# C.C., C.E. & S.T. - BANGALORE (ADJUDICATION) ETC v. M/S NORTHERN OPERATING SYSTEMS PVT LTD

- **Citation:** [2022] 18 S.C.R. 901
- **Court:** Supreme Court of India
- **Decided:** 2022-05-19
- **Case number:** Civil Appeal No. 2289-2293 of 2021
- **Bench:** Uday Umesh Lalit, S. Ravindra Bhat, Pamidighantam Sri Narasimha
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/c-c-c-e-s-t-bangalore-adjudication-etc-v-m-s-northern-operating-systems-pvt-ltd-36176
- **Pages:** 47

## Headnote

Finance Act, 1994 - Service Tax - SecondmentAgreement;
Service Agreement-Revenue issued four show cause notices(SCNs
) alleging that the respondent-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-Demandsconfirmed
by Commissioner of Service Tax-Commissioner had also discharged
the proceedings arising from a show cause notice-Appeals by
Revenue as well as by assessee -Revenue's appeals were rejected
while that of the assessee's were allowed by CESTAT - On appeal,
held: Assessee was the service recipient for service (of manpower
recruitment and supply services) by the overseas entity, in regard to
the employees it seconded to the assessee, for the duration of their
deputation or secondment - Assessee liable to pay service tax for
the periods spelt out in the SCNs, consequential demands therefore,
shall be recovered from the assessee - However, the invocation of
the extended period of limitation was unjustified - Impugned
common order of the CESTAT is set aside -Commissioner's orders
in original are 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 be modified,
excluding any liability for the extended period of limitation.
Secondment Arrangement- Held: In a typical secondment
arrangement, employees of overseas entities are deputed to the host
entity (Indian associate) on the latter's request to meet its specific
needs and requirements of the Indian associate - During the
arrangement, the secondees work under the control and supervision
of the Indian company and in relation to the work responsibilities
of the Indian affiliate - Social security laws of the home country
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[2022] 18 S.C.R.
(of the secondees) and business considerations result in payroll
retention and salary payment by the foreign entity, which is claimed
as reimbursement from the host entity.
Finance Act, 1994 - s.65(44) - Held: By s.65 (44), "service"
means (a) any activity (b) carried out by a person for another (c)
for consideration, and (d) includes a declared service (the term
"declared service" is defined in s.66E) - However, s.65 (44)excludes
from its sweep [by clause (b)], "a provision of service by an employee
to the employer in the course of or in relation to his employment".
Deeds and Documents - Interpretation of documents - Held:
One of the cardinal principles of interpretation of documents, is
that the nomenclature of any contract, or document, is not decisive
of its nature - An overall reading of the document, and its effect, is
to be seen by the courts.
Contract - Contract of service or Contract for service - Held:
There is not one single determinative factor, which the courts give
primacy to, while deciding whether an arrangement is a contract of
service (as the assessee asserts the arrangement to be) or a contract
for service - The general drift of cases which have been decided,
are in the context of facts, where the employer usually argues that
the person claiming to be the employee is an intermediary -Supreme
court has consistently applied one test- substance over form,
requiring a close look at the terms of the contract, or the agreements.
Partly allowing the appeals, the Court
HELD: 1.1 The issue which this court has to decide is
whether the overseas group company or companies, with whom
the assessee has entered into agreements, provide it manpower
services, for the discharge of its functions through seconded
employees.The contemporary global economy has witnessed rapid
cross-border arrangements for which dynamic mobile workforces
are optimal. To leverage talent within a transnational group,
employees are frequently seconded to affiliated or group
companies based on business considerations. In a typical
secondment arrangement, empl

## Text

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 [2022] 18 S.C.R. 901
901
C.C., C.E. & S.T. - BANGALORE (ADJUDICATION) ETC.
v.
M/S NORTHERN OPERATING SYSTEMS PVT LTD.
(Civil Appeal No. 2289-2293 of 2021)
MAY 19, 2022
[UDAY UMESH LALIT, S. RAVINDRA BHAT AND
PAMIDIGHANTAM SRI NARASIMHA, JJ.]
Finance Act, 1994 - Service Tax - SecondmentAgreement;
Service Agreement-Revenue issued four show cause notices(SCNs
) alleging that the respondent-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-Demandsconfirmed
by Commissioner of Service Tax-Commissioner had also discharged
the proceedings arising from a show cause notice-Appeals by
Revenue as well as by assessee -Revenue's appeals were rejected
while that of the assessee's were allowed by CESTAT - On appeal,
held: Assessee was the service recipient for service (of manpower
recruitment and supply services) by the overseas entity, in regard to
the employees it seconded to the assessee, for the duration of their
deputation or secondment - Assessee liable to pay service tax for
the periods spelt out in the SCNs, consequential demands therefore,
shall be recovered from the assessee - However, the invocation of
the extended period of limitation was unjustified - Impugned
common order of the CESTAT is set aside -Commissioner's orders
in original are 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 be modified,
excluding any liability for the extended period of limitation.
