Supply of Manpower by Overseas Entities is a Taxable Service: Supreme court [Read Judgment]

The division bench of Supreme Court has held that the supply of manpower by overseas entities is a taxable service. The assessee, M/S Northern Operating Systems Pvt Ltd, provides service under the categories of Manpower Recruitment Agency Service. The assessee is reimbursed by the foreign entity, 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 revenue initiated proceedings against the assessee alleging 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 and demanded service tax, except the demand for the period from April 2006 to September 2006. On appeal The Commissioner confirmed the decision of AO and against which assessee and revenue filed appeal. The CESTAT while allowing the assessee’s appeal 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 revenue’s appeals were rejected. Against which the revenue filed petition before Supreme Court. The counsel for the assessee submitted that the 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. 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. The revenue submitted that 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. The contract between the parties was essential for the supply of services by the concerned overseas company to the assessee. Therefore, it was a taxable service and not excluded by virtue of amended Section 65 of the Finance Act, 1994 The Coram of Mr. Justice Uday Umesh Lalit, Mr. Justice S. Ravindra Bhat and Mr. Justice Pamidighantam Sri Narasimha has observed that 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 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. The Supreme Court held that “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”. Support our journalism by subscribing to Taxscan AdFree. Follow us on Telegram for quick updates.

Supply of Manpower by Overseas Entities is a Taxable Service: Supreme court [Read Judgment]

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