9911796707🚨 Important Update for Our Users
We are transitioning to our new and improved portal - www.taxtmi.com - for a better experience.
⚠️ This portal will be discontinued on 31-07-2025
If you encounter any issues or problems while using the new portal,
please
let us know via our feedback form
so we can address them promptly.
Follow us:
|
Home
2025 (7) TMI 482 - AT - Service TaxValuation of service tax - manpower agency service - Applicability of Pure Agent concept under Rule 5(2) of the Service Tax (Determination of Value) Rules 2006 - suppression of facts or not - invocation of extended period of limitation - levy of penalty - HELD THAT - It is observed that the interpretation of Rule 5(2) of the Service Tax (Determination of Value) Rules 2006 by the Ld. Co missioner (Appeals) is not erroneous. The business arrangement between the Appellant and the Manpower Agencies is that the Appellant engaged these agencies for supply of workers and under the agreements the agencies were required to deploy workers at the Appellant s premises based on the requirement of the Appellant collect wages from the Appellant disburse these wages to the workers without any margin or markup and separately charge their service fees (supervision charges) for the manpower supply service. In the impugned order the Ld. Appellate authority has mentioned that the Appellant has not satisfied condition (viii) of Rule 5(2) of the Service Tax (Determination of Value) Rules 2006 but we find that the ld. appellate authority has not explained how the agencies have not satisfied the said condition. On the other hand from the agreement it is found that it has been categorically mentioned that the Appellant will be receiving the salary of the workers and will be paying to them without any mark-up. Under such circumstances the appellant has fulfilled all the conditions of Rule 5(2) of the Service Tax (Determination of Value) Rules 2006 and hence they qualify as Pure Agents as defined under the said Rules. The manpower agencies acted as Pure Agents and hence the amounts of salary/wages paid to workers through manpower agencies are not includible in the taxable value for the purpose of computation of their Service Tax liability under Reverse Charge Mechanism as the said agencies act as pure agents as provided under Rule 5(2) of Service Tax (Determination of Value) Rules 2006 read with Section 67 of the Finance Act 1994. Consequently the demand of service tax confirmed in the impugned order along with interest is not sustainable. Extended period of limitation - levy of penalty - HELD THAT - It is found that suppression of facts with intention to evade the tax has not been established in this case. It is observed that the Appellant have filed regular ST-3 returns clearly showing the Service Tax paid on supervision charges. The books of accounts reflected the true position with separate ledger heads for different components. All agreements and documentation were available and were produced whenever called for. It is also observed that the issue involved is of interpretation of legal provisions and not suppression of facts. Rather it is noted that the Appellant acted on a reasonable interpretation that wage reimbursements through agencies acting as pure agents are not includible in taxable value. Accordingly the extended period cannot be invoked to demand service tax in this case. As there is no suppression of facts involved the penalty imposed on the Appellant to be unwarranted and hence the same is set aside. The impugned order is set aside - appeal allowed.
The core legal questions considered in this appeal are:
1. Whether the amounts paid by the appellant to manpower supply agencies for wages and salaries of workers deployed at the appellant's premises qualify for exclusion from the taxable value under the 'pure agent' concept as per Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006. 2. Whether the manpower agencies acted as pure agents of the appellant in disbursing wages and salaries without any markup or margin, thereby rendering such payments non-includible in the assessable value for Service Tax under the Reverse Charge Mechanism. 3. Whether the department's interpretation that the workers deployed at the appellant's premises are not "third parties," and thus the pure agent concept does not apply, is legally tenable. 4. Whether the demand of Service Tax on the wage component, along with interest and penalty, is sustainable in light of the appellant's compliance and disclosure. 5. Whether the extended period of limitation can be invoked for demanding Service Tax and imposing penalty, considering the appellant's conduct and disclosure. Issue-wise Detailed Analysis: Issue 1 & 2: Applicability of the Pure Agent Concept under Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006 The legal framework centers around Rule 5(2) which provides conditions under which a service provider acting as a 'pure agent' of the service recipient can exclude certain reimbursed expenses from the taxable value. The rule requires that the service provider incurs expenditure on behalf of the recipient without any markup, does not intend to hold title to the goods or services, and the recipient is aware of the arrangement, among other conditions. The appellant contended that the manpower agencies acted strictly as pure agents for the wage disbursement component, collecting wages from the appellant and passing them on to workers without any profit or margin. The agencies separately charged supervision/service fees, which were the actual consideration for the manpower supply service. The appellant relied on contractual agreements and billing patterns that distinctly separated wages (reimbursed expenses) from service charges (consideration for service). The department argued that since the workers were deployed within the appellant's factory and worked under its supervision and control, the workers could not be considered third parties, and thus the pure agent concept under Rule 5(2) was inapplicable. The department maintained that the entire amount paid to the agencies, including wages, constituted consideration for manpower supply service and was includible in the taxable value. The Tribunal examined the agreements and found that the agencies satisfied all conditions of Rule 5(2), including:
The Tribunal referred to a precedent where a similar arrangement was held to qualify as pure agency, excluding wage reimbursements from taxable value. The Tribunal also relied on authoritative rulings, including a Supreme Court decision, which emphasized that only the consideration for the service component is taxable, and reimbursed expenses or pass-through amounts are excluded. The Tribunal rejected the department's interpretation that the workers were not third parties, clarifying that the third party in the context of Rule 5(2) refers to the workers who receive wages, not the service recipient. The Tribunal held that the agencies acted as intermediaries, merely passing wages to workers, and thus the wage component is a reimbursement and not consideration for service. Issue 3: Interpretation of "Third Party" and Inclusion of Wages in Taxable Value The department's contention that the workers were not third parties because they worked under the appellant's control was critically examined. The Tribunal noted that the pure agent concept is concerned with whether the service provider acts as a conduit for payments to third parties (here, the workers), irrespective of the location or supervision of the workers. The Tribunal found that the department's interpretation would nullify the pure agent concept in manpower supply services, which is contrary to the legislative intent and established legal principles. The Tribunal emphasized that the service component is distinct from wage reimbursements, and the latter should not be taxed. Issue 4: Demand of Service Tax, Interest, and Penalty The demand arose from the department's view that the entire amount paid to manpower agencies, including wages, was taxable. The appellant had filed regular returns disclosing service tax paid on supervision charges and maintained transparent books of account with separate ledger heads. The Tribunal found that the appellant's conduct was based on a bona fide and reasonable interpretation of the law, supported by contractual documentation and industry practice. There was no evidence of suppression of facts or intention to evade tax. The Tribunal held that the demand for service tax on the wage component was unsustainable as it was contrary to the pure agent principle and relevant legal precedents. Issue 5: Invocation of Extended Period and Penalty The department invoked extended limitation and imposed penalty alleging suppression of facts. The Tribunal observed that the appellant had voluntarily disclosed the service tax payment mechanism and had not concealed any material facts. The issue was one of legal interpretation rather than factual suppression. Accordingly, the Tribunal held that the extended period of limitation could not be invoked, and the penalty was unwarranted. The penalty was set aside. Significant Holdings: "We find that the manpower agencies satisfy all the conditions prescribed under Rule 5(2) as follows: - (a) The agencies incurred expenditure (wages to workers) in the course of providing manpower service to the Appellant. (b) The agencies neither intended to hold nor held any title to the wages - they were mere pass-through amounts. (c) The agencies did not use the wages but merely transmitted them to workers. (d) The agencies received only the actual amount of wages incurred to pay workers, without any markup. (e) The Appellant knew that wages would be paid by agencies to workers as its authorized representatives. (f) The wage payments were separately indicated in invoices distinct from service charges. (g) The agencies recovered only actual wages paid without any profit element. (h) The wage payment facilitation was in addition to the core manpower supply service provided by agencies." "Rule 5(1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. It purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider 'in the course of providing taxable service'. What is brought to charge under the relevant Sections is only the consideration for the taxable service." "The pure agent concept under Rule 5(2) is designed precisely to prevent the taxation of pass-through amounts where the service provider adds no value and acts merely as a payment conduit." "The issue involved is of interpretation of legal provisions and not suppression of facts. Rather, it is noted that the Appellant acted on a reasonable interpretation that wage reimbursements through agencies acting as pure agents are not includible in taxable value." "We hold that the demand of service tax confirmed in the impugned order along with interest is not sustainable." "As there is no suppression of facts involved, we find the penalty imposed on the Appellant to be unwarranted and hence, the same is set aside." Core principles established include:
Final determinations on each issue are:
|