Secondment Arrangement- Held: In a typical secondment
arrangement, employees of overseas entities are deputed to the host
entity (Indian associate) on the latter's request to meet its specific
needs and requirements of the Indian associate - During the
arrangement, the secondees work under the control and supervision
of the Indian company and in relation to the work responsibilities
of the Indian affiliate - Social security laws of the home country
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SUPREME COURT REPORTS
[2022] 18 S.C.R.
(of the secondees) and business considerations result in payroll
retention and salary payment by the foreign entity, which is claimed
as reimbursement from the host entity.
Finance Act, 1994 - s.65(44) - Held: By s.65 (44), "service"
means (a) any activity (b) carried out by a person for another (c)
for consideration, and (d) includes a declared service (the term
"declared service" is defined in s.66E) - However, s.65 (44)excludes
from its sweep [by clause (b)], "a provision of service by an employee
to the employer in the course of or in relation to his employment".
Deeds and Documents - Interpretation of documents - Held:
One of the cardinal principles of interpretation of documents, is
that the nomenclature of any contract, or document, is not decisive
of its nature - An overall reading of the document, and its effect, is
to be seen by the courts.
Contract - Contract of service or Contract for service - Held:
There is not one single determinative factor, which the courts give
primacy to, while deciding whether an arrangement is a contract of
service (as the assessee asserts the arrangement to be) or a contract
for service - The general drift of cases which have been decided,
are in the context of facts, where the employer usually argues that
the person claiming to be the employee is an intermediary -Supreme
court has consistently applied one test- substance over form,
requiring a close look at the terms of the contract, or the agreements.
Partly allowing the appeals, the Court
HELD: 1.1 The issue which this court has to decide is
whether the overseas group company or companies, with whom
the assessee has entered into agreements, provide it manpower
services, for the discharge of its functions through seconded
employees.The contemporary global economy has witnessed rapid
cross-border arrangements for which dynamic mobile workforces
are optimal. To leverage talent within a transnational group,
employees are frequently seconded to affiliated or group
companies based on business considerations. In a typical
secondment arrangement, employees of overseas entities are
deputed to the host entity (Indian associate) on the latter's
request to meet its specific needs and requirements of the Indian
associate. During the arrangement, the secondees work under
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the control and supervision of the Indian company and in relation
to the work responsibilities of the Indian affiliate. Social security
laws of the home country (of the secondees) and business
considerations result in payroll retention and salary payment by
the foreign entity, which is claimed as reimbursement from the
host entity. The crux of the issue is the taxability of the cross
charge, which is primarily based on who should be reckoned as
an employer of the secondee. If the Indian company is treated as
an employer, the payment would in effect be reimbursement and
not chargeable to tax in the hands of the overseas entity. However,
in the event the overseas entity is treated as the employer, the
arrangement would be treated as service by the overseas entity
and taxed.[Paras 33, 34][933-D-H]
1.2 A plain reading of the definition of "manpower
recruitment agency" (per Section 65 (68) of the unamended Act)
requires that to fall within that description, (a) a person (the
expression is not defined; however, by Section 3 (42) of the
General Clauses Act, the term includes "any company or
association or body of individuals whether incorporated or not");
(b) provides service (c) directly or indirectly, (d) in any manner
for recruitment or supply of manpower, (e) temporarily or
otherwise. The question is what are the services provided to the
assessee, and by whom? Do they include the provision of services,
through employees, by its overseas group companies or affiliates?
After 01.07.2012, the definition of "service" underwent a change.
Except listed categories of activities excluded from, or kept out
of the fold of the definition, every activity virtually is "service".
Now, by Section 65 (44), "service" means (a) any activity (b)
carried out by a person for another (c) for consideration, and(d)
includes a declared service (the term "declared service" is
defined in Section 66E).Section 65 (44), however, excludes from
its sweep [by clause (b)], "a provision of service by an employee to
the employer in the course of or in relation to his employment."
The assessee contends that the secondment agreement has the
effect of placing the overseas employees under its control, so to
say, and enables it to require them to perform the tasks for its
purposes. It emphasizes that the real nature of the relationship
between it and the seconded employees is of employer and
C.C., C.E. & S.T. - BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD.
