For granting Service Tax Exemption based on Nature of Agreements, Agreements ought to be read as a Composite whole: Supreme Court [Read Order]

The Supreme Court has held that for granting Service Tax exemption based on the nature of agreements, agreements ought to be read as a composite whole.

The appellant, Adiraj Manpower Services Pvt. Ltd. obtained service tax registration under the category of ‘Manpower Recruitment or Supply Agency Service’. On 1 January 2012, the appellant entered into an agreement with Semco Electric Pvt. Ltd. (later known as Sigma Electric Manufacturing Corporation Pvt. Ltd.2) and was required to provide personnel for activities such as felting, material handling, pouring and supply of material to furnace. Similarly, on 1 January 2013 and 1 January 2014, fresh agreements were entered into between the appellant and Sigma.

The order of the adjudicating authority was challenged in an appeal before the CESTAT, WZB, Mumbai. By its judgment dated 15 July 2019, the Tribunal held that the service provided by the appellant to Sigma was not in the nature of job work services exempted under the Notification bearing No.25/2012-Service Tax dated 20 June 2012. The Tribunal held, after considering the terms of the agreement between the appellant and Sigma and the relevant provisions of the Contract Labour (Regulation and Abolition) Act 1970, that the services provided by the appellant were in the nature of contract labour and not job work. 

The Tribunal held that clause 10, 11 and 17 of the agreement required the appellant to obtain a licence under the CLRA; the agreement imposed the responsibility for the payment of wages to the employees/workmen and for making payments under the Employees’ State Insurance Act 1948 and Provident Fund in respect of the employees of the contractor on the appellant. The Tribunal accordingly held that the agreement between the appellant and Sigma is a contract labour agreement executed for the purpose of providing requisite manpower and is not a job work contract to extend the benefit of Notification No.25/2012-Service Tax dated 20 June 2012.

The division bench of Justice Dr Dhananjaya Y Chandrachud and Justice Surya Kant has held that the decisions of CESTAT relied upon by the appellant also do not help their submissions as they are fact-specific and based on a reading of the contracts in those cases. In this case, though ostensibly, the agreement contains a provision for payment on the basis of the rates mentioned in Schedule II, the agreement has to be read as a composite whole. On reading the agreement as a whole, it is apparent that the contract is pure and simple a contract for the provision of contract labour. An attempt has been made to camouflage the contract as a contract for job work to avail of the exemption from the payment of service tax. The judgment of the Tribunal does not, in the circumstances, suffer from any error of reasoning.

“There is a complete absence in the agreement of any reference to the nature of the process of work which has to be carried out by the appellant; provisions for maintaining the quality of work; the nature of the facilities utilised; or the infrastructure deployed to generate the work; the delivery schedule; specifications in regard to the work to be performed; and consequences which ensue in the event of a breach of the contractual obligation,” the court said.

Adiraj Manpower Services Pvt. Ltd. vs Commissioner of Central Excise Pune II

CITATION: 2022 TAXSCAN (SC) 118

To Read the full text of the Order CLICK HERE

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