Service tax on Cost sharing amount related companies-reg, Service Tax

[N Balachandran]

Dear sir,

Could you pl clarify ,the Salary paid to an employee whose salary is debited to among the group companies on cost sharing basis, is liable for Service tax or not?.

Regards

N.Balachandran

Posts / Replies

[Naveed S]

Section 65B(44) of the Finance Act, 1994 which defines the term ‘service’ specifically excludes services provided by an employee to employer in the course of employment from the purview of Service tax.

Accordingly, on careful reading of the provisions relating to reverse charge in light of the Service tax laws, it can be concluded that if there is an employee-employer relationship, then there is no service tax liability and, hence, no question of reverse charge can arise.

Reverse charge provisions can apply only if a service is otherwise taxable.

 

[Ramanujam Varadarajan]

Post negative list concept, any recovery of salary paid to the employee from group companies would be subject to service tax and the same is chargeable from the group companies proportionate to the recovery made. The specific provision of Section 65B(44) would only cover the payments of salary by employer to the employee and not the recoveries made from group companies.

[Pradeep Khatri]

Dear N Balachandran,

This judgment may be of your use. Please go through it.

TMI ID= 245634

2014 (4) TMI 132 - GUJARAT HIGH COURT  Other Citation: 2014 (35) S.T.R. 496 (Guj.)

Commissioner of Service Tax Versus Arvind Mills Ltd.

Liability to service tax - Deputation of employees to group company - Manpower Supply Recruitment Agency Service - Whether activity of Respondent would cover under Manpower Supply Recruitment Agency Service - Held that:- definition of Manpower Supply Recruitment Agency is wide and would cover within its sweep range of activities provided therein - such definition would not cover the activity of the respondent - To recall, the respondent in order to reduce his cost of manufacturing, deputed some of its staff to its subsidiaries or group companies for stipulated work or limited period. All throughout the control and supervision remained with the respondent. As pointed out by the respondent, company is not in the business of providing recruitment or supply of manpower. Actual cost incurred by the company in terms of salary, remuneration and perquisites is only reimbursed by the group companies. There is no element of profit or finance benefit. The subsidiary companies cannot be said to be their clients. Deputation of the employees was only for and in the interest of the company. There was no relation of agency and client. It was pointed out that the employee deputed did not exclusively work under the direction of supervision or control of subsidiary company. All throughout he would be under the continuous control and direction of the company. The definition though provides that Manpower Recruitment Supply Agency means any commercial concern engaged in providing any services directly or indirectly in any manner for recruitment or supply of manpower temporarily or otherwise to a client, in the present case, the respondent cannot be said to be a commercial concern engaged in providing such specified services to a client. It is true that the definition is wide and would include any such activity where it is carried out either directly or indirectly supplying recruitment or manpower temporarily or otherwise. However, fundamentally recruitment of the agency being a commercial concern engaged in providing any such service to client would have to be satisfied - No question of law arises - Decided against Revenue.

