P. Padmavathi Vs Commissioner of Central Tax (CESTAT Hyderabad)
Summary: The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal considered whether wages paid by a manpower service provider to labourers and subsequently reimbursed by the client could be included in the taxable value of ‘Manpower Recruitment or Supply Agency Service’ (MRSAS), or whether service tax was payable only on the commission/service charges retained by the appellant.
The appellant, P. Padmavathi, had entered into an agreement with M/s Crown Beers India Ltd (CBIL) for supply of manpower. Separate invoices were raised towards wages payable to labourers and service charges/commission. The Department nevertheless demanded service tax on the entire amount, including wages, contending that the appellant did not qualify as a pure agent under Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006.
The appellant submitted that wages were separately identified, reimbursed on actual basis and never retained as income. According to the appellant, only the commission represented consideration for the taxable service. The adjudicating authority and Commissioner (Appeals) rejected this contention on the basis that the conditions prescribed under Rule 5(2) were not fulfilled and consequently treated the entire amount as gross value of taxable service.
The Tribunal examined the valuation principles under Section 67 of the Finance Act, 1994 and observed that although service tax is levied with reference to the gross amount charged for the taxable service, only the amount representing consideration for the service rendered can be subjected to tax. It held that reimbursement of expenditure which does not constitute consideration cannot automatically become taxable merely because the amount flows through the service provider. The Tribunal referred to Section 67 and the Service Tax (Determination of Value) Rules, 2006, including Rule 5(2) concerning pure-agent expenditure.
Reliance was placed on Daurala Organics Vs CCE, 2014 (35) STR 214 (All), Sri Bhagavathy Traders Vs CCE, Cochin, 2011 (24) STR 290 (Tri-LB), and CCE & ST, Surat Vs Jalaram Security Services, 2020 (37) GSTL 189 (Tri-Ahmd). These decisions were relied upon for the proposition that separately identifiable wages or labour charges reimbursed to the contractor, where only agreed service charges or commission accrue to the contractor, cannot mechanically be treated as taxable consideration.
The Tribunal rejected the Revenue’s approach that the controversy depended entirely on compliance with every condition under Rule 5(2). It held that the more fundamental question was whether the reimbursement of wages itself constituted consideration for the taxable service. Even assuming that the appellant did not strictly qualify as a pure agent, actual wages paid to labourers could not be treated as income earned by the appellant where the amount merely passed through the appellant without any element of profit.
While applying the principle laid down by the Supreme Court in CCCE & ST, Bangalore Vs Northern Operating Systems Pvt Ltd, 2022 (61) GSTL 129 (SC), the Tribunal examined the real nature and substance of the contractual arrangement. It found that the labourers were engaged for rendering services to CBIL, while the appellant merely arranged and supervised the manpower and received commission for that activity. The wages belonging to the labourers never formed part of the appellant’s earnings.
The Tribunal also referred to Shanti Bheem Friends Educated Unemployed Cooperative Society Ltd Vs UOI [MANU/CH/0023/2025], observing that authorities determining taxable value in manpower supply contracts must ascertain whether the contractor merely recovers wages on actual basis or derives consideration from them. Only the amount representing consideration for the taxable service can be subjected to service tax.
The records showed separate bills for wages and commission and a written arrangement between the parties. The Department had not produced material establishing that the wages represented the appellant’s income or that any portion was retained by the appellant as consideration. The Tribunal therefore held that the mere failure to satisfy every ingredient of Rule 5(2) was insufficient to conclude that reimbursement of wages automatically became taxable consideration.
On limitation, the Tribunal found that the contractual documents themselves disclosed the essential facts, including separate invoices for wages and commission. The allegation of deliberate suppression with intent to evade service tax was therefore not sustainable. Since the issue concerned interpretation of valuation provisions and divergent judicial views existed during the relevant period, invocation of the extended period under the proviso to Section 73(1) of the Finance Act, 1994 was held unjustified. Consequently, penalties under Sections 76, 77 and 78 also could not survive.
