C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. versus M/S NORTHERN OPERATING SYSTEMS PVT LTD. on 19 May 2022

[2022] 18 S.C.R. 901

C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC.

v.

M/S NORTHERN OPERATING SYSTEMS PVT LTD.

(Civil Appeal No. 2289-2293 of 2021)

MAY 19, 2022

[UDAY UMESH LALIT, S. RAVINDRA BHAT ANDPAMIDIGHANTAM SRI NARASIMHA, JJ.]

Finance Act, 1994 – Service Tax – SecondmentAgreement;Service Agreement–Revenue issued four show cause notices(SCNs) alleging that the respondent-assessee failed to discharge servicetax under the category of “manpower recruitment or supply agencyservice” with regard to certain employees who were seconded tothe assessee by the foreign group companies–Demandsconfirmedby Commissioner of Service Tax–Commissioner had also dischargedthe proceedings arising from a show cause notice–Appeals byRevenue as well as by assessee –Revenue’s appeals were rejectedwhile that of the assessee’s were allowed by CESTAT – On appeal,held: Assessee was the service recipient for service (of manpowerrecruitment and supply services) by the overseas entity, in regard tothe employees it seconded to the assessee, for the duration of theirdeputation or secondment – Assessee liable to pay service tax forthe periods spelt out in the SCNs, consequential demands therefore,shall be recovered from the assessee – However, the invocation ofthe extended period of limitation was unjustified – Impugnedcommon order of the CESTAT is set aside –Commissioner’s ordersin original are restored, except to the extent they seek to recoveramounts for the extended period of limitation – The demand againstthe assessee, for the two separate periods, shall be modified,excluding any liability for the extended period of limitation.

Secondment Arrangement– Held: In a typical secondmentarrangement, employees of overseas entities are deputed to the hostentity (Indian associate) on the latter’s request to meet its specificneeds and requirements of the Indian associate – During thearrangement, the secondees work under the control and supervisionof the Indian company and in relation to the work responsibilitiesof the Indian affiliate – Social security laws of the home country

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A(of the secondees) and business considerations result in payrollretention and salary payment by the foreign entity, which is claimedas reimbursement from the host entity.

Finance Act, 1994 – s.65(44) – Held: By s.65 (44), “service”means (a) any activity (b) carried out by a person for another (c)Bfor consideration, and (d) includes a declared service (the term“declared service” is defined in s.66E) – However, s.65 (44)excludesfrom its sweep [by clause (b)], “a provision of service by an employeeto the employer in the course of or in relation to his employment”.

Deeds and Documents – Interpretation of documents – Held:COne of the cardinal principles of interpretation of documents, isthat the nomenclature of any contract, or document, is not decisiveof its nature – An overall reading of the document, and its effect, isto be seen by the courts.

Contract – Contract of service or Contract for service – Held:DThere is not one single determinative factor, which the courts giveprimacy to, while deciding whether an arrangement is a contract ofservice (as the assessee asserts the arrangement to be) or a contractfor service – The general drift of cases which have been decided,are in the context of facts, where the employer usually argues thatthe person claiming to be the employee is an intermediary –SupremeEcourt has consistently applied one test- substance over form,requiring a close look at the terms of the contract, or the agreements.

Partly allowing the appeals, the Court

Conclusion

Partly allowing the appeals, the Court

HELD: 1.1 The issue which this court has to decide isFwhether the overseas group company or companies, with whomthe assessee has entered into agreements, provide it manpowerservices, for the discharge of its functions through secondedemployees.The contemporary global economy has witnessed rapidcross-border arrangements for which dynamic mobile workforcesare optimal. To leverage talent within a transnational group,Gemployees are frequently seconded to affiliated or groupcompanies based on business considerations. In a typicalsecondment arrangement, employees of overseas entities aredeputed to the host entity (Indian associate) on the latter’srequest to meet its specific needs and requirements of the Indianassociate. During the arrangement, the secondees work underH

the control and supervision of the Indian company and in relationto the work responsibilities of the Indian affiliate. Social securitylaws of the home country (of the secondees) and businessconsiderations result in payroll retention and salary payment bythe foreign entity, which is claimed as reimbursement from thehost entity. The crux of the issue is the taxability of the crosscharge, which is primarily based on who should be reckoned asan employer of the secondee. If the Indian company is treated asan employer, the payment would in effect be reimbursement andnot chargeable to tax in the hands of the overseas entity. However,in the event the overseas entity is treated as the employer, thearrangement would be treated as service by the overseas entityand taxed.[Paras 33, 34][933-D-H]

1.2 A plain reading of the definition of “manpowerrecruitment agency” (per Section 65 (68) of the unamended Act)requires that to fall within that description, (a) a person (theexpression is not defined; however, by Section 3 (42) of theGeneral Clauses Act, the term includes “any company orassociation or body of individuals whether incorporated or not”);(b) provides service (c) directly or indirectly, (d) in any mannerfor recruitment or supply of manpower, (e) temporarily orotherwise. The question is what are the services provided to theassessee, and by whom? Do they include the provision of services,through employees, by its overseas group companies or affiliates?After 01.07.2012, the definition of “service” underwent a change.Except listed categories of activities excluded from, or kept outof the fold of the definition, every activity virtually is “service”.Now, by Section 65 (44), “service” means (a) any activity (b)carried out by a person for another (c) for consideration, and(d)includes a declared service (the term “declared service” isdefined in Section 66E).Section 65 (44), however, excludes fromits sweep [by clause (b)], “a provision of service by an employee tothe employer in the course of or in relation to his employment.”The assessee contends that the secondment agreement has theeffect of placing the overseas employees under its control, so tosay, and enables it to require them to perform the tasks for itspurposes. It emphasizes that the real nature of the relationshipbetween it and the seconded employees is of employer and AB

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[2022] 18 S.C.R.

Aemployee, and outside the purview of the service taxregime.[Paras 43-45][940-B-G]

1.3 Prior to July 2012, what had to be seen was whether a(a) person provided service (b) directly or indirectly, (c) in anymanner for recruitment or supply of manpower (d) temporarilyBor otherwise. After the amendment, allactivities carried out byone person for another, for a consideration, are deemed services,except certain specified excluded categories. One of the excludedcategory is the provision of service by an employee to theemployer in relation to his employment. One of the cardinalprinciples of interpretation of documents, is that the nomenclatureCof any contract, or document, is not decisive of its nature. Anoverall reading of the document, and its effect, is to be seen bythe courts.The task of this court, therefore is to, upon an overallreading of the materials presented by the parties, discern thetrue nature of the relationship between the seconded employees Dand the assessee, and the nature of the service provided – inthat context - by the overseas group company to the assessee.Aco-joint reading of the documents on record show that: (i)Attachment 1 to the service agreement ensures that the overseasgroup company assigns, inter alia, certain tasks to the assessee,including back office operations of a certain kind, in relation toEits activities, or that of other group companies or entities; (ii)The assessee is paid a mark up of 15% of the overall expenditureit incurs, by the overseas company (clause 2, read with attachment1 of the Service Agreement); (iii) By the Secondment Agreement,the parties agree that the overseas employee is temporarily loanedFto the assessee (Article I read with the Schedule); (iv) Duringthe period of secondment, the assessee has control over theemployee, i.e. it can require the seconded employee to return,and likewise, the employee has the discretion to terminate therelationship (Article II); (v) The overseas employer (group company) pays the seconded employee, which is reimbursed toGthe overseas company, by the assessee (Article III); (vi) Theassessee is responsible for the work of the seconded employee,i.e., the overseas employer, during the secondment period, isabsolved of any liability for the job or work of its secondedemployees (Article VII); (vii) The secondment is for a specifiedH

duration, and the employment with the assessee ceases uponthe expiration of that period (Article II of the secondmentagreement and the “Duration” clause in the letter ofunderstanding with the seconded employee); (viii) The letter ofunderstanding issued to the seconded employee specifies thatthe tenure with the assessee is an assignment (in one place, theterm used is “At its conclusion, repatriation will be in accordancewith the Global Mobility Repatriation Policy”); (ix) The termsinclude the salary payable as well as other allowances, such ashardship allowance, vehicle allowance, servant allowance, paidleave, housing allowance, etc. The nature of salary and other perksunderscore the fact that the seconded employees are of a certainskill and possess the expertise, which the assesseerequires.[Paras 46-49][940-H; 941-A-B, E-G]

