Case Law Details
M/s Canon India Pvt Ltd Vs Commissioner, Goods & Service Tax (CESTAT Chandigarh)
The issue involved in the present case is in respect of levy of service tax on the amounts paid as salary to expats under the taxable category of Manpower Supply Services.
With effect from 01.07.2012, the law as introduced by the way of above amendments had changed the concepts of taxation of services. Whereas prior to this date tax was levied on the services defined to be taxable services, and Manpower Supply Services as defined by Section 65 (105)(k) was one of such taxable services. Since we are concerned with the period post 01.07.2012, the decisions which have held that the services provided by the appellant parent company were not covered by the definition of Manpower Supply Services, under Section 65 (105)(k) as it existed then will have no application to the facts of this case.
However, the judicial member have a view the same would be applicable. The matter is referred to larger bench of tribunal.
FULL TEXT OF THE CESTAT JUDGEMENT
The appeal No ST/61410/2018-CU(DB) is directed against Order in Original No GST/GGM/COM/SM/26/18-19 dated 29th June 2018 of the Commissioner Good and Service Tax, Gurgaon. By the impugned order, Commissioner held as follows:
i. I confirm the demand of Rs 2,17,99,762 (Rupees Two crore Seventeen Lakh Ninety Nine Thousand Seven Hundred and Sixty Two Only) and order the same to be recovered from the noticee under sub-section (1A) of Section 73 of the existing Finance Act, 1994 as amended, read with Rule 6 of existing Service Tax Rules, 1994
ii. I order for recovery of interest at the appropriate rate on the said recoverable amount of Service Tax including all cesses under Section 75 of the existing Finance Act, 1994.
iii. I impose a penalty of Rs 21,79,976/- (Rupees Twenty One Lakhs Seventy Nine Thousand Nine Hundred and Seventy Six only) under Section 76 of the existing Finance Act, 1994 upon the noticee for their failure to pay the appropriate Service Tax liability in accordance with the provisions of Section 68 of the existing Act;
iv. I also impose a Penalty of Rs 1 0,000/- (Rupees Ten Thousand Only) under Section 77 of the existing Finance Act, 1994 upon the noticee for their failure to furnish statutory ST-3 returns in the manner prescribed under Section 70 of the existing Act.”
1.2 The appeal No ST/60852/2019-CU(DB) is directed against Order in Original No GST/GGM/COM/Adj/Canon/128/18-19 dated 30th April 2019 of the Commissioner Good and Service Tax, Gurgaon. By the impugned order, Commissioner held as follows:
i. I confirm the demand of Rs 3,04,07,553 (Rupees Three crore Four Lakh Seven Thousand Five Hundred and Fifty Three Only) and order the same to be recovered from the noticee under Section 73 of the Finance Act, 1994.
ii. I order for recovery of interest at the appropriate rate on the said recoverable amount of Service Tax under Section 75 of the existing Finance Act, 1994.
iii. I impose a penalty of Rs 30,40,755/- (Rupees Thirty Lakhs Forty Thousand Seven Hundred and Fifty Five only) under Section 76 of the Finance Act, 1994 upon them.;
iv. I also impose a Penalty of Rs 1 0,000/- (Rupees Ten Thousand Only) under Section 77 of the Finance Act, 1994 upon them.”
2.1 Appellant herein are registered with the department for providing various services which were classifiable as taxable services under various categories up to 01.07.2012. Thereafter the services provided by them continued to be taxable as they were not covered by the negative list of services nor were exempted.
2.2 During the course of audit undertaken by the department it was observed that:-
- As per balance sheet of 2012-13, they have shown expenditure in foreign currency under head of “Salary Wages & Bonus”. No Service Tax in respect of these expenses was paid on these expenses under reverse charge mechanism as per the provisions of Rule 2(1) (d)(i)(G) of Service Tax Rules, 1994 read with Notification No 30/2012 dated 20.06.2012.
- They provided sample copies of employment contract and international assignment letter of Mr Katsuyuki Nagai, Mr Akiyoshi Momoi and Mr Toshihiko Kuwahara (all expat) and the copies of cost reimbursement agreements between them and M/s Canon Inc Japan (Foreign Company) in respect of these expats.
- Revenue was of the view that as per these agreements the said expats continued to be the employee of Foreign Company and remained on their payrolls. The Foreign Company was paying and disbursing the salaries to these expats and thereafter the appellant used to reimburse such salary costs to Foreign Company. Thus these expats were rendering services to the appellants and the reimbursement made to Foreign Company was in nature of “Fees for Technical Services.”
- As per the agreement, it appeared that the expats were transferred temporarily by the Foreign Company to appellants. The Foreign Company retains the lien and control over the expats. On completion of the tenure the expats are repatriated and return back to the Foreign Company.
- Appellant was not paying service tax on the expenses incurred towards payment of gross amount (salary) to such expats by them to the Foreign Company situated outside India. Such services received by them were taxable under the category of ‘Manpower Recruitment and Supply agency Service’ (upto 30/06/2012) and thereafter with effect from 01.07.2012 under ‘Service’ as defined under Section 65B(4) of the Finance Act, 1994.
2.3 Since appellants had received services from Canon Inc. Japan (referred as Foreign Company) and had not paid Service Tax on same under reverse charge mechanism during the period 01.04.2015 to 30.06.2017 under provisions of Rule 2 (1)(d)(i)(G) of the Service Tax Rules, 1994 read with Notf 30/2012 dated 20.06.2012, show cause notices were issued to them for demanding the service tax along with interest as provided for by the Finance Act, 1994. Penalties were also proposed in the Show Cause Notices.
2.4 These Show Cause Notices have been adjudicated by the Commissioner as per the impugned orders mentioned in para 1, supra.
2.5 Aggrieved by the impugned order, Appellant has filed these appeals
3.1 We have heard Shri Sujit Ghosh Advocate for the Appellant and Shri Rajeev Gupta, Commissioner and Shri Vijay Gupta, Superintendent, Authorized Representative for the revenue.
