Commissioner of Central Excise and Service Tax, Bangalore v. Northern Operating Systems Pvt. Ltd.

Case snapshot

Sections / provisions: Man power recruitment and supply agency services- secondment of employee- group company- upheld.

Questions before the Court / Tribunal

• CCE Banglore Vs Northern Operating Systems Pvt ltd (Supreme Court) Date-19th May 2022 Sub-Services of employees of Overseas group company received by the Indian counter part on secondment held to be manpower services liable to be taxed under the service tax regime, though extended period of limitation held not liable to be involved. The Supreme Court three judges considered in detail the meaning of manpower recruitment or supply agency service, the agreement between employer and employee and secondment agreement and whether the facts of a given case reveal, who is the employer, and whether the relationship between an employee and another, is one of master servant, or whether there is an underlying contract for service, by which the real employer, lends the services of his employee to another. Thereafter the court held that in the case of Mersey Docks and Harbour Board v. Coggins &…
• Which factual, statutory and procedural conditions controlled the requested relief?
• How did the forum apply the governing provisions to the evidence and procedural history recorded in this case?

Material facts and procedural background

1. The Commissioner of Central Excise and Service Tax (hereafter variously described as “the revenue” or “the appellant”) has preferred appeals 1, directed against the impugned orders of the Customs, Excise and Service Tax Appellate Tribunal (hereafter “CESTAT”)2 which set aside two orders dated 03.03.2014 and 04.03.2014 by the Commissioner of Service Tax (hereafter “the Commissioner”). The Commissioner had confirmed demands, made through show cause notices, for service tax along with interest and penalty. The commissioner had discharged, by an order (dated 27.02.2017/16.06.2017) the proceedings arising from another show cause notice (hereafter “SCN”) in respect of a similar dema nd. That led to the revenue’s appeal to CESTAT, challenging that order, discharging proceedings initiated by the revenue for the subsequent period. The CESTAT, by its common

1 Under Section 35L (b) of the Central Excise Act, 1944. 2 Dated 23 .12.2020 in Service Tax Appeal (STA) Nos. 22573 -74/2014; STA No. 21502/2017, Service Tax/CROSS/21077/2017 and Service Tax/CROSS/20255/2018.

order, rejected the revenue’s appeals, and allowed that of the respondent, Northern Operating Systems (Pvt.) Ltd. (hereafter “the assessee” or “NOS”).

Facts of the case 2. The assessee was registered with the revenue, as a service provider under the categories of “Manpower Recruitment Agency Service”, “Business Auxiliary Service”, “Commercial Training and Coaching Service”, “TTSS”, “Telecommunication and Legal Consultancy Service” etc., under the Finance Act, 1994 (hereafter “the Act”) . Following an audit of the records by the revenue’s officials, proceedings were initiated against the assessee alleging non-payment of service tax concerning agreements entered into by it with its group companies located in USA, UK, Dublin (Ireland), Singapore , etc. to provide general back - office and operational support to such group companies. 3. The nature and contents of the agreements, are discernible in their description, extracted from the impugned order - where the assessee has been referred to as “the appellant” by the CESTAT - which is as follows: “The relevant terms of the agreement to understand the activity are as follows: a) When required Appellants requests the group companies for managerial and technical personnel to assist in its business and accordingly the employees are selected by the group company and they would be transferred to Appellants. b) The employees shall act in accordance with the instructions and directions of Appellants.

company for all these expenses and there shall be no mark -up on such reimbursement.” As a matter of fact, the assessee issues the prescribed forms to the seconded employees, in terms of the Income Tax Act , 1961 (hereafter “IT Act”) . Those individuals too file income tax return s and contribute to the provident fund. Furthermore, NOS remits the above amounts in foreign exchange, which are reflected in its financial statements. The assessee is reimbursed (by the foreign entity, Northern Trust Company - hereafter described as such) for the amounts it pays as salaries, to these seconded employees . The assessee pays for certain services received from the group companies.

