Whether services provided are man power services or job work services so as to be exempted under the relevant notifications issued under Finance Act, 1994.
BRIEF FACTS:
1. The appellant obtained service tax registration under the category of ‘Manpower Recruitment or Supply Agency Service’. On 1 January 2012, the appellant entered into an agreement with Semco Electric Pvt. Ltd. (later known as Sigma Electric Manufacturing Corporation Pvt. Ltd.) and was required to provide personnel for activities such as felting, material handling, pouring and supply of material to furnace. Similarly, on 1 January 2013 and 1 January 2014, fresh agreements were entered into between the appellant and Sigma.
2. 4 On 26 September 2014, a notice to show cause was issued by the Commissioner of the erstwhile Pune-I Central Excise Commissionerate demanding service tax along with interest and with a proposed penalty of Rs. 10,50,23,672.
3. The allegations in the show cause notice were that:
(i) The appellant had failed to pay their service tax dues on or before the due date for the period from April 2012 to March 2014;
(ii) The appellant had failed to assess and discharge service tax liability on the service value in accordance with their sales ledgers relating to Sigma for the period from September 2012 to March 2014 regarding the supply of manpower;
(iii) The appellant had suppressed the facts and made a misrepresentation by filing incorrect ST-3 returns for the above period and did not declare the true and correct taxable value and service tax thereon and;
(iv) The appellant had filed ST-3 returns for the period between April 2013 to September 2013 after the due date as stipulated under Section 70(1) of the Finance Act 1994 and Rule 7 of the Service Tax Rules 1994.
4. The allegations in the show cause notice were based on material collected during the course of an investigation by the Department, indicating that:
(i) The appellant had obtained service tax registration under the category of ‘Manpower Recruitment or Supply Agency Service’;
(ii) The bills were raised by the appellant on their customers on a monthly basis for providing manpower supply services and service tax was charged thereon;
(iii) The supply of manpower services by the appellant conformed to the provisions of the Contract Labour (Regulation and Abolition) Act 1970;
(iv) In respect of the services of manpower supplied by the appellant to their customer, namely Sigma, the appellant had charged and paid service tax up to July 2012;
(v) From 1 August 2012, based on an agreement dated 1 January 2012, the appellant had termed the service activity as ‘job work with tonnage rates’ and had not charged and paid service tax, classifying the provision of the said services as business auxiliary services, claiming the benefit of a service tax exemption specified at Serial No. 30(c) of Notification No.25/2012-Service Tax dated 20 June 2012;
(vi) The invoices raised by the appellant and its agreement dated 1 January 2012 and 1 January 2013 indicated that the services provided by the appellant were of supplying skilled/unskilled manpower for carrying out activities like material handling, assembly, pouring, supply of cast machine parts and painting within the factory premises of Sigma which was confirmed by the director of the appellant in his statement recorded on 6 February 2014;
(vii) The nature of the services provided by the appellant was similar before and after August 2012;
(viii) The appellant had not substantiated their claim of job work; and
(ix) The appellant had not obtained service tax registration under the category of business auxiliary services for the period from September 2012 to March 2014
5. The show cause notice was adjudicated upon by the Commissioner of Central Excise Pune-I, Commissionerate by an order dated 24 February 2015.
The adjudicating authority held that:
(i) The appellant habitually delayed paying service tax every month from April 2012 to March 2014;
(ii) The appellant did not have any machinery or equipment of its own and was using the equipment and machinery of Sigma at the latter’s premises; and
(iii) The supply of labour by the appellant to Sigma for doing the work of fettling, material handling, assembly and pouring on ‘piecemeal basis’ did not alter the characteristics of the manpower services provided by the appellant to Sigma. The adjudicating authority confirmed the demand of service tax and interest besides imposing penalty.
6. The order of the adjudicating authority was challenged in an appeal before the CESTAT, WZB, Mumbai. By its judgment dated 15 July 2019, the Tribunal held that the service provided by the appellant to Sigma was not in the nature of job work services exempted under the Notification bearing Notification No 25/2012 dated 20th June, 2012. The Tribunal held, after considering the terms of the agreement between the appellant and Sigma and the relevant provisions of the Contract Labour (Regulation and Abolition) Act 1970 , that the services provided by the appellant were in the nature of contract labour and not job work.
The Tribunal held that;
(i) clause 10, 11 and 17 of the agreement required the appellant to obtain a licence under the CLRA;
(ii) the agreement imposed the responsibility for the payment of wages to the employees/workmen and for making payments under the Employees’ State Insurance Act 1948 and Provident Fund in respect of the employees of the contractor on the appellant.
(iii) The Tribunal accordingly held that the agreement between the appellant and Sigma is a contract labour agreement executed for the purpose of providing requisite manpower and is not a job work contract to extend the benefit of Notification No 25/2012 dated 20th June, 2012
SUPREME COURT HELD THAT:
7. The Supreme Court in this case was dealing with the questions;
(i) whether the appellant in this case had provided job work services which were exempted in terms of Serial No 30(c) Notification No 25/2012 dated 20th June, 2012 issued under Finance Act, 1994 or
(ii) man power services which were fully taxable.
The substratum of the agreement between the appellant and Sigma deals with the regulation of the manpower which is supplied by the appellant in his capacity as a contractor. The fact that the appellant is not a job worker is evident from a conspicuous absence in the agreement of crucial contractual terms which would have been found had it been a true contract for the provision of job work in terms of Para 30(c) of the exemption notification.
The Court relying on the agreement entered into between the parties by observing that there is a complete absence in the agreement of any reference to:
i) The nature of the process of work which has to be carried out by the appellant;
ii) provisions for maintaining;
(a) the quality of work;
(b) the nature of the facilities utilised; or
(c) the infrastructure deployed to generate the work;
(iii) the delivery schedule;
(iv) specifications in regard to the work to be performed; and
(v) consequences which ensue in the event of a breach of the contractual
obligation.
The decisions of CESTAT relied upon by the appellant also do not help their submissions as they are fact-specific and based on a reading of the contracts in those cases. In this case, though ostensibly, the agreement contains a provision for payment on the basis of the rates mentioned in Schedule II, the agreement has to be read as a composite whole.
On reading the agreement as a whole, it is apparent that the contract is pure and simple a contract for the provision of contract labour. An attempt has been made to camouflage the contract as a contract for job work to avail of the exemption from the payment of service tax. The judgment of the Tribunal does not, in the circumstances, suffer from any error of reasoning.
The absence of the above terms and conditions which are determinative of the nature of the services which are performed, led the court to dismiss the appeal by holding that the appellant was trying to camaflouge the agreement as Job work agreement and thus was liable to pay the service tax.
CONCLUSION: This judgement will be helpful in similar disputes where the job work services or man power services are subject matter of dispute. The Apex Court in this case depends on terms and conditions of the agreement between the parties and found that there is complete absence of in the agreement with reference to the nature of the process of work which has to be carried out by the appellant and provisions of maintaining various works and hence the contract is not of nature of Job-Work.
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