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employee, and outside the purview of the service tax
regime.[Paras 43-45][940-B-G]
1.3 Prior to July 2012, what had to be seen was whether a
(a) person provided service (b) directly or indirectly, (c) in any
manner for recruitment or supply of manpower (d) temporarily
or otherwise. After the amendment, all activities carried out by
one person for another, for a consideration, are deemed services,
except certain specified excluded categories. One of the excluded
category is the provision of service by an employee to the
employer in relation to his employment. One of the cardinal
principles of interpretation of documents, is that the nomenclature
of any contract, or document, is not decisive of its nature. An
overall reading of the document, and its effect, is to be seen by
the courts.The task of this court, therefore is to, upon an overall
reading of the materials presented by the parties, discern the
true nature of the relationship between the seconded employees
and the assessee, and the nature of the service provided - in
that context - by the overseas group company to the assessee.A
co-joint reading of the documents on record show that: (i)
Attachment 1 to the service agreement ensures that the overseas
group company assigns, inter alia, certain tasks to the assessee,
including back office operations of a certain kind, in relation to
its activities, or that of other group companies or entities; (ii)
The assessee is paid a mark up of 15% of the overall expenditure
it incurs, by the overseas company (clause 2, read with attachment
1 of the Service Agreement); (iii) By the Secondment Agreement,
the parties agree that the overseas employee is temporarily loaned
to the assessee (Article I read with the Schedule); (iv) During
the period of secondment, the assessee has control over the
employee, i.e. it can require the seconded employee to return,
and likewise, the employee has the discretion to terminate the
relationship (Article II); (v) The overseas employer (group
company) pays the seconded employee, which is reimbursed to
the overseas company, by the assessee (Article III); (vi) The
assessee is responsible for the work of the seconded employee,
i.e., the overseas employer, during the secondment period, is
absolved of any liability for the job or work of its seconded
employees (Article VII); (vii) The secondment is for a specified
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duration, and the employment with the assessee ceases upon
the expiration of that period (Article II of the secondment
agreement and the "Duration" clause in the letter of
understanding with the seconded employee); (viii) The letter of
understanding issued to the seconded employee specifies that
the tenure with the assessee is an assignment (in one place, the
term used is "At its conclusion, repatriation will be in accordance
with the Global Mobility Repatriation Policy"); (ix) The terms
include the salary payable as well as other allowances, such as
hardship allowance, vehicle allowance, servant allowance, paid
leave, housing allowance, etc. The nature of salary and other perks
underscore the fact that the seconded employees are of a certain
skill and possess the expertise, which the assessee
requires.[Paras 46-49][940-H; 941-A-B, E-G]
1.4 The above features show that the assessee had
operational or functional control over the seconded employees;
it was potentially liable for the performance of the tasks assigned
to them. That it paid (through reimbursement) the amounts
equivalent to the salaries of the seconded employees - because
of the obligation of the overseas employer to maintain them on
its payroll, has two consequences: one, that the seconded
employees continued on the rolls of the overseas employer; two,
since they were not performing jobs in relation to that employer's
business, but that of the assessee, the latter had to ultimately
bear the burden. There is nothing unusual in this arrangement,
given that the seconded employees were performing the tasks
relating to the assessee's activities and not in relation to the
overseas employer. To put it differently, it would be unnatural to
expect the overseas employer to not seek reimbursement of the
employees' salaries, since they were, for the duration of
secondment, not performing tasks in relation to its activities or
business. There is not one single determinative factor, which the
courts give primacy to, while deciding whether an arrangement
is a contract of service (as the assessee asserts the arrangement
to be) or a contract for service. The general drift of cases which
have been decided, are in the context of facts, where the employer
usually argues that the person claiming to be the employee is an
intermediary. This court has consistently applied one test:
C.C., C.E. & S.T. - BANGALORE (ADJUDICATION) ETC. v. M/S
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substance over form, requiring a close look at the terms of the
contract, or the agreements.A vital fact which is to be considered
in this case, is that the nature of the overseas group companies
business appears to be to secure contracts, which can be
performed by its highly trained and skilled personnel. This
business is providing certain specialized services (back office,
IT, bank related services, inventories, etc.). Taking advantage
of the globalized economy, and having regard to locational
advantages, the overseas group company enters into agreements
with its affiliates or local companies, such as the assessee. The
role of the assessee is to optimize the economic edge (be it
manpower or other resources availability) to perform the specific
tasks given it, by the overseas company. As part of this agreement,
a secondment contract is entered into, whereby the overseas
company's employee or employees, possessing the specific
required skill, are deployed for the duration the task is estimated
to be completed in. This court is not concerned with unravelling
the nature of relationship between the overseas company and
the assessee. However, what it has to decide, is whether the
secondment, for the purpose of completion of the assessee's job,
amounts to manpower supply. [Paras 50-52][942-G-H, A-F]
1.5 Facially, or to put it differently, for all appearances, the
seconded employee, for the duration of her or his secondment,
is under the control of the assessee, and works under its direction.
