SEZ Exemption Defeats Service Tax Demand on Secondment: CESTAT Chennai

Renault Nissan Technology & Business Centre India Pvt. Ltd. Vs Commissioner of CGST & Central Excise (CESTAT Chennai)

Summary: The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, decided three connected appeals involving Renault Nissan Technology & Business Centre India Pvt. Ltd. (RNTBCI) and the Commissioner of CGST & Central Excise, Chennai, concerning the service tax treatment of expatriate employees deputed by overseas group companies, reimbursements of employment-related expenditure, remuneration paid to company directors and entitlement to exemption under the Special Economic Zones Act, 2005. RNTBCI operated as a Special Economic Zone (SEZ) unit engaged in research and development, engineering, information technology, IT-enabled services, back-office support and business process outsourcing for its overseas group entities, including Renault Global Management SA, Geneva, and Nissan Motor Co. Ltd., Japan. The dispute covered three financial periods: 2008-09 to 2012-13, 2013-14 and 2014-15. In the first proceeding, the Department confirmed service tax of Rs. 8,88,22,838, together with interest and penalties under the relevant provisions of the Finance Act, 1994. In the second proceeding, a demand of Rs. 7,02,70,161, together with interest and applicable penalty, was confirmed. However, the adjudicating authority dropped the proposed demand of Rs. 5,69,07,212 for FY 2014-15. Consequently, RNTBCI challenged the first two adverse adjudication orders, while the Department appealed against the order dropping the third demand. The connected matters arose from Order-in-Original Nos. 07/2014 (ST) dated 13 November 2014, 06/2015 ST dated 28 August 2015 and 08/2016 ST dated 30 December 2016. The Division Bench comprising Shri Vasa Seshagiri Rao, Member (Technical), and Shri Ajayan T.V., Member (Judicial), examined the disputes together and delivered Final Order Nos. 40988–40990/2025 on 2 September 2025. The central controversy was whether overseas secondment constituted taxable manpower supply and, even if it did, whether the statutory exemption available to an SEZ unit eliminated the resulting tax liability.

The proceedings originated from departmental scrutiny of RNTBCI’s foreign currency payments to Renault and Nissan towards social security contributions, relocation expenses, administrative charges, training expenditure and other costs connected with employees transferred to India. Under an international transfer arrangement dated 1 October 2008 and related employment documents, personnel of the foreign companies were assigned to RNTBCI for specified periods and worked in its research, engineering and other business operations. The Department observed that the employees continued to maintain connections with the overseas entities, including payroll arrangements and social security contributions in their home countries. The overseas entities discharged certain obligations abroad, and the Indian company reimbursed those amounts. Revenue treated these arrangements as the import of manpower recruitment or supply agency services, taxable under the reverse charge mechanism prescribed by the Finance Act, 1994 and the Service Tax Rules, 1994. The Department relied particularly on Notification No. 30/2012-Service Tax dated 20 June 2012. It also alleged liability on remuneration paid to directors with reference to Notification No. 45/2012-Service Tax dated 7 August 2012 and Rule 2(1)(d)(i)(EE) of the Service Tax Rules. RNTBCI disputed the demands, submitting that its expatriate personnel were its own employees during their assignments in India and worked under its operational supervision. The company relied on the Contract of Mandate, International Transfer Agreements and individual employment contracts to establish that the overseas companies merely discharged certain employment-related obligations on its behalf. According to RNTBCI, the payments represented reimbursement of expenditure rather than consideration for an independent service. It invoked Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd. to contest inclusion of reimbursement amounts in taxable value under Section 67 of the Finance Act, 1994.