The Tribunal held that actual wages reimbursed to labourers could not be included in the taxable value merely because they were routed through the appellant. Only the consideration retained towards manpower supply service was liable to service tax, subject to verification of the actual figures from the records.
Accordingly, the impugned order was set aside to the extent it included reimbursement of wages in the assessable value. The matter was remanded to the Adjudicating Authority only for limited re-quantification of service tax on the commission/service charges actually retained by the appellant, after reasonable opportunity of hearing. The demand for the extended period and penalties under Sections 76, 77 and 78 was set aside. The appeal was allowed by way of remand with consequential relief, if any, in accordance with law.
Cases Discussed
- Daurala Organics Vs CCE [2014 (35) STR 214 (All)]
- Sri Bhagavathy Traders Vs CCE, Cochin [2011 (24) STR 290 (Tri-LB)]
- CCE & ST, Surat Vs Jalaram Security Services [2020 (37) GSTL 189 (Tri-Ahmd)]
- CCCE & ST, Bangalore Vs Northern Operating Systems Pvt Ltd [2022 (61) GSTL 129 (SC)]
- Shanti Bheem Friends Educated Unemployed Cooperative Society Ltd Vs UOI [MANU/CH/0023/2025]
FULL TEXT OF THE JUDGMENT/ORDER OF CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
This appeal has been filed by P. Padmavathi (hereinafter referred to as the appellant) against Order-in-Appeal dt.30.04.2013, whereby, the Commissioner (Appeals) partly upheld the OIO dt.30.11.2012 confirming demand of service tax for the period March, 2008 to March, 2011 along with interest under the category of ‘Manpower Recruitment or Supply Agency Service’ (MRSAS). The main dispute in the present appeal is whether the amount representing wages paid to labourers by the appellant while providing MRSAS is liable to be included in the taxable value or whether service tax is payable only on the commission/service charges retained by the appellant.
2. The facts are not in dispute. The appellant entered into an agreement with M/s Crown Beers India Ltd (CBIL) for supply of manpower. Separate invoices were admittedly raised towards (i) wages payable to labourers and (ii) service charges/commission. The department has demanded service tax on the entire amount including wages on the ground that the appellant was not acting as pure agent under Rule 5(2) of Service Tax (Determination of Value) Rules, 2006.
3. The appellant has submitted that wages were separately identified, reimbursed on actual basis and were never retained as its income. According to the appellant, only the commission represented the consideration for the taxable service.
4. The adjudicating authority as well as Commissioner (Appeals) rejected the contention by holding that the conditions prescribed under Rule 5(2) were not fulfilled and therefore, the entire amount constitutes gross value of taxable service.
5. Before examining rival submissions, it would be appropriate to notice the settled legal principles governing valuation under the Finance Act, 1994. Section 67 contemplates levy of service tax on the gross amount charged for the taxable service. However, only the amount which represents consideration for the service rendered can be subjected to tax. Reimbursement of expenditure, which does not constitute consideration for the service, cannot automatically become taxable merely because it flows through the service provider.
6. The Hon’ble Allahabad High Court in the case of Daurala Organics Vs CCE [2014 (35) STR 214 (All)], while dealing on manpower supply service, held that where the wages paid to the labourers are separately identifiable and the service provider merely retains the agreed service charges, the wages cannot automatically be treated as taxable consideration merely because they are routed through the contractor. The Hon’ble High Court recognized the distinction between reimbursement of wages and consideration for the service. Similarly, the principles were reiterated by the Bangalore Bench of the Tribunal in the case of Sri Bhagavathy Traders Vs CCE, Cochin [2011 (24) STR 290 (Tri-LB)], wherein it was held that where labour charges are reimbursed separately and only commission accrues to the contractor, the value attributable to reimbursement cannot be mechanically subjected to service tax.