Yet, the fact remains that they are on the pay rolls of their overseas
employer. What is left unsaid- and perhaps crucial, is that this is
a legal requirement, since they are entitled to social security benefits
in the country of their origin. It is doubtful whether without the
comfort of this assurance, they would agree to the secondment.
Furthermore, the reality is that the secondment is a part of the
global policy - of the overseas employer loaning their services,
on temporary basis. On the cessation of the secondment period,
they have to be repatriated in accordance with a global repatriation
policy (of the overseas entity). The letter of understanding
between the assessee and the seconded employee nowhere states
that the latter would be treated as the former's employees after
the seconded period (which is usually 12-18 months). On the
contrary, they revert to their overseas employer and may in fact,
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be sent elsewhere on secondment. The salary package, with
allowances, etc., are all expressed in foreign currency (e.g., US $
330,000/- per annum in the letter produced before court).
Furthermore, the allowances include a separate hardship
allowance of 20% of the basic salary for working in India. The
monthly housing allowance in the specific case was 366,700. In
addition, an annual utility allowance of 3,97,500/- is also assured.
These are substantial amounts, and could have been only by
resorting to a standardized policy, of the overseas
employer.[Paras 53, 54][943-G-H; 944-A-D]
1.6 The overall effect of the four agreements entered into
by the assessee, at various periods, with NTS or other group
companies, clearly points to the fact that the overseas company
has a pool of highly skilled employees, who are entitled to a certain
salary structure- as well as social security benefits. These
employees, having regard to their expertise and specialization,
are seconded (a term synonymous with the commonly used term
in India, deputation) to the concerned local municipal entity (in
this case, the assessee) for the use of their skills. Upon the
cessation of the term of secondment, they return to their overseas
employer, or are deployed on some other secondment. While the
control (over performance of the seconded employees' work) and
the right to ask them to return, if their functioning is not as is
desired, is with the assessee, the fact remains that their overseas
employer in relation to its business, deploys them to the assessee,
on secondment. Secondly, the overseas employer- for whatever
reason, pays them their salaries. Their terms of employment -
even during the secondment - are in accord with the policy of the
overseas company, who is their employer. Upon theend of the
period of secondment, they return to their original places, to await
deployment or extension of secondment.[Paras 55, 57][944-E-F,
945-A-B]
1.7 The assessee was, for the relevant period, service
recipient of the overseas group company concerned, which can
be said to have provided manpower supply service, or a taxable
service, for the two different periods in question (in relation to
which show cause notices were issued).[Para 61][946-B]
1.8 The assessee was the service recipient for service (of
manpower recruitment and supply services) by the overseas
C.C., C.E. & S.T. - BANGALORE (ADJUDICATION) ETC. v. M/S
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entity, in regard to the employees it seconded to the assessee,
for the duration of their deputation or secondment. Furthermore,
in view of the above discussion, the invocation of the extended
period of limitation in both cases, by the revenue is not tenable.
In light of the above, the assessee is liable to pay service tax for
the periods spelt out in the SCNs. However, the invocation of
the extended period of limitation, in this court's opinion, was
unjustified and unreasonable. Resultantly, the assessee is held
liable to discharge its service tax liability for the normal period
or periods, covered by the four SCNs issued to it. The
consequential demands therefore, shall be recovered from the
assessee. The impugned common order of the CESTAT is 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. [Paras
65-67][947-C-F]
Commissioner of Income Tax v. M/s. Eli Lilly & Company
India Pvt. Ltd. (2009) 15 SCC 1 : 2009 (5) SCR 20;
Smt. Savita Garg v. The Director, National Heart Institute
(2004) 8 SCC 56 : 2004 (5) Suppl. SCR 359; Workmen
of Nilgiri Cooperative Marketing Limited v. State of
Tamil Nadu & Ors. (2004) 3 SCC 514 : 2004 (2) SCR
159; Hussain Bhai Calicut v. Alath Factory Thozhilali
(1978) 4 SCC 257 : 1978 (3) SCR 1073; Sushilaben
Indravadan Gandhi v. New India Assurance Co. Ltd.
(2021) 7 SCC 151 : 2020 (9) SCR 32; Intercontinental
Consultants and Technocrats Pvt. Ltd. v. Union of India
(2018) 4 SCC 669 : (2018) 10 SCR 309; Escorts v.