3.2 Arguing for the Appellant learned counsel submitted as follows:
> Appellants enter into employment contracts with the expat professionals who are in employment with the Appellants parent company, for a definite period of time.
> Since these expats are employees of the appellants parent company, the parent company issues appropriate international assignment letters to them to enable them take employment with the appellant as per terms and directions set by the appellants.
> As per these contracts, expats work under control and direction of the appellants and the contract can be terminated either by the expatriate or the Board of Directors of appellant.
> The remuneration paid to expats has component paid in Indian currency which is paid by the Appellant, and component paid in Foreign currency which is paid by Appellant parent company.
> As per the cost reimbursement agreement entered into between the appellant’s and their parent company, as per matter of administrative convenience the Foreign Currency component of remuneration to expats as per the employment contract entered directly between the appellant and expat, is paid by the parent company to them, for and on behalf of the appellants. The payment so made by the parent company is reimbursed to them by the appellant on an actual basis without any markup or profit element.
> Appellants were deducting TDS on the Indian Component of the remuneration paid by them to the expats.
> As per the impugned order the parent company has provided manpower supply services to the appellant and the amounts paid by the appellant to the parent company are consideration for the provision of these services. As per the provisions of Finance Act, 1994 providing for payment of service tax on reverse charge basis by the recipient of service, in such circumstance, appellants were required to discharge service tax in respect of the services so received. Hence these demands.
> The issue involved in the matter is no longer res integra and they rely upon the decisions of tribunal as detailed below in their support:
○ Samsung India Electronics [2015-TIOL-393-CESTAT-DEL]
○ Air Bus Group [2016 (45) STR 120 (T-Del)]
○ Volkswagen India Private Limited [2014 (34) STR 135 (T)]
○ Nissin Brake India [2019 (24) GSTL 563 (T-Del)]
○ India Yamaha Motor Pvt Ltd [Final Order No 50890/2019 dated 28.06.2019 of Delhi Bench]
> Since the facts in the cases decided by the tribunal as above are identical to the facts in present case and also the parent company was not engaged in providing manpower supply services, the impugned orders are bad in law and need to be set aside.
> Departmental Authorities have themselves decided the issue in their favour for the period 2006-07 to 2008-09 and for period 2014-15, holding that the demand of service tax made under the category of manpower supply services cannot be sustained. Ø In view of above appeals need to be allowed
3.3. Arguing for the revenue, learned authorized representative submitted while reiterating the findings recorded in the impugned order as follows:
- W.e.f. 01.07.2012, the service has been defined under section 65 B (44) of the Finance Act, 1994 and by going through various documents viz. Agreement between foreign company, appellants and the expats, it emerges that the services provided by foreign company to the appellants are well covered by this definition of service;
- The scope of services contemplated by the employment contract, indicate that the arrangement is not a simple agreement which normally happens in enterprises operating in multiple locations to familiarize the employee with the operations being carried out in other locations.
- This is a case where operations in India require the expertise of the employees of the non-resident companies and their ability to implement processes and practices in the appellant company. The objective of utilization of such services is to create an effective interface between the outsourced suppliers of the overseas entities, ensuring that those suppliers follow best practices etc.
- It can be seen that the foreign company is the service provider and not the persons employed as expats. They work here for the purpose of business operations of foreign companies and not the appellants.
- “Terms of Agreement” contained in the cost reimbursement agreements (RUD with SCN) between foreign company and appellants make it evident that the expats continue to be in employment of the Foreign Company only and are transferred for a fixed time against specific assignment to Indian counterpart.
- The International assignment letter issued by the foreign company to the expats;
- Another identical letter with same terms and conditions was also issued by appellants to the expats
- On perusal of the documents submitted in the form of affidavit during the hearing on 21.01.2020 before the Hon’ble Bench, it is observed that expats continue as the employee of foreign company even during the period he is transferred to appellants.
- Thus, it clearly emerges that the services are not provided by such expats to the appellants but the services are provided by the foreign company through its employees (expats). These services are covered by the definition of services as per 65B(44) of Finance Act, 1994 and same is neither covered under negative list nor are exempted from payment of Service Tax.
- Another contention raised by the appellants is that the expats are their employees and payments are made to them as salary and TDS is deducted by them under salary head. This contention of the appellants does not make the person as their employee but he remains the employee of the foreign company. Such payments in foreign currency are regulated by Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2000. The expats were receiving their salary in Japan from the foreign company in their foreign accounts. Therefore, as per Sub-regulation 8 of Regulation 7 of the said Regulations read with the agreements for payment facility between the companies and expats, it is evident that the expats were foreign citizens, resident in India, employees of foreign company, receiving remuneration as payable to them by the foreign company. As per the provisions of said regulations, they cannot be termed as the employees of the appellants.
- Appellants have vigorously submitted that the expats were their own employees as they had deducted TDS on the amounts paid by them as salary to these expats. The deduction of TDS of Income Tax on such amounts is in accordance with the said FEMA notification which provides that “Income Tax is chargeable on the entire salary as accrued in India” and hence, cannot be considered as an evidence to prove that the said expats were the employees of the appellants. Moreover, the appellants have not provided any evidence to show that the expats were not employees of the foreign companies. They had not left/ resigned that company but were transferred/ assigned to the appellants. After completion of the assignment, they were to report back to the foreign company.
- Income Tax is levied on the source rule. i.e. Tax is leviable in the country where services have been provided even if payment is made out of India. This has also been held by the Hon’ble SC in GVK Industries Ltd Vs Income Tax officer (Order dated 18.02.2015 in Civil Appeal No 7796 of 1997 reported at [2015] 54 taxman.com 347 (SC)= 2017 (49) STR 513 (SC).
