In a recent ruling, the Bangalore bench of the Customs Excise and Service Tax Appellate Tribunal ( CESTAT ) has upheld a ₹1, 12, 86,898/- crores service tax demand for manpower recruitment and supply agency service along with an equal amount of penalty under Section 78 of the Finance Act. However, the demand for Business Auxiliary Service was set aside, along with interest and penalties.
The issues to be decided was whether the appellant is liable to pay Service Tax under the category of ‘Manpower Recruitment or Supply Agency Service’ and ‘Business Auxiliary Service
Parallel regimes for exemption of Charitable and Religious Trust i.e. Section 10(23C) and Section 11 to 13 of the Income Tax Act,1961 | Know More
M/s. Aztecsoft Ltd., the appellant, is involved in providing software products, engineering services, and various project-related activities. During an investigation, it was discovered that the company was also engaged in the deputation of its employees to other companies on a monthly payment basis, classified as ‘Manpower Supply Service’. As a result, the Commissioner issued an order under Section 65 of the Finance Act, 1994, categorizing these services under ‘Manpower Recruitment or Supply Agency Service’. The Commissioner then demanded and confirmed a duty amount of Rs. 1, 12, 86,898/- along with interest and an equivalent penalty for the period from June 2005 to March 2007.
Additionally, services provided by an overseas service provider under the Selling Agreement and Master Agreement were classified under ‘Business Auxiliary Service’ (BAS) for the period from July 2003 to March 2007. This classification led to a further demand of Rs. 4, 69,45,582/- under BAS, along with interest and an equal amount of penalty. Aggrieved by these demands, the appellant has filed the current appeal.
Mr. N. Anand, representing the appellant, argued that the appellant is a 100% Export Oriented Unit (EOU-STP) engaged in developing embedded software and other software-related services, primarily for export. During the disputed period, the appellant provided embedded software development and other IT-related services to customers in India through “software outsourcing contracts”. The Department, based on a Master Services Agreement dated December 7, 2005, with M/s. Philips Electronics India Ltd. (PEIL), confirmed the service tax under the category of ‘Manpower Recruitment or Supply Agency Service’. The Directorate General of Central Excise Intelligence (DGCEI) alleged that the Master Service Agreement with PEIL, specifically concerning “Time and Materials Projects,” fell under the category of ‘Manpower Recruitment or Supply Agency Service’ and was thus liable for service tax from May 16, 2005.
Parallel regimes for exemption of Charitable and Religious Trust i.e. Section 10(23C) and Section 11 to 13 of the Income Tax Act,1961 | Know More
Furthermore, the DGCEI alleged that two agreements dated April 1, 2001, with M/s. Aztec Software Inc., USA, was subject to service tax under the Reverse Charge Mechanism (RCM) as Business Auxiliary Service. The appellant maintained that they were under the bona fide belief that the software services rendered to customers in India, including PEIL, were classified as “information technology services” and thus not taxable under existing service categories.
The appellant further argued that until the Finance Act, 2008, “information technology service” was not considered a taxable service under Section 65(105) of the Act. The Parliament specifically excluded “information technology service” from the service tax levy, and it was only with the introduction of the “Information Technology Software Services” (ITSS) category on May 16, 2008, that such services became taxable. Therefore, the appellant contended that the impugned order incorrectly reclassified the services as “manpower supply.”
Parallel regimes for exemption of Charitable and Religious Trust i.e. Section 10(23C) and Section 11 to 13 of the Income Tax Act,1961 | Know More
Additionally, the appellant argued that the demands were barred by the limitation period, as there was no willful suppression of facts or intent to evade payment of service tax. The appellant believed that the services were classifiable under “information technology service,” which was either exempt or excluded from the definition of taxable services. The appellant also challenged the imposition of penalties, including the equal amount of penalty under Section 78 of the Finance Act.
Mr. Dyamappa Airani, representing the revenue, argued that the appellant was engaged in software product engineering services and other projects, and investigations revealed that the appellant also deputed employees to other IT companies on a monthly payment basis for IT project work under the control of their clients. The Master Service Agreement with PEIL included two types of projects: “Fixed Price Project” and “Time and Materials Project.” The “Time and Materials Project” involved providing personnel to PEIL, where the project was controlled by PEIL, making it taxable under the category of ‘Manpower Recruitment and Supply Agency Service’.
Parallel regimes for exemption of Charitable and Religious Trust i.e. Section 10(23C) and Section 11 to 13 of the Income Tax Act,1961 | Know More
The revenue cited previous decisions where similar services were classified under the ‘Manpower Recruitment and Supply Agency Service’ category.
The tribunal, comprising OM Misra (Judicial Member) and R. Bhagya Devi (Technical Member), observed that the appellant did not deny receiving services from their overseas company but argued that for the period prior to April 17, 2006, they were not liable to pay duty. For the period from April 18, 2006, to March 2007, the appellant contended that the definition of ‘Business Auxiliary Service’ did not include information technology services, and therefore, the demand for service tax under RCM for this period could not be sustained. The tribunal found no specific findings in the impugned order regarding this plea.
As a result, the tribunal confirmed the demand of Rs. 1, 12, 86,898/- for ‘Manpower Recruitment and Supply Agency Service’ along with an equal amount of penalty under Section 78 of the Finance Act. However, the demand for Business Auxiliary Service for the period from July 2003 to April 17, 2006, was set aside, along with interest and penalties. The matter for the period from April 18, 2006, to March 2007 was remanded to the Commissioner for redetermination of service tax on Business Auxiliary Service after considering the appellant’s submissions and providing a reasonable opportunity for a hearing.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