Appellant / petitioner / assessee submissions

In other words, what was provided to the assessee by the overseas counterpart or group companies w ere services through its employees. These services directly pertained to the discharge of functions of the assessee. 16. It was argued that CESTAT’s reasoning that the contract between the parties was not one in which the overseas group company supplied se rvices, was erroneous. In this context, it was urged that the mere fact that the temporary control over the manner of performance of duties of the employees seconded did not take away or diminish the fact that their real employer was none other than the overseas company. The scale of payments made to such seconded employees was of such magnitude that they were regarded as highly skilled for the performance of specific tasks by the assessee.

Contentions of the assessee 20. Mr. V. Sridharan, learned senior counsel appearing for the assessee urged that a conjoint reading of Section 65(68) with Section 65(105)(k) of the Finance Act, 1994 makes it clear that the 'manpower recruitment and supply agency service' seeks to bring under its ambit two types of activities i.e. recruitment of manpower and supply of manpower. Further the service becomes a taxable service only if provided by a manpower recruitment or supply agency. In the present case, the dispute pertains to whether the secondment of employees by the group companies to the Respondent will be regarded as supply of manpower. 21. It was argued that Circular F.

Revenue / respondent submissions

14. The revenue contended that looking at an overall reading of the agreement, i.e. services agreement dated 01.09.2006 and its attachment , the master service agreement dated 12.02.2009 (with its annexures), the secondment agreement dated 01.04.2007, and the secondment assignment letter or agreement with the concerned employee clearly showed that the overseas employer provided the services of its employees to the assessee for the performance of agreed tasks. These tasks were handed over to the assessee by the overseas group company. It was not as if the assessee was free in regard to the manner of performance of the jobs assigned to it. The consideration provided to it was fixed (15% markup over the actual costs incurred); the costs included the remuneration nominally paid by the assessee to the seconded employee. Further, those were reimbursed. For a temporary period, the seconded employee was only operationally under the control of the assessee. It

Court / Tribunal analysis and reasoning

no evidence to show reasonable cause. The extended period assessment and penalty was therefore, warranted. 6. Aggrieved by the impugned order, the assessee filed two appeals before the CESTAT. As far as the third appeal5 by the department was concerned, the period involved was from April 2012 to September 2014. As a sequel to the earlier SCNs, the assessee was issued two SCNs6 demanding service tax of ₹ 4,36,75,590/- and ₹ 7,55,48,448/- for the period April 2012 to April 2013, and April 2013 to September 2014 respectively, along with interest and penalty. 7. The assessee filed detailed replies on 02.07.2014 and 31.12.2015, mainly arguing that service tax cannot be demanded as the services provided by foreign affiliates do not fall under manpower recruitment or supply agency services for the period prior to negative list.

Further, for the period after the introduction of the negative list, the definition of the term ‘service’ under the Finance Act, specifically excluded service provided by the employee to the employer. Therefore, the amount paid to the foreign entity as reimbursement of salary of the seconded employees cannot be construed as consideration for supply of manpower services. 8. The Commissioner, Bangalore by order7 dropped the proposals in the SCN for the period April 2012 to March 2013 and April 2013 to September 2014, thereby setting aside demands for service tax of ₹ 4,36,75,590/- and ₹ 7,55,48,448/- respectively ( total ₹ 11,92,24,038/-). However, b ased on a read ing of the Secondment Agreement, the Commissioner by order dated 27.02.2017/16.06.20178 held that firstly, seconded employees continued on their foreign employer’s payroll only for continuing social security benefits and for all practical purposes the asseesee was the employer of such seconded employee .

Eighthly, for the period post 2012, the remittance is a reimbursement based on actuals and there is no amount which is payable in respect of the activity in question and therefore there is no consideration involved. 9. Aggrieved by the Commissioner's order dropping the demand, the Revenue has filed an appeal challenging it, in which the assessee too filed its cross objection. The impugned order 10. The CESTAT, by its order noted the position in law – that earlier, the definition of taxable services under Section 65(105) (k) included service by a manpower recruitment or supply agency in relation to recruitment or supply of manpower temporarily or othe rwise. It was noted that the scope of the term “manpower recruitment of supply agency” was spelt out in Para 22.3 in the Circular of 27.07.200510.