- Appellant has claimed that he is not liable to pay Service Tax as the services fall under negative list, for the reason of existence of employer – employee relationship. They have failed to establish that the services provided by the expats and same falls under negative list for the same reason. In case of Rajasthan Spg and Wvg Mills Ltd Vs Collector of C Ex Jaipur reported as 1995 (77) ELT 474 (SC), the Hon’ble Supreme Court has held that exemption notification should be construed strictly and it is for the person claiming exemption to establish his eligibility to said exemption. Five Member bench of Apex Court has in case of Dilip Kumar & Co [2018 (361) ELT 527 (SC) reiterated the same setting to rest all the controversies in this regard.
- The argument of the appellants that no Service Tax is payable by them as the value of services becomes Nil as the foreign company has received only that amount which they have paid to the expats and have not charged any markup or profit. Only the expenses have been reimbursed. But as per Section 67 of the Finance Act, 1994, gross value of the amount paid is taxable and no deduction on account of expenses is permissible. As per the item No 4 of the cost reimbursement agreement, it is evident that the appellant transfers the money to the foreign company which in turn pays to the expats. The amount paid by the foreign company to the expats (its employees) is nothing but a expense on their part and cannot be deducted for the purpose of calculation of the Service Tax. The gross amount received for rendering the services to the appellants is the total consideration received for such services and which is liable to Service Tax without any deductions of expenditures on any account.
- The judgments relied upon by the ld advocate of the appellants relates to the period prior to 30.06.2012 i.e. the period when services were categorised and it was held that the foreign company does not fall under manpower supply agency.
3.4 After completion of hearing both the sides were given liberty to file written submissions in matter. Appellants while filing the written submissions filed miscellaneous applications ST/Misc/60084/2020 seeking opportunity of hearing in the matter to explain certain points being made by them in written submissions. These applications were heard and allowed on 27.02.2020. Accordingly matter was posted for hearing on 28.02.2020.
3.5 On 28.02.2020, learned counsel for the appellant made following submissions:
> During the course of argument in the matter earlier he has not raised the point in relation to issue estoppel which is in appeal memo filed by them, this point should be taken on record as the issue for earlier periods has been adjudicated in their favour.
> He has filed the affidavits from the parent company, duly certified by the concerned embassies, endorsing his submissions that they had received the exact amount as paid by them to expats in foreign currency.
4.1 We have considered the impugned order with the submissions made in appeal, during the course of arguments and in the writtens submissions filed.
4.2 Appellants have assailed the impugned orders on the grounds of :-
a. Issue Estoppel
b. The issue regarding levy of service tax in respect of payments of salary to expats, is squarely covered in their favour by various decisions of tribunal, and hence is no longer res-integra.
Issue Estoppel
4.3 The issue involved in the present case is in respect of levy of service tax on the amounts paid as salary to expats under the taxable category of Manpower Supply Services. In their case the issue has been settled in their favour by the Commissioner himself for the previous period (2007-08 to 2008-09 & 2014-15). Hence opening the issue afresh for the subsequent periods will be hit by the principles of “Issue estoppel”. It is now settled principle, in law, that estoppel does not operate against the statue. More so over in respect of Fiscal Statutes and matters relating to assessment to tax Hon’ble Supreme Court has in case of Elson Machinery [1988 (38) E.L.T. 571 (SC)] held as follows:
“The next submission on behalf of the appellant is that the Classification Lists had been approved earlier and the Excise Authority was estopped from taking a different view. Plainly there can be no estoppel against the law. The claim raised before us is a claim based on the legal effect of a provision of law and, therefore, this contention must be rejected.”
Following this decision in case of Palsmac Manufacturing [1991 (51) ELT 361 (SC)+, Hon’ble Supreme Court has laid down the law as follows:
“6. The appellants contention that the department having earlier approved the classification of Tie Bar Nuts under Tariff Item 68 has no justification for its revision is, to our mind, not tenable inasmuch as there could be no estoppel against a statute. If according to law Tie Bar Nuts fall within Tariff Item 52 the fact that the department earlier approved their classification under Tariff Item 68 will not estop it from revising that classification to one under Tariff Item 52. See M/s. Elson Machines Pvt. Ltd. v. Collector of Central Excise – 1988 (38) E. L. T. 571 (SC) = 1989 Suppl. (1) SCC 671, Para 10 at 675.”
In case of Pefco Foundary Chemicals Ltd [1993 SCC (Suppl 1) 74] again Supreme Court held as follows:
“Once the tribunal found that cylinder liner ceased to be cast iron it is obvious that the department could not be precluded from levying duty on it subject to the law of limitation. Since show cause notice which resulted in these proceedings was for a period other than for which proceedings had been dropped, it was not reviewed as urged by the learned counsel for appellant. In Plasmac Machine Mfg. Co. Pvt. Ltd. v. Collector of Central Excise, AIR 1991 SC 999 it was held by court, of which one of us (R. M. Sahai, J.) was a member, that if an item was found dutiable then the department could not be prevented from levying duty on it because it had earlier approved classification as there is no estoppel against statute.”
4.4 In view of the above decisions we are not in position to agree with the submissions made by the Appellants invoking the principle of estoppel.
4.5 We also not that in case of U R Malpani [1999 (110) ELT 317 (SC)+, Hon’ble Supreme Court has refused to apply the principle of “issue estoppel” to the criminal prosecution of accused, even after noting that he has been acquitted by the Commissioner in adjudication proceedings. The relevant paragraphs of said decision are reproduced below:
“These appeals by certificate arise from the decision of the High Court of Bombay in Criminal Revision Application No. 238 of 1966 wherein the following questions of law arise for decision:
(i) Whether the prosecution from which these Criminal Revision Petitions arose is barred under Art. 20 (2) of the Constitution as against accused Nos. 1 and 2 in that case by reason of the decision of the Collector of Customs in the proceedings under the Sea Customs Act ?
(ii) Whether under any circumstance the finding of the Collector of Customs that the Ist and 2nd accused are not proved to be guilty operated as an issue estoppel in the criminal case against those accused ?
(iii) ……
(iv) ……
………..