1.4 The above features show that the assessee hadoperational or functional control over the seconded employees;it was potentially liable for the performance of the tasks assignedto them. That it paid (through reimbursement) the amountsequivalent to the salaries of the seconded employees – becauseof the obligation of the overseas employer to maintain them onits payroll, has two consequences: one, that the secondedemployees continued on the rolls of the overseas employer; two,since they were not performing jobs in relation to that employer’sbusiness, but that of the assessee, the latter had to ultimatelybear the burden. There is nothing unusual in this arrangement,given that the seconded employees were performing the tasksrelating to the assessee’s activities and not in relation to theoverseas employer. To put it differently, it would be unnatural toexpect the overseas employer to not seek reimbursement of theemployees’ salaries, since they were, for the duration ofsecondment, not performing tasks in relation to its activities orbusiness. There is not one single determinative factor, which thecourts give primacy to, while deciding whether an arrangementis a contract of service (as the assessee asserts the arrangementto be) or a contract for service. The general drift of cases whichhave been decided, are in the context of facts, where the employerusually argues that the person claiming to be the employee is anintermediary. This court has consistently applied one test:

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Asubstance over form, requiring a close look at the terms of thecontract, or the agreements.A vital fact which is to be consideredin this case, is that the nature of the overseas group companiesbusiness appears to be to secure contracts, which can beperformed by its highly trained and skilled personnel. Thisbusiness is providing certain specialized services (back office,BIT, bank related services, inventories, etc.). Taking advantageof the globalized economy, and having regard to locationaladvantages, the overseas group company enters into agreementswith its affiliates or local companies, such as the assessee. Therole of the assessee is to optimize the economic edge (be itCmanpower or other resources availability) to perform the specifictasks given it, by the overseas company. As part of this agreement,a secondment contract is entered into, whereby the overseascompany’s employee or employees, possessing the specificrequired skill, are deployed for the duration the task is estimatedto be completed in. This court is not concerned with unravellingDthe nature of relationship between the overseas company andthe assessee. However, what it has to decide, is whether thesecondment, for the purpose of completion of the assessee’s job,amounts to manpower supply. [Paras 50-52][942-G-H, A-F]

1.5 Facially, or to put it differently, for all appearances, theEseconded employee, for the duration of her or his secondment,is under the control of the assessee, and works under its direction.Yet, the fact remains that they are on the pay rolls of their overseasemployer. What is left unsaid- and perhaps crucial, is that this isa legal requirement, since they are entitled to social security benefitsFin the country of their origin. It is doubtful whether without thecomfort of this assurance, they would agree to the secondment.Furthermore, the reality is that the secondment is a part of theglobal policy – of the overseas employer loaning their services,on temporary basis. On the cessation of the secondment period, they have to be repatriated in accordance with a global repatriationGpolicy (of the overseas entity). The letter of understandingbetween the assessee and the seconded employee nowhere statesthat the latter would be treated as the former’s employees afterthe seconded period (which is usually 12-18 months). On thecontrary, they revert to their overseas employer and may in fact,H

be sent elsewhere on secondment. The salary package, withallowances, etc., are all expressed in foreign currency (e.g., US $330,000/- per annum in the letter produced before court).Furthermore, the allowances include a separate hardshipallowance of 20% of the basic salary for working in India. Themonthly housing allowance in the specific case was 366,700. Inaddition, an annual utility allowance of 3,97,500/- is also assured.These are substantial amounts, and could have been only byresorting to a standardized policy, of the overseasemployer.[Paras 53, 54][943-G-H; 944-A-D]

1.6 The overall effect of the four agreements entered intoby the assessee, at various periods, with NTS or other groupcompanies, clearly points to the fact that the overseas companyhas a pool of highly skilled employees, who are entitled to a certainsalary structure- as well as social security benefits. Theseemployees, having regard to their expertise and specialization,are seconded (a term synonymous with the commonly used termin India, deputation) to the concerned local municipal entity (inthis case, the assessee) for the use of their skills. Upon thecessation of the term of secondment, they return to their overseasemployer, or are deployed on some other secondment. While thecontrol (over performance of the seconded employees’ work) andthe right to ask them to return, if their functioning is not as isdesired, is with the assessee, the fact remains that their overseasemployer in relation to its business,deploys them to the assessee,on secondment. Secondly, the overseas employer- for whateverreason, pays them their salaries. Their terms of employment –even during the secondment – are in accord with the policy of theoverseas company, who is their employer. Upon theend of theperiod of secondment, they return to their original places, to awaitdeployment or extension of secondment.[Paras 55, 57][944-E-F,945-A-B]

1.7 The assessee was, for the relevant period, servicerecipient of the overseas group company concerned, which canbe said to have provided manpower supply service, or a taxableservice, for the two different periods in question (in relation towhich show cause notices were issued).[Para 61][946-B]

1.8 The assessee was the service recipient for service (ofmanpower recruitment and supply services) by the overseas AB

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Aentity, in regard to the employees it seconded to the assessee,for the duration of their deputation or secondment. Furthermore,in view of the above discussion, the invocation of the extendedperiod of limitation in both cases, by the revenue is not tenable.In light of the above, the assessee is liable to pay service tax forthe periods spelt out in the SCNs. However, the invocation ofBthe extended period of limitation, in this court’s opinion, wasunjustified and unreasonable. Resultantly, the assessee is heldliable to discharge its service tax liability for the normal periodor periods, covered by the four SCNs issued to it. Theconsequential demands therefore, shall be recovered from theCassessee. The impugned common order of the CESTAT is setaside. The commissioner’s orders in original are accordinglyrestored, except to the extent they seek to recover amounts forthe extended period of limitation. The demand against theassessee, for the two separate periods, shall now be modified,excluding any liability for the extended period of limitation. [ParasD65-67][947-C-F]

Commissioner of Income Tax v. M/s. Eli Lilly & CompanyIndia Pvt. Ltd. (2009) 15 SCC 1 : 2009 (5) SCR 20;Smt. Savita Garg v. The Director, National Heart Institute(2004) 8 SCC 56 : 2004 (5) Suppl. SCR 359; Workmen E

of Nilgiri Cooperative Marketing Limited v. State ofTamil Nadu & Ors. (2004) 3 SCC 514 : 2004 (2) SCR159; Hussain Bhai Calicut v. Alath Factory Thozhilali(1978) 4 SCC 257 : 1978 (3) SCR 1073; SushilabenIndravadan Gandhi v. New India Assurance Co. Ltd.F(2021) 7 SCC 151 : 2020 (9) SCR 32; IntercontinentalConsultants and Technocrats Pvt. Ltd. v. Union of India(2018) 4 SCC 669 : (2018) 10 SCR 309; Escorts v.Commissioner of Central Excise (2015) 9 SCC 109 :2015 (5) SCR 241; Commissioner of Customs v. MagusMetals (2017) 16 SCC 491; Director Income Tax v. M/GS Morgan Stanley & Co. Inc. (2007) 7 SCC 1 : 2007(8) SCR 52; Dharangadhara Chemical Works Ltd. v.State of Saurashtra 1957 SCR 158; D.C. DewanMohideen Sahib and Sons v. Secretary, United BeediWorkers’ Union 1964 (7) SCR 646; Silver Jubilee G

C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/SNORTHERN OPERATING SYSTEMS PVT LTD.

Tailoring House v. Chief Inspector of Shops &Establishments 1974 (1) SCR 747; Indian BanksAssociation v. Workmen of Syndicate Bank 2001 (1)SCR 1011; Indian Overseas Bank v. Workmen (2006)3 SCC 729; State of Orissa v. Titaghur Paper Mills Co.Ltd. 1985 Supp SCC 280; Prakash Roadlines (P) Ltd.v. Oriental Fire & General Insurance Co. Ltd. (2000)10 SCC 64; Cosmic Dye Chemical v. Collector ofCentral Excise (1995) 6 SCC 117; Uniworth Textiles v.Commissioner of Central Excise (2013) 9 SCC 753 –referred to.

