Service tax liability confirmed on remuneration, bonuses, and allowances disbursed to employees seconded from foreign entities, in accordance with the decision of the Supreme Court, as upheld by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT).
Summary:
- The CESTAT Chennai bench has affirmed the obligation of service tax on salaries paid to foreign-based expatriate employees who were seconded from a foreign entity. The basis for this ruling is that such remuneration is regarded as compensation for the manpower services procured from the foreign entity. The CESTAT drew heavily from the influential judgment of the Supreme Court (SC) in the case of Northern Operating System Private Limited (NOS decision). It noted that the circumstances in the present case are akin to those in the NOS decision.
- According to the CESTAT’s observation, the agreement between the parties distinctly stipulated that the appellant was responsible for remunerating the secondees employed by them in India, encompassing aspects like salaries, bonuses, and allowances. In this context, the term ‘consideration’ encompasses any sum payable for the provision or intended provision of taxable services. Thus, the CESTAT concluded that the payments made by the appellant for salaries, bonuses, allowances, etc., effectively represented the expenditure for the manpower services rendered to them.
- While the CESTAT validated the demand for the regular period, accompanied by interest, it invalidated the demand for the extended period. This decision was grounded in the notion that the case lacked any attempt to hide or manipulate facts, rendering it a revenue-neutral circumstance.
Background:
- Renault Nissan Automotive India Pvt. Ltd., referred to as the appellant, was actively engaged in rendering business auxiliary services.
- The appellant had entered into an agreement with Nissan Motor Company Ltd (NMC) to employ expatriate foreign workers through a secondment arrangement. In tandem, the appellant had separately concluded employment contracts with the foreign expatriates.
- Treating the secondees as their own staff, the appellant deducted Tax Deducted at Source (TDS) from their salaries and furnished Form 16. The appellant also accounted for expenses in their financial statements under personnel costs.
- The salary disbursed to these seconded employees operated on a split formula: a portion was covered by the appellant, while another part was facilitated by NMC in the form of social security obligations and retirement benefits. The portion covered by NMC was subsequently reimbursed by the appellant.
- The adjudicating authority issued Show Cause Notices (SCNs) to demand service tax under the Reverse Charge Mechanism (RCM) for the transaction categorized as manpower supply services for the financial years 2008–09 to 2013–14.
- The appellant argued that due to the employment visa, an employer-employee relationship existed between them and the seconded employees.
- The appellant acknowledged the service tax liability related to reimbursed social security charges under the RCM.
- The commissioner sustained the service tax demand, inclusive of interest, based on the assertion that the amounts paid for expat salaries and perks should be recognized as a component of the consideration for the provision of manpower services, thereby becoming part of the assessable value.
- In response, the appellant lodged an appeal before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) to contest this decision.
Issue before CESTAT
- The question at hand is whether the salary and additional benefits furnished to the secondees by the appellant should be considered as components of the assessable value in accordance with the definition outlined in Section 67 of the Finance Act.
Arguments Presented by the Appellant
- Documentation Supporting Employment: The appellant put forth evidence such as employment visas, Tax Deducted at Source (TDS) certificates, and provident fund registration, demonstrating that the foreign workers were formally on the appellant’s payroll. This contrasts with the situation in the NOS decision.
- Control and Supervision: The appellant argued that the expatriate workers carried out their assigned tasks based on the appellant’s directives, even though they followed the instructions from Nissan Motor Company Ltd (NMC). The appellant maintained a comprehensive control over the secondees throughout their secondment duration.
- Dual Employment Perspective: The appellant contended that even if a part of the demand order was accepted, the arrangement between NMC and the appellant would lead to a scenario of dual employment. This implies that both entities would function as joint employers for the expatriates, and thus the cost of these employees would be shared by both. Consequently, the appellant asserted that no service provider-recipient relationship existed between the appellant and NMC.