2. ……
3. ……
4. In that connection an enquiry was held by the Customs authorities. In the course of the enquiry some of the goods said to have been smuggled were seized. After the close of the enquiry those goods were ordered to be confiscated. In addition, a penalty was imposed on some of the accused. Thereafter on February 19, 1965, the Assistant Collector of Customs, Bombay after obtaining the required sanction of the Government filed a complaint against five persons including the appellants in Criminal Appeal No. 35 of 1967 (accused Nos. 1 and 2 in the case) under Section 120B, I.P.C. read with Clauses (37), (75), (76) and (81) of Section 167 of the Sea Customs Act, 1878 (Act VIII of 1878) as well as under Section 5 of the Imports and Exports (Control) Act, 1947. Before the commencement of the enquiry in that complaint, the Ist accused filed on August 3, 1965, the application mentioned above.
5. Now we shall proceed to examine the contentions set out earlier.
6. Reliance on Article 20(2) is placed under the following circumstances. In the enquiry held by the Collector of Customs, he gave the benefit of doubt to accused Nos. 1 and 2. This is what he stated therein :
“As regards M/s. Larmel Enterprises (of which accused No. 1 is the proprietor and accused No. 2 is the Manager) although it is apparent that they have directly assisted the importers in their illegal activities and are morally guilty. Since there is no conclusive evidence against them to hold them as persons concerned in the act of unauthorised importation, they escape on a benefit of doubt.”
7. ……….
8. We shall not take up the contention that the finding of the Collector of Customs referred to earlier operated as an issue estoppel in the present prosecution. The issue estoppel rule is but a facet of the doctrine of autrefois acquit. In Sam basivan v. Public Prosecutor, Federation of Malaya – (1950) AC 458 at p. 479, Lord MacDermott enunciated the said rule thus :
“The effect of a verdict of acquittal pronounced by a competent court on a lawful charge and after a lawful trial is not completely stated by saying that the person acquitted cannot be tried again for the same offence. To that it must be added that the verdict is binding and conclusive in all subsequent proceedings between the parties of the adjudication. The maxim “Res judicata pro veritate accipitur” is no less applicable to criminal than to civil proceedings. Here, the appellant having been acquitted at the first trial on the charge of having ammunition in his possession, the prosecution was bound to accept the correctness of that verdict and was precluded from taking any step to challenge it at the second trial. And the appellant was no less entitled to rely on his acquittal in so far as it might be relevant in his defence. That it was not conclusive of his innocence on the firearm charge is plain, but it undoubtedly reduced in some degree the weight of the case against him, for at the first trial the facts proved in support of one change were clearly relevant to the other having regard to the circumstances in which the ammunition and revolver were found and the fact that they fitted each other.”
9. The rule laid down in that decision was adopted by this Court in Pritam Singh v. State of Punjab – AIR 1956 S.C. 415 and again in N. R. Ghose alias Nikhil Rajan Ghose v. State of West Bengal – (1960) 2 SCR 58. But before an accused can call into aid the above rule, he must establish that in a previous lawful trial before a competent court, he has secured a verdict of acquittal which verdict is binding on his prosecutor. In the instant case for the reasons already mentioned, we are unable to hold that the proceeding before the Collector of Customs is a criminal trial. From this it follows that the decision of the Collector does not amount to a verdict of acquittal in favour of accused Nos. 1 and 2.”
4.6 Since the ingredients as laid down by the Apex Court in the decision of Malpani, for invoking the principle of “issue estoppel” are missing in the present case we are not in position to agree with this submission of the Appellant.
Issue Not Res-integra
4.7 Appellants defence in the case is that the expats the present case were their employees and have argued the same on the basis of submissions stating that-
> they entered into an agreement with these expats directly and during the course of their employment these expats worked under their control;
> they deducted and deposited TDS on the remuneration paid by them to expats;
> The parent company had issued international assignment letter to these expats, as per which they were permitted to undertake employment with the appellants;
> Indian component of remuneration/ salary was paid directly by the appellants to expats after deducting, TDS and the foreign component was routed through the parent company, in terms of cost reimbursement agreement with the parent company.
> the parent company was not engaged in providing manpower supply services.
4.8 The issue in similar circumstances and facts have been decided holding that the services do not qualify as Manpower Supply Services as defined by Section 65 (105)(k) of the Finance Act, 1994 and hence following the precedents the impugned order needs to be set aside. (Refer to para 3.2, supra for the decisions relied upon by the appellants in their support). In all the cases relied upon by the Appellant the period involved is prior to July 2012, when the service tax was levied on those services which fall under the taxable categories as defined by Section 65 (105)(k) of the Finance Act, 1994. Instead of referring to each decision separately we refer to the decision of Hon’ble High Court in case of Computer Science Corporation *2014 (52) taxmann.com 256 (Allahabad)+, Hon’ble Allahabad High Court has held as follows:
“8. In the present case, the Commissioner clearly missed the requirement that the service which is provided or to be provided, must be by a manpower recruitment or supply agency. Moreover, such a service has to be in relation to the supply of manpower. The assessee obtained from its group companies directly or by transfer of the employees, the services of expatriate employees. The assessee paid the salaries of the employees in India, deducted tax and contributed to statutory social security benefits such as provident fund. The assessee was also required to remit contributions, which had to be paid towards social security and other benefits that were payable to the account of the employees under the laws of the foreign jurisdiction. There was no basis whatsoever to hold that in such a transaction, a taxable service involving the recruitment or supply of manpower was provided by a manpower recruitment or supply agency. Unless the critical requirements of clause (k) of Section 65(1 05) are fulfilled, the element of taxability would not arise.”