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SRF Ltd. v. Commissioner 2016 (331) ELT A 138 (S.C.);Commissioner of Central Excise v. Coca Cola India Pvt.Ltd. 2007 (213) ELT 490 (S.C.); Honeywell TechnologySolutions Pvt. Ltd. v. CST, Bangalore 2020-TIOL-1277-CESTAT-BANG; Volkswagen India Pvt. Ltd. v. CCE,Pune-I 2014 (34) S.T.R. 135 (Tri. - Mumbai);Commissioner v. Volkswagen India (Pvt.) Ltd. 2016 (42)S.T.R. J145 (S.C.); Computer Sciences CorporationIndia Pvt. Ltd. v. Commissioner of Service Tax, Noida2014-TIOL-434-CESTAT DEL – referred to.

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Klaus Vogel on Double Tax Conventions, Den Haag:Wolters Kluwer, Law and Business 2015 - referredto.

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CIVIL APPELLATE JURISDICTION : Civil Appeal Nos.2289-B2293 of 2021.

From the Judgment and Order dated 23.12.2020 of the Customs,Excise & Service Tax Appellate Tribunal, South Zonal Bench, Bangalorein STA Nos.22573-22574 of 2014, 21502 and 21077 of 2017, 20225 of2018.CBalbir Singh, ASG, Ms. Swati Ghildiyal, Akshay Amritanshu,Divyansh H. Rathi, Shyam Gopal, Ms. Preeti Rani, Mukesh KumarMaroria, Advs. for the Appellant.

V. Sridharan, Sr. Adv., Aditya Bhattacharya, Ms. Mounica Kasturi,Ms. Apeksha Mehta, Sahil Parghi, Ms. Charanya Lakshmikumaran, Advs.Dfor the Respondent.

The Judgment of the Court was delivered by

S. RAVINDRA BHAT, J.

1. The Commissioner of Central Excise and Service Tax (hereafterEvariously described as “the revenue” or “the appellant”) has preferredappeals[1], directed against the impugned orders of the Customs, Exciseand Service Tax Appellate Tribunal (hereafter “CESTAT”)[2] which setaside two orders dated 03.03.2014 and 04.03.2014 by the Commissionerof Service Tax (hereafter “the Commissioner”). The Commissioner hadconfirmed demands, made through show cause notices, for service taxFalong with interest and penalty. The commissioner had discharged, byan order (dated 27.02.2017/16.06.2017) the proceedings arising fromanother show cause notice (hereafter “SCN”) in respect of a similardemand. That led to the revenue’s appeal to CESTAT, challenging thatorder, discharging proceedings initiated by the revenue for the subsequent Gperiod. The CESTAT, by its common order, rejected the revenue’s appeals,and allowed that of the respondent, Northern Operating Systems (Pvt.)Ltd. (hereafter “the assessee” or “NOS”).

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/H2017, Service Tax/CROSS/21077/2017 and Service Tax/CROSS/20255/2018.

Facts of the case

2. The assessee was registered with the revenue, as a serviceprovider under the categories of “Manpower Recruitment AgencyService”, “Business Auxiliary Service”, “Commercial Training andCoaching Service”, “TTSS”, “Telecommunication and Legal ConsultancyService” etc., under the Finance Act, 1994 (hereafter “the Act”).Following an audit of the records by the revenue’s officials, proceedingswere initiated against the assessee alleging non-payment of service taxconcerning agreements entered into by it with its group companies locatedin 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 intheir description, extracted from the impugned order - where the assesseehas been referred to as “the appellant” by the CESTAT- which is asfollows:

“The relevant terms of the agreement to understand the activityare as follows:

a) When required Appellants requests the group companiesfor managerial and technical personnel to assist in its businessand accordingly the employees are selected by the groupcompany and they would be transferred to Appellants.

b) The employees shall act in accordance with the instructionsand directions of Appellants. The employees would devotetheir entire time and work to the employer seconded to.

c) The seconded employees would continue to be on the payrollof the group company (foreign entity) for the purpose ofcontinuation of social security/retirement benefits, but for allpractical purposes, Appellants shall be the employer. Duringthe term of transfer or secondment the personnel shall be theemployee of Appellants. Appellants issue an employment letterto the seconded personnel stipulating all the terms of theemployment.

d) The employees so seconded would receive their salary,bonus, social benefits, out of pocket expenses and otherexpenses from the group company.

e) The group company shall raise a debit note on Appellantsto recover the expenses of salary, bonus etc. and the Appellants A

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Ashall reimburse the group company for all these expenses andthere shall be no mark-up on such reimbursement.”

As a matter of fact, the assessee issues the prescribed forms tothe seconded employees, in terms of the Income Tax Act, 1961 (hereafter“IT Act”). Those individuals too file income tax returns and contributeBto the provident fund. Furthermore, NOS remits the above amounts inforeign exchange, which are reflected in its financial statements. Theassessee is reimbursed (by the foreign entity, Northern Trust Company- hereafter described as such) for the amounts it pays as salaries, tothese seconded employees. The assessee pays for certain servicesreceived from the group companies. The assessee used to dischargeCservice tax on payments for such services in terms of Section 66A ofthe Act. The appropriate major expense heads were ‘Salaries &Allowances’, ‘Relocation expenses’, ‘Consultancy Charges’,‘Communication Expenses’ and ‘Computer Maintenance and repairs.’

4. The revenue issued four show cause notices[3] alleging that theDassessee failed to discharge service tax under the category of “manpowerrecruitment or supply agency service” with regard to certain employeeswho were seconded to the assessee by the foreign group companies.The first two of these notices also invoked the proviso to Section 73 (1)read with Section 66A of the Act, proposing to demand service tax forEthe extended period. The assessee resisted these notices, refuting theallegations in the four SCNs. It was also given a hearing. By two orders[4]the commissioner confirmed the proposals in the notice (except thedemand for the period from April 2006 to September 2006) acceptingthe fact that part of the demand has been raised @ 12.3% instead of10.3%. The Commissioner confirmed the demand, holding that firstly,Fproviding skilled manpower, on secondment basis, is manpowerrecruitment or supply agency service in the meaning of Section 65(68)read with Section 65(105) (k) of the Act. Secondly, the group companiesand their various branches abroad, would be the service providers andthe assessee, who receives skilled manpower, on secondment basis, isGthe service recipient. Thirdly, the definition of manpower recruitment orsupply agency, under Section 65(68) has no exclusion clause, requiring 3 Dated 23.04.2012; (for the period October 2006 - March 2011), 19.10.2012 (for theperiod April 2011 to March 2012),07.05.2014& 26.11.2015 (for the period April 2012to September 2014).

4 Order-in-Original No. 29/2013-14 dated 03.03.2014 and No. 30/2013-14 datedH04.03.2014.

service providers to possess the status of certain specified persons ororganizations, for the purpose of providing the taxable service ofmanpower, recruitment or supply agency. It was held, fourthly, that in asecondment arrangement a secondee would continue to be employed bythe original employer during the secondment, and will, following itstermination return to the seconder/ original employer. As a consequenceof this, the secondee does not become integrated into the host’sorganization. It was next concluded that the service provider’s obligationceases once employees were recruited and seconded. Hence the liabilityof service tax under Section 65 (105) (k) would be triggered at thatevent. Sixthly, it was held that there is no exclusive provision in law thatrestricts taxability of service of manpower recruitment or supply agency,when salaries are drawn by the assessee for manpower so supplied andTDS under the Income Tax Act had been affected. Regarding differentialservice tax liability, mere worksheets without documentary proof wouldbe insufficient to grant relief as against the service tax of 41,11,473/-for the period 2008-2009.