On examining the contractual documents and the rival submissions, the Tribunal held that the factual circumstances of the overseas secondment arrangements were substantially comparable to those considered by the Supreme Court in CC, CE & ST, Bangalore v. Northern Operating Systems Pvt. Ltd., 2022 (61) G.S.T.L. 129 (SC). In that decision, the Supreme Court had examined the complete commercial and employment arrangements rather than relying exclusively on the formal description of the employment relationship or the manner of salary disbursement. Applying the same approach, CESTAT considered the continued connection of the expatriates with the overseas companies, contractual provisions governing international transfers, employment benefits, reimbursement obligations and the economic substance of the arrangements. Significantly, the Contract of Mandate provided for reimbursement of contributions paid by Renault Global Management on behalf of RNTBCI and contained an additional operating fee calculated at 2.5% of the relevant payments. The Tribunal concluded that the overseas entities remained employers for the purposes relevant to the secondment arrangements and that their provision of expatriate personnel constituted manpower supply services received by RNTBCI. The assessee’s contention that the arrangements were merely transactions between an Indian employer and its own employees was therefore not accepted on the issue of classification and taxability. The Tribunal also declined to treat reimbursement terminology or the availability of CENVAT credit and refunds as sufficient grounds to eliminate a statutory tax incidence. It noted that the Supreme Court in Northern Operating Systems had already considered the arguments based on Intercontinental Consultants and revenue neutrality. The Tribunal accordingly answered the first issue in favour of Revenue by holding that overseas manpower supply services were involved. However, it expressly examined the separate questions of limitation, director remuneration and the overriding SEZ exemption before determining whether any enforceable demand would survive.

On the extended period of limitation, CESTAT found that the dispute involved a genuinely debatable interpretation of intricate contractual arrangements and the applicable service tax legislation. The appellant had consistently maintained that the expatriates were its employees and that the overseas payments constituted reimbursement of employment expenses. The legal position had previously been the subject of differing judicial decisions, including CCE & ST v. Nissin Brake India Pvt. Ltd. and decisions concerning Volkswagen India and Computer Sciences Corporation India. The Tribunal observed that the Supreme Court in Northern Operating Systems had itself rejected invocation of the extended limitation period notwithstanding its conclusion that manpower supply services were taxable. In the present case, Revenue failed to establish deliberate suppression of facts or wilful misstatement with an intention to evade tax. The Department had previously audited relevant transactions, and an adjudicating authority had also accepted RNTBCI’s position for a subsequent period. CESTAT therefore held that the extended limitation period could not be invoked. The Tribunal separately examined whether remuneration paid to RNTBCI’s whole-time directors attracted service tax under the reverse charge provisions. RNTBCI had produced employment contracts, extracts of board resolutions, financial statement disclosures and Form 16 certificates reflecting tax deduction under Section 192 of the Income-tax Act, 1961. The Tribunal considered these documents evidence of an employer-employee relationship. It applied the exclusion of employment services under Section 65B(44) of the Finance Act, 1994 and relied on the established treatment of salaried whole-time directors explained in Maithan Alloys Ltd. v. CCE & ST and related CESTAT decisions. It further held that Revenue could not introduce a new allegation in appeal concerning similarity between the directors’ employment agreements and expatriate secondment arrangements when that allegation had not formed part of the show cause notice. Consequently, remuneration paid to directors in their capacity as employees was held outside the service tax levy, and the demands on this issue were set aside.

The decisive issue was whether RNTBCI, being an approved SEZ unit, was entitled to an upfront and complete exemption from service tax on services received for its authorised operations. RNTBCI submitted that the overseas personnel worked exclusively on research, engineering and other activities forming part of its approved SEZ operations. It relied on the Development Commissioner’s Letters of Approval and the list of approved services, which included manpower recruitment and supply agency services. Revenue disputed the extent of the approval and argued that the assessee had not sufficiently established eligibility under the relevant service tax notifications, particularly where services were connected with customers situated in the Domestic Tariff Area. The Tribunal examined Section 26(1)(e) and Section 26(2) of the SEZ Act, 2005, which provide exemption from service tax on specified services used for authorised operations and authorise the Central Government to prescribe the applicable conditions. It also considered Section 2(c), defining authorised operations, Section 2(o), concerning imports, and Section 2(w), defining the expression prescribed by reference to rules made under the SEZ Act. Under Rules 22 and 31 of the Special Economic Zones Rules, 2006, the relevant conditions concerned matters such as the prescribed bond-cum-undertaking, accounting and compliance requirements and the receipt of services for authorised operations. The Tribunal also considered the procedures in Notification No. 12/2013-Service Tax dated 1 July 2013 and the earlier exemption regime. The Bench held that Revenue had not established that the disputed manpower services were utilised for operations other than RNTBCI’s authorised SEZ activities. The mere existence of Domestic Tariff Area transactions did not, on the facts and approvals recorded, demonstrate that the services ceased to qualify as authorised operations.

