Manufacturing of tugs and barges cannot be classified under Manpower Recruitment or Supply Agency Service

Dosti Fabricators Vs Commissioner of Central Excise & ST (CESTAT Ahmedabad)

CESTAT Ahmedabad held that activity of manufacturing of tugs and barges cannot be classified as supply of manpower and hence cannot be taxed under the category of Manpower Recruitment or Supply Agency Service.

Facts- The appellant are primarily engaged in the fabrication of tugs and barges out of raw material like steel plates etc supplied by the clients. Fabrication charge is paid to the appellant on lump-sum or per ton basis. The case of the department is that the contract between the appellant and their client is for supply of labour therefore, the activity of the appellant falls under the category of Manpower Recruitment or Supply Agency Service hence, the same is taxable.

Conclusion- Held that even though manpower was deployed by the service provider but the job is for specific activity such as manufacture, processing etc. and charges is paid on the basis of job and not on the basis of manpower, the activity was held not to be classifiable under Manpower Recruitment or Supply Agency Service.

Held that from 01.03.2011, Central Excise duty was levied on the manufacturing of tugs and barges and the appellants have started paying excise duty on the same activity. This further reinforce the claim of the appellant that the activity of fabrication of barges is a manufacturing activity and the appellant are indeed a manufacturer. If the contention of the Revenue is assumed to be correct then the appellant cannot be treated as manufacturer but in such case, their client shall be held as manufacturer which is not a case here.

FULL TEXT OF THE CESTAT AHMEDABAD ORDER

The brief facts of the case are that appellant are primarily engaged in the fabrication of tugs and barges out of raw material like steel plates etc supplied by the clients. Fabrication charge is paid to the appellant on lump-sum or per ton basis. The case of the department is that the contract between the appellant and their client is for supply of labour therefore, the activity of the appellant falls under the category of Manpower Recruitment or Supply Agency Service hence, the same is taxable.

2. Shri Vikash Mehta, learned Consultant appearing on behalf of the appellant submits that in the present case the contract between the appellant and their client is for specific job of fabrication of tugs and barges out of raw material like steel plates etc. supplied by their client and the charges for such fabrication is on lump-sum or per ton basis. He submits that from the contract it is clear that appellant have undertaken job of fabrication of tugs and barges and there is no supply of labour to their client therefore, activity does not fall under the category of “Manpower Recruitment or Supply Agency Service”. In this regard he referred to the relevant clauses of the contract whereby he submits that the contract is not for supply of manpower but specifically for fabrication of barges and tugs which does not fall under ^„Manpower Recruitment or Supply Agency Service‟. He also submits that the activity of the appellant is of manufacturing which is evident from the undisputed fact that with effect from 01.03.2011, Central Excise duty was levied on the manufacture of tugs and barges. The appellant took Central Excise registration and paid Central Excise duty during the years 2011-12 and 2012-13 respectively. This also shows that the activity is not of supply of manpower but of manufacturing. He submits that identical issue has been decided in the following decisions:-

(i) SA Engineering Works – 2023 (6) TMI 699-CESTAT AHMEDABAD.

(ii) Matadin Mali – 2022 (11) TMI 290-CESTAT AHMEDABAD

(iii) Shailu Traders – 2018 (10) GSTL 462 (Tri.- Del.)

(iv) Shri Ramadhar Singh – 2018 (9) GSTL 303 (Tri.-Del.)

(v) Tiwari Services – 2020 (37) GSTL 57 (Tri.-Mumbai).

3. He further submits that in the show cause notice dated 15.04.2011, out of total demand of Rs. 2,18,63,663/- service tax on the value of Rs. 1,05,12,549/- is related to repair of barges for which the appellant had obtained service tax registration and discharged the service tax.

4. Shri Rajesh Nathan, learned Assistant Commissioner, (AR) appearing on behalf of the Revenue reiterates the findings of the impugned order.

5. We have carefully considered the submissions made by both the sides and perused the record. We find that it is the Revenue’s case that appellant’s activity of manufacturing of tugs and barges is supply of manpower and hence the same is taxable under the category of Manpower Recruitment or Supply Agency Service. To understand the actual arrangement between the appellant and their client, it is necessary to go through the contract entered into by them and the sample invoice, which are reproduced below:-

MEMORANDUM OF UNDERSTANDING

This memorandum of understanding made on 01 august 2005 between M/s. WORLD OCEAN LIGHTERAGE COMPANY (hereinafter called the ‘owner’) the party of first part & M/s.Dosti Fabricators (hereinafter called the ‘contractor’) the party of the second part.