5. It was also ruled that the assessee had not separately discloseddetails of the gross receipts (as receiver of service) of the said servicesin the taxable value in the half-yearly ST-3 Returns filed by them withthe department, with intent to evade payment of service tax. On theeligibility of CENVAT Credit, the onus of furnishing the evidence ordocuments indicating factual eligibility of CENVAT credit within the scopeof Rule 3(1) of the CENVAT Credit Rules, 2004 (hereafter “CENVATRules”) had not been discharged by the assessee. The Commissionerwas of the view that the assessee was aware of the provisions of lawand had placed nothing on record to indicate the circumstances thatprevented it from approaching the department or accessing the CBECwebsite available on public domain. It led no evidence to show reasonablecause. The extended period assessment and penalty was therefore,warranted.

6. Aggrieved by the impugned order, the assessee filed two appealsbefore the CESTAT. As far as the third appeal[5] by the department wasconcerned, the period involved was from April 2012 to September 2014.As a sequel to the earlier SCNs, the assessee was issued two SCNs[6]demanding service tax of 4,36,75,590/- and 7,55,48,448/- for theperiod April 2012 to April 2013, and April 2013 to September 2014respectively, along with interest and penalty.

5 Service Tax Appeal No. 21502/2017

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A7. The assessee filed detailed replies on 02.07.2014 and 31.12.2015,mainly arguing that service tax cannot be demanded as the servicesprovided by foreign affiliates do not fall under manpower recruitment orsupply agency services for the period prior to negative list. Further, forthe period after the introduction of the negative list, the definition of theterm ‘service’ under the Finance Act, specifically excluded serviceBprovided by the employee to the employer. Therefore, the amount paidto the foreign entity as reimbursement of salary of the secondedemployees cannot be construed as consideration for supply of manpowerservices.

8. The Commissioner, Bangalore by order[7] dropped the proposalsCin the SCN for the period April 2012 to March 2013 and April 2013 toSeptember 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, based on a reading of the Secondment Agreement, theCommissioner by order dated 27.02.2017/16.06.2017[8] held that firstly,Dseconded employees continued on their foreign employer’s payroll onlyfor continuing social security benefits and for all practical purposes theasseesee was the employer of such seconded employee. Secondly, duringsecondment, those employees had to entirely devote their skill andknowledge towards achieving the purpose of their secondment. Thirdly,Eeach employee had to report to and be responsible to the assessee.Fourthly, a look at one sample agreement showed that it was betweenthe individual and the asseesee, and not between the overseas entity andthe asseesee. Fifthly, the obligation to honour the compensation agreementwas upon the assessee only. Sixthly, the facts were parallel to VolkswagenIndia Pvt. Ltd[9], in which the CESTAT decided the matter in favour ofFthe assessee. Seventhly, there was no supply of manpower rendered tothe assessee by the foreign holding company and the method of salarydisbursement is not determinative of the nature of the transaction.Eighthly, for the period post 2012, the remittance is a reimbursementbased on actuals and there is no amount which is payable in respect ofthe activity in question and therefore there is no consideration involved.G

6 Bearing C No. IV/16/153/2014- ST. Adjn. (SCH No. CAU/153/Div. III/Gr 29 dated07.05.2014 and C. No. IV/16/293/2015 ST II Adjn./2043/15 dated 26.11.20157 Order-in-Original No. 54-55/2016-17 dated 27.02.2017/16.06.20178 Order-in-Original No. 54-55/2016-17 dated 27.02.2017/16.06.20179 2014 (34) STR 135

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9. Aggrieved by the Commissioner’s order dropping the demand,the Revenue has filed an appeal challenging it, in which the assessee toofiled its cross objection.

The impugned order

10. The CESTAT, by its order noted the position in law – thatearlier, the definition of taxable services under Section 65(105) (k) includedservice by a manpower recruitment or supply agency in relation torecruitment or supply of manpower temporarily or otherwise. It wasnoted that the scope of the term “manpower recruitment of supplyagency” was spelt out in Para 22.3 in the Circular of 27.07.2005[10]. Next,the CESTAT noted that the position in law changed in that manpowerand recruitment services was per se included since it did not form partof the negative list. In this regard, it noticed Section 65B (44) in whichby clause (b), provision of service by an employee or employer by or inrelation to employment is an excluded service. CESTAT, therefore,reasoned that the essential ingredients for any activity to be called asmanpower recruitment or supply agency was that it should be “anyperson”, engaged in providing a specified service; the specific serviceought to be recruitment of manpower which should be providedtemporarily or otherwise; such service may be provided directly orindirectly and in any manner – further that the service should be providedto some other person. According to CESTAT, the definition of “manpowerrecruitment or supply agencies” brought under its ambit two types ofactivity, i.e., manpower recruitment and manpower supply, andfurthermore, service became taxable only if provided by a manpowerrecruitment or supply agency. CESTAT reasoned that in the presentcase, it was concerned with supply of manpower after July 2012, whendefinition of service specifically excluded certain transactions, such asthe one provided by an employee to an employer in relation toemployment.

11. The CESTAT then, on an examination of the agreements,interpretation of documents on record (including the agreements enteredby the respondent with its group company), held that the subject matterof the contract was not supply of manpower. The group companies werenot engaged in supply of manpower. The CESTAT held that thoseseconded to the assessee working in the capacity of employees andreceiving salaries by group companies were only for disbursement 10 Circular F.No.B1/6/2005-TRU

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Apurposes. The employee-employer relationship existed and that theactivity, therefore, could not be termed as “manpower recruitment andsupply agency.” It was held that the assessee obtained from its groupcompanies directly or by transfer, service of expatriate employees whowere paid salaries by the assessee in India, for which tax was deductedand paid to statutory benefits – such as provident fund. The assesseeBalso remitted contributions to be paid toward social security and otherbenefits on account of the employees, under the laws applicable to thegroup companies abroad. In these circumstances, it was held that theoverseas group companies which had contracted with the assessee werenot in the business of supply of manpower and that the assessee was notCa service recipient. On the strength of this reasoning, the assessee’sappeals were allowed and the revenue’s appeals were rejected.Contentions of Revenue

12. Mr. Balbir Singh, learned ASG relied upon the materialsproduced before the CESTAT. He submitted that in terms of the ServicesDAgreement (dated 01.09.2006), by Clause 8, the assessee NOS agreedto perform or provide to the foreign group company (Northern TrustCompany) various services which were enumerated in Attachment 1 orsuch other services as would be agreed to by the parties in future. Interms of Attachment 1, the assessee was to provide “IT enabled services”Esupporting back-up and office related operations. It was submitted thatthe remuneration to be provided for the service was fixed at the actualcost plus a mark-up of 15%. The ASG then referred to the masterservices agreement between the assessee and Northern Trust Companydated 12.02.2009. In terms of this master agreement the assessee wasto provide “general back office and operational support” to the foreignFgroup company which included foreign investment, investmentmanagement liaison group cash, evaluations and reporting, IRAS fundaccounting, securities, lending operations; tax related operations, includingtax reclaimed, etc. It was pointed out that in terms of Clause 2.1, thoughthe assessee was to perform and provide services to the foreign groupGcompany, such services could be delivered to other parties nominated bythe Northern Trust Company.

13. The third document referred was the secondment agreemententered into with effect from 01.04.2007 between the Northern TrustManagement Services Ltd. (an overseas group company - also “NTMS”)Hand the assessee. The ASG relied broadly on Article I by which parties agreed that the assessee would request for the secondment of employeesto be remunerated through the payroll of their foreign employer. Reliancewas also placed upon Article III which stated that the assessee had toreimburse the expenses paid during the secondment period, in respect ofremuneration of the seconded employees, including the salary, incentive,out of pocket expenses, etc. It was urged that this clause specificallystated that the payments by the assessee would be limited to actualcosts incurred, including administrative clause reasonably attributable toservices. The payment mechanism was spelt out in Article IV. The learnedASG also referred to the independent letter of agreement between theforeign group company and one of the seconded employees whichspecifically stated that secondment was a limited duration assignment interms of which the employee had the right to terminate the engagement.It was submitted that a clause would clearly indicate that apart from theremuneration normally paid, such seconded employees were entitled toannual home leave allowance – including for members of the family; carrental costs; and housing – monthly rent for which was fixed at 3,97,500.Furthermore, allowances toward packing, shipment, storage, temporarylodging, rest and recreation, trip allowance, etc. were fixed. It washighlighted that in terms of this agreement, the base salary and bonus ofthe employee clause read as follows:

“Effective with your assignment in Bangalore, India, yourbase salary will be US$ 3,30,000/-.