- Limited Payments to NMC: Except for reimbursing social security amounts, the appellant asserted that it didn’t make any other payments to NMC. The demand for such reimbursements contradicted the decision in the case of M/s. Intercontinental Consultants and Technocrats Private Limited, which deemed reimbursements not taxable prior to the amendment in the definition of ‘consideration.‘
- Transparent Disclosure: The appellant revealed the amounts disbursed to the secondees as salaries under the category ‘salaries, wages, and bonus.’ This, the appellant argued, negates the existence of a service provider-service recipient relationship between the appellant and NMC.
- Compliance with NOS Decision: The appellant emphasized its adherence to the principle outlined in the NOS decision by fulfilling the service tax obligation on the reimbursement of social security charges under the Reverse Charge Mechanism (RCM). Consequently, the appellant asserted that the essence of the NOS judgment favored their position.
Observations and Ruling by Chennai CESTAT:.
- Consideration for Services Received: The tribunal noted that the term ‘consideration’ within the context of Section 67 of the Finance Act encompasses any amount payable for taxable services rendered or to be rendered. According to the agreement’s stipulations, the CESTAT observed that the appellant was obligated to disburse salaries, bonuses, allowances, etc., to the secondees employed by them in India. In this context, the compensation provided by the appellant was essentially the cost of the manpower services acquired by them. As such, these payments are to be regarded as ‘consideration’ for the purpose of imposing service tax under the Reverse Charge Mechanism (RCM).
- Levying Service Tax on Seconded Employees’ Services: The CESTAT referenced the Supreme Court’s ruling in the NOS case and found that the terms, conditions, and scope of the secondment agreement in the present case were analogous to those in the aforementioned case. Consequently, the tribunal held that the appellant was liable to pay the relevant service tax as per applicable regulations.
- In summary, the CESTAT ruled that the payments made by the appellant to the seconded employees should indeed be treated as ‘consideration’ for the purposes of service tax, in line with the agreement’s terms. The decision of the Supreme Court in the NOS case was referenced to substantiate the requirement for service tax on services provided by seconded employees.
Inclusion of ‘Recruitment’ and ‘Supply’ in Manpower Agency Terms: The tribunal made reference to the
Supreme Court’s decision in the case of International Merchandising Company, LLC. The SC’s judgment established that the terms ‘manpower recruitment’ or ‘supply agency’ are comprehensive enough to encompass both ‘recruitment’ and ‘supply’ of manpower. The term ‘supply’ holds a broader connotation than ‘recruitment.‘
Citing Pragathi Concrete Products Case: The tribunal pointed to the Supreme Court’s verdict in the case of Pragathi Concrete Products. This decision held that when a taxpayer’s unit had undergone multiple audits and physical inspections by the department over a certain period, any possibility of suppression was eliminated. The tribunal agreed that this constituted a revenue-neutral context. It concluded that attempting to suppress such known information would not have granted the appellant/ assessee any advantageous outcome.
The CESTAT’s reference to the Pragathi Concrete Products case supported its earlier stance that the situation in the present case was characterized by a lack of suppression and a revenue-neutral condition, thereby underscoring the rationale behind its decision.
Department’s Awareness and Lack of Suppression: The tribunal reiterated that the entirety of the activities in question was already known to the Revenue and the department’s officials. Given this comprehensive awareness, there was no ground for asserting any suppression of facts. Consequently, the tribunal concluded that the demand associated with the extended limitation period lacked a valid basis.
Modern Insecticides Ltd vs. Commissioner, CGST & Anr.
Tax deposited during search cannot be retained by department, till adjudication of notice.
FACTS
The respondent conducted a search at the petitioner’s premises, detaining their Chartered Accountant and Director, during the second search. They were released upon depositing Rs. 2.15 crores, with Rs. 34.04 lakhs from the Electronic Credit Ledger and Rs. 5.10 lakhs from the Electronic Cash Ledger. However, essential documents and gadgets required for filing returns were not provided. A petition was subsequently filed seeking a refund of the deposited amount of Rs. 2.54 crores.
RULING
Drawing on the Vallabh Textile’s case judgment, it’s crucial to emphasize that the amount deposited during the search cannot be construed as a voluntary act on the part of the petitioner. This is a significant legal distinction because voluntary payments typically indicate acknowledgment of liability, whereas deposits made during a search are often made under duress or pressure. Therefore, the reliance on the Vallabh Textile’s case sets a precedent that such deposits should not be automatically treated as admissions of guilt or liabilities.