Commissioner of Central Excise (2015) 9 SCC 109 :
2015 (5) SCR 241; Commissioner of Customs v. Magus
Metals (2017) 16 SCC 491; Director Income Tax v. M/
S Morgan Stanley & Co. Inc. (2007) 7 SCC 1 : 2007
(8) SCR 52; Dharangadhara Chemical Works Ltd. v.
State of Saurashtra 1957 SCR 158; D.C. Dewan
Mohideen Sahib and Sons v. Secretary, United Beedi
Workers' Union 1964 (7) SCR 646; Silver Jubilee
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Tailoring House v. Chief Inspector of Shops &
Establishments 1974 (1) SCR 747; Indian Banks
Association v. Workmen of Syndicate Bank 2001 (1)
SCR 1011; Indian Overseas Bank v. Workmen (2006)
3 SCC 729; State of Orissa v. Titaghur Paper Mills Co.
Ltd. 1985 Supp SCC 280; Prakash Roadlines (P) Ltd.
v. Oriental Fire & General Insurance Co. Ltd. (2000)
10 SCC 64; Cosmic Dye Chemical v. Collector of
Central Excise (1995) 6 SCC 117; Uniworth Textiles v.
Commissioner of Central Excise (2013) 9 SCC 753 -
referred to.
SRF Ltd. v. Commissioner 2016 (331) ELT A 138 (S.C.);
Commissioner of Central Excise v. Coca Cola India Pvt.
Ltd. 2007 (213) ELT 490 (S.C.); Honeywell Technology
Solutions Pvt. Ltd. v. CST, Bangalore 2020-TIOL-1277CESTAT-BANG; Volkswagen India Pvt. Ltd. v. CCE,
Pune-I 2014 (34) S.T.R. 135 (Tri. - Mumbai);
Commissioner v. Volkswagen India (Pvt.) Ltd. 2016 (42)
S.T.R. J145 (S.C.); Computer Sciences Corporation
India Pvt. Ltd. v. Commissioner of Service Tax, Noida
2014-TIOL-434-CESTAT DEL - referred to.
Klaus Vogel on Double Tax Conventions, Den Haag:
Wolters Kluwer, Law and Business 2015 - referred
to.
Case Law Reference
[2009] (5) SCR 20
referred to
Para 18
[2004] (5) Suppl. SCR 359
referred to
Para 18
[2004] (2) SCR 159
referred to
Para 18
[1978] (3) SCR 1073
referred to
Para 18
[2020] (9) SCR 32
referred to
Para 18
[2018] (10) SCR 309
referred to
Para 26
[2015] (5) SCR 241
referred to
Para 63
[2007] (8) SCR 52
referred to
Para 35
[1957] SCR 158
referred to
Para 38
C.C., C.E. & S.T. - BANGALORE (ADJUDICATION) ETC. v. M/S
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[1964] (7) SCR 646
referred to
Para 39
[1974] (1) SCR 747
referred to
Para 40
[2001] (1) SCR 1011
referred to
Para 41
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.22892293 of 2021.
From the Judgment and Order dated 23.12.2020 of the Customs,
Excise & Service Tax Appellate Tribunal, South Zonal Bench, Bangalore
in STA Nos.22573-22574 of 2014, 21502 and 21077 of 2017, 20225 of
2018.
Balbir Singh, ASG, Ms. Swati Ghildiyal, Akshay Amritanshu,
Divyansh H. Rathi, Shyam Gopal, Ms. Preeti Rani, Mukesh Kumar
Maroria, Advs. for the Appellant.
V. Sridharan, Sr. Adv., Aditya Bhattacharya, Ms. Mounica Kasturi,
Ms. Apeksha Mehta, Sahil Parghi, Ms. Charanya Lakshmikumaran, Advs.
for the Respondent.
The Judgment of the Court was delivered by
S. RAVINDRA BHAT, J.
1. The Commissioner of Central Excise and Service Tax (hereafter
variously described as "the revenue" or "the appellant") has preferred
appeals1, directed against the impugned orders of the Customs, Excise
and Service Tax Appellate Tribunal (hereafter "CESTAT")2 which set
aside two orders dated 03.03.2014 and 04.03.2014 by the Commissioner
of Service Tax (hereafter "the Commissioner"). The Commissioner had
confirmed demands, made through show cause notices, for service tax
along with interest and penalty. The commissioner had discharged, by
an order (dated 27.02.2017/16.06.2017) the proceedings arising from
another show cause notice (hereafter "SCN") in respect of a similar
demand. That led to the revenue's appeal to CESTAT, challenging that
order, discharging proceedings initiated by the revenue for the subsequent
period. The CESTAT, by its common order, rejected the revenue's appeals,
and allowed that of the respondent, Northern Operating Systems (Pvt.)