In addition to the salary liability, servant allowance andhardship allowance (fixed at 20% of the base salary duringthe assignment in Bangalorewas payable..”

14. The revenue contended that looking at an overall reading ofthe agreement, i.e. services agreement dated 01.09.2006 and itsattachment, the master service agreement dated 12.02.2009 (with itsannexures), the secondment agreement dated 01.04.2007, and thesecondment assignment letter or agreement with the concerned employeeclearly showed that the overseas employer provided the services of itsemployees to the assessee for the performance of agreed tasks. Thesetasks 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 ofperformance of the jobs assigned to it. The consideration provided to itwas fixed (15% markup over the actual costs incurred); the costs includedthe remuneration nominally paid by the assessee to the seconded AB

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Aemployee. Further, those were reimbursed. For a temporary period, theseconded employee was only operationally under the control of theassessee. It was submitted that this arrangement was essential becausewithout such control, it would not have been practicable for the assesseeto have ensured performance of the tasks, it was expected to, throughthe seconded employees concerned. Yet, the fact remained that uponBthe cessation of the assignment, the employees reverted back to theiroriginal position in the overseas companies to work there or to be deployedelsewhere in terms of the global policy.

15. Learned counsel submitted that a combined reading of thematerials on record clearly establish that the arrangement between theCassessee and its overseas group companies – apparent through the variousconditions spelt out in different documents- was one of a contract forservice. In other words, what was provided to the assessee by theoverseas counterpart or group companies were services through itsemployees. These services directly pertained to the discharge of functionsof the assessee.D

16. It was argued that CESTAT’s reasoning that the contractbetween the parties was not one in which the overseas group companysupplied services, was erroneous. In this context, it was urged that themere fact that the temporary control over the manner of performanceof duties of the employees seconded did not take away or diminish theEfact that their real employer was none other than the overseas company.The scale of payments made to such seconded employees was of suchmagnitude that they were regarded as highly skilled for the performanceof specific tasks by the assessee.

17. It was argued that the real reason or purpose for theFsecondment by the overseas companies to the assessee was to ensurethat their expertise was utilized for the performance of tasks by theassessee in terms of the service agreement and the master servicesagreement. Such secondment, it was contended, used their skill sets andexpertise, to ensure the quality required by the overseas employer.

G18. The learned ASG relied upon the decision of the SupremeCourt in Commissioner of Income Tax v. M/s. Eli Lilly & CompanyIndia Pvt. Ltd.[11]. Reliance was also placed on Klaus Vogel’s Treatiseon Double Taxation[12]. He also placed reliance on the judgment of this 11 (2009) 15 SCC 112 Klaus Vogel on Double Tax Conventions, Den Haag: Wolters KLuwer, Law andHBusiness (2015).

Court in Smt. Savita Garg v. The Director, National Heart Institute[13];Workmen of Nilgiri Cooperative Marketing Limited v. State of TamilNadu & Ors.[14]; Silver Jubilee Tailoring House v. Chief Inspector ofShops[15]; Hussain Bhai Calicut v. Alath Factory Thozhilali[16] andSushilaben Indravadan Gandhi v. New India Assurance Co. Ltd.[17].

19. It was submitted that whether a particular contract is one forproviding services or not is to be decided on the facts of an individualcase. Further, the fact of control over the manner of performance ofduties or any one such singular factor cannot be decisive. It was submittedthat the facts of the present case clearly establish that the overseascompany entered into specific secondment agreements by which itsemployees were deputed to work in the assessee’s establishment. Thetasks performed by them were in aid of the assessee’s work which wasundertaken by it in the service agreement with the overseas company.The salary, allowances the duration of the secondment, were alldetermined by the overseas employer and not by the assessee. Uponcompletion of the assignment, the seconded employees were to returnto their original positions and in the overseas company. The control ifany, which was with the assessee was for a limited duration – it was notenabled to impose sanctions, such as cut in salary, etc. In case it wasdissatisfied, it could only ask for return of the employee to her or hisoriginal position with the foreign employer. Upon an overview of all thesecircumstances, it was clear that the contract between the parties wasessential for the supply of services by the concerned overseas companyto the assessee. Therefore, it was a taxable service and not excluded byvirtue of amended Section 65 of the Finance Act, 1994.

Contentions of the assessee

20. Mr. V. Sridharan, learned senior counsel appearing for theassessee urged that a conjoint reading of Section 65(68) with Section65(105)(k) of the Finance Act, 1994 makes it clear that the ‘manpowerrecruitment and supply agency service’ seeks to bring under its ambittwo types of activities i.e. recruitment of manpower and supply ofmanpower. Further the service becomes a taxableservice only if providedby a manpower recruitment or supply agency. In the present case, the13 (2004) 8 SCC 5614 (2004) 3 SCC 51415 (1974) 3 SCC 49816 (1978) 4 SCC 25717 (2021) 7 SCC 151

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Adispute pertains to whether the secondment of employees by thegroupcompanies to the Respondent will be regarded as supply ofmanpower.

21. It was argued that Circular F. No. B1/6/2005-TRU dated27.07.2005 clarified the scope of ‘Manpower Recruitment or SupplyBAgency’ service to include staff who are not contractually employed bythe recipient but come under his direction. This view is furtherstrengthened by Master Circular No. 96/7/2007-ST, dated 23.08.2007.It was contended that post July 2012, under the Negative List Regime,by Section 65 (44) of the Finance Act, 1994, the services provided by anemployee to the employer in the course of employment are kept beyondCthe ambit of the definition of ‘service’. Thus, the position of law bothprior to as well as post July 2012 is same. Employee-employer relationshipis outside the scope of the said service. The category of supplyofmanpower by an agency covers those cases where the manpower sosupplied, comes under the direction and control of the recipient withoutDcontractual employment.

22. Learned counsel argued that, ever since the introduction ofservice tax in India, service by an employee to anemployer was neversubject to service tax. There is no country in the world which leviesVAT/GST on employment service, or any services rendered by an employeeEto theemployer.

23. Counsel urged that the agreements entered by the assesseewith its group companies were to provide certain specialized services.The seconded personnel are contractually hiredas the assessee’semployees. Control over them is exercised by theassessee. SuchFemployees devote all their time and efforts under the direction of theassessee; their remuneration is also fixed by it. The employees secondedto India are required to report to the assessee’s designated offices. Theyare accountable for their performance to the assessee; the process ofdispersal of the salaries and allowances is solely for the sake ofconvenience and continual of the social security benefits in the expatsGhome county.

24. It was urged that in Collector of Central Excise & ServiceTax v. Nissin Brake India (P) Ltd[18], this court while considering similarset of facts dismissed the revenue’s appeal, which had challenged the H18 Civil Appeal Diary No(s). 45344/2018 (C.A. No. 2408 / 2019)

CESTAT’s ruling that expenses reimbursed by the Indian companies tothe foreign group companies in relation to seconded employees cannotbe subject to service tax under Manpower Recruitment or Supply AgencyService.

25. It was also urged that the group companies are not in thebusiness of supplying manpower. The foreign group companies areengaged in providing personal financial services (PFS) and Corporateand Institutional services along with investment products. The foreigngroup companies cannot be considered as “Manpower Supply Agency’.