Furthermore, it’s important to note that as of the present date, no proceedings under Section 74(1) of the CGST Act have been initiated against the petitioner. This is significant because according to Rule 142(1A) of the CGST Rules, the department is not authorized to issue Form GST DRC-01A, which is used to demand payment of tax, interest, and penalties, until such proceedings have been formally initiated. In essence, the absence of formal proceedings means that the department lacks the legal basis to demand payment from the petitioner.
In addition, the passage of two years without the issuance of any formal notice or initiation of proceedings raises concerns about the undue retention of the tax deposit by the department. The principle of justice and fairness dictates that the department should not indefinitely withhold these funds pending future adjudication, which could potentially take even more time. This situation creates financial and operational uncertainties for the pet
Consequently, the respondents have been requested to promptly return the deposited amount of Rs. 2.54 crores to the petitioner(s), coupled with simple interest at the rate of 6% per annum. This interest is meant to compensate the petitioner for the opportunity cost and any financial losses incurred due to the prolonged retention of their funds by the tax authorities until the payment is made. The request for interest underscores the importance of timely and fair resolution in taxation matters, ensuring that taxpayers are not unduly burdened by delays and uncertainties in the adjudication process.
Returning the Input Tax Credit (ITC) by the recipient who has received a credit note- is the adjustment of previously claimed Input Tax Credit (ITC) by a recipient in response to a credit note issued by the supplier for corrections in the original transaction.
In accordance with Section 34 of the CGST Act, the issuance of credit notes is covered, along with the specific situations and conditions that warrant their issuance. An evaluation of this statutory provision unmistakably indicates that credit notes may be mandated for the following objectives:
The need for issuing a credit note arises for several reasons, as outlined in Section 34 of the CGST Act, including:
- When the taxable value or tax charged in the tax invoice exceeds the taxable value or tax payable for the supply.
- When the recipient returns the goods supplied.
- When there are deficiencies found in the goods or services provided.
An instances that require issuing a credit note is rooted in Section 15(3), which pertains to determining the value of a supply when a supplier offers a discount. According to this section, the discount amount should not be included in the value of the supply if, after the supply has been made, such a discount has been granted:
- This situation arises when, in accordance with an agreement made either at or before the time of such supply and specifically tied to the relevant invoices:
- b) The Input Tax Credit (ITC) related to the discount, has been reversed by the recipient of the supply, following the issuance of a credit note by the supplier.
The requirement specified in (b) above is unique and not found in relation to other situations outlined in Section 34 for the issuance of a credit note. Nevertheless, it has come to our attention that tax authorities have been insisting on obtaining confirmation or a declaration from the recipient of the supply regarding the reversal of Input Tax Credit (ITC) by them. Failure to provide such confirmation has led to the issuance of demand notices by the authorities. These requirements may be viewed as additional and unnecessary, especially in situations where credit notes are issued for reasons other than post-supply discounts.
GST CALENDAR
| Nature of Compliances | Due Date |
| GSTR-7 (Tax Deducted at Source ‘TDS’) | October 10, 2023 |
| GSTR-8 (Tax Collected at Source ‘TCS’) | October 10, 2023 |
| GSTR-1 | October 11, 2023 |
| IFF- Invoice furnishing facility (Availing QRMP) | October 13, 2023 |
| GSTR-6 August 2021 Input Service Distributor | October 13, 2023 |
| GSTR-2B (Auto Generated Statement) | October 14, 2023 |
| GSTR-3B | October 20, 2023 |
| GSTR-5 (Non-Resident Taxable Person) | October 20, 2023 |
| GSTR-5A (OIDAR Service Provider) | October 20, 2023 |
| PMT-06 (who have opted for QRMP scheme) | October 20, 2023 |
| Annual Return GSTR- 9 | December 31, 2023 |
| Statement (need Audit) GSTR-9C | December 31, 2023 |
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