The Tribunal placed substantial reliance on GMR Aerospace Engineering Ltd. v. Union of India, 2019 (31) G.S.T.L. 596 (High Court of Andhra Pradesh and Telangana), in which the High Court held that the conditions governing exemptions under Section 26 of the SEZ Act must be prescribed under that enactment and its rules. Notifications issued through the general exemption power contained in Section 93 of the Finance Act, 1994 could not impose additional restrictions inconsistent with the special SEZ framework. The High Court’s decision explained that compliance requirements involving Forms A-1 and A-2 under service tax notifications could not independently defeat the statutory exemption where the prescribed SEZ conditions had been fulfilled. CESTAT noted that the Special Leave Petition challenging GMR Aerospace had been dismissed by the Supreme Court on 26 July 2019. Subsequently, in Commissioner of CGST, Navi Mumbai v. eClerx Services Ltd., 2023 (72) G.S.T.L. 4 (SC), the Supreme Court dismissed Revenue’s appeal against a CESTAT decision extending the SEZ exemption despite procedural infirmities. The underlying eClerx Services Ltd. v. Commissioner of CGST & Central Excise decision had recognised the overriding effect of Section 26 read with Section 51 of the SEZ Act. CESTAT Chennai also referred to the Madras High Court decision in Salcomp Manufacturing India Pvt. Ltd. v. Commissioner, (2024) 18 Centax 162 (Mad.), which acknowledged the continuing authority of GMR Aerospace. Similar principles had been followed in decisions involving Metlife Global Operations Support Center, TVS Logistics Services, Cognizant Technology Solutions and other SEZ units. Following these authorities, the Tribunal held that Section 51 of the SEZ Act gave the special statutory exemption overriding effect over inconsistent conditions imposed through service tax notifications. Accordingly, RNTBCI was entitled to the exemption for services received and used in carrying out its authorised SEZ operations.

In its final determination, CESTAT Chennai expressly distinguished the existence of a taxable manpower supply transaction from the subsequent availability of a statutory exemption. It held that the overseas entities had supplied manpower services to RNTBCI within the meaning of the relevant service tax provisions, applying the Supreme Court’s ruling in Northern Operating Systems. However, this conclusion did not authorise recovery of service tax when the services were covered by the overriding exemption under Section 26 of the SEZ Act. The Tribunal found that RNTBCI’s approved status as an SEZ unit, the inclusion of manpower supply services in the approved list and the uncontroverted use of the expatriates for authorised operations satisfied the substantive entitlement. The contrary approach adopted by the adjudicating authorities, which imposed additional restrictions by reference to the Finance Act, 1994 and service tax notifications, was held unsustainable in light of GMR Aerospace and the related judicial decisions. Independently, the Tribunal held that the extended period of limitation was unavailable because no deliberate suppression or fraudulent intent had been established. It also rejected service tax on remuneration paid to whole-time directors in their capacity as employees, recognising that salary supported by employment documents, board resolutions and income-tax deductions was distinguishable from consideration for independent services rendered by directors. Consequently, the Bench set aside the adverse findings in the first two Orders-in-Original, allowed RNTBCI’s Service Tax Appeal Nos. 40528/2015 and 40037/2016, and dismissed Revenue’s Service Tax Appeal No. 40906/2017 against the order dropping the third demand. Consequential relief, if any, was directed to follow in accordance with law. The decision establishes that a finding of taxable secondment does not, by itself, displace a separately applicable SEZ exemption. It also reinforces the requirements of substantiating employment status, respecting the boundaries of show cause notices and independently establishing the statutory prerequisites before invoking extended limitation or denying an exemption.

