Service Tax Payable on Overseas Employee Secondment but Extended Limitation Invalid: CESTAT Bangalore

Dell International Services India Private Limited Vs. The Commissioner of Central Excise &
Customs, Bangalore Commissionerate (CESTAT Bangalore)

Summary: The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), in a common order involving Dell International Services India Private Limited and Dell India Private Limited, examined seven appeals concerning the levy of service tax on the deputation of employees from overseas group companies. During the disputed period, employees of foreign group companies were seconded to the Indian entities, while their salaries and related expenses were initially paid by the overseas companies and subsequently reimbursed by the appellants. The Department treated these arrangements as taxable manpower recruitment or supply agency services under Sections 65(68) and 65(105)(k) of the Finance Act, 1994, and demanded service tax under the reverse charge mechanism prescribed under Section 66A. The principal issues were whether the secondment arrangements attracted service tax, whether the extended period of limitation could be invoked, and whether interest was payable on the tax liability.

The Tribunal relied on the Supreme Court judgment in Commissioner of Customs, Central Excise & Service Tax v. Northern Operating Systems Pvt. Ltd., which held that secondment arrangements involving overseas group companies could constitute taxable manpower supply services. Applying that decision, CESTAT held that the Indian appellants were recipients of taxable services supplied by their overseas group companies and were consequently liable to discharge service tax under the reverse charge mechanism. However, the Tribunal also followed the Supreme Court’s findings regarding the extended period of limitation and held that demands raised for the extended period could not be sustained. Regarding interest, the Tribunal examined Section 75 of the Finance Act, 1994, and relied on the Supreme Court’s decision in Pratibha Processors v. Union of India to explain that interest is compensatory rather than penal. It therefore rejected the appellants’ contention that interest should be waived merely because the non-payment of service tax was not deliberate.

Accordingly, CESTAT dismissed Service Tax Appeal Nos. 26039/2013, 28100/2013, 28101/2013, 28231/2013 and 21504/2014, thereby sustaining the demands relating to the normal limitation period. Service Tax Appeal No. 26058/2013 was allowed in full, while Service Tax Appeal No. 3195/2011 was partly allowed. The Tribunal set aside the extended-period demands of Rs. 9,66,68,469 and Rs. 1,63,05,344, respectively, while maintaining the normal-period liability along with applicable interest. The appellants stated that Rs. 3,88,75,209 had already been deposited towards the normal-period demand. The adjudicating authority was directed to verify the payments and recover any outstanding normal-period liability, if applicable. No interest was payable on the demands set aside as time-barred. The order was pronounced on 3 February 2023.

Cases Discussed

• Commissioner of Customs, Central Excise & Service Tax v. Northern Operating Systems Pvt. Ltd. — Civil Appeal Nos. 2289–2293 of 2021, decided 19.05.2022
• Cosmic Dye Chemical v. Collector of Central Excise — (1995) 6 SCC 117
• Uniworth Textiles v. Commissioner of Central Excise — (2013) 9 SCC 753
• Escorts v. Commissioner of Central Excise — (2015) 9 SCC 109
• Commissioner of Customs v. Magus Metals — (2017) 16 SCC 491
• Commissioner of Central Excise and Service Tax, Rohtak v. Merino Panel Products Ltd. — 2022 (12) TMI 453 (SC)
• Pratibha Processors v. Union of India — (1996) 11 SCC 101

FULL TEXT OF THE ORIGINAL JUDGMENT/ORDER OF CESTAT BANGALORE

M/s Dell International Services India Private Limited is a subsidiary of Dell International LLC. It was registered as a company under the Companies Act, 1956 and is also a 100% Export Oriented Unit registered under the Software Technology Park Scheme for the purpose of development and export of software. In addition, it also provides various other services such as “business auxiliary service” and “information technology software” services and receives services such as “commercial training and coaching” services, “management or business consultant” services and “telecommunication services” from outside India.