4.9 In the present appeals, the issue is not in respect of levy of service tax under the category of Manpower Supply Services as defined by erstwhile Section 65 (105)(k) of the Finance Act, 1994 prior to 01.07.2012. The scheme of taxation of services was amended by the Finance Act, 2012, and Section 65 B(44) and 65B(51) inserted in Finance Act, 1994 read as follows:
(44) “service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-
(a) an activity which constitutes merely,-
(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) such transfer, delivery or supply of any goods which is deemed to be sale within the meaning of clause (29A) of article 366 of the Constitution; or
(iii) a transaction in money or actionable claim;
(b) a provision of service by an employee to the employer in the course of or in relation to his employment;
(c) fees taken in any Court or tribunal established under any law for the time being in force.
Explanation 1.– For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to,-
(A) ………; or
(B) ……. ; or
(C) ……
Explanation 2.- ……
Explanation 3.- For the purposes of this Chapter,-
(a) ……….;
(b) ……….;
Explanation 4.- ……….;”
(51) “taxable service” means any service on which service tax is leviable under section 66B;
Section 66B inserted in Finance Act, 1994 by Finance Act, 2012 read as follows:
“66B. There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.”
4.9 Hence with effect from 01.07.2012, the law as introduced by the way of above amendments had changed the concepts of taxation of services. Whereas prior to this date tax was levied on the services defined to be taxable services, and Manpower Supply Services as defined by Section 65 (105)(k) was one of such taxable services. Since we are concerned with the period post 01.07.2012, the decisions which have held that the services provided by the appellant parent company were not covered by the definition of Manpower Supply Services, under Section 65 (105)(k) as it existed then will have no application to the facts of this case. Hence the submission made by the appellants counsel, by referring to various decisions deciding the issue for period prior to 01.07.2012, that the issue is no longer res-integra, cannot be agreed to.
Nature of transaction between Appellant and its Parent Company
4.10 As per Section 65 B (44) inserted in Finance Act, 1994 and made effective from 01.07.2012 (para 4.9 supra) the “service” has been defined to mean any activity done by one person for another for a consideration. This definition has widened the scope of service much beyond the term “service” as was interpreted by the the Apex Court in case of Lucknow Development Authority vs M K Gupta [1994 SCC (1) 243] holding as follows:
“4. What is the meaning of the word ‘service’? Does it extend to deficiency in the building of a house or flat? Can a complaint be filed under the Act against the statutory authority or a builder or contractor for any deficiency in respect of such property. The answer to all this shall depend on understanding of the word ‘service”. The term has a variety of meanings. It may mean any benefit or any act resulting in promoting interest or happiness. It may be contractual, professional, public, domestic, legal, statutory etc. The concept of service thus is very wide. How it should be understood and what it means depends on the context in which it has been used in an enactment. Clause (o) of the definition section defines it as under:
‘service’ means service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, board or lodging or both, housing construction, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service;”
It is in three parts. The main part is followed by an inclusive clause and ends by an exclusionary clause. The main clause itself is very wide. It applies to any service made available to potential users. The words ‘any’ and ‘potential’ are significant. Both are of wide amplitude. The word ‘any’ dictionarily means ‘one or some or all’. In Black’s Law Dictionary it is explained thus, “word ,any’ has a diversity of meaning and may be employed to indicate ‘all’ or ,every’ as well as ‘some’ or ‘one’ and its meaning in a given statute depends upon the context and the subject- matter of the statute”. The use of the word ‘any’ in the context it has been used in clause (o) indicates that it has been used in a wider sense extending from one to all. The other word ‘potential’ is again very wide. In Oxford Dictionary it is defined as ‘capable of coming into being, possibility’. In Black’s Law Dictionary it is defined as “existing in possibility but not in act. Naturally and probably expected to come into existence at some future time, though not now existing; for example, the future product of grain or trees already planted, or the successive future installments or payments on a contract or engagement already made.” In other words service which is not only extended to actual users but those who are capable of using it are covered in the definition. The clause is thus very wide and extends to any or all actual or potential users. But the legislature did not stop there. It expanded the meaning of the word further in modem sense by extending it to even such facilities as are available to a consumer in connection with banking, financing etc. Each of these are wide-ranging activities in day to day life.
………………”
4.11 In U K, VAT Legislation, also defines supply of service in very manner stating as follow:
“(b) anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services.”
The same definition has been adopted across the entire European Union. The crux of the definition, is that anything done for a consideration which does not qualify as supply of goods is a supply of service. Similar explanation has been given in the Education Guide, issued by the “Central Board of Excise and Customs” at time of introduction of these amendments in 2012. The relevant portion of the guide explaining the meaning of phrase activity for consideration is reproduced below:
“2.3 Activity for a consideration
The concept ‘activity for a consideration’ involves an element of contractual relationship wherein the person doing an activity does so at the desire of the person for whom the activity is done in exchange for a consideration. An activity done without such a relationship i.e. without the express or implied contractual reciprocity of a consideration would not be an ‘activity for consideration’ even though such an activity may lead to accrual of gains to the person carrying out the activity.
Thus an award received in consideration for contribution over a life time or even a singular achievement carried out independently or without reciprocity to the amount to be received will not comprise an activity for consideration.
There can be many activities without consideration. An artist performing on a street does an activity without consideration even though passersby may drop some coins in his bowl kept after feeling either rejoiced or merely out of compassion. They are, however, under no obligation to pay any amount for listening to him nor have they engaged him for his services. On the other hand if the same person is called to perform on payment of an amount of money then the performance becomes an activity for a consideration.
Provisions of free tourism information, access to free channels on TV and a large number of governmental activities for citizens are some of the examples of activities without consideration.
Similarly there could be cases of payments without an activity though they cannot be put in words as being “consideration without an activity”. Consideration itself pre-supposes a certain level of reciprocity. Thus grant of pocket money, a gift or reward (which has not been given in terms of reciprocity), amount paid as alimony for divorce would be examples in this category. However a reward given for an activity performed explicitly on the understanding that the winner will receive the specified amount in reciprocity for a service to be rendered by the winner would be a consideration for such service. Thus amount paid in cases where people at large are invited to contribute to open software development (e.g. Linux) and getting an amount if their contribution is finally accepted will be examples of activities for consideration.”