Cases Discussed

• Hindustan Construction Company Ltd. v. Commissioner of CGST, (2025) 27 Centax 299 (CESTAT Mumbai), affirmed in (2025) 27 Centax 300 (Supreme Court). Cited by RNTBCI concerning the treatment of reimbursement arrangements and the absence of independently taxable consideration.
• Chaque Jour Outsourcing Solutions Pvt. Ltd. v. Commissioner, (2025) 26 Centax 391 (CESTAT New Delhi). Relied upon by the assessee in contesting the inclusion of reimbursed expenditure in the value of taxable services.
• Rane Holdings Limited v. Commissioner of GST & Central Excise, 2025 (5) TMI 407 (CESTAT Chennai). Cited by the assessee on the treatment of certain reimbursed expenses under service tax valuation provisions.
• Dixcy Textiles Pvt. Ltd. v. CCE & ST, 2025 (5) TMI 316 (CESTAT Chennai). Relied upon and discussed by the Tribunal concerning the non-taxability of remuneration paid to directors who are employees of the company.
• Salcomp Manufacturing India Pvt. Ltd. v. Commissioner of CGST & Central Excise, (2024) 18 Centax 162 (Madras High Court). Referred to as recognising that the decision in GMR Aerospace Engineering continued to govern the relevant SEZ exemption issue.
• Dependable Security Bureau v. Commissioner, 2024 (12) TMI 13 (CESTAT Chennai). Cited by the assessee concerning valuation and reimbursement of expenditure.
• Sundaram Asset Management Co. Ltd. v. Commissioner, 2024 (9) TMI 842 (CESTAT Chennai). Cited by the assessee in support of its challenge to the valuation of reimbursed expenses.
• Sulphur Mills Limited v. CCE & ST, 2024 (9) TMI 1549 (CESTAT Ahmedabad). Cited concerning service tax treatment of remuneration paid to directors.
• Faiveley Transport Rail Technologies India Pvt. Ltd. v. Commissioner, 2024 (8) TMI 1143 (CESTAT Chennai). Relied upon by the assessee on extended limitation and the absence of wilful suppression.
• Bangalore International Airport v. Commissioner, 2024 (7) TMI 1600 (CESTAT Bangalore). Cited concerning reimbursement and service tax liability.
• Ratnamani Metals and Tubes Ltd. v. CCE & ST, 2024 (3) TMI 10 (CESTAT Ahmedabad). Relied upon in the submissions relating to directors’ remuneration.
• International Seaport Dredging Ltd. v. CCGST & CE, (2024) 21 Centax 469 (CESTAT Chennai). Cited concerning the permissibility of invoking the extended limitation period.
• Jai Balaji Industries Ltd. v. CCE, (2024) 20 Centax 146 (CESTAT Kolkata), and CCE v. Jai Balaji Industries, (2024) 20 Centax 147 (Calcutta High Court). Relied upon by the assessee in contesting interest and penalty consequences.
• CCE & ST v. Reliance Industries Ltd., 2023 (7) TMI 196 (Supreme Court). Cited by RNTBCI in its submissions concerning the extended period of limitation.
• Commissioner of CGST, Navi Mumbai v. eClerx Services Ltd., 2023 (72) G.S.T.L. 4 (Supreme Court), 27/01/2023. Applied in the Tribunal’s SEZ exemption analysis as confirmation that Revenue’s appeal arising from the eClerx SEZ exemption dispute had been dismissed by the Supreme Court.
• Mahanagar Telephone Nigam Ltd. v. Union of India, 2023 (4) TMI 216 (Delhi High Court). Cited in the assessee’s submissions on limitation.
• GD Goenka Pvt. Ltd. v. Commissioner of CGST, (2023) 11 Centax 2 (CESTAT New Delhi). Relied upon by the assessee concerning the extended period of limitation.
• eClerx Services Ltd. v. Commissioner of CGST & Central Excise, 2023 (72) G.S.T.L. 99 (CESTAT Mumbai), 01/09/2022. Followed in substance for the proposition that procedural deficiencies under service tax notifications cannot defeat an established SEZ exemption.