26. It was next urged that service tax is leviable only on the grossamount charged for the provision of service. It was argued that assumingbut not admitting that service is provided by the group companies to theassessee, it cannot be said that the value of consideration for that serviceis the amount of salaries paid to the expats. To determine value of taxableservices for charging Service Tax, gross amount charged for providingthe services is to be determined. Reliance is placed on the judgment ofthe Delhi High Court in Intercontinental Consultants and TechnocratsPvt. Ltd. v. Union of India[19], which held that Rule 5(1) of Service Tax(Determination of Value) Rules, 2006 goes beyond the mandate of Section67 of the Finance Act, 1994 as quantification of the value of the servicecan never exceed the gross amount charged by the service provider forthe service provided by him. This position was upheld by this court inIntercontinental Consultants and Technocrats Pvt. Ltd[20]. In thepresent case, the demand of the service tax is being computed on thesalaries and allowances paid to the employees. The salaries cannot besaid to be consideration paid to group companies for provision of serviceand thus such demand (of service tax in lieu of salaries),is untenable.Therefore, any cost or expense reimbursed does not represent the grossvalue of taxable service and cannot be a consideration for charging servicetax.

27. Counsel argued that debit notes raised by the overseas entityupon the assessee show that amounts paid were towards reimbursementof salaries and other allowances to employees. There was no mark-upcharged 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 beset aside. The assessee was underthe bona fide belief that the seconded19 2013 (29) S.T.R. 9 (Del.)

20 (2018) 4 SCC 669.

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Aemployees were its employees and therefore, not covered under theambit of manpower supply services. Further, in anycase, the assessee isentitled to avail refund of the service tax paid on input servicesunderRule 5 of the CENVAT Rules read with Rule 6A of the Service TaxRules, 1994. Therefore, there can be no intention to evade tax. Counselalso urged that the bona fide belief was further strengthened by theBfact that for the subsequent period (April 2012 to September 2014), theAdjudicating Authority itself dropped the demand by recording favourablefindings.

29. It was lastly urged that services received by the assesseefrom foreign group companies would qualify as input services and that itCis eligible to avail credit of service tax paid on such input services.Therefore, even if the said demand of service tax is paid, the entireamount is available as input credit and is refunded to the Respondent incash by virtue of Rule 5 of the CENVAT Rules read with Rule 6A of theService Tax Rules, 1994 (“1994 Rules”). The assessee relied on detailed Dfacts in this regard through affidavit on record by its affidavitdated17.08.2021 before this court. It is also on record that all the refundclaims filed by the assessee had largely been granted barring smallamounts which were paid against input services such as Clearing andForwarding Agent Services, Courier Services, Information TechnologySoftware Services. In this regard, reliance is placed on SRF Ltd. v.ECommissioner[21] and Commissioner of Central Excise v. Coca ColaIndia Pvt. Ltd[22].

Relevant provisions of the Finance Act, 1994 with amendments

30. Before amendment of the Finance Act, its provisions, to theextent they are relevant, are extracted hereunder. The definition ofF“manpower recruitment or supply agency” and “Taxable service” underthe definition clause, in Section 65 are extracted below:

Old provisions of the

Act

“Definitions.

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65. In this Chapter, unless the context otherwise requires, -

(1) “actuary” has the meaning assigned to it in clause (1) ofsection 2 of the Insurance Act, 1938 (4 of 1938); who renders 21 2016 (331) ELT A 138 (S.C.)H22 2007 (213) ELT 490 (S.C)

C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/SNORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]

any advice, consultancy or technical assistance, in relationto financial management, human resources management,marketing management, production management, logisticsmanagement, procurement and management of informationtechnology resources or other similar areas of management;]

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23(68) “manpower recruitment or supply agency” means any[person) engaged in providing any service, directly orindirectly, in any manner for recruitment or supply ofmanpower, temporarily or otherwise, ‘’[to any other person);]

xxxxxx xxxxxx xxxxxx(105) “taxable service” means any service provided [24][or tobe provided],- C

xxxxxx xxxxxx xxxxxx

25[(k)26[to any person], by a manpower recruitment orDsupply agency in relation to the recruitment or supply ofmanpower, temporarily or otherwise, in anymanner.]

27[Explanation.—For the removal of doubts, it is herebydeclared that for the purposes of this sub-clause, recruitmentor supply of manpower includes services in relation to pre-recruitment screening, verification of the credentials andantecedents of the candidate and authenticity of documentssubmitted by the candidate;..”

E

The provisions, post amendment in 2012 (w.e.f. 01.07.2012), readas follows:

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Amended provisionsof the Act

“Interpretations.

65B.In this Chapter, unless the context otherwise requires, - G

23 Substituted by the Finance Act, 2005, w.e.f. 16.06.2005.

24 Inserted by the Finance Act, 2005, w.e.f. 16.06.2005.

25 Substituted by the Finance Act, 2005, w.e.f. 16.06.2005.26 Substituted for “to a client” by the Finance Act, 2008, w.e.f. 16.05.2008.27 Inserted by the Finance Act, 2007, w.e.f. 01.06.2007.

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

(a) an activity which constitutes merely, -

(i) a transfer of title in goods or immovable property, by wayBof sale, gift or in any other manner; or

(ii) such transfer, delivery or supply of any goods which isdeemed to be a sale within the meaning of clause (29A) ofarticle 366 of the Constitution; or

(iii) a transaction in money or actionable claim; C

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

(c) fees taken in any Court or tribunal established under anylaw for the time being in force.

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Explanation 1.- For the removal of doubts, it is hereby declaredthat nothing contained in this clause shall apply to,- (A) the functions performed by the Members of Parliament,Members of State Legislative, Members of Panchayats,Members of Municipalities and Members of other localEauthorities who receive any consideration in performing thefunctions of that office as such member; or (B) the duties performed by any person who holds any postin pursuance of the provisions of the Constitution in thatcapacity; or F

(C) the duties performed by any person as a Chairperson ora Member or a Director in a body established by the CentralGovernment or State Governments or local authority and whois not deemed as an employee before the commencement ofthis section.

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Explanation 2.- For the purposes of this clause, transactionin money shall not include any activity relating to the use ofmoney or its conversion by cash or by any other mode, fromone form, currency or denomination, to another form, currencyor denomination for which a separate consideration isHcharged.

Explanation 3.- For the purposes of this Chapter —

(a) an unincorporated association or a body of persons, asthe case may be, and a member thereof shall be treated asdistinct persons; (b) an establishment of a person in the taxable territory andany of his other establishment in a non-taxable territory shallbe treated as establishments of distinct persons.

-Explanation 4.A person carrying on a business through abranch or agency or representational office in any territoryshall be treated as having an establishment in that territory;”

The agreements and their relevant stipulations

31. The first in the series of relevant documents, is the ServicesAgreement. It was entered into between Northern Trust Company (theoverseas group entity, known hereafter as “NTC”) and the assessee. Interms of the services agreement (dated 01.09.2006), it was acknowledgedthat the assessee was engaged in providing “incidental back-officesupport services” which it agreed to provide to NTC. By clause 2, itwas agreed that:

“2. Consideration: The consideration for performance of theservices shall be paid on a mutually agreed basis as describedin Attachment 1”

By clause 8, the services to be performed by the assessee werealso set out in Attachment 1. Their description reads as follows:

“Service: IT enabled services supporting back-office bankingand related operations”

The part relating to consideration, i.e., fee (payable to the assessee)reads as follows:

“Beginning September 1 2006, NOS shall charge NorthernTrust for all actual costs incurred in providing the agreedservices, plus a mark up of 15.0%. …”

32. The provisions of the secondment agreement, entered betweenNTMS and the assessee, to the extent relevant read as follows:

“SECONDMENT AGREEMENT

This SECONDMENT AGREEMENT (this “Agreement”) isentered into and effective April 1, 2007 byand between:

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Northern Trust Management Services Ltd a companyincorporated under the laws of the UnitedKingdom with itsprincipal office located at 50 Bank Street, London, E14 5NT,(hereinafter referred toas “NTMS’), A

and

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Northern Operating Services Private Limited, a companyorganised and existing under the laws ofIndia and having itsprincipal office at RMZ Ecospace Campus 1C, Sarjapur OuterRing Road,Bangalore-5600037, India (hereinafter referredto as “NOS”).