Ltd. (hereafter "the assessee" or "NOS").
1 Under Section 35L (b) of the Central Excise Act, 1944.
2 Dated 23.12.2020 in Service Tax Appeal (STA) Nos. 22573-74/2014; STA No. 21502/
2017, Service Tax/CROSS/21077/2017 and Service Tax/CROSS/20255/2018.
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Facts of the case
2. The assessee was registered with the revenue, as a service
provider under the categories of "Manpower Recruitment Agency
Service", "Business Auxiliary Service", "Commercial Training and
Coaching Service", "TTSS", "Telecommunication and Legal Consultancy
Service" etc., under the Finance Act, 1994 (hereafter "the Act").
Following an audit of the records by the revenue's officials, proceedings
were initiated against the assessee alleging non-payment of service tax
concerning agreements entered into by it with its group companies located
in USA, UK, Dublin (Ireland), Singapore, etc. to provide general backoffice and operational support to such group companies.
3. The nature and contents of the agreements, are discernible in
their description, extracted from the impugned order - where the assessee
has been referred to as "the appellant" by the CESTAT- which is as
follows:
"The relevant terms of the agreement to understand the activity
are as follows:
a) When required Appellants requests the group companies
for managerial and technical personnel to assist in its business
and accordingly the employees are selected by the group
company and they would be transferred to Appellants.
b) The employees shall act in accordance with the instructions
and directions of Appellants. The employees would devote
their entire time and work to the employer seconded to.
c) The seconded employees would continue to be on the payroll
of the group company (foreign entity) for the purpose of
continuation of social security/retirement benefits, but for all
practical purposes, Appellants shall be the employer. During
the term of transfer or secondment the personnel shall be the
employee of Appellants. Appellants issue an employment letter
to the seconded personnel stipulating all the terms of the
employment.
d) The employees so seconded would receive their salary,
bonus, social benefits, out of pocket expenses and other
expenses from the group company.
e) The group company shall raise a debit note on Appellants
to recover the expenses of salary, bonus etc. and the Appellants
C.C., C.E. & S.T. - BANGALORE (ADJUDICATION) ETC. v. M/S
NORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]
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shall reimburse the group company for all these expenses and
there shall be no mark-up on such reimbursement."
As a matter of fact, the assessee issues the prescribed forms to
the seconded employees, in terms of the Income Tax Act, 1961 (hereafter
"IT Act"). Those individuals too file income tax returns and contribute
to the provident fund. Furthermore, NOS remits the above amounts in
foreign exchange, which are reflected in its financial statements. The
assessee is reimbursed (by the foreign entity, Northern Trust Company
- hereafter described as such) 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 appropriate major expense heads were 'Salaries &
Allowances', 'Relocation expenses', 'Consultancy Charges',
'Communication Expenses' and 'Computer Maintenance and repairs.'
4. The revenue issued four show cause notices3 alleging that 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.
The first two of these notices also invoked the proviso to Section 73 (1)
read with Section 66A of the Act, proposing to demand service tax for
the extended period. The assessee resisted these notices, refuting the
allegations in the four SCNs. It was also given a hearing. By two orders4
the commissioner confirmed the proposals in the notice (except the
demand for the period from April 2006 to September 2006) accepting
the fact that part of the demand has been raised @ 12.3% instead of
10.3%. The Commissioner confirmed the demand, holding that firstly,
providing skilled manpower, on secondment basis, is manpower
recruitment or supply agency service in the meaning of Section 65(68)
read with Section 65(105) (k) of the Act. Secondly, the group companies
and their various branches abroad, would be the service providers and
the assessee, who receives skilled manpower, on secondment basis, is
the service recipient. Thirdly, the definition of manpower recruitment or
supply agency, under Section 65(68) has no exclusion clause, requiring
3 Dated 23.04.2012; (for the period October 2006 - March 2011), 19.10.2012 (for the
period April 2011 to March 2012),07.05.2014& 26.11.2015 (for the period April 2012
to September 2014).
4 Order-in-Original No. 29/2013-14 dated 03.03.2014 and No. 30/2013-14 dated
04.03.2014.