• CC, CE & ST, Bangalore v. Northern Operating Systems Pvt. Ltd., 2022 (61) G.S.T.L. 129 (Supreme Court), Civil Appeal Nos. 2289–2293/2021, 19/05/2022. Applied as the controlling precedent on the classification of overseas employee secondment as manpower supply services and rejection of the extended period in the absence of the required justification.
• Commissioner of Commercial Taxes v. ABB Limited, 2022 (6) TMI 1212 (Karnataka High Court). Relied upon by RNTBCI in its submissions opposing extended limitation.
• Larsen & Toubro Limited v. Assistant Commissioner, 2022-VIL-800-CAL-ST (Calcutta High Court). Cited on the question of limitation.
• TVS Logistics Services Ltd. v. Principal Commissioner of Service Tax, Chennai, 2021 (50) G.S.T.L. 530 (CESTAT Chennai). Referred to as a coordinate-bench decision applying the overriding provisions of the SEZ Act.
• Cognizant Technology Solutions India Pvt. Ltd. v. CCE & ST, 2021-VIL-533-CESTAT-CHE-ST (CESTAT Chennai). Relied upon concerning service tax exemption and refund benefits available to SEZ units.
• ATC Tyres Pvt. Ltd. v. CCGST & CE, 2021-VIL-106-CESTAT-CHE-ST (CESTAT Chennai). Cited for applying SEZ exemption principles to services used for authorised operations.
• Wabco India Ltd. v. Commissioner of GST & CE, 2021-VIL-263-CESTAT-CHE-ST (CESTAT Chennai). Relied upon in the assessee’s submissions concerning the overriding statutory SEZ exemption.
• Metlife Global Operations Support Center Pvt. Ltd. v. Commissioner of Service Tax, 2021 (46) G.S.T.L. 418 (CESTAT New Delhi), decision dated 22/12/2020. Referred to for the principle that substantive SEZ exemption cannot be defeated merely by procedural grounds.
• Bengal Beverages Pvt. Ltd. v. CGST & CE, 2020 (11) TMI 622 (CESTAT Kolkata). Cited in support of the proposition that salary remuneration paid to whole-time employee-directors is not taxable as an independent service.
• Maithan Alloys Ltd. v. CCE & ST, 2020 (33) G.S.T.L. 228 (CESTAT Kolkata). Applied in the analysis of employer-employee relationships involving whole-time directors and salary deductions under Section 192 of the Income-tax Act.
• Viram Solar Pvt. Ltd. v. Commissioner of CGST & Central Excise, 2019 (6) TMI 517 (CESTAT Kolkata). Cited by RNTBCI in support of its argument concerning Domestic Tariff Area turnover and the scope of authorised operations.
• CCE & ST v. Nissin Brake India Pvt. Ltd., 2019 (24) G.S.T.L. J171 (Supreme Court). Relied upon by the assessee; its treatment in the context of secondment was considered subject to the subsequent Supreme Court reasoning in Northern Operating Systems.
• GMR Aerospace Engineering Ltd. v. Union of India, 2019 (31) G.S.T.L. 596 (Andhra Pradesh and Telangana High Court), W.P. No. 13546/2018, 27/12/2018. Followed as the principal SEZ exemption authority holding that statutory benefits under Section 26 of the SEZ Act cannot be curtailed through additional inconsistent conditions in Finance Act notifications.
• Union of India v. Intercontinental Consultants and Technocrats Pvt. Ltd., (2018) 4 SCC 669; 2018 (10) G.S.T.L. 401 (Supreme Court). Relied upon by RNTBCI in arguing that reimbursed expenditure could not automatically constitute consideration for a taxable service. The Tribunal considered the effect of Northern Operating Systems on this plea.
• Commissioner of Service Tax v. Shreenath Motors Pvt. Ltd., 2018 (9) TMI 1731 (Bombay High Court). Cited by RNTBCI in support of its submissions concerning penalty and bona fide belief.
