Daimler India Commercial Vehicles Pvt. Ltd. Vs Commissioner of CGST & Central Excise (CESTAT Chennai)
Summary: The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, decided five appeals filed by Daimler India Commercial Vehicles Pvt. Ltd. against common Orders-in-Original Nos. 04–08/2019 dated 27 June 2019, passed by the Commissioner of CGST and Central Excise, Chennai. The dispute concerned service tax liability on expatriate employees transferred from Daimler AG, Germany, to the appellant in India under international employee transfer arrangements. The Department alleged that the overseas group company supplied manpower to the appellant and that payments towards expatriate remuneration constituted consideration for taxable manpower recruitment and supply services under the reverse charge mechanism. The proceedings covered FY 2008-09 to June 2017. The adjudicating authority confirmed service tax demands with applicable interest and penalties under the Finance Act, 1994. The Tribunal examined whether the arrangements constituted employment or taxable manpower supply, whether salary reimbursements formed part of taxable consideration, whether revenue neutrality defeated the demand, and whether extended limitation and penalties were sustainable.
The appellant manufactured and sold commercial vehicles, traded in vehicles and spare parts, and provided shared services, annual maintenance contracts and warranty-related services. Commercial production commenced in June 2012. It was registered under several service tax categories and discharged service tax as both provider and recipient of services. During compliance verification, the Department examined foreign-currency expenditure and found payments connected with expatriates deputed from overseas group companies. These employees worked at the appellant’s Indian establishment, and their remuneration was reflected as salary in its financial statements. The appellant maintained that the expatriates were under dual employment arrangements, were engaged for specified periods and could return to their overseas employer after completion of their Indian assignment. It also stated that their entire salary was subject to Indian income tax. The Department, however, treated the arrangement as import of manpower services liable to service tax under the reverse charge mechanism.
The Department issued a show-cause notice dated 14 October 2014 covering FY 2008-09 to FY 2012-13 and four subsequent statements of demand covering FY 2013-14 to June 2017. The amounts proposed were ₹14,44,04,740, ₹5,39,68,688, ₹4,35,86,947, ₹4,65,76,069 and ₹7,74,54,201, respectively. The first notice invoked the extended period under the proviso to Section 73(1) of the Finance Act, 1994, while the subsequent demands relied on the ordinary statutory recovery provisions. The adjudicating authority confirmed the demands, interest and penalties, resulting in five appeals before the Tribunal.
The appellant relied principally on two Framework Agreements for International Transfers of Employees, effective from 1 January 2008 and 1 January 2014. Under these arrangements, Daimler AG, Germany, transferred employees to the Indian company at its request. According to the appellant, the expatriates performed work exclusively for the Indian business, were subject to its operational control and supervision, and were integrated into its organisation. Separate employment contracts were executed with the expatriates. Their remuneration was determined under the appellant’s policies, and the appellant bore the entire employment cost. A portion of the salary was paid abroad by Daimler AG for administrative convenience and subsequently reimbursed without any markup. The appellant also relied on provident fund contributions, deduction of tax at source under Section 192 of the Income-tax Act, 1961, and taxation of the entire remuneration in India as evidence of a genuine employer-employee relationship.
The appellant argued that the framework agreements expressly established that the overseas entity was not providing services to the Indian company. It maintained that the foreign employer’s role was limited to facilitating international transfers and making certain salary payments on behalf of the appellant. The employment of expatriates with Daimler AG was stated to become inactive during secondment, and the Indian company assumed responsibility for their work and remuneration. Consequently, the appellant contended that payments reimbursed to Daimler AG represented salary expenditure rather than consideration for manpower supply services. It challenged taxability both under the pre-1 July 2012 provisions relating to Manpower Recruitment and Supply Agency Services and under the post-1 July 2012 definition of taxable service.
A central issue was the applicability of the Supreme Court’s judgment in Commissioner of Customs, Central Excise and Service Tax Vs Northern Operating Systems Pvt. Ltd., reported in (2022) 17 SCC 90 and 2022 (61) G.S.T.L. 129 (SC). The appellant sought to distinguish that decision on the basis that its expatriates worked exclusively for its Indian operations and did not provide services back to the foreign company. It emphasised that Daimler AG did not maintain a pool of personnel for supplying services to group entities in the manner alleged in the cited precedent. The appellant further submitted that the salary obligation rested with the Indian company and that only part of the remuneration was paid abroad through Daimler AG. Referring to CBIC Instruction No. 05/2023 dated 13 December 2023, it argued that the Supreme Court’s ruling depended on the particular contractual and factual circumstances and could not be applied mechanically to every secondment arrangement.
The appellant alternatively challenged the valuation of the alleged taxable service. It argued that no separate consideration flowed to Daimler AG for supplying employees and that the overseas entity merely reimbursed or facilitated salary payments without any commercial markup. Reliance was placed on Intercontinental Consultants and Technocrats Pvt. Ltd. Vs Union of India, Boeing India Defense Pvt. Ltd., Bhayana Builders Pvt. Ltd. and other decisions concerning reimbursable expenses and taxable consideration. The appellant maintained that reimbursement of salary could not automatically be treated as the value of a taxable service under Section 67 of the Finance Act, 1994. For the period following the amendment to Rule 5 of the Service Tax (Determination of Value) Rules, 2006, it also invoked the exclusion relating to expenses incurred as a pure agent. According to the appellant, Daimler AG merely discharged a payment obligation on its behalf, and the amount reimbursed remained employment expenditure.
