Commissioner of Central Tax Vs Fuji Furukawa Engineering and Construction Co. (India) Private Limited (CESTAT Bangalore)
Summary: The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore, considered the Revenue’s appeal against Order-in-Appeal No. 541/2018-CT dated 31 December 2018, which had set aside a service tax demand of ₹69,06,616 against Fuji Furukawa Engineering and Construction Co. (India) Pvt. Ltd. The assessee was engaged in providing erection, commissioning, installation and consulting engineering services. During April 2013 to March 2015, it entered into Dispatch and Secondment Agreements with its Japanese associated company, Fuji Furukawa Engineering and Construction Co. Ltd. (FFECJ), for deputation of qualified and skilled personnel to facilitate its business operations in India. Following a departmental audit, a show-cause notice dated 10 June 2017 proposed recovery of service tax with interest and penalties. The adjudicating authority confirmed the demand, but the Commissioner (Appeals) set aside the order, prompting the Revenue’s appeal before the Tribunal.
The Revenue argued that the overseas deputation arrangement constituted taxable manpower supply under Section 65B(44) of the Finance Act, 1994, relying on the Supreme Court’s judgment in CC, CE & ST, Bangalore (Adjudication) Vs Northern Operating Systems Pvt. Ltd., 2022 (61) GSTL 129 (SC). It further contended that the extended limitation period was applicable because the assessee had not disclosed the services received from its overseas associated company. The assessee distinguished the Supreme Court ruling, particularly on the ground that its arrangement did not involve a Master Service Agreement. After examining the Dispatch Agreement, Secondment Agreement and employment documents, the Tribunal found that the contractual arrangements were substantially similar to those considered in Northern Operating Systems. The personnel worked under the Indian company’s supervision, while certain salary components and benefits were paid in Japan and reimbursed by the Indian entity. Applying the Supreme Court’s reasoning, the Tribunal concluded that the overseas secondment arrangement attracted service tax.
On the question of limitation, the Tribunal followed the Supreme Court’s decision in Northern Operating Systems, particularly its treatment of the extended limitation period. Although the arrangement was held taxable, the Tribunal did not sustain recovery for the extended period. Consequently, it set aside the Commissioner (Appeals)’s order and remanded the matter to the adjudicating authority for computation of service tax liability and applicable interest restricted to the normal period of limitation. The Revenue’s appeal was accordingly disposed of, with the matter requiring fresh computation rather than unconditional restoration of the entire demand of ₹69,06,616. The order was pronounced in open court on 3 May 2024.
Cases Discussed
- CC, CE & ST, Bangalore (Adjudication) Vs Northern Operating Systems Pvt. Ltd. — 2022 (61) GSTL 129 (SC). Applied on secondment taxability and extended limitation.
- Sushilaben Indravadan — Mentioned in the reproduced Supreme Court reasoning concerning the distinction between a contract of service and a contract for service; full citation not supplied.
- SRF, Coca Cola, Volkswagen and Computer Sciences Corporation — Mentioned in the reproduced Supreme Court judgment concerning revenue neutrality and precedential value; complete citations not supplied.
FULL TEXT OF THE ORIGINAL JUDGMENT/ORDER OF CESTAT BANGALORE
This appeal is filed by the Revenue against the Order-in- Appeal No.541/2018-CT dt. 31.12.2018 passed by the Commissioner of Central Tax (Appeals-II), Bangalore.
2.1. Brief facts of the case are that the respondent is primarily engaged in providing services of Erection, Commission and Installation, Consulting Engineer Services and they are registered with the Service Tax Department for the said services. The said services were brought under the ambit of service tax w.e.f. 01.07.2012. During the period 2013-14 to 2014-15, the respondent had entered into an agreement viz. “Dispatch Agreement” with M/s. Fuji Furukawa Engineering and Construction Co. Ltd., Japan (FFECJ, for short) for deputation / assignment of personnel having qualification and skill for facilitating the business operations of the respondent in India; also entered into Dispatch Agreement and Secondment Agreement for supply of qualified and skilled personnel.