2. Dell India Private Limited is a company incorporated under the Companies Act, 1956 with its registered office in Bangalore. It is engaged, inter-alia, in the business of import and sale of storage units, servers, notebooks and peripherals such as projector and monitors. In addition to it, it also provides various other services such as “erection, commissioning or installation” services, “management maintenance or repair” services, “information technology software” services and “business auxiliary service”.

3. Dell International and Dell India shall hereinafter be referred to as the appellant.

4. During the course of rendering the aforementioned services during the period from 2006 to 2010, the employees of group companies of the appellant were deputed to India and salaries/expenses of such deputed employees were paid by the group companies and same was reimbursed by raising bills/invoices on the respective group companies. The total amount that was reimbursed to the group companies on account of the payment of salaries was grouped under “salary cost” in the „Profit and Loss Account‟ of the appellant for the disputed period and was also disclosed in the „Notes to Annual Reports‟ as “Expenditure Incurred in Foreign Currency”, under related party transactions.

5. Audit of the records of the appellant was conducted and it was noticed that the expenses incurred in foreign currency in relation to the aforesaid expenses were leviable to service tax under the category of “manpower recruitment or supply agency” services with effect from 16.06.2005 under the reverse charge mechanism in 3 terms of section 66A of the Finance Act, 1994, as the appellant had not paid the service tax on such expenses.

6. Show cause notices were, therefore, issued to the appellant, wherein inter alia it was alleged that the transaction of deputation of employees from group companies to the appellant would come under the category of “manpower recruitment or supply agency” service as defined under section 65 (105) (k) read with section 65 (68) of the Finance Act. The appellant was called upon to show cause why service tax should not be recovered from the appellant under section 66A of the Finance Act, read with section 68(2) of the Finance Act and rule 2 (1) (d) (iv) of the Service Tax Rules, 1994.

7. The following chart will indicate details of all the seven appeals with regard to the date of the show cause notice, the date of the impugned order, the period involved, the total tax demand (both for both the normal period and the extended period), and the date on which the payment was made by the appellant.

8. The issue involved in all the aforesaid seven appeals is as to whether the group companies who have seconded their employees to the appellant would result in “manpower recruitment or supply agency” services taxable at the hands of the appellant under the reverse charge mechanism placed under section 66A of the Finance
Act.

9. This issue has been considered and decided by the Supreme Court in Commissioner of Customs, Central Excise & Service Tax-Bangalore (Adjudication) ETC. v/s M/s Northern 4 Operating System Pvt. Ltd.. In this case, the revenue had issued four show cause notices alleging that the assessee failed to discharge service tax under the category of “manpower recruitment or supply agency” service with regard to 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 Finance Act, proposing to demand service tax for the  extended period. The issue that arose for decision before the Supreme Court was whether the overseas group companies, with whom the assessee had entered into agreements, provided manpower services for the discharge of its functions through seconded (a synonym for deputationist) employees. It is in this connection that the Supreme Court observed:-

“34. 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 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.

46. From the above discussion, it is evident, that 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.

49. 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 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.

50. 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.

54. 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, 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, extracted above). 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 Rs. 366,700/-. In addition, an annual utility allowance of Rs. 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.

55. 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.

57. Taking a cue from the above observations, 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 the end of the period of secondment, they return to their original places, to await deployment or extension of secondment.

65. It is held, for the foregoing reasons, that the 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. Furthermore, in view of the above discussion, the invocation of the extended period of limitation in both cases, by the revenue is not tenable.

66. In light of the above, the Revenue”s appeals succeed in part; 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. “

(emphasis supplied)

10. It would be seen from the aforesaid judgment of the Supreme Court that while the control over the performance of the employees who were seconded and the right to ask them to return was with the assessee, but it was the overseas employer who, in relation to its business, deployed them to the assessee; it was the overseas employer who paid them the salaries; the terms of employment even during the secondment were in accord with the policy of overseas company; and at the end of the period of secondment the employees returned to their original place to await deployment or extension of secondment.