The appellant further argued that the entire transaction was revenue-neutral because any service tax payable under the reverse charge mechanism would be eligible for CENVAT credit. It relied on several judicial decisions concerning revenue neutrality and submitted that requiring payment of tax only to permit equivalent credit would serve no practical purpose. It also contested the extended period of limitation, maintaining that the taxability of secondment arrangements involved complex legal interpretation and had been the subject of prolonged litigation. The appellant asserted that it had acted under a bona fide belief that salary reimbursements were not taxable. Relying on the Supreme Court’s treatment of limitation in Northern Operating Systems, it submitted that allegations of suppression or deliberate tax evasion were unsustainable. It consequently opposed the associated interest and penalties.
The Revenue defended the adjudication order, submitting that the expatriates continued to remain on the rolls of Daimler AG during their Indian assignments and returned to the overseas entity after completion of secondment. According to the Department, the employees were supplied under contractual arrangements between the group companies, and the amounts paid towards salary, allowances and other remuneration constituted consideration for manpower supply services. It emphasised that the true substance of the arrangements, rather than their contractual descriptions, determined taxability. The Revenue relied on Northern Operating Systems, Renault Nissan Automotive India Pvt. Ltd., Nissan Motors India Pvt. Ltd. and other decisions to argue that international secondment arrangements attracted service tax under the reverse charge mechanism. It also disputed the appellant’s reliance on reimbursement and revenue-neutrality principles.
After examining the framework agreements, employment contracts, statutory provisions and rival submissions, the Tribunal concluded that the arrangements were substantially similar to those considered by the Supreme Court in Northern Operating Systems. It held that the contractual documents had to be read together to determine the real relationship between the Indian company, the overseas group entity and the expatriates. The Tribunal found that the appellant was the recipient of manpower recruitment and supply services provided by Daimler AG for the duration of the employees’ secondment. It accordingly held that the arrangement attracted Section 65(105)(k) of the Finance Act, 1994 before 1 July 2012 and the relevant taxable-service provisions under Section 65B(44) thereafter. The appellant was consequently liable to discharge service tax under Section 66A and the applicable service tax and place-of-provision rules.
The Tribunal rejected the appellant’s argument that salary reimbursement and the absence of a separate service fee necessarily excluded the arrangement from taxation. It considered the Supreme Court’s reasoning in Northern Operating Systems binding on the character of the transaction and the corresponding service tax liability. The Tribunal also rejected the contention that entitlement to CENVAT credit extinguished the obligation to pay service tax. It observed that credit or refund entitlement arose only after the tax liability had been discharged and remained subject to statutory conditions. Accepting revenue neutrality as an automatic defence would, in the Tribunal’s view, undermine the operation of Section 66A in cases involving imported services. It therefore declined to set aside the demand merely because the appellant might subsequently qualify for corresponding input tax credit.
However, the Tribunal accepted the appellant’s objection to the extended period of limitation. It observed that the question of service tax liability on international employee secondment had been legally debatable and that the appellant’s understanding of its obligations was not shown to be mala fide. The Revenue had not established wilful suppression of facts or deliberate misstatement sufficient to justify extended limitation. Following the Supreme Court’s decision in Northern Operating Systems, the Tribunal held that the extended period could not be invoked against the appellant. It consequently restricted the recoverable demands to the normal statutory limitation period. The Tribunal also set aside the penalties imposed under the impugned adjudication orders.
In conclusion, CESTAT Chennai partly allowed the five appeals. It upheld the common Orders-in-Original dated 27 June 2019 insofar as they established service tax liability on manpower recruitment and supply services received from Daimler AG, but modified them by excluding demands relating to the extended limitation period and setting aside the penalties. The demands surviving within the normal limitation period remained recoverable together with applicable interest. The decision therefore distinguished between the substantive taxability of employee secondment arrangements and the separate statutory requirements for invoking extended limitation. Although the appellant did not succeed in its principal challenge to taxability, it obtained relief against the extended-period demands and penalties. The appeals were disposed of accordingly by Final Order Nos. 40683–40687/2025, pronounced on 2 July 2025.
Cases Discussed
- Commissioner of Customs, Central Excise and Service Tax v. Northern Operating Systems (P) Ltd., (2022) 17 SCC 90; 2022 (61) G.S.T.L. 129 (SC) — applied on secondment taxability and limitation.
- Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India, 2018 (3) TMI 357 (SC) — relied upon by appellant on reimbursement; rejected as a basis to depart from Northern Operating Systems.
- Principal Commissioner of CGST v. Boeing India Defense Pvt. Ltd., 2023 (5) TMI 523 (CESTAT New Delhi); appeal dismissed, 2023 (12) TMI 239 (SC) — relied upon by appellant concerning reimbursement and valuation.
