Summary
Northern Operating Systems, an Indian back-office service provider to its Northern Trust group companies abroad (paid cost plus 15%), obtained skilled employees from them on secondment: the secondees worked under its control but stayed on the overseas payroll, drew salaries and expatriate allowances in foreign currency under the group's global mobility policy and reverted to the overseas employer afterwards, the Indian company reimbursing the salary cost. The revenue demanded service tax on reverse-charge basis as 'manpower recruitment or supply agency service' (pre-July 2012) and as 'service' (post-July 2012), invoking the extended period; CESTAT found no taxable service. The Supreme Court, applying substance over form, held the overseas company was the real employer supplying manpower to the assessee, liable for the normal periods only, as there was no wilful suppression.
Issues
- Whether secondment of skilled employees by overseas group companies to an Indian affiliate — the secondees working under the Indian company's control but remaining on the overseas payroll, paid under the group's expatriate policy and repatriated on completion — amounts to 'manpower recruitment or supply agency service' under Sections 65(68) and 65(105)(k) of the Finance Act, 1994 (before 01.07.2012) and to a taxable 'service' not excluded by Section 65B(44)(b) (after 01.07.2012), or to an employer-employee relationship outside service tax.
- Whether the absence of a mark-up on reimbursement of salaries means there was no consideration, and whether revenue neutrality (eligibility to refund or CENVAT credit) affects the incidence of tax.
- Whether the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994 could be invoked on the ground of wilful suppression.
Provisions considered
- Sections 65(68) and 65(105)(k) (pre-01.07.2012); Section 65B(44) and its exclusion (b) (post-01.07.2012); Section 66A, Finance Act, 1994Before July 2012 the question was whether any person provided service, directly or indirectly, in any manner for recruitment or supply of manpower, temporarily or otherwise; after it, every activity for consideration is 'service' save for the excluded categories, including service by an employee to his employer. On the true nature of the arrangement the overseas company remained the employer and supplied its employees to the assessee, so the exclusion did not apply and the assessee was the service recipient liable on reverse charge for both periods. (¶¶ 43, 44, 45, 46, 49, 50, 53, 54, 55, 57, 61, 65)
- Section 73(1) proviso (extended period of limitation), Finance Act, 1994Following Cosmic Dye Chemical (on the identically worded Section 11A of the Central Excise Act) and Uniworth Textiles, suppression or misstatement must be wilful, with intent to evade; the CESTAT's reliance on its own earlier orders in the assessee's favour and the revenue's own dropping of the later two show cause notices showed the assessee's view was neither untenable nor mala fide, so the extended period could not be invoked. (¶¶ 62, 63, 64, 65, 66)
Held
- The taxability of a cross-charge for seconded employees turns on who is the real employer: if the Indian company is the employer the payment is reimbursement and not taxable; if the overseas entity is, the arrangement is a service by it and taxable. The nomenclature of a contract is not decisive; its overall effect must be seen (Titaghur Paper Mills). The control test is no longer the sole or decisive test — a conglomerate of tests on the totality of facts (integration, who pays, economic reality) decides whether a contract is of service or for service (Dharangadhara; Silver Jubilee Tailoring House; Sushilaben Indravadan Gandhi), and the Court applies substance over form. (¶¶ 34, 38, 40, 41, 47, 48, 51, 56)
- On a conjoint reading of the services agreement, master services agreement, secondment agreement and letter of understanding: the overseas company assigns tasks to the assessee and pays it cost plus 15%; the employee is temporarily loaned, works under the assessee's operational control, and the assessee bears responsibility and reimburses salary; the secondment is for a fixed term, treated as an 'assignment' with repatriation under the group's global mobility policy; salary and expatriate allowances (hardship, housing, servant, home leave) are fixed in foreign currency under the overseas employer's standardised policy. The secondees remain on the overseas payroll — a legal requirement for their home-country social security — and revert to that employer or go on further secondment; the letter of understanding never contemplates their becoming the assessee's employees after the term. (¶¶ 49, 50, 52, 53, 54, 55, 57)
- Though the assessee had operational control and the right to send a secondee back, the overseas employer deployed them to the assessee in relation to its own business, paid their salaries and governed their terms even during secondment, and received them back at the end; the overseas group company was therefore the employer and provided manpower supply service (pre-2012) or a taxable service not within exclusion (b) of Section 65B(44) (post-2012), with the assessee as service recipient. (¶¶ 55, 57, 61, 65)
- Payment of remittances is only one way of reckoning consideration; the economic benefit to the assessee, which secures jobs and revenues from the group companies and has the benefit of experts for limited periods, supplies the quid pro quo implicit in the scheme. Revenue neutrality is irrelevant to the incidence of tax: whether and to what extent the assessee may later claim refund or credit does not bear on whether the taxable event occurred, and the unreasoned affirmations in SRF, Coca Cola, Volkswagen and Computer Sciences Corporation have no precedential value. (¶¶ 58, 59, 60)
- Mere non-payment is not wilful suppression; misstatement or suppression must be wilful, with intent to evade (Cosmic Dye Chemical; Uniworth Textiles). Given CESTAT's earlier orders in favour of such assessees and the revenue's own discharge of the later notices, the assessee's view was bona fide and the extended period of limitation was wrongly invoked; liability is confined to the normal periods under the four show cause notices. (¶¶ 62, 63, 64, 66)
Result
Appeals partly allowed; the CESTAT's common order of 23.12.2020 set aside and the Commissioner's orders-in-original restored except to the extent they recover amounts for the extended period of limitation; the assessee held liable to service tax for the normal periods covered by the four show cause notices, the demands to be modified accordingly. No order on costs.