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WITNESSETH:

xxxxxx xxxxxx xxxxxxARTICLE I

SECONDMENT

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NOS shall request NTMS to provide employees (“theEmployees) who have the expertise required byNOS. In orderto help NTMS make the selection, NOS shall provide NTMSwith a description of theskills and competencies required byNOS. Based on the list provided by ÒOS, NTMS shall identifythe people and select the employees.

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NTMS hereby agrees to second the employees to NOS for timeperiod(s) (“the Secondment Period”) withcommencementdates and completion dates, as reflected in Appendix I andAppendix II of thisagreement. Appendix I and Appendix IIFwill be updated from time to time to reflect any changes madeasa result of Article II (E) or Article II (G) or Article II (H).

The employees seconded to NOS shall continue to beremunerated through the payroll of NTMS only forthe purposeof continuation of social security, retirement and healthbenefits but for all practical purposes, NOS shall be theemployer.

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ARTICLE II

DUTIES AND OBLIGATIONS

NTMS shall ensure that:

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(A) The Employee shall act in accordance with the instructionsand directions of NOS.

(B) During the Secondment Period, the Employees shall devotethe whole of their time, attention andskills to the duties oftheir secondment.

(C) The employees shall be reportable and responsible to NOS.

(D) All the responsibility and risk for work undertaken bythe Employees will remain with NOSduring the SecondmentPeriod.

(E) NOS shall have the right, at any time, to approve or rejectthe Employee selected for secondmentand to request fromNTMS the replacement of any Employees who, in the opinionof NOS, arenot qualified or do not meet the requirementsnecessary to fulfil their Secondment, xxxxxx xxxxxx xxxxxx (H) All terms and conditions of employment with NTMS willcease during the Secondment Period.The terms and conditionsof employment with NOS, as stated in the employmentagreementsbetween the Employees and NOS will remain inforce during the Secondment Period.

ARTICLE III

DUTIES AND OBLIGATIONS OF NOS

NOS reimburse expenses paid by NTMS as follows:

During the Secondment Period, as defined in Appendix I andAppendix II hereto, NOS shall reimburseNTMS for thefollowing amounts (collectively the “ReimbursableExpenses”):

(1) All remuneration of the Employees, including but not limitedto, salary, incentives and employmentbenefits of the Employeespaid by NTMS; and

(2) All out-of-pocket expenses incurred by the secondedEmployees and reimbursed by NTMS,including but not limited A

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to, business travel expenses and other miscellaneous expenses,directlyrelated to the secondment of the Employee.

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It is specifically agreed that the payments by NOS to NTMSshall be limited to actual costs incurred,includingadministrative costs, as may be reasonably attributable topayroll services provided by NTMS.Administrative cost forthis purpose would be 1% of actual cost incurred. The partiesagree that during the Secondment Period, the role of NTMSis restricted to that of a payroll services provider only.

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ARTICLE VII

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INDEMNIFICATION

NTMS will endeavor to provide appropriate qualifiedEmployees for secondment under this Agreement.Nothing inthis Agreement, shall be construed as a warranty of the qualityof the seconded Employees.

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Further NOS shall hold NTMS harmless and shall indemnifyNTMS from all claims, demands, suits,actions, loss, damage,costs and expenses (excluding consequential loss or damage)to which NTMS maybecome liable in respect to any and allloss, damage or injury as a result of any act or omission byEtheseconded Employee.

The master services adverted to earlier, between NTC (groupcompany) and the assessee, reads as follows:

“THIS MASTER SERVICES AGREEMENT(“this Agreement”)is dated F

February 12th, 2009 and made

BETWEEN:

(1) THE NORTHERN TRUST COMPANY, a companyestablished under the laws of the State of Illinois in the UnitedGStates of America, whose principal place of business in theU.S.A. is at 50 South LaSalle Street, Chicago 60603, Illinois,U.S.A. (“TNTC Chicago”); and

(2) NORTHERN OPERATING SERVICES PRIVATE LIMITED, a company established under the laws of India, whose H

principal place of business in India is at 2nd Floor, RMZEcospace Campus 10, Sarjapur Outer Ring Road, Bangalore560037, India (“NOS”). TNTC Chicago and NOS arehereinafter collectively referred to as “Parties” andindividually as “Party”.

3. Duties of NOS

3.1 NOS agrees that it will use reasonable efforts to ensurethat the Services contemplated under this Agreement areperformed by NOS promptly and to the best of its ability andin accordance with the Standard of Care. TNTC Chicagoagrees that it will provide proper information and assistanceto NOS by making reasonable efforts in order for NOS tohave access to the data and assistance required in order toproperly carry out the duties contemplated by this Agreementto be performed by it.

3.2 It is understood and agreed that the Services performedhereunder by NOS for TNTC Chicago shall be carried outin accordance with policies, authorities, and procedures asare or may be established and authorized by TNTC Chicago.

xxxxxx xxxxxx xxxxxxSCHEDULE 3 — FEES & DETERMINATION THEREOF

1. The fees for the Services shall be payable by TNTC Chicagofor the Services rendered by NOS for TNTC Chicago.

2. The fees for the Services performed by NOS under theAgreement shall be the Total Service Costs (as defined below)incurred by NOS for rendering the Services plus a mark-upon the Total Service Cost. Mark-up shall be 15% on TotalService Costs for the period of agreement. This shall be revisedfrom time to time depending upon the market conditions andtransfer pricing requirements.

xxxxxx xxxxxxxxxxxx”

The letter of understanding issued to one of the secondedemployees, to the extent it is relevant, reads as follows:

“LETTER OF UNDERSTANDING

August 6, 2012

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SUPREME COURT REPORTS

ADear Brian Ovaert,

This letter of agreement between Northern Operating ServicesPrivate Limited (NOS) and Brian Ovaert confirms our mutualunderstanding of the terms and conditions applying to youremployment with the Company while on internationalBassignment to Northern Operating Services Pvt. Ltd. in theposition of Regional Executive reporting directly to NOS Boardof Directors.

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Duration

CThe effective date of your international assignment is July 1,2012, and it is expected that your assignment to andemployment with NOS will be 12 months in duration. At itsconclusion, repatriation will be in accordance with the GlobalMobility Repatriation Policy. Alternatively, by mutualagreement, your assignment to and employment with NOS mayDbe extended. Should this be the case, an extension letter willbe entered into between NOS and yourself.

However, you have the right to terminate your employment atany time for any reason and the Company has the same right.

Exxxxxxxxxxxxxxxxxx

Vacation/Local Public Holidays Your annual vacationentitlement is currently 20 days. You will be entitled to alllocal public holidays observed by NOS. However, you mustuse vacation days to observe any United States publicFobserved holiday that is not observed in NOS. A list of NOS’public holidays maybe foundon My Place.

Home Leave During your assignment, you will be providedthe following HomeLeave Options:

You may elect to receive an annual home leave allowance foreach member of your immediate family to Chicago for twohome leave trips.

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This allowance is non-accountable and is intended to coverairfare and ground transportation to and from the airports inyour home and at Bangalore, India.

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If you prefer, you may book your travel directly through BCDTravel for direct reimbursement according to Northern’s TravelPolicy.

In the final year of your assignment, home leave entitlementwill continue if you are on assignment at least six monthsfrom your assignment anniversary date. You will be grantedan additional 2 travel days (round trip) in any year in whichyou are entitled to home leave You should plan to address allof your repatriation matters during your final annual homeleave visit.

All accommodation and car rental costs during home leaveare your personal responsibility.

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Housing

Northern Trust willmake arrangements directly with thelandlord/owner of the property of your choice in Bangalore,India. Do not enter into personal agreements. You should aimto identify and select a property that will suit you and yourfamily for the duration of your assignment (taking into accountschools/location). The monthly rent of your selectedaccommodation should be limited to INR 366,700. In addition,an annual utility allowance of (NR 397,500 will be paid toyou. This allowance will cover water, sewer, gas, oil, electricity,basic telephone service, basic satellite/cable TV service andinitial set-up for broadband service, but will exclude the costof monthly premium satellite/cable TV, monthly telephone calls,and monthly broadband service.