Next, the CESTAT noted that the position in law changed in that manpower and recruitment services was per se included since it did not form part of the negative list. In this regard, it noticed Section 65B (44) in which by clause (b), provision of service by an employee or employer by or in relation to employment is an excluded service. CESTAT, therefore, reasoned that the essential ingredients for any activity to be called as manpower recruitment or supply agency

11. The CESTAT then, on an examination of the agreements, interpretation of documents on record (including the agreements entered by the respondent with its group company), held that the subject matter of the contract was not supply of manpower. The group companies were not engaged in supply of manpow er. The CESTAT held that those seconded to the assessee working in the capacity of employees and receiving salaries by group companies were only for disbursement purposes. The employee -employer relationship existed and that the activity, therefore, could not be termed as “manpower recruitment and supply agency.” It was held that the assessee obtained from its group companies directly or by transfer, service of expatriate employees who were paid salaries by the assessee in India, for which tax was deducted and paid to statutory benefits – such as provident fund.

concerned overseas company to the assessee. Therefore, it was a taxable service and not excluded by virtue of amended Section 65 of the Finance Act, 1994.

Operative decision and relief

Therefore, any cost or expense reimbursed does not represent the gross value of taxable service and cannot be a consideration for charging service tax. 27. Counsel argued that debit note s raised by the overseas entity upon the assessee show that amounts paid were towards reimbursement of salaries and other allowances to employees. There was no mark-up charged by the foreign company. 28. It was next submitted that the demand to the extent of ₹ 8,12,62,382/- for the period October 2006 to September 2010, should be set aside. The assessee was under the bona fide belief that the seconded employees were its employees and therefore, not covered under the ambit of manpower supply services.

Furthermore, in view of the above discussion, the invocation of the extended period of limitation in both cases, by the revenue is not tenable. 66. In light of the above, the revenue’s appeals succeed in part; the assessee is liable to pay service tax for the periods spelt out in the SCNs. However, the invocation of the extended period of limitation, in this court’s opinion, was unjustified and unreasonable. Resultantly, the assessee is held liable to discharge its service tax liability for the normal period or periods, covered by the four SCNs issued to it. The consequential demands therefore, shall be recovered from the assessee. 67. The impugned common order of the CESTAT is accordingly set aside.

Ratio and legal principle

The narrow proposition associated with Commissioner of Central Excise and Service Tax, Bangalore v. Northern Operating Systems Pvt. Ltd. concerns cce banglore vs northern operating systems pvt ltd (supreme court) date-19th may 2022 sub-services of employees of overseas group company received by the indian counter part on secondment held to be manpower services liable to be taxed under the service tax regime, though extended period of limitation held not liable to be involved. the supreme court three judges considered in detail the meaning of manpower recruitment or supply agency service, the agreement between employer and employee and secondment agreement and whether the facts of a given case reveal, who is the employer, and whether the relationship between an employee and another, is one of master servant, or whether there is an underlying contract for service, by which the real employer, lends the services of his employee to another. thereafter the court held that in the case of mersey docks and harbour board v. coggins &… The proposition cannot be separated from the judgment’s facts, the governing statutory version, the forum’s jurisdiction, and the exact relief recorded in CIVIL APPEAL NO. 2289-2293 OF 2021.

For working-paper purposes, the decision should be cited only after matching the material facts and reading the passages under the judgment-grounded record above. The editorial outcome label “Quashed / set aside” is a navigation aid; it does not replace the operative order or explain every issue in a multi-issue case.