11. The arrangement in the present seven appeals is similar. Thus, the assessee would be a service recipient of the overseas group company concerned, which provided „manpower supply‟ service, which is a taxable service. The appellant, therefore, is required to discharge service tax on reverse charge mechanism.

12. In so far as the invocation of the extended period of limitation in the show cause notice, the Supreme Court in Northern Operating System did not agree with the contention of the Department that it was correctly invoked and it was held that the Department was not justified in invoking the extended period of limitation. The relevant paragraphs of the judgment are as follows:-

“62. The Revenue”s argument that the assessee had indulged in wilful suppression, in this court’s considered view, is insubstantial. The view of a previous three judge ruling, in Cosmic Dye Chemical v. Collector of Central Excise5 – in the context of section 11A of the Central Excise Act, 1944, which is in identical terms with section 73 of the Finance Act, 1994 was that: “Now so far as fraud and collusion are concerned, it is evident that the requisite intent, i.e., intent to evade duty is built into these very words. So far as misstatement or suppression of facts are concerned, they are clearly qualified by the word “wilful” preceding the words “misstatement or suppression of facts” which means with intent to evade duty. The next set of words “contravention of any of the provisions of this Act or rules” are again qualified by the immediately following words “with intent to evade payment of duty”. It is, therefore, not correct to say that there can be a suppression or misstatement of fact, which is not wilful and yet constitute a permissible ground for the purpose of the proviso to section 11-A. Misstatement or suppression of fact must be wilful.”

63. This decision was followed in Uniworth Textiles v. Commissioner of Central Excise6 where it was observed that “(t)he conclusion that mere non- payment of duties is equivalent to collusion or willful misstatement or suppression of facts” is “untenable”. This view was also followed in Escorts v. Commissioner of Central Excise7, Commissioner of Customs v. Magus Metals8 and other judgments.

64. The fact that the CESTAT in the present case, relied upon two of its previous orders, which were pressed into service, and also that in the present case itself, the revenue discharged the later two show cause notices, evidences that the view held by the assessee about its liability was neither untenable, nor mala fide. This is sufficient to turn down the Revenue”s contention about the existence of “wilful suppression” of facts, or deliberate misstatement. For these reasons, the revenue was not justified in invoking the extended period of limitation to fasten liability on the assessee. “

13. It is only in respect of two appeals that the issue of the extended period of limitation arises. It can be seen from the chart contained in paragraph 7 of this order that in Service Tax Appeal No. 26058 of 2013 the entire demand has been confirmed for the extended period of limitation, whereas in Service Tax Appeal No. 3195 of 2011 part of the demand has been confirmed for the normal period and part of the demand has been confirmed for the extended period.

14. In view of the aforesaid decision of the Supreme Court in Northern Operating Systems, it has to be held that the demand confirmed for the extended period cannot be sustained.

15. Ms. Disha Gurus Haney, learned counsel for the appellant pointed out that the service tax liability to the extent of Rs. 38,87,52,09.00/- for the normal period was deposited by the appellant on 12.08.2022 and so the only issue that remains to be decided in these two appeals is regarding invocation of the extended period of limitation and the imposition of the interest upon the appellant under section 75 of the Finance Act for the normal period.

16. Regarding the imposition of interest under section 75 of the Finance Act is concerned, it is seen that in Northern Operating Systems, the Commissioner had confirmed the demand made for service tax with interest and penalty. The Supreme Court, in paragraph 67 of the judgment, restored the order passed by the Commissioner except to the extent that it sought to recover an amount for the extended period of limitation. Thus, the Supreme Court confirmed the imposition of interest under section 75 of the Finance Act.

17. Learned counsel for the appellant, however, placed reliance upon the decision of the Supreme Court in Commissioner of Central Excise and Service Tax, Rohtak v/s Merino Panel 9 Product Ltd. to contend that no interest should have been levied under section 75 of the Finance Act.