2.2. On audit of their records by the Department, it is alleged that the services received by the respondent during the said period is taxable and consequently show-cause notice dated 10.06.2017 was issued to them demanding service tax amounting to Rs.69,06,616/- for the period April 2013 to March 2015 with interest and penalty. On adjudication, the said demand was confirmed with interest and penalty. Aggrieved by the said order, the respondent preferred an appeal before the learned Commissioner(Appeals) who allowed their appeal by setting aside the order of the adjudicating authority. Hence the Revenue is in appeal.
3.1. At the outset, the learned AR for the Revenue reiterating the grounds of appeal has submitted that the learned Commissioner(Appeals) has not considered the main issue that assigned employees are deputed by FFECJ which goes without saying that such employees do not cease to be their employees even during the period of assignment to the respondent. The employees are rendered services on the request of the respondent and against such assignment the respondent pays FFECJ which is in the nature of Internation Assignees Costs and other remunerations; therefore the assignments/deployment of employees from FFEJ against receipt of consideration is an activity under Section 65B(44) of the Finance Act, 1994. He has further submitted that no doubt the services provided by an employee to their employer in the course of employment are outside the ambit of service tax, but services provided outside the ambit of employment for a consideration would be a service. In the present case, it is admitted that the employees were assigned /deputed to the respondent’s company; therefore liable to service tax and there is no existence of relationship of employer and employee between the respondent and the personnels deputed by FFECJ. Further he has submitted that the issue is no more res integra; settled by the Hon’ble Supreme Court in the case of CC,CE&ST, Bangalore (Adjudication) Vs. Northern Operating Systems Pvt. Ltd. [2022(61) GSTL 129 (SC)].
3.2. Further he has submitted that the adjudicating authority has rightly confirmed the demand invoking extended period of limitation as the appellant had suppressed fact as they had never informed/disclosed about the services received by them from the FFECJ located in non-taxable territory even though they have registered with the Department for rendering services for other categories.
4. Per contra, the learned advocate for the respondent has submitted that the judgment delivered by the Hon’ble Supreme Court in Northern Operating Systems’ case (supra) is distinguishable and not applicable to the facts of the present case. He has submitted that the primary point of distinction is in the present case is the absence of a Master Service Agreement between FFECJ and the respondent where the overseas company renders service to the respondent, which makes the present case is different from the said judgment. Thereafter, he compared the facts of the said judgment to the present case on various aspects and submitted that the Dispatch Agreement and Secondment Agreement in the present case are different from the facts and circumstances in Northern Operating Systems’ case.
5. Heard both sides and perused the records.
6. The short questions involved in the present appeal are: (i) whether the principle of law laid down by the Hon’ble Supreme Court on applicability of service tax on receiving services from the overseas company FFECJ through Dispatch Agreement and Secondment Agreement in deployment of qualified and skilled employees during the said period and (ii) whether extended period of limitation could be invoked in the circumstances of the case.
7. The Revenue’s argument is that the facts of the present case are similar to the facts decided by the Hon’ble Supreme Court in Northern Operating Systems Pvt. Ltd.’s case (supra); hence applying the ratio laid down in the said case, the service tax demand confirmed by the adjudicating authority be restored. On the other hand, the respondent argued that the Dispatch Agreement and Secondment Agreement are different in the present case to the one decided by the Hon’ble Supreme Court; hence ratio of the Supreme Court judgment is not applicable to the present case.
8. Reading the judgment of the Hon’ble Supreme Court, it is clear that in para 3, the nature and content of the agreement has been narrated which reads as follows:-
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 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.’
