No Service Tax applicable on Deputed Employees working under control, direction, and supervision of Overseas Company: CESTAT [Read Order]

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The Customs, Excises, Service Tax Appellate Tribunal (CESTAT), Chennai Bench held that no service tax is applicable on Deputed employees working under control, direction and supervision of overseas companies.

The appellant, M/s.Komatsu India Pvt. Ltd. is engaged in the manufacture of dump trucks and other allied items. The appellant’s company belongs to the Komatsu Group, having their business establishments in the countries of Japan and Singapore.

During the initial period of setting up of the factory premises, the appellant had entered into a secondment agreement with its parent companies, by which the employees of the said companies were deputed to work in the appellant’s factory. For deployment of the employees, the appellant had incurred expenditure in foreign exchange towards payment of salary to the employees.

The modus operandi adopted by the appellant regarding deployment of the employees of the parent company and payment of salaries to them was considered by the department as a taxable service under the head “Manpower Recruitment or Supply Agency Service‟, defined under Section 65 (68) of the Finance Act, 1994.

Accordingly, show cause proceedings were initiated on the premise that the appellant should be liable to pay service tax under reverse charge mechanism, as a recipient of such taxable service. The adjudicating authority has confirmed the adjudged demands on the appellant, holding that by deploying the employees to the appellant company, the parent company located abroad had provided the taxable service and the appellant being a recipient of service in India, is liable to pay service tax under reverse charge mechanism in terms of Section 66A.

Section 65 (68) of the Finance Act, 1994 defines the taxable service under the category of “Man Power Recruitment or Supply Agency” to mean any person engaged in providing any service for recruitment or supply of manpower. Further, “taxable service‟ has been defined under Section 65 (104) (k) to mean any service provided to any person by a man power recruitment or supply agency for recruitment or supply of manpower to any other person.

The two-member bench of judicial member, S.K.Mohanty and Accountant Member, P.Venkata Subba Rao on perusal of the contract entered into between both the sides, found that there is no existence of service provider-service recipient relationship.

It was further noted that the appellant had also separately entered into contract with the employees deputed by the group companies, providing for payment of salary and other benefits. Mere transfer of funds for security reasons for the benefit of the family of the employees based abroad cannot create the tax liability under such category of taxable service. It is not the case of Revenue that over and above the amount paid to the employees or their families, any other additional amounts were charged by the overseas entities or paid by the appellant towards such deployment of the employees.

“Thus, under such circumstances, it cannot be said that the overseas group companies have provided the service of recruitment or supply of manpower and the appellant should be liable to pay service tax as a recipient of such service under the reverse charge mechanism,” the tribunal said.

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