18. It would be seen from the aforesaid decision of the Supreme Court in Merino Panel Products that the imposition of penalty had been set aside only for the reason that the revenue appeared to be unclear on the correct method to be adopted for valuation of the goods.

19. Section 75 of the Finance Act deals with interest on delayed payments of service tax and it is reproduced below:-

“75. Interest on delayed payment of service tax Every person, liable to pay the tax in accordance with the provisions of section 68 or rules made thereunder, who fails to credit the tax or any part thereof to the account of the Central Government within the period prescribed, shall pay simple interest at such rate not below ten per cent. and not exceeding thirty-six per cent. per annum, as is for the time being fixed by the Central Government, by notification in the Official Gazette for the period by which such crediting of the tax or any part thereof is delayed:

PROVIDED that in the case of a person who collects any amount as service tax but fails to pay the amount so collected to the credit of the Central Government, on or before the date on which such payment is due, the Central Government may, by notification in the Official Gazette, specify such other rate of interest, as it may deem necessary: PROVIDED FURTHER that in the case of a service provider, whose value of taxable services provided in a financial year does not exceed sixty lakh rupees during any of the financial year covered by the notice or during the last preceding financial year, as the case may be, such rate of interest, shall be reduced by three per cent. per annum.”

20. It is seen from the aforesaid provision that every person who fails to credit the tax or any part thereof within the period prescribed shall pay simple interest at such rate not below ten per cent and not exceeding thirty six per cent per annum for the period by which such crediting of the tax or any part thereof is delayed. Thus, imposition of interest is irrespective of the fact whether such non- payment/short payment was on account of innocence or malafide.

21. In Pratibha Processors v/s Union of India the Supreme Court pointed out the difference between the imposition of interest and penalty. Whereas penalty is ordinarily levied on an assessee for some contumacious conduct or for deliberate violation of the provision of a particular statute, interest is compensatory in character and is imposed on the assessee who has withheld payment of any tax when it is due. Thus, in terms of section 75 of the Finance Act, payment of interest is mandatory on every person who fails to deposit the service tax or any part thereof within the prescribed period.

22. It is, therefore, not possible to accept the contention of the learned counsel for the appellant that imposition of interest under section 75 of the Finance Act should be set aside.

23. Thus, for the reasons stated above, Service Tax Appeal No. 26039 of 2013, Service Tax Appeal No. 28100 of 2013, Service Tax Appeal No. 28101 of 2013, Service Tax Appeal No. 28231 of 2013 and Service Tax Appeal No. 21504 of 2014 are dismissed. Service Tax Appeal No. 26058 of 2013 is, however, allowed and the order dated 31.12.2012 passed by the Commissioner is set aside. Service Tax Appeal No. 3195 of 2011 is partly allowed and the demand confirmed for the extended period of limitation is set aside but the demand confirmed for the normal period is maintained.

24. The appellant has stated that an amount of Rs. 38,875,209/- was deposited on 12.08.2022 which covers the demand for the normal period. The demand to the extent of Rs. 96,668,469/- and Rs. 16,305,344/-, which are in relation to the extended period of limitation in Service Tax Appeal No. 3195 of 2011 and Service Ta Appeal No. 26058 of 2013 respectively, are set aside. These facts may be verified by the adjudicating authority and in case any further amount is due for the normal period, the same may be recovered from the appellant. As the demand for the extended period of limitation has been set aside, no interest would be payable on the said amount.

(Order pronounced in the Open Court on 03.02.2023)
Note:-
1. Dell International
2. Dell India
3. the Finance Act
4. Civil Appeal No. 2289-2293 of 2021 decided on 19.05.2022
5. (1995) 6 SCC 117
6. (2013) 9 SCC 753
7. (2015) 9 SCC 109
8. (2017) 16 SCC 491
9. 2022 (12) TMI 453- Supreme Court
10. (1996) 11 SCC 101