No. - Tax Appeal No. 138 of 2014

Dated - March 20, 2014

Akil Kureshi And Sonia Gokani,JJ. For the Petitioner : Mr. AY Kogje, Advocate For the Respondent : Mr. Bharat T. Rao, Advocate ORDER ( Per : Honourable Mr. Justice Akil Kureshi ) 1. Revenue is in appeal against the judgment of the Customs Excise and Service Tax Appellate Tribunal (“the Tribunal” for short) dated 26.7.2013 raising following questions for our consideration:- “(a) Whether in the fact and the circumstances of the case the Hon’ble CESTAT has erred in applying the ratio of a case decided by CESTAT Delhi in case of Aramount communication Ltd. reported in 2013-TIOL-37-CESTAT-DEL.: 2013 (29) STR 317 without narrating and applying the same to the facts of the present case? (b) Whether in the facts and the circumstances the activity of the Respondent is covered under the definition of “Manpower Recruitment Agency” as contemplated in C168 of S.65 of the Finance Act 1994 R/w. C1 105 (k), thus the respondent is liable for the Service Tax? (c) Whether in the facts and circumstances of the case whether the service rendered by the respondent is a taxable activity attracting Service Tax?” 2. Issue in brief is whether the respondent is a Manpower Supply Recruitment Agency. Definition of the said term applicable at the relevant time reads as under:- “Manpower recruitment or supply agency means any commercial concern engaged in providing any service directly or indirectly, in any manner for recruitment or supply of manpower, temporary or otherwise to a client”. 3. Brief facts are that respondent had a composite textile mill and was engaged in manufacturing of fabrics and ready-made garments. In order to reduce its cost the respondent deputed some of its employees to its group company, who were also engaged in similar businesses. Reason for such deputation was also on certain occasions stipulated work arising for a limited period. The Tribunal recorded that there was no allegation of finding that the respondent had deputed employees to any other concerns outside its own subsidiary companies. The Tribunal also recorded that undisputedly the employees deputed do not work exclusively under the direction or supervision of the subsidiary company and upon completion of the work they were repatriated to the respondent company. On such basis, the Tribunal held that the respondent cannot be said to be Manpower Supply Recruitment Agency and, therefore, not exigible to service tax. 4. Counsel for the Revenue vehemently contended that the definition of Manpower Supply Recruitment Agency is very wide and would include range of activities of supply of manpower either temporarily or permanently. He submitted that sizable manpower was required for the respondent from the group companies for deputation of the staff. He drew our attention to the amendment of such definition to contend that after the amendment, the definition was widened. 5. It is true that in the present form, the definition of Manpower Supply Recruitment Agency is wide and would cover within its sweep range of activities provided therein. However, in the present case, such definition would not cover the activity of the respondent as rightly held by the Tribunal. To recall, the respondent in order to reduce his cost of manufacturing, deputed some of its staff to its subsidiaries or group companies for stipulated work or limited period. All throughout the control and supervision remained with the respondent. As pointed out by the respondent, company is not in the business of providing recruitment or supply of manpower. Actual cost incurred by the company in terms of salary, remuneration and perquisites is only reimbursed by the group companies. There is no element of profit or finance benefit. The subsidiary companies cannot be said to be their clients. Deputation of the employees was only for and in the interest of the company. There was no relation of agency and client. It was pointed out that the employee deputed did not exclusively work under the direction of supervision or control of subsidiary company. All throughout he would be under the continuous control and direction of the company. 6. We have to examine the definition of Manpower Supply Recruitment Agency in background of such undisputable facts. The definition though provides that Manpower Recruitment Supply Agency means any commercial concern engaged in providing any services directly or indirectly in any manner for recruitment or supply of manpower temporarily or otherwise to a client, in the present case, the respondent cannot be said to be a commercial concern engaged in providing such specified services to a client. It is true that the definition is wide and would include any such activity where it is carried out either directly or indirectly supplying recruitment or manpower temporarily or otherwise. However, fundamentally recruitment of the agency being a commercial concern engaged in providing any such service to client would have to be satisfied. In the present case, facts are to the contrary. 7. In the result, no question of law arises. Tax Appeal is dismissed. ***

Regards,

YAGAY and SUN

[Ramanujam Varadarajan]

The highlighted decision is in the context of taxability of service under Manpower recruitment/hiring. It was not considered even in the context of Business support service etc earlier. Thus, in the context of post negative list concept, with the wide coverage, favorable reliance of the decision is doubtful.

[Pradeep Khatri]

Dear Balachandran,

It is important to note that old definition of Manpower Recruitment or Supply Agency was rescinded w.e.f. July 1, 2012, and new definition of “Supply of Manpower” provided under Rule 2(1)(g) of the Service Tax Rules, 1994, which reads as under:

“Supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control.”

There was change in the definition of Manpower Recruitment or Supply Agency at several occasions and considering recent change in the definition of Supply of manpower effective from July 1 2012, essence of the said judgment still holds good on principle and Service tax should not be chargeable on deputation of employees to subsidiary companies for limited period on cost-sharing basis under Supply of Manpower services.

It is advisable to have proper agreement to substantiate that deputed employees sent for limited period on actual cost sharing basis and do not work under the supervision and control of the service recipient so as to be out of the ambit of supply of manpower service.

Regards,

YAGAY and SUN

[Naveed S]

Sir the views provided by Pradeep Sir are quite relevant to the issue.

The negative list concept is not applicable to the present case; as clarity regarding exclusion of employer - employee relationship specifically provided in the definition of 'service'; also no specific mention on the subject issue discussed therein.