether there is an underlying contract for service, by which the real employer,
lends the services 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 relationship 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 is 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' Union34, the court analysed the sample 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 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 deducted from the so-called price fixed for the
bidis. In effect all that happened is that the so-called independent contractor is
supplied with tobacco and leaves and is paid certain amounts for the wages of
the workers employed and for 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 as such employee or agent he
33 1957 SCR 158
34 1964 (7) SCR 646
27
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 not 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 of Shops &
Establishments35 this court remarked how the test of control, or manner of
performance of a task, by an employee by another is not conclusive to decide if an
employer employee relationship subsists:
“This distinction (viz., between telling a servant what to do and telling him how
to do it) was based upon the social conditions of an earlier age; it assumed that
the employer of labour was able to direct and instruct the labourer as to the
technical methods he should use in performing his work. In a mainly
agricultural society and even in the earlier stages of the Industrial Revolution
the master could be expected to be superior to the servant in the knowledge, skill
and experience which had to be brought to bear upon the choice and handling
of the tools. The control test was well suited to govern relationships like those
between a farmer and an agricultural labourer (prior to agricultural
mechanization) a craftsman and a journeyman, a householder and a domestic
servant, and even a factory owner and an unskilled 'hand'. It reflects a state of
society in which the ownership of the means of production coincided with the
profession of technical knowledge and skill in which that knowledge and skill
was largely acquired by being handed down from one generation to the next by
oral tradition and not by being systematically imparted in institutions of
learning from universities down to technical schools. The control test postulates
a combination of managerial and technical functions in the person of the
employer i.e. what to modern eyes appears as an imperfect 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 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].”
35 1974 (1) SCR 747
28
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 Bank36 and Indian Overseas Bank v. Workmen37
. 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 computer age, the earlier simple test of control, whether
or not actually exercised, has now yielded more complex tests in order to decide
complex matters which would have factors both for and against the contract
being a contract of service as against a contract for service. The early 'control
of the employer' 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 employed. A variety of cases come in between cases
which are crystal clear-for example, a master in a school who is employed like
other employees of the school and who gives music lessons as part of his
employment, as against an independent professional piano player who gives
music lessons to persons who visit her premises. Equally, a variety of cases arise
between a ship's master, a chauffeur and a staff reporter, as against a ship's
pilot, a taxi driver and a contributor 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 actual control of when
and how work is to be performed to the right to exercise control, is one in a
series of factors which may lead to an answer on the facts of a case slotting such
case either as a contract of service or a contract for service. The test as to
whether the person employed is integrated into the 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 factors would be a test elastic enough to apply to a large variety of cases.
The test of who owns the assets with 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
36 2001 (1) SCR 1011
37 (2006) 3 SCC 729
29
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, 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 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 point in the opposite direction to arrive at the correct
conclusion on the facts of each case.”
42. The assessee’s contention before the CESTAT, inter alia, was that apart
from it having control over the nature of work 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 incorporated 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 affiliates? 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
30
(d) includes a declared service (the term “declared service” 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 the 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 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. Ltd38 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 and not
by picking and choosing certain clauses and the ultimate effect or result as the
Court did in the Orient Paper Mills case (1977) 2 SCR 149)” .
This principle was reiterated in Prakash Roadlines (P) Ltd. v. Oriental Fire &
General Insurance Co. Ltd.39
38 1985 Supp SCC 280
39 (2000) 10 SCC 64
31
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 overall expenditure it incurs, by
the overseas company (clause 2, read with attachment 1 of the Service Agreement);
(iii) By the Secondment Agreement, the parties agree that 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 seconded 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, and 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 assignment (in one place, the term used is “At its
conclusion, repatriation will be in accordance with the Global Mobility
Repatriation Policy”);
32
(ix) The terms include the salary payable 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 to not seek reimbursement of the employees’ salaries, since they were,
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 whether an arrangement is a contract of
service (as the assessee 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 employee 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 and skilled personnel. This business is providing
33
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 affiliates
or local companies, such as the assessee. The role of the assessee 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 the 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 the country
of their origin. It is doubtful whether without 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
34
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 employer, or
are deployed on some other secondment.
56. This court, upon a review of the previous judgment 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 complex
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 necessarily be relevant, or, if relevant, be given the same
weight.”
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, is 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
35
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 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, 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, that the orders of the
CESTAT, affirmed by this court, in Volkswagen and Computer Sciences
Corporation, are unreasoned and of no precedential value.
36
61. In view of the above discussion, it is held that the assessee was, for the
relevant period, service recipient of the overseas 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 Excise40
- 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 built into these very words. So far
as misstatement or suppression of facts are concerned, they are clearly
qualified by the word “wilful” preceding the words “misstatement or
suppression of facts” which means with intent to evade duty. The next set of
words “contravention of any of the provisions of this Act or rules” are again
qualified by the immediately following words “with intent to evade payment of
duty”. It is, therefore, not correct to say that there can be a suppression or
misstatement of fact, which is not wilful and yet constitute a permissible ground
for the purpose of the proviso to Section 11-A. Misstatement or suppression of
fact must be wilful.”
63. This decision was followed in Uniworth Textiles v. Commissioner of
Central Excise41 where it was observed that “(t)he conclusion that mere nonpayment of duties is equivalent to 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 Metals43 and other
judgments.
40 (1995) 6 SCC 117
41 (2013) 9 SCC 753
42 (2015) 9 SCC 109
43 (2017) 16 SCC 491
37
64. The fact that the CESTAT in the present case, relied upon 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 and supply services) by the
overseas entity, in regard to the employees it seconded to the assessee, for the
duration of their deputation or secondment. 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 part; the assessee is
liable to pay service tax for the periods spelt 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.
38
68. The appeals are partly allowed, to the above extent, with no order on costs.
...........................................................................J.
 [UDAY UMESH LALIT]
…......................................................................J.
 [S. RAVINDRA BHAT]
..........................................................................J.
 [PAMIDIGHANTAM SRI NARASIMHA]
New Delhi,
May 19, 2022.

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