4.12 Also what is meant by “provision of service by an employee to employer”, which falls in exception/ exclusion clause of Section 65B(44) has been explained as follows:
“2.9.1 Are all services provided by an employer to the employee outside the ambit of services?
No. Only services that are provided by the employee to the employer in the course of employment are outside the ambit of services. Services provided outside the ambit of employment for a consideration would be a service. For example, if an employee
provides his services on contract basis to an associate company of the employer, then this would be treated as provision of service.
2.9.2 Would services provided on contract basis by a person to another be treated as services in the course of employment?
No. Services provided on contract basis i.e. principal-to-principal basis are not services provided in the course of employment.”
4.13 Service tax is a transaction and contract based levy. Which means that for determination of liability to service tax, the transaction sought to be taxed needs to be examined and all other factors which are extraneous to such transaction need to be ignored or discarded. In this respect following documents need to be considered:
A. International Assignment Letter issued by the foreign company, which provides as follows:-
a. The expats get a specific amount payable to him/her as fixed by the foreign company. The amount is payable in foreign currency as well as Indian currency as fixed by the foreign entity. Even the bonus payable (twice in a year) and other entitlements like free return tickets (once in a year) etc are pre-fixed by the foreign company. (Annexure –I to the letter issued by the Foreign Co.)
b. Specific terms and conditions of assignment are as fixed by the foreign company,
c. His services can be terminated by the foreign company before completion of the tenure with the appellant. However, he will continue to work for the foreign company after his termination of contract with the appellant which shows that effective controls remain with the foreign company.
B. “Terms of Agreement” contained in the cost reimbursement agreements (RUD with SCN) between foreign company and appellants provides as following :-
a. The expats are employees of the foreign company (Item 1)
b. They are transferred to India (Item 2),
c. They come to India for a specific period of three years as fixed by the foreign company (Item 2),
d. They are deputed for a specific task against the post fixed by the foreign company and will work in the capacity of Assistant Director- Consumer System Products Division/ Manger – Market Engineering Group etc. (Item 2).
C. In the Affidavit filed during hearing on 21.01.2020, it is observed that Annexure-1 attached with International Assignment Letter issued by the foreign company to Sh Kota Kuramochi is different from the Annexure 1 attached with Employment contract issued by the appellants (Both annexures dated 30/10/2014) in as much as that the foreign company has allowed additional benefit of “Return ticket of Economy class to Japan once in One Year”.
4.14 From the documents as discussed above undisputedly it can be said that Expats were providing certain specific and specialized services to the Appellants. For the services provided by the Expats remuneration was agreed and paid by the Appellants in the manner agreed. The services provided by the Expats cannot be considered to be provided by the employee to the employer, to be covered under the exclusion clause ‘b’ in Section 65 B (44) of the Finance Act, 1994 as amended from 01.07.2012. Even the Education Guide issued by the Central Board of Excise and Customs, in 2012 at 2.9.1 & 2.9.2 (refer para 4.13 above) clarifies so. Post 01.07.2012, all the activities, carried out for a consideration except those covered under exclusion clause, negative list or specifically exempted are subjected to service tax. It is not the case of the Appellant, that the services provided by the Expats fall under the negative list or are exempted by way of an exemption notification under Section 93 of Finance Act, 1994. Since we do not find that the services provided by the Expats qualify as services provided by employees to employers in course of employment, we are not in position to extend the benefit of exclusion clause to appellants, and hold that the services are liable to tax.
4.15 It has been time and again stated by the Hon’ble Apex Court that any exclusion clause, which is an exception to general tax policy needs to be construed in a strict manner and interpreted giving the benefit of ambiguity, doubt in favour of revenue. Some of the decisions on the point and relevant paragraphs of the same are reproduced below:
- In case of Rajasthan Spg and Wvg Mills Ltd [1995 (77) ELT 474 (SC)] held that “it is for the assessee to establish that the goods manufactured by him come within the ambit of the exemption notification. Since it is a case of exemption from duty, there is no question of any liberal construction to extend the term and scope of exemption notification. Such exemption notification must be strictly construed and the assessee should bring himself squarely within the ambit of the notification. No extended meaning can be given to the exempted item to enlarge the scope of exemption granted by the notification.”
- A Five Member Bench of Hon’ble SC in the case of Commissioner of Customs (Import) Mumbai Vs Dilip Kumar and Company & Ors [(2018) 9 SCC 1] after examining various judgments held-
“ 52 To sum up, we answer the reference holding as under –
(i) Exemption notification should be interpreted strictly; the burden of providing applicability would be on the assessee to show that his case comes within parameters of the exemption clause or exemption notification.
(ii) When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue.
(iii) The ratio in Sun Export case (supra) is not correct and all the decisions which took a similar view as in Sun Export case (supra) stands over-ruled.“
- Again in case of VVF and Others [Order dated 22.04.2020 in Civil Appeal Nos. 2256-2263 of 2020 (Arising out of S.L.P.(C) Nos. 28194-28201/2010)+, a three member bench of Hon’ble Supreme Court held as follows:
“13.5. In the case of R. K. Garg v. Union of India (1981) 4 SCC 675, this Court observed and held as follows:
“8. xxx xxx xxx The Court must always remember that “legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry”; “that exact wisdom and nice adaption of remedy are not always possible” and that “judgment is largely a prophecy based on meagre and uninterpreted experience”. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as pointed out by the United States Supreme Court in Secretary of Agriculture v. Central Roig Refining Company [94 L Ed 381 : 338 US 604 (1950)] be converted into tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distortions and abuses. Indeed, howsoever great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or by the possibilities of abuse of any of its provisions. If any crudities, inequities or possibilities of abuse come to light, the legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must guide and inspire the legislature in dealing with complex economic issues.”