7. Further, the Ahmedabad Bench of the Tribunal in the case of CCE & ST, Surat Vs Jalaram Security Services [2020 (37) GSTL 189 (Tri-Ahmd)] also examined valuation in manpower/security services and observed that where documentary evidence establishes separate reimbursement of salary and wages and only administrative charges constitute the contractor’s income, the taxable value has to be determined accordingly.
8. The Revenue has strongly relied on Rule 5(2) of the Valuation Rules and contended that the appellant cannot be treated as a pure agent.
9. We find that the controversy does not entirely depend upon whether every condition prescribed under Rule 5(2) is satisfied. The more fundamental question is whether the reimbursement of wages itself constitutes consideration for the taxable service. Even assuming that the appellant does not strictly qualify as a pure agent, the amount representing actual wages paid to labourers cannot be treated as income earned by the appellant, if it merely passes through the appellant without any element of profit.
10. The Hon’ble Supreme Court in the case of CCCE & ST, Bangalore Vs Northern Operating Systems Pvt Ltd [2022 (61) GSTL 129 (SC)], emphasized that taxability has to be determined by examining the real nature and substance of the contractual arrangement, rather than mere nomenclature adopted by the parties. The Court observed that the actual economic relationship between the parties and the real recipient of the consideration must be ascertained. Applying the aforesaid principle, the substance of the present arrangement reveals that labourers were engaged for rendering services to CBIL; the appellant merely arranged and supervised the manpower and received commission for such activity. The wages belonging to the labourers never form part of the appellant’s earning.
11. The department has proceeded on the assumption that because the appellant issued consolidated invoices, the entire amount became consideration for service. Such an approach ignores the distinction between reimbursement of wages and remuneration earned by the contractor.
12. We also find support from the recent decision of the Hon’ble Punjab & Haryana High Court in the case of Shanti Bheem Friends Educated Unemployed Cooperative Society Ltd Vs UOI [MANU/CH/0023/2025], wherein the Hon’ble High Court reiterated that while determining taxable value in manpower supply contracts, the authorities are required to ascertain whether the contractor merely recovers wages on actual basis or derives consideration from them. Only the amount representing consideration for the taxable service can be subjected to service tax.
13. The records disclose that separate bills were raised towards wages and commission. The department has not produced any material to establish that the wages represented the appellant’s income or that any portion thereof was retained by the appellant as consideration.
14. The findings recorded in the impugned order proceed primarily on the premise that the appellant does not satisfy every ingredient of Rule 5(2). In our considered view, such reasoning is insufficient to conclude that reimbursement of wages automatically becomes taxable consideration. Tax is leviable on the value of the taxable service and not on amounts, which merely pass through the contractor for payment to the labourers.
15. The records further reveal that the appellant had maintained separate invoices indicating wages and commission. The arrangement was supported by a written arrangement. Therefore, the essential facts were available from the contractual documents themselves. In these circumstances, the allegation of deliberate suppression with intent to evade payment of service tax is not sustainable. The issue essentially relates to interpretation of Valuation provisions, on which divergent judicial views exist during the relevant period. Consequently, invocation of extended period under the proviso to Section 73(1) of the Finance Act, 1994 is not justified. Once the extended period fails, penalties imposed under Sections 76, 77 and 78 of the Finance Act, 1994 also cannot survive.
16. In view of the above discussion, we hold that the amount representing actual wages reimbursed to labourers cannot be included in the taxable value merely because it was routed through the appellant. Only the consideration retained by the appellant towards manpower supply service is liable to service tax subject to verification of actual figures from the records.
17. Accordingly, the impugned order is set aside to the extent it includes reimbursement of wages in the assessable value. The matter is remanded to the Adjudicating Authority only for the limited purpose of re-quantification of service tax on the commission/service charges actually retained by the appellant, after granting reasonable opportunity of hearing. The demand for extended period and penalties imposed under Sections 76, 77 and 78 are set aside.
18. Appeal is allowed by way of remand in the above terms, with consequential relief, if any, in accordance with law.
(Pronounced in the Open Court on 28.07.2026)