Why this judgment matters

This decision is relevant when a file raises the same central question identified in the source headnote: CCE Banglore Vs Northern Operating Systems Pvt ltd (Supreme Court) Date-19th May 2022 Sub-Services of employees of Overseas group company received by the Indian counter part on secondment held to be manpower services liable to be taxed under the service tax regime, though extended period of limitation held not liable to be involved. The Supreme Court three judges considered in detail the meaning of manpower recruitment or supply agency service, the agreement between employer and employee and secondment agreement and whether the facts of a given case reveal, who is the employer, and whether the relationship between an employee and another, is one of master servant, or whether there is an underlying contract for service, by which the real employer, lends the services of his employee to another. Thereafter the court held that in the case of Mersey Docks and Harbour Board v. Coggins &… Its practical value lies in the way the Supreme Court of India connected the governing provisions—Man power recruitment and supply agency services- secondment of employee- group company- upheld.—to the procedural posture and evidence before it.

The authority level is Supreme Court. That affects persuasive or binding weight, but authority level alone is never enough. Territorial jurisdiction, statutory period, the identity of the challenged order, and later appellate treatment must all be checked before the case is used in advice, a submission, or litigation strategy.

Practitioner action points

• Begin with the complete judgment and mark the paragraphs supporting the exact proposition relied upon.
• Match the statutory version of Man power recruitment and supply agency services- secondment of employee- group company- upheld. and the decision date 2022-05-19; do not assume the current text is identical.
• Compare the notice, assessment, appeal or other procedural sequence with the chronology recorded in this case.
• Verify the stated later-history status and any review, appeal, SLP, curative or rectification proceedings before citation.
• Record why the client’s evidence is materially similar, and also record any fact capable of distinguishing the result.

Does this case match your facts?

Detailed reliance and distinction analysis

Identity check. Confirm that the cited cause title is Commissioner of Central Excise and Service Tax, Bangalore v. Northern Operating Systems Pvt. Ltd., the proceeding is CIVIL APPEAL NO. 2289-2293 OF 2021, and the decision is dated 2022-05-19. These fields are taken from the judgment record and should appear exactly in the citation note.

Bench check. The judgment identifies the coram as S. Ravindra Bhat, J. (authoring judge identified in judgment). A later order by another bench, a larger bench, or a higher forum may alter the weight or interpretation of the proposition.

Provision check. The source associates the dispute with Man power recruitment and supply agency services- secondment of employee- group company- upheld.. The practitioner should place the historical statutory text next to the current text and identify every amendment, proviso, explanation, rule or notification that could change the analysis.

Fact check. The source issue is not a free-standing abstract rule. It arises from the concrete record summarized above. A reliable application note should list the common facts, the different facts, and whether each difference affects jurisdiction, admissibility, limitation, burden, computation or relief.

Remedy check. The recorded result is Quashed / set aside. Where a matter is remanded, set aside, partly allowed, or disposed with directions, the exact operative language is more important than a binary winner/loser label.

History check. The current closure state is REVIEW_CURATIVE_DOCKET_CHECK_PENDING. If that state is pending, the page does not assert that no later case exists. It means the check remains open and must be completed at the point of professional reliance.

Section / provision impact

• Man power recruitment and supply agency services- secondment of employee- group company- upheld. — apply the exact version considered in the judgment.

Case network

• OERLIKON BALZERS COATING INDIA PRIVATE LIMITED VS. UNION OF INDIA & ANR — Court / Tribunal to be verified · Quashed / set aside
• UCB India Pvt. Ltd. vs. ACIT — Supreme Court of India · Quashed / set aside
• SPL Labs India Pvt ltd Vs ITO,Circle 6 Bangalore — Supreme Court of India · Quashed / set aside
• M/s Suneja Towers Private Limited & Anr Vs Anita Merchant — Supreme Court of India · Quashed / set aside

Related Finin2min resources

• Case Law Hub
• Search all 592 judgments
• Explore Appeals, Revision, Rectification & Procedure

Full judgment and source control

Read / download packaged judgment record

Source class: OFFICIAL_PRIMARY_EXACT_SANITIZED_MIRROR · Repository status: PUBLISH_READY