Whereas the party of the first M/s. WORLD OCEAN LIGHTERAGE COMPANY is desirous of constructing a self propelled barge more particularly described in the drawings & specifications here to annexed in schedule no.1 & whereas the party of the second part M/s. Dosti fabricators have shown their willingness to fabricate, assemble & erect, hull machinery’s & equipment of the said barge as mentioned in schedule No.1 on Turn key basis.

AND WHEREAS now both the parties have agreed upon to enter into business understanding to initiate and enhance mutual interest on the following terms and conditions

1. The party of the second part shall construct the said barge as specified in schedule No.1 on behalf of the owner as per IRS approved drawings.

2. All the Raw material, Machineries, Equipment accessories (except welding material & gas) required for the purpose of construction of the said barge shall be supplied by the owners to the contractors.

3 to 13 ………….       …………            ……………

14. It is mutually agreed by the party of the both the part that the contractor will, execute the entire work at Rs. 30,00,000/-(Rupees thirty lakhs only) absolutely on turnkey basis only. The details for the same are mentioned in schedule No 2. TDS shall be deducted as per the Rate applicable under the TAX ACT.

The schedules referred to above:

Schedule No 1: Details of the barge to be constructed.

Self propelled twin screw ore carrier barge fitted with Cummins make NT 855 m engines 2 Nos. coupled with Z F marine W-320, 4.526:1 Ratio gear box.

Schedule No 2: Scope & Specification of labour job (Turn Key Basis)

Mobilization with Total Accessories, Electricity, Welding machine, Gas cutting equipment’s and Stagings, Ghodies Stool Foundation and also A generating set suitable for at least 5 welding machines.

You shall provide complete security to our material and barge from filtration.

Gauging, grinding and welding all seams & butts. For X-Ray quality welding.

Reut of plot welding machines, Electricity & Building berth.

All steel fabrication labour charge for hull, Electrical equipment’s Carpentry Furniture and Fitting and Engine alignment with chalking, fittings.

Deck Outfitting Labour charges.

Consumables with total Accessories & Equipment’s (Esab Ferrospeed Electrodes are to used as agreed.) Steering Gear Alignments Labour charges.

Piping Labour charges.

Water tight door fabrication & erection Labour charges.

Masonry and Sanitary Labour charges.

Painting Labour charges including sand blasting & priming.

All W T Comnts And F.O. and F.W. tanks Testing Labour charges.

Launching Labour charges

Inclining Experiment Labour charges.

Sea Trail Labour charges.

Deflection in keel to be checked frequently to maintain even keel.

Carpentry Works, Electrical Works, Piping, Joints and valves are to be tested at site.

Hydraulic steering gear Installation piping and testing.

Center line of ship to be bisected to get true line on bottom plate as well on deck.

All Procedure required for test and samples pieces.

Welder qualification procedures as per IRS and Quality assurance plan to be submitted

to IRS.

Radiographic procedure and facilities to be provided.

Hydraulic testing machine for pipes testing.

5 HP Pump and canvas hose pipe as required for Tank Testing.

Anchor Windlass installation and testing.

Pipes Valves to be tested at site.

Delivery of the barge to be given to the owners at New, Pier Rozy (Port) bunder.

From the above memorandum, it can be seen that the entire activity nowhere suggests that the appellant are supplying the manpower simpliciter whereas the contract is to fabricate, assemble and Erect, Hull Machineries and Equipment of the barge on turnkey basis. As per Clause-2 of the memorandum, the entire raw material, machinery and equipment (except welding material and gas) shall be supplied by the owners of the barge to the contractor i.e. the present appellant. The charges of the said fabrication activity, as per clause 14 is in lump-sum for the entire work and after fabrication of the barge, the same is delivered to the clients. With these conditions in MoU between the appellant and their client it is clearly fabrication of barge and delivery of the same to their clients.

6. The Adjudicating Authority simply relied on certain terms which speak about the terms of deployment of workman by the appellant. It is obvious that for carrying out any job workman has to be deployed. In the present case the workmen are employed with the appellant not with the service recipient. All the labour force is in the control of the appellant and the recipient of service has no concern about the profession of the labour. Since the appellant has an obligation to fabricate the barges, it is the appellant who has to use their own work force for carrying out the work. In the memorandum there is no whisper of supply of manpower, number of manpower, consideration payable to manpower etc. on the part of the service recipient. The sample invoice scanned supra also clearly shows that the appellant have charged for the fabrication of barges and tugs belonging to their client and the charges for such fabrication was also made, for example, Rs. 18,000/- per ton of weight of barges fabricated by the appellant. Therefore, there is absolutely no single material evidence even to remotely indicate that the appellant are involved in supply of manpower to their service recipient.

