No Service Tax on deputation of employees from a group company in Japan to Appellant in India

Mikuni India Pvt. Limited Vs Commissioner of Central Goods and (CESTAT Delhi)

It is not in dispute that the issue involved in this appeal is similar to the issues involved in the appeal that came up for decision before the Division Bench of the Tribunal in M/s India Yamaha Motor Private Limited. The Division Bench held that neither during the pre-negative list nor post negative list, Service Tax could not be levied on deputation of employees from a group company in Japan to the Appellant in India.

FULL TEXT OF THE CESTAT JUDGEMENT

This appeal seeks to assail the order dated 23 August, 2016 passed by the Commissioner of Central Excise by which the Service Tax demand has been confirmed and penalty has also been imposed. The period in dispute is from 01 April, 2014 to 31 March, 2015.

2. The issue involved in this appeal is regarding the applicability of Service Tax on deputation/secondment of employees from a group company in Japan to the appellant in India.

3. M/s Mikuni India Private Limited is engaged in the manufacture of throttle body, carburettors and other automobile parts falling under Chapter Heading 8708 of the Central Excise Tariff Act. It entered into a Cost Reimbursement Agreement (CRA) with M/s Mikuni Corporation, Japan (MCI) for receiving its personnel on secondment as and when required by the appellant. The relevant terms of the agreement, in short, are as follows:

“(a) Japanese personnel have to be considered as employees of the Appellant and have to report to the Managing Director or Board of Directors of the Appellant;

(b) Moreover, such personnel would exclusively work for the Appellant and would not further the business of the Appellant or enter into contracts on behalf of MCI. All rewards and risks rested with the Appellant; and

(c) Compensation and benefits paid to the personnel were to be borne by the Appellant. Any amount paid to the Japanese personnel by MCI on behalf of the Appellant was to be reimbursed by the Appellant.”

4. During the audit, the Officers of the Department observed that MCI had deputed its employees to the appellant for providing services in its factory premises at Neemrana as per the CRA. A show cause notice dated 15 October, 2015 was, therefore issued to the appellant with respect to the period in dispute. The show cause notice proposed demand of Service Tax under “Manpower Supply Services” under a reverse charge mechanism with interest and penalty. The appellant submitted a detailed reply to the show cause notice. However, the Commissioner confirmed the demand that has been impugned in this appeal.

5. The demand was made under “Manpower Supply Services”, which was a taxable service prior to 01 July, 2012 under Section 65(68) of the Finance Act, 1994¹ read with Section 65(105)(k). The said Sections are reproduced below:-

“65 (68) “manpower recruitment or supply agency” means any person engaged in providing any service, directly or indirectly, in any manner for recruitment or supply of manpower, temporarily or otherwise, to any person

65 (105)(k) – taxable services means any service provided or to be provided to any person, by a manpower recruitment or supply agency in relation to the recruitment or supply of manpower, temporarily or otherwise, in any manner.

Explanation.- For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, reimbursement or supply of manpower includes services in relation to pre-recruitment screening, verification of the credentials and antecedents of the candidate and authenticity of documents submitted by the candidate”.

6. Even after 1 July, 2012, Service Tax could be levied on the salaries paid by the Appellant to its Japanese employees in India as the definition of ^„Service‟ under Section 65B (44) of the Act excluded provision of service by an employee to the employer in the course of or in relation to his employment. Section 65B (44) of the Act is reproduced below:

“65B (44) “Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-

(b) a provision of service by an employee to the employer in the course of or in relation to his employment;”