9.1. In the sample Secondment Agreement and the Dispatch Agreement between the respondent and FFECJ reveals that these agreements’ terms and conditions are more or less similar to the one referred to in para 3 of the judgment of the Hon’ble Supreme Court in Northern Operating Systems Pvt. Ltd. (supra). In the present case also, the respondent was in need of personnel for facilitating the business operations in India and the overseas company which has such personnel who possesses the requisite qualification and skilled employees itself desired to employ such persons on exclusive basis and the overseas company has duly consented to depute such personnel. The deputed personnel while under employment with the respondent was not in any way subjected to any kind of instruction or control or direction or supervision of the overseas company and they would report only to respondent’s management. They shall function solely under the control, direction and supervision of respondent and in accordance with the policy, rules, guidelines applicable to the employees of the respondent. The respondent shall have the sole right to take punitive steps against misconduct, negligence, fraud or unsatisfactory performance of work by the dispatched personnel during employment with the respondent company and also have the right to terminate the employment. The remuneration to be paid by the respondent to dispatched personnel as laid down at Article 5 comprising of Monthly salary in India; Monthly Salary in Japan; Bonus in Japan and any other allowance paid / cost incurred for the dispatched personnel during the employment period. Further it is agreed that in respect of monthly salary in India and monthly salary in Japan and bonus in Japan on the request of the dispatched personnel as his home country is Japan and for administrative convenience, respondent company to request overseas company to make such payments in Japan which shall be reimbursed by the respondent on actual cost basis. It is also stipulated that such arrangement in no manner be considered as employer- employee relationship between the overseas company and the dispatched personnel.
9.2. In the Secondment Agreement, the dispatched personnel agrees with all the conditions settled between the respondent and the overseas company under the dispatch agreement.
9.3. A careful reading of the Dispatch Agreement along with the Secondment Agreement and also the contract of the employment, letter of employment etc., we do not find any substantial difference from the facts stated in the judgment of Hon’ble Supreme Court in Northern Operating Systems Pvt. Ltd.’s case. After analysing the agreement, their lordships observed as follows:-
48. 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.
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.
51. As discussed previously, 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: substance over form, requiring a close look at the terms of the contract, or the agreements.
52. 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.
53. 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).
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 ` 3,66,700. 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.
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.
56. This Court, upon a review of the previous judgment in Sushilaben Indravadan (supra) held that there no one single determinative test, but that what is applicable is “a conglomerate of all applicable tests taken on the totality of the fact situation in a given case that would ultimately yield, particularly in a complex hybrid situation, whether the contract to be construed is a contract of service or a contract for service. Depending on the fact situation of each case, all the aforesaid factors would not necessarily be relevant, or, if relevant, be given the same weight.”
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.
58. One of the arguments of the assessee was that arguendo, the arrangement was “manpower supply” (under the unamended Act) and a service [(not falling within exclusion (b) to Section 65(44)] yet it was not required to pay any consideration to the overseas group company. The mere payment in the form of remittances or amounts, by whatever manner, either for the duration of the secondment, or per employee seconded, is just one method of reckoning if there is consideration. The other way of looking at the arrangement is the economic benefit derived by the assessee, which also secures specific jobs or assignments, from the overseas group companies, which result in its revenues. The quid pro quo for the secondment agreement, where the assessee has the benefit of experts for limited periods, is implicit in the overall scheme of things.
59. As regards the question of revenue neutrality is concerned, the assessee’s principal contention was that assuming it is liable, on reverse charge basis, nevertheless, it would be entitled to refund; it is noticeable that the two orders relied on by it (in SRF and Coca Cola) by this Court, merely affirmed the rulings of the CESTAT, without any independent reasoning. Their precedential value is of a limited nature. This Court has been, in the present case, called upon to adjudicate about the nature of the transaction, and whether the incidence of service tax arises by virtue of provision of secondment services. That a particular rate of tax – or no tax, is payable, or that if and when liability arises, the assessee, can through a certain existing arrangement, claim the whole or part of the duty as refund, is an irrelevant detail. The incidence of taxation, is entirely removed from whether, when and to what extent, Parliament chooses to recover the amount.
60. This Court is also of the view, for similar reasons, that the orders of the CESTAT, affirmed by this Court, in Volkswagen and Computer Sciences Corporation, are unreasoned and of no precedential value.
61. In view of the above discussion, it is held that 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).
Their Lordships on the issue of invocation of extended period of limitation decided in favour of the assessee.
10. Consequently, following the aforesaid ratio, the impugned order is set aside and the matter is remanded to the adjudicating authority to compute the liability of the service tax payable with interest for the normal period of limitation. Revenue’s appeal is accordingly disposed of.
(Order pronounced in Open Court on 03.05.2024)