7. In the contract, various works contracted with the client shows the labour charges. The Adjudicating Authority has completely mis-understood the term labour charges and concluded that manpower was supplied. In the trade parlance of construction service, there is a term ^„labour charges‟ and ^„material cost‟. So, wherever there is a term ^„labour charges‟ is mentioned that does not mean that manpower supply and it is only service charges without material. Therefore, the entire case made out by the department is under assumption that since ^„labour charge‟ is mentioned in the contract it is manpower supply service whereas the Adjudicating Authority has ignored the important aspect of job work i.e. fabrication of barges on the material supplied by the client. The impugned order has traveled completely on wrong interpretation and incorrect footing.

8. We find that on the identical facts, this Tribunal has considered this issue in various judgments and some of the judgments are reproduced below:-

(a) In the case of SA Engineering Works vs. CCE&ST, Vadodara (supra) the Tribunal held as under:-

“6. We have considered the submission made by both the sides and perused the records. We find that the issue involved in this case is regarding demand of service tax under the category of manpower Recruitment and Supply Services. On perusal of the sample copy of bills and agreement entered into by the appellant with M/s Flexicon Bellows & Hoses Pvt. Ltd., it is seen that the amount being paid to the Appellant for the activity of Job works.

7. We find that M/s Flexicon Bellows & Hoses Pvt. Ltd. has entered into agreement with the appellant for manufacture of Flexicon Bellow on job-work basis. The appellant was paid for carrying out such activities. The workmen deployed by the appellant for carrying out such activities were under the supervision and control of the appellant. The ultimate manufacturer, who entrusted the job to the appellant was no way concerned with the workmen deployed by the appellant. It is also noticed that over and above paying the amount for manufacturing activities undertaken by the appellant on job-work basis, the said service receiver had not paid any specific price to the workmen/ Labour deployed by the appellant. Thus, under such circumstances, it cannot be said that the appellant had provided the Manpower Recruitment and Supply Agency Service. The documents submitted by the appellant indicate a lump sum charge for the work undertaken by them. There is no evidence of supply of manpower with details of number and nature of manpower, duration and other conditions for such supply. In absence of such evidence, the job work charges cannot be taxed under “Manpower Recruitment and Supply Agency Service”. Hence, we are of the considered view that the adjudged demand confirmed on the appellant cannot be sustained.

8. Therefore, we do not find any merits in the impugned order. Accordingly we set aside the impugned order and allow the appeal with consequential relief, if any, as per law.

(b) In the case of Matadin Mali vs. CCE&ST, Ahmedabad (supra) the Tribunal held as under:-

“6. We have carefully gone through the relevant contract entered into by Appellant with M/s Pino Bisazza Glass Pvt. Ltd and find that M/s. Pino has entered into agreement with the appellant for packing and salvaging activities. The appellant was paid for carrying out such activities on per Kgs / Per Metric Ton basis. The workmen deployed by the appellant for carrying out such activities were under the supervision and control of the appellant. M/s Pino, who entrusted the job contract to the appellant was no way concerned with the workmen deployed by the appellant. It is also noticed that over and above paying the amount for activities undertaken by the appellant on job contract basis, the said service receiver had not paid any specific price to the workmen deployed by the appellant. Since there is no specific mention about deployment of labour/work force, the services provided by the appellant should not fall under the taxable category of manpower recruitment or supply agency service. Further, the rate contract provided in the work order clearly indicates that the amount shall be paid at a fixed basis i.e. on per kgs /per metric ton basis. Since there is no specific mention about payment of reimbursement of wages and salaries to the workman, the services provided shall not fall under such taxable category of service.

7. Thus, under the facts and circumstances of this case, it cannot be said that the appellant had provided the Manpower Recruitment and Supply Agency Service. Hence, we are of the considered view that the service tax demands confirmed on the appellant cannot be sustained.

8. Therefore, we do not find any merits in the impugned order. Accordingly after setting aside the same, we allow the appeal in favour of the appellant with consequential relief as per law.”

(c) In the case of Shailu Traders vs. CCE, Indore (supra) the Principal Bench of this Tribunal held as under:-

“5. In this case, the appellant had entered into agreement on 1-4-2002 with M/s. J.K. Industries Ltd. for undertaking the activities of material handling and shifting within the premises of such principal. The relevant Paragraph in the said agreement for consideration of the present dispute are extracted herein below :

3. That the ‘Contractor’ will decide the numbers of employees to be engaged for execution of work and will along be entitled to dictate such employees about the manner of the execution without any interference or instruction or intervention whatsoever of the ‘Principal’. The ‘Principal’ will not have any connection with employees engaged by the ‘Contractor’ neither he nor any of his official will supervise, dictate to the employees the manner of execution/completion of the job.

5. The ‘Principal will not be entitled to retain any control, supervision or the manner of the discharge, dismissal or retrenchment or re-employment of the workers engaged/employed by the ‘contractors’.