7. The learned Counsel for the Appellant submitted that for the period prior to 1 July, 2012, the deputation/secondment of employees was not covered under the aforesaid definition of “Manpower Recruitment and Supply Agency” and consequently no service tax was payable. It is also his submission that even after 01 July, 2012 no Service Tax was payable by the appellant on the salaries paid by the appellant to its Japanese employee in India as the definition of “service” under Section 65B (44) excludes provision of service by an employee to an employer in the course of or in relation to his employment. It is, therefore, his submission that the finding recorded by the Commissioner in the impugned order that MCI is providing “Manpower Recruitment and Supply Agency Service” to the appellant is, incorrect. Elaborating his submission, learned Counsel submitted that MCI is engaged in the manufacture of carburettors and not in the business of supply of manpower and, therefore, cannot be treated as a “Manpower Supply Agency” and, therefore, no service tax is payable on transfer of Japanese personnel from MCI to the appellant. Learned Counsel pointed out that MCI has only done activities of paying money to the employees of the appellant on behalf of the appellant and for such an activity, MCI is not charging any consideration. It is, therefore, his submission that since no consideration is involved, the activity will not qualify as a service and consequently service tax cannot be levied. Learned Counsel pointed out that reimbursement is on cost to cost basis. In support of his contention, learned Counsel placed reliance on a recent judgment of this Tribunal in M/s India Yamaha Motor Private Limited vs. Commissioner of Central Excise & Service Tax, New Delhi².

8. Learned Authorised Representative of the Department does not dispute that the issue involved in this appeal is covered by the decision of the Tribunal in M/s India Yamaha Motor Private Limited.

9. The Division Bench in M/s India Yamaha Motor Private Limited examined the issue both for the period prior to 1 July, 2012 and for the post negative list for the period subsequent to 1 July, 2012. In regard to the demand relating to the period prior to 01 July, 2012 (pre negative list period), the Division Bench observed as follows :

“6. Also for the reason that the contract of employment between the appellant and the Japanese experts is clear enough to express that same is a contract of employment/appointment letter calling upon the said experts into the employment of the appellant whose reporting officer has to be employee of the appellant itself. Appellant only is disbursing the Provident Fund contributions and is also deducting tax at source. These observations are sufficient to corroborate the above observations of the impugned arrangement between the appellant and the Japanese experts to be that of a service and to not to be of manpower supply service. The circular as relied upon by the department is perused to be a draft circular. There is nothing on record about the same being ever notified. Thus, we are of the opinion that the adjudicating authority below has definitely committed an error while relying upon the draft circular.

10. For the period post 1 July, 2012, the Division bench observed:

“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) “Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include

………..

(b) a provision of service by an employee to the employer in the course of or in relation to his employment.”

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.

8. Above all the issue is no more res integra enable High Court of Allahabad in the case of CCE Vs. Computer Sciences Corporation India Pvt. Ltd. – 2015 (37) STR 62 (All.), has dealt 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(105) are fulfilled, the element of taxability would not arise.”

9. The Hon’ble High Court Gujarat in the case of Commissioner of Service Tax Vs. Arvind Mills Ltd. – 2014 (35) STR 496 has held that even if the actual cost incurred by appellant in terms of salary remuneration and perquisites is only reimbursed by group of companies, there remains no element of profit or finance benefit. The arrangement is that of the continuous control and the direction of the company to whom the holding company has deputed the employee such as an arrangement is out of the ambit to be called manpower supply service. This Tribunal also in appellant’s own case as decided by Final Order No. 70436/2019 dated 11.10.2019 by relying upon the case of Volkswagen India Pvt. Ltd. Vs. CCE, Pune-I – 2014 (34) STR 135 (Tri.-Mumbai) and the above discussed case law has held that the expatriates working under the appellant are the employees of the appellant as there is an employer-employee relationship. As such, there is no supply of manpower service which is rendered to the appellant by the foreign/ holding company.”

11. It is not in dispute that the issue involved in this appeal is similar to the issues involved in the appeal that came up for decision before the Division Bench of the Tribunal in M/s India Yamaha Motor Private Limited. The relevant paragraphs of the judgment have been reproduced above. The Division Bench held that neither during the pre-negative list nor post negative list, Service Tax could not be levied on deputation of employees from a group company in Japan to the Appellant in India.

12. Thus, for the reasons mentioned in the aforesaid judgement, it is not possible to sustain the order dated 23 August, 2016 passed by the Commissioner. It is, accordingly, set aside and the appeal is allowed.

(Dictated and pronounced in open Court)

Notes:

1. The Act

2. Service Tax Appeal No. 53046 of 2016 decided on 28 June, 2019