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service providers to possess the status of certain specified persons or
organizations, for the purpose of providing the taxable service of
manpower, recruitment or supply agency. It was held, fourthly, that in a
secondment arrangement a secondee would continue to be employed by
the original employer during the secondment, and will, following its
termination return to the seconder/ original employer. As a consequence
of this, the secondee does not become integrated into the host's
organization. It was next concluded that the service provider's obligation
ceases once employees were recruited and seconded. Hence the liability
of service tax under Section 65 (105) (k) would be triggered at that
event. Sixthly, it was held that there is no exclusive provision in law that
restricts taxability of service of manpower recruitment or supply agency,
when salaries are drawn by the assessee for manpower so supplied and
TDS under the Income Tax Act had been affected. Regarding differential
service tax liability, mere worksheets without documentary proof would
be insufficient to grant relief as against the service tax of 41,11,473/-
for the period 2008-2009.
5. It was also ruled that the assessee had not separately disclosed
details of the gross receipts (as receiver of service) of the said services
in the taxable value in the half-yearly ST-3 Returns filed by them with
the department, with intent to evade payment of service tax. On the
eligibility of CENVAT Credit, the onus of furnishing the evidence or
documents indicating factual eligibility of CENVAT credit within the scope
of Rule 3(1) of the CENVAT Credit Rules, 2004 (hereafter "CENVAT
Rules") had not been discharged by the assessee. The Commissioner
was of the view that the assessee was aware of the provisions of law
and had placed nothing on record to indicate the circumstances that
prevented it from approaching the department or accessing the CBEC
website available on public domain. It led no evidence to show reasonable
cause. The extended period assessment and penalty was therefore,
warranted.
6. Aggrieved by the impugned order, the assessee filed two appeals
before the CESTAT. As far as the third appeal5 by the department was
concerned, the period involved was from April 2012 to September 2014.
As a sequel to the earlier SCNs, the assessee was issued two SCNs6
demanding service tax of 4,36,75,590/- and 7,55,48,448/- for the
period April 2012 to April 2013, and April 2013 to September 2014
respectively, along with interest and penalty.
5 Service Tax Appeal No. 21502/2017
C.C., C.E. & S.T. - BANGALORE (ADJUDICATION) ETC. v. M/S
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7. The assessee filed detailed replies on 02.07.2014 and 31.12.2015,
mainly arguing that 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. Further, 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.
8. The Commissioner, Bangalore by order7 dropped the proposals
in the SCN for the period April 2012 to March 2013 and April 2013 to
September 2014, thereby setting aside demands for service tax of
4,36,75,590/- and 7,55,48,448/- respectively (total 11,92,24,038/-).
However, based on a reading of the Secondment Agreement, the
Commissioner by order dated 27.02.2017/16.06.20178 held that firstly,
seconded employees continued on their foreign employer's payroll only
for continuing social security benefits and for all practical purposes the
asseesee was the employer of such seconded employee. Secondly, during
secondment, those employees had to entirely devote their skill and
knowledge towards achieving the purpose of their secondment. Thirdly,
each employee had to report to and be responsible to the assessee.
Fourthly, a look at one sample agreement showed that it was between
the individual and the asseesee, and not between the overseas entity and
the asseesee. Fifthly, the obligation to honour the compensation agreement
was upon the assessee only. Sixthly, the facts were parallel to Volkswagen
India Pvt. Ltd9, in which the CESTAT decided the matter in favour of
the assessee. Seventhly, there was no supply of manpower rendered to
the assessee by the foreign holding company and the method of salary
disbursement is not determinative of the nature of the transaction.
Eighthly, for the period post 2012, the remittance is a reimbursement
based on actuals and there is no amount which is payable in respect of
the activity in question and therefore there is no consideration involved.
6 Bearing C No. IV/16/153/2014- ST. Adjn. (SCH No. CAU/153/Div. III/Gr 29 dated
07.05.2014 and C. No. IV/16/293/2015 ST II Adjn./2043/15 dated 26.11.2015
7 Order-in-Original No. 54-55/2016-17 dated 27.02.2017/16.06.2017
8 Order-in-Original No. 54-55/2016-17 dated 27.02.2017/16.06.2017
9 2014 (34) STR 135
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9. Aggrieved by the Commissioner's order dropping the demand,
the Revenue has filed an appeal challenging it, in which the assessee too
filed its cross objection.
