Reimbursable Salary Paid to Seconded Employee Not Taxable as Technical Service: CESTAT [Read Order]

The Bangalore Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that reimbursable salary paid to a seconded employee could not be included for levy of service tax under technical services.

CAE Simulation Technologies Pvt. Ltd., the appellant, rendered services under Management or Business Consultant Service, Manpower Recruitment or Supply Agency Services and Information Technology Software Services. During audit, the department found that the appellant had not discharged service tax for October 2007 to March 2012 on services received from its holding company in Canada under reverse charge mechanism.

The Commissioner examined the secondment agreement and held that technical personnel were provided to the appellant. A demand of Rs. 25,57,292 was confirmed under manpower supply. Other demands were also confirmed with interest. Penalty equal to the tax amount was imposed under Section 78 of the Finance Act, 1994, and Rs. 10,000 was imposed under Section 77.

Chartered Accountant Akbar Basha appeared for the appellant. The counsel argued that the secondment agreement could not be treated as technical service. They also argued that the case was distinguishable from Northern Operating Systems. They appellant submitted that out of the demand, Rs. 13,15,128 represented reimbursable salary paid to an employee and was not taxable.

The appellant’s counsel also argued that the extended period could not be invoked because there was no wilful misstatement or suppression. The appellant’s counsel submitted that the payments were based on agreements available on record.

The revenue counsel argued that the issue relating to manpower supply stood covered by the Supreme Court decision in Northern Operating Systems. It submitted that the Commissioner had correctly confirmed the demand and that the appellant had accepted part of the liability by making payment.

The two-member bench of P.A. Augustian, Judicial Member, and R. Bhagya Devi, Technical Member, observed that the appellant had entered into a secondment agreement with CAE Inc., Canada from November 15, 2009. The agreement provided for qualified technical personnel as required by the appellant.

The tribunal observed that the appellant had paid service tax of Rs. 12,42,164 along with interest, but disputed Rs. 13,15,128 as reimbursable salary. It accepted the appellant’s argument that this amount was salary paid to Mr. Micheal Thibault and was reimbursable in nature.

The tribunal held that Rs. 13,15,128 could not be included for levy of service tax under technical services. It also held that the extended period was not invocable as there was no evidence of suppression. The CESTAT partly allowed the appeal. It limited the demand on the secondment issue to the normal period, upheld other admitted demands and set aside all penalties.