13.6 In the of Commissioner of Customs (Import) v. Dilip Kumar and Company (2018) 9 SCC 1, after considering various decisions on the Interpretation of Fiscal Statutes, it is ultimately concluded that every taxing statute including, charging, computation and exemption clauses, at the threshold stage should be interpreted strictly. Further, though in case of ambiguity in charging provisions, the benefit necessarily goes in favour of the assessee, but for an exemption notification or exemption clause the benefit of ambiguity must be strictly interpreted in favour of the Revenue/State.
It is further observed and held that a person claiming exemption, therefore, has to establish that his case squarely falls within the exemption notification, and while doing so, a notification should be construed against the assessee in case of ambiguity. A person who claims exemption has to establish his case.”
Does Deduction of TDS by the Appellant from remuneration paid establishes the employer-employee relationship:
4.16 In case of GVK Industries *2017 (49) STR 513 (SC)+ Hon’ble Supreme Court has held as follows:
“37 . As the factual matrix in the case at hand, would exposit the NRC had acted as a consultant. It had the skill, acumen and knowledge in the specialized field i.e. preparation of a scheme for required finances and to tie-up required loans. The nature of activities undertaken by the NRC has earlier been referred to by us. The nature of service referred by the NRC, can be said with certainty would come within the ambit and sweep of the term ‘consultancy service’ and, therefore, it has been rightly held that the tax at source should have been deducted as the amount paid as fee could be taxable under the head ‘fee for technical service’. Once the tax is payable paid the grant of ‘No Objection Certificate’ was not legally permissible. Ergo, the judgment and order passed by the High Court are absolutely impregnable.”
Liability to income tax, and consequently deduction of TDS under Section 194, dependent on the source rule. If the income is incurred by the Non Resident, in lieu of the services provided in India, then the same is liable to Income Tax in India and accordingly TDS needs to be deducted as per Section 194 of the Income Tax Act, 1961. However, just deduction of TDS cannot be conclusive proof for establishing employer employee relationship. Also the deduction of TDS was as per Sub-regulation 8 of Regulation 7 Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2000 and FEMA notification which provides that “Income Tax is chargeable on the entire salary as accrued in India” and hence, cannot be considered as an evidence to prove that the said expats were the employees of the appellants. The above provisions read with the agreements for payment facility between the companies and expats, it is evident that the expats were foreign citizens, resident in India, employees of foreign company, receiving remuneration as payable to them by the foreign company. Hence in our view just for the reason that Appellants were deducting TDS from the remuneration made to the Expats it cannot be concluded that there existed an employer employee relationship between the Appellant and Expats.
Decision of Delhi Bench in case of India Yamaha Motor Private Ltd.
4.17 In our view the decision of Delhi Bench in case of India Yamaha Motor Private Ltd [Final Order No 50890/2019 dated 28.06.2019] holding as follows will not be applicable in the present case.
“7. For the post negative list period: Section 65B(44) of Finance Act 1944 comes to the rescue of the appellant which reads as follows:
“Section 65B: Interpretations:
(44) …………………….”
The definition makes it clear that when the arrangement is that of relationship of employer and employee that the same is expressly excluded from the ambit of taxability.”
In the facts of that case Bench had concluded that there existed an employer, employee relationship between the expats and the Indian Company hence had given the benefit of exclusion clause to Section 65 B (44), which is not the case in appeals before us.
4.18 In view of our discussions as above we are not in position to agree with the submissions made by the appellants on the merits of the issue. Before concluding discussion on the issue of liability to service tax we would put on record, that Commissioner has in both the impugned order considered the definition of Service as it existed at the relevant time as per Section 65 B (44) ibid, and has decided the issue accordingly and not on the basis of Section 65 (105) (k) defining Manpower Supply Services. All the arguments made by Appellants relying on various decisions in respect of Manpower Supply Services have been rejected by us earlier.
4.19 Since the Show Cause Notice and demand notice have been issued within the normal period of limitation as per Section 73 of Finance Act, 1994, appellants have also not argued limitation before us. Hence we uphold the demand of service tax made as per the impugned orders.
Interest
4.20 Since the demand of tax has been upheld the demand for interest will follow. It is now settled law that interest under Section 75, is for delay in the payment of tax from the date when it was due. Since appellants have failed to pay the said Service Tax by the due date interest demanded cannot be faulted. In view of the decisions as follows:-
> P V Vikhe Patil SSK [2007 (215) ELT 23 (Bom)]
> Kanhai Ram Thakedar [2005 (185) ELT 3 (SC)]
> TCP Limited [2006 (1) STR 134 (T-Ahd)]
> Pepsi Cola Marketing Co [2007 (8) STR 246 (T-Ahd)]
> Ballarpur Industries Limited [2007 (5) STR 197 (T-Mum)]
Penalty Under Section 76 and 77 of Finance Act, 1994
4.21 Penalty has been imposed by the Commissioner under Section 77 for various infractions noticed in complying with provision of law. Penalty under Section 77 is civil in nature and are imposed for infractions noticed. Hon’ble Supreme Court has in case of Gujarat Travancore Agency vs. Commissioner of Income Tax [1989 (42) ELT 350 (SC)], Hon’ble Supreme Court held as under:
“4. ……………. In most cases of criminal liability, the intention of the Legislature is that the penalty should serve as a deterrent. The creation of an offence by Statute proceeds on the assumption that society suffers injury by and the act or omission of the defaulter and that a deterrent must be imposed to discourage the repetition of the offence. In the case of a proceeding under Section 271(1)(a), however, it seems that the intention of the legislature is to emphasise the fact of loss of Revenue and to provide a remedy for such loss, although no doubt an element of coercion is present in the penalty. In this connection the terms in which the penalty falls to be measured is significant. Unless there is something in the language of the statute indicating the need to establish the element of mens rea it is generally sufficient to prove that a default in complying with the statute has occurred. In our opinion, there is nothing in Section 271(1)(a) which requires that mensrea must be proved before penalty can be levied under that provision. We are supported by the statement in Corpus Juris Secundum Volume 85, page 580, Paragraph 1023
:
“A penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in its nature, and is far different from the 41 ST/85354,85355/2015 penalty for a crime or a fine or forfeiture provided as punishment for the violation of criminal or penal laws.”