• Volkswagen India Pvt. Ltd. v. CCE, 2014 (34) S.T.R. 135 (CESTAT Mumbai), Supreme Court dismissal reported in 2016 (42) S.T.R. J145. Referred to in the context of earlier secondment jurisprudence, with its precedential significance considered in light of Northern Operating Systems.
• CCE v. Computer Sciences Corporation India Pvt. Ltd., 2014 (35) S.T.R. 94 (CESTAT Delhi); 2015 (37) S.T.R. 62 (Allahabad High Court). Considered among earlier decisions relied upon on employee secondment; Northern Operating Systems examined the precedential weight of the earlier decisions.
• Krohne Marshall Pvt. Ltd. v. CCE, Pune-I, 2015 (10) TMI 2459 (CESTAT Mumbai), Supreme Court dismissal reported in 2016 (44) S.T.R. J153. Cited by RNTBCI in support of its position that secondment arrangements involved genuine employment rather than taxable manpower supply.
• Spirax Marshall Pvt. Ltd. v. CCE, Pune-I, 2016 (44) S.T.R. 310 (CESTAT Mumbai), Supreme Court dismissal reported in 2016 (44) S.T.R. J153. Cited concerning the taxability of expatriate employee arrangements.
• Nirlon Limited v. CCE, 2015 (320) E.L.T. 22 (Supreme Court). Relied upon in the assessee’s submissions concerning extended limitation.
• Jain Irrigation Systems Ltd. v. CCE, Nashik, 2015 (40) S.T.R. 752 (CESTAT Mumbai). Cited in submissions concerning interest and penalty.
• CST v. Arvind Mills Ltd., 2014 (35) S.T.R. 496 (Gujarat High Court). Cited by RNTBCI on the treatment of employee-related arrangements under service tax.
• British Airways v. Commissioner (Adjudication), Central Excise, Delhi, 2014 (6) TMI 626 (CESTAT New Delhi, Larger Bench). Relied upon in support of the plea concerning extended limitation.
• Tata Consultancy Services Ltd. v. Commissioner, 2013 (29) S.T.R. 393. Cited by the assessee in the context of benefits under the SEZ exemption framework.
• Commissioner of Service Tax v. Motor World, 2012 (27) S.T.R. 225 (Karnataka High Court). Cited in connection with the defence of reasonable cause and penalties.
• Commissioner of Customs, Mumbai v. Toyo Engineering India Ltd., 2006 (201) E.L.T. 513 (Supreme Court). Applied for the principle that Revenue cannot travel beyond the allegations forming the foundation of the show cause notice.
• CCE, Bhubaneswar-I v. Champdany Industries Ltd., 2009 (241) E.L.T. 481 (Supreme Court). Applied to reject Revenue’s attempt to introduce a new basis for demanding service tax on directors’ remuneration beyond the show cause notice.
• Commissioner of Income Tax v. Eli Lilly & Co. (India) Pvt. Ltd., (2009) 15 SCC 1 (Supreme Court). Discussed within the reproduced reasoning of Northern Operating Systems concerning the employment and taxation implications of secondment arrangements.
• Workmen of Nilgiri Cooperative Marketing Society Ltd. v. State of Tamil Nadu, (2004) 3 SCC 514 (Supreme Court). Referred to within Northern Operating Systems on tests for determining an employer-employee relationship.
• Silver Jubilee Tailoring House v. Chief Inspector of Shops, (1974) 3 SCC 498 (Supreme Court). Considered within the reproduced Supreme Court reasoning on employment relationships and the relevance of control and supervision.
• Hussainbhai v. Alath Factory Thozhilali Union, (1978) 4 SCC 257 (Supreme Court). Referred to in the discussion of the substance of employment relationships.
• Ram Prashad v. CIT, 1972 (4) TMI 1 (Supreme Court). Cited by RNTBCI concerning the circumstances in which remuneration paid to a director constitutes salary arising from an employment relationship.
• CIT v. B.P. Dalmia, 1993 (1) TMI 2 (Calcutta High Court). Cited in the appellant’s submissions relating to the employment status and income-tax treatment of directors.