6. That the ‘contractor’ will be liable for due observation and implementation of the statutory conditions and requirements of Labour and Factory laws duly complied with as applicable from time to time to his employees.

6. On perusal of the conditions contained in the agreement, it reveals that the manpower/employees deployed for executing the assigned task were under the control and supervision of the appellant and the activities undertaken pursuant to the agreement relate to the work of material handling and shifting. Since the appellant was in no way connected with any recruitment or supply of manpower to the client, rather the manpower/employees were under the active control and supervision of the appellant and were deployed for undertaking the assigned job work entrusted by the principal, in our considered view, such service should not fall under the taxable category of ‘Manpower Recruitment and Supply Agency Service’.

7. Therefore, we do not find any merits in the impugned order. Accordingly, after setting aside the same, we allow the appeal in favour of the appellant.”

(d) In the case of Shri Ramadhar Singh vs. CCE, Raipur (supra) the Principal Bench of this Tribunal held as under:-

“4. On perusal of the impugned order, we find that the ld. Commissioners (Appeals) has recorded the findings that for executing various jobs relating to production and maintenance of furnace, the appellant had supplied/deployed the manpower in the factory premises of its client. Further, the Bill No. 94-95/04, dated 30-6-2004 referred to in the impugned order were towards the charges of handling, finishing activities of mill and production against dispatch quantity of 162.5 mt @ Rs. 135 mt. The appellant has stated the nature of activities under taken by it, which inter alia includes unloading of raw material, movement of raw material to various machines/storage tank as per the requirement of manufacturer process, sorting of raw material/finished goods, cutting of material to required sizes, etc.

5. Since the essence of contract is execution of the assigned work and control over the workman and supervision was always with the appellant, it cannot be said that the activities undertaken by the appellant falls under the category of “Manpower Recruitment or Supply Agency Service”, for levy of service tax. Further, the documents available on records show that the service receiver M/s. Super Iron and Steel Ltd. has paid for the lump sum amount for the contract executed by the appellant. Thus, in our considered view the appellant cannot be considered as Manpower Recruitment or Supply Agency inasmuch as the deployment of the labour/workforce was for the execution of the job by itself and not by its client.

6. Therefore, we do not find any merits in the impugned order. Accordingly, after setting aside the same, we allow the appeal in favour of the appellant. Cross appeal is disposed of.”

(e) In the case of Tiwari Services vs. CCE, Aurangabad (supra) the coordinate bench this Tribunal held as under:-

“6. We find that M/s. Dhoot Compack Ltd. has entered into agreement with the appellant for manufacture of fabrics on job work basis. The appellant was paid for carrying out such activities on per meter basis. The workmen deployed by the appellant for carrying out such activities were under the supervision and control of the appellant. The ultimate manufacturer, who entrusted the job to the appellant was no way concerned with the workmen deployed by the appellant. It is also noticed that over and above paying the amount for manufacturing activities undertaken by the appellant on job work basis, the said service receiver had not paid any specific price to the workmen deployed by the appellant. Thus, under such circumstances, it cannot be said that the appellant had provided the Manpower Recruitment and Supply Agency Service. Hence, we are of the considered view that the adjudged demands confirmed on the appellant cannot be sustained.

7. Therefore, we do not find any merits in the impugned order. Accordingly after setting aside the same, we allow the appeal in favour of the appellant.”

9. From the above judgments it can be seen that even though manpower was deployed by the service provider but the job is for specific activity such as manufacture, processing etc. and charges is paid on the basis of job and not on the basis of manpower, the activity was held not to be classifiable under Manpower Recruitment or Supply Agency Service. The ratio of the above judgments is directly applicable in the facts of the present case.

10. We also find that appellant have also argued that from 01.03.2011, Central Excise duty was levied on the manufacturing of tugs and barges and the appellants have started paying excise duty on the same activity. This further reinforce the claim of the appellant that the activity of fabrication of barges is a manufacturing activity and the appellant are indeed a manufacturer. If the contention of the Revenue is assumed to be correct then the appellant cannot be treated as manufacturer but in such case, their client shall be held as manufacturer which is not a case here.

11. As regards the servicer tax on a value of Rs. 1,05,12,549/- related to repair of barges, it is the appellant‟s claim that they have discharged service tax on this amount. The Revenue is at liberty to verify the same. However, considering overall facts of the case, penalties are not sustainable hence the same are set-aside.

12. As per our above discussion and findings the entire service tax demand (except the demand of service tax of Rs. 1,05,12,549/-) in respect of repair service) is not sustainable, hence the same is set-aside. The impugned orders are modified to the above extent. Appeals are allowed in the above terms with consequential relief if any, in accordance with law.

(Pronounced in the open court on 23.08.2023)