Since there is no dispute about such infractions as recorded by the Commissioner in his impugned order, penalties as imposed under Section 77(2) are justified.
4.22 Commissioner has in impugned order also imposed penalties under Section 76 of the Finance Act, 1994.
Hon’ble Kerala High Court has in case of Krishna Poduval [2006 (1) STR 185 (Ker)] held as follows:
“11. The penalty imposable under S. 76 is for failure to pay service tax by the person liable to pay the same in accordance with the provisions of S. 68 and the Rules made thereunder, whereas S. 78 relates to penalty for suppression of the value of taxable service. Of course these two offences may arise in the course of the same transaction, or from the same act of the person concerned. But we are of opinion that the incidents of imposition of penalty are distinct and separate and even if the offences are committed in the course of same transaction or arises out of the same act, the penalty is imposable for ingredients of both the offences. There can be a situation where even without suppressing the value of taxable service, the person liable to pay service tax fails to pay. Therefore, penalty can certainly be imposed on erring persons under both the above Sections, especially since the ingredients of the two offences are distinct and separate. Perhaps invoking powers under S. 80 of the Finance Act, the appropriate authority could have decided not to impose penalty on the assessee if the assessee proved that there was reasonable cause for the said failure in respect of 42 ST/85354,85355/2015 one or both of the offences. However, no circumstances are either pleaded or proved for invocation of the said Section also. In any event we are not satisfied that an assessee who is guilty of suppression deserves such sympathy. As such, we are of opinion that the learned single Judge was not correct in directing the 1st appellant to modify the demand withdrawing penalty under 5. 76. Therefore, the judgment of the learned single Judge, to the extent it directs the first appellant to modify Ext. P1 by withdrawing penalty levied under 5. 76, is liable to be set aside and we do so. The cumulative result of the above findings would be that the Writ Petitions are liable to be dismissed and we do so. However, we do not make any order as to costs.” Since appellants had not paid the service tax due from them in the manner prescribed by the due date, in our view the penalty imposed under Section 76 is justified.
5.1 In view of discussions as above we do not find any merits in the appeals filed by the appellant and dismiss the same.
(Pronounced on /06/2020)
(ASHOK JINDAL)
MEMBER (JUDICIAL)
(SANJIV SRIVASTAVA)
MEMBER (TECHNICAL)
6. As I am not in agreement with the decision taken by the learned brother, therefore, I am writing a separate order.
7. Without commenting on the merits of the case during the course of hearing, Ld. Counsel for the appellant relied upon on the two decisions of Principal bench of Delhi:-
(a) M/s. Mikuni India Pvt.Ltd.-2019 (546-CESTAT-DEL-ST
(b) India Yamaha Motor Private Limited-2019-VIL-508-CESTAT-DEL-ST That the post 1.7.2012 also this Tribunal held that the services in question are not liable to service tax.
8. I have gone through the order drafted by the Hon’ble Member (Technical), post 17.2012 where in without distinguishing the facts of this case from the facts in the case M/s. Mikuni India Pvt.Ltd. and India Yamaha Motor Private Limited (supra) has held that the decision is not applicable to the present case. In fact, as Hon’ble Member (Technical) have not discussed the facts in the case in hand from the facts of M/s. Mikuni India Pvt.Ltd. and India Yamaha Motor Private Limited (supra), therefore, in my considered view as held by the Hon’ble Bombay High Court in the case of Mercedes Benz India Pvt.Ltd.-2010 (252) ELT 168 (Bom), contrary decision cannot be taken by the Tribunal and best course is to refer the matter to the larger bench in the interest of justice delivery system.
9. In the above said case, it has been observed as under:-
“19. Having said so, the impugned view taken by the Tribunal by no means can be said to be correct approach. Needless to mention that if the Tribunal wanted to differ to the earlier view taken by the Tribunal in the identical set of facts, the judicial discipline required reference to the larger bench. One co-ordinate bench finding fault with another coordinate bench is not a healthy way of dealing with the matters. In this view of the matter, we have no option but to set aside the impugned judgment passed by the Tribunal on 20th November, 2009 incorporated at Exh.A to the petition.”
10. As discussed above, Hon’ble Member (Technical) have not distinguished the facts of this case from the above cited cases cited by the Ld.Counsel for the appellant and have taken a contrary view, therefore, in the light of the decision of Hon’ble Bombay High Court in the case of Mercedes Benz India Pvt.Ltd. (supra) and I am of considered opinion that this matter requires consideration by the Larger Bench of this Tribunal in the interest of justice delivery system. Hence, Registry is directed to place the papers before Hon’ble President to constitute larger bench to resolve the following issue:-
Whether in the facts and circumstances of the case, the levy of service tax in respect of payment of salary of expats is liable to be taxed post 1.7.2012 under reverse charge mechanism or not?
(ASHOK JINDAL)
MEMBER (JUDICIAL)
(SANJIV SRIVASTAVA)
MEMBER (TECHNICAL
In view of the difference in opinion as stated in the order of proposed by the learned brother Member (Judicial) matter is referred to the Hon’ble President for resolving the difference between the two members of the bench. Following question is proposed for reference to third member:
“i. Whether in view of the para 4.17 of the order proposed by Member (Technical), Member (Judicial) is correct in making the observation to effect that the decision of Delhi Bench which as per him are contrary to the view being taken in this case have not been considered in the order proposed by Member (technical)
ii. Whether in view of the observations made by Member (Judicial) matter needs to be referred to larger bench or in view of para 4.17 of the order proposed by the Member (Technical) appeal needs to be dismissed.
(ASHOK JINDAL)
MEMBER (JUDICIAL)
(SANJIV SRIVASTAVA)
MEMBER (TECHNICAL)