The impugned order
10. The CESTAT, by its order noted the position in law - that
earlier, the definition of taxable services under Section 65(105) (k) included
service by a manpower recruitment or supply agency in relation to
recruitment or supply of manpower temporarily or otherwise. It was
noted that the scope of the term "manpower recruitment of supply
agency" was spelt out in Para 22.3 in the Circular of 27.07.200510. Next,
the CESTAT noted that the position in law changed in that manpower
and recruitment services was per se included since it did not form part
of the negative list. In this regard, it noticed Section 65B (44) in which
by clause (b), provision of service by an employee or employer by or in
relation to employment is an excluded service. CESTAT, therefore,
reasoned that the essential ingredients for any activity to be called as
manpower recruitment or supply agency was that it should be "any
person", engaged in providing a specified service; the specific service
ought to be recruitment of manpower which should be provided
temporarily or otherwise; such service may be provided directly or
indirectly and in any manner - further that the service should be provided
to some other person. According to CESTAT, the definition of "manpower
recruitment or supply agencies" brought under its ambit two types of
activity, i.e., manpower recruitment and manpower supply, and
furthermore, service became taxable only if provided by a manpower
recruitment or supply agency. CESTAT reasoned that in the present
case, it was concerned with supply of manpower after July 2012, when
definition of service specifically excluded certain transactions, such as
the one provided by an employee to an employer in relation to
employment.
11. The CESTAT then, on an examination of the agreements,
interpretation of documents on record (including the agreements entered
by the respondent with its group company), held that the subject matter
of the contract was not supply of manpower. The group companies were
not engaged in supply of manpower. The CESTAT held that those
seconded to the assessee working in the capacity of employees and
receiving salaries by group companies were only for disbursement
10 Circular F.No.B1/6/2005-TRU
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purposes. The employee-employer relationship existed and that the
activity, therefore, could not be termed as "manpower recruitment and
supply agency." It was held that the assessee obtained from its group
companies directly or by transfer, service of expatriate employees who
were paid salaries by the assessee in India, for which tax was deducted
and paid to statutory benefits - such as provident fund. The assessee
also remitted contributions to be paid toward social security and other
benefits on account of the employees, under the laws applicable to the
group companies abroad. In these circumstances, it was 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 assessee's
appeals were allowed and the revenue's appeals were rejected.
Contentions of Revenue
12. Mr. Balbir Singh, learned ASG relied upon the materials
produced before the CESTAT. He submitted that in terms of the Services
Agreement (dated 01.09.2006), by Clause 8, the assessee NOS agreed
to perform or provide to the foreign group company (Northern Trust
Company) various services which were enumerated in Attachment 1 or
such other services as would be agreed to by the parties in future. In
terms of Attachment 1, the assessee was to provide "IT enabled services"
supporting back-up and office related operations. It was submitted that
the remuneration to be provided for the service was fixed at the actual
cost plus a mark-up of 15%. The ASG then referred to the master
services agreement between the assessee and Northern Trust Company
dated 12.02.2009. In terms of this master agreement the assessee was
to provide "general back office and operational support" to the foreign
group company which included foreign investment, investment
management liaison group cash, evaluations and reporting, IRAS fund
accounting, securities, lending operations; tax related operations, including
tax reclaimed, etc. It was pointed out that in terms of Clause 2.1, though
the assessee was to perform and provide services to the foreign group
company, such services could be delivered to other parties nominated by
the Northern Trust Company.
13. The third document referred was the secondment agreement
entered into with effect from 01.04.2007 between the Northern Trust
Management Services Ltd. (an overseas group company - also "NTMS")
and the assessee. The ASG relied broadly on Article I by which parties
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agreed that the assessee would request for the secondment of employees
to be remunerated through the payroll of their foreign employer. Reliance
was also placed upon Article III which stated that the assessee had to
reimburse the expenses paid during the secondment period, in respect of
remuneration of the seconded employees, including the salary, incentive,
out of pocket expenses, etc. It was urged that this clause specifically
stated that the payments by the assessee would be limited to actual
costs incurred, including administrative clause reasonably attributable to
services. The payment mechanism was spelt out in Article IV. The learned
ASG also referred to the independent letter of agreement between the
foreign group company and one of the seconded employees which
specifically stated that secondment was a limited duration assignment in
terms of which the employee had the right to terminate the engagement.
It was submitted that a clause would clearly indicate that apart from the
remuneration normally paid, such seconded employees were entitled to
annual home leave allowance - including for members of the family; car
rental costs; and housing - monthly rent for which was fixed at 3,97,500.
Furthermore, allowances toward packing, shipment, storage, temporary
lodging, rest and recreation, trip allowance, etc. were fixed. It was
highlighted that in terms of this agreement, the base salary and bonus of
the employee clause read as follows:
"Effective with your assignment in Bangalore, India, your
base salary will be US$ 3,30,000/-.
In addition to the salary liability, servant allowance and
hardship allowance (fixed at 20% of the base salary during
the assignment in Bangalore was payable.."
14. The revenue contended that looking at an overall reading of
the agreement, i.e.