Packing/Shipping/Storage

A moving firm designated by Northern Trust will ship yourhousehold goods via air and ocean freight. Insurance at areasonable value amount on both of these shipments will alsobe covered by the Company. Household goods that are notshipped to Bangalore, India will be stored if required for theduration of your assignment and the costs of storage andInsurance premiums will be met. You should note that certain A

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items may be excluded from shipment and storage. You willbe advised if this is the case. Your air shipment allotment Is600 lbs. for you and your spouse.

Furniture Allowance in Lieu of Shipment

In lieu of shipping some or all of your current householdfurnishings via ocean freight to Bangalore, India, you canreceive a “furniture allowance” which would be an amountbased on country norms. Your furniture allowance is USD$9,000.

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Personal Vehicle Disposal

You will be reimbursed for a loss you incur when selling yourpersonal vehicle(s), upon initial transfer to Bangalore, Indiaup to a maximum of US$5,000 for each car. Details of the carlosson-sale policy are described in the Global Mobility Policy.

R&R Trips

You will be provided two (2) R & R trips in a 12 month periodfor you and your spouse to leave Bangalore, India. Thesetrips are in addition to your two annual home leave trips. TheR & R allowance is non- accountable and is intended to assistwith hotel and airfare costs. Providing an allowance allowsyou the flexibility to choose the length and destination of yourR & R trips. The allowance per trip for your family size of 2 isUSD$2,100.

xxxxxx

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Base Salary and Bonus

Effective with your assignment in Bangalore, India your basesalary will be USD $330,000.

Mobility Allowance

You will be paid a one-time sum of USD $7,500 prior to yourdeparture by deposit to your checking account. The MobilityAllowance is specifically compensating you for any incidentaladditional expenses incurred as a result of your assignment.

Hardship Allowance

You will be paid a hardship allowance of 20% of your basesalary during your assignment to Bangalore, India. Thisamount may be adjusted during your assignment asindependent data is updated. Any changes will becommunicated prior to implementation. This amount will bepaid semi-monthly along with your normal salary.

Servant Allowance

While on assignment in Bangalore, India, it may be necessaryto have the use of household servants to maintain a household,ship for groceries, perform daily living duties, etc. Anallowance of $2,000/yr. will be paid to you by BrookfieldGlobal Relocation Services to facilitate this.”

Analysis and Conclusions

33. The issue which this court has to decide is whether the overseasgroup company or companies, with whom the assessee has entered intoagreements, provide it manpower services, for the discharge of itsfunctions through seconded employees.

34. The contemporary global economy has witnessed rapid cross-border arrangements for which dynamic mobile workforces are optimal.To leverage talent within a transnational group, employees are frequentlyseconded to affiliated or group companies based on businessconsiderations. In a typical secondment arrangement, employees ofoverseas entities are deputed to the host entity (Indian associate) on thelatter’s request to meet its specific needs and requirements of the Indianassociate. During the arrangement, the secondees work under the controland supervision of the Indian company and in relation to the workresponsibilities of the Indian affiliate. Social security laws of the homecountry (of the secondees) and business considerations result in payrollretention and salary payment by the foreign entity, which is claimed asreimbursement from the host entity. The crux of the issue is the taxabilityof the cross charge, which is primarily based on who should be reckonedas an employer of the secondee. If the Indian company is treated as anemployer, the payment would in effect be reimbursement and notchargeable to tax in the hands of the overseas entity. However, in theevent the overseas entity is treated as the employer, the arrangementwould be treated as service by the overseas entity and taxed.

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A35. In Director Income Tax v. M/S Morgan Stanley & Co. Inc[28]this court had to consider whether an arrangement involving secondment,in the context of liability to income tax. The court had observed:

“17. As regards the question of deputation, we are of theview that an employee of MSCo when deputed to MSAS doesBnot become an employee of MSAS. A deputationist has a lienon his employment with MSCo. As long as the lien remainswith MSCo the said company retains control over thedeputationist’s terms and employment. The concept of aservice PE finds place in the UN Convention. It is constitutedif the multinational enterprise renders services through itsCemployees in India provided the services are rendered for aspecified period. In this case, it extends to two years on therequest of MSAS. It is important to note that where theactivities of the multinational enterprise entails it beingresponsible for the work of deputationists and the employeesDcontinue to be on the payroll of the multinational enterpriseor they continue to have their lien on their jobs with themultinational enterprise, a service PE can emerge.

18. Applying the above tests to the facts of this case we findthat on request/requisition from MSAS the applicant deputesEits staff. The request comes from MSAS depending upon itsrequirement. Generally, occasions do arise when MSAS needsthe expertise of the staff of MSCo. In such circumstances,generally, MSAS makes a request to MSCo. A deputationistunder such circumstances is expected to be experienced inbanking and finance. On completion of his tenure he isFrepatriated to his parent job. He retains his lien when he comesto India. He lends his experience to MSAS in India as anemployee of MSCo as he retains his lien..”

36. In Eli Lilly (supra) the appellant was incorporated in Indiaunder the Companies Act, 1956 and was a joint venture between M/s EliGLilly, Netherlands B.V. and Ranbaxy Laboratories (Ltd.). The foreignpartner had seconded four expatriates to the Indian joint venture. Theemployees, however, continued to remain on the rolls of the foreigncompany. They received home salary outside India from the foreignpartner. The joint venture company deducted tax under Section 192(1)

H28 (2007) 7 SCC 1

in respect of the salary paid by it to the expatriates in India, and did notdeduct tax in respect of the home salary paid by the foreign company.This court held that the provisions of the tax deduction at source (TDS)under the Income Tax Act, were applicable in relation to the salary paidby the foreign employer.

37. The CESTAT, in this case, relied on its previous rulings inHoneywell Technology Solutions Pvt. Ltd. v. CST, Bangalore[29]. Itheld that that the method of disbursement of salary cannot determinethe nature of the transaction, based on the ruling in Volkswagen IndiaPvt. Ltd. v. CCE, Pune-I[30] which was affirmed by this court by anorder[31]. Another order, in Computer Sciences Corporation India Pvt.Ltd. v. Commissioner of Service Tax, Noida[32 ]similarly affirmed by thiscourt by another order, was relied on.

38. Questions that have repeatedly arisen, in different contexts,and at different times, is whether the facts of a given case reveal, whois the employer, and whether the relationship between an employee andanother, is one of master servant, or whether there is an underlyingcontract for service, by which the real employer, lends the services ofhis employee to another. In Dharangadhara Chemical Works Ltd. v.State of Saurashtra[33] this court observed as follows:

“The principle which emerges from these authorities is thatthe prima facie test for the determination of the relationshipbetween master and servant is the existence of the right in themaster to supervise and control the work done by the servantnot only in the matter of directing what work the servant is todo but also the manner in which he shall do his work, or toborrow the words of Lord Uthwatt at p. 23 in Mersey Docksand Harbour Board v. Coggins & Griffith (Liverpool) Ltd.[(1952) SCR 696, 702] “The proper test is whether or not thehirer had authority to control the manner of execution of theact in question.”

39. In D.C. Dewan Mohideen Sahib and Sons v. Secretary,United Beedi Workers’ Union[34], the court analysed the sample29 2020-TIOL-1277-CESTAT-BANG30 2014 (34) S.T.R. 135 (Tri. - Mumbai)31 Commissioner v. Volkswagen India (Pvt.) Ltd. - 2016 (42) S.T.R. J145 (S.C.).32 2014-TIOL-434-CESTAT DEL33 1957 SCR 15834 1964 (7) SCR 646

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Aagreement which disclosed the facts of the case before it, and, for thefirst time, held that the “control” test is not necessarily determinative todiscern the real employer:

“…There is in our opinion little doubt that this system hasbeen evolved to avoid Regulations under the Factories Act.BFurther there is also no doubt from whatever terms ofagreement are available on the record that the so-calledindependent contractors have really no independence at all.As the appeal court has pointed out they are impecuniouspersons who could hardly afford to have factories of theirown. Some of them are even ex-employees of the Appellants.CThe contract is practically one-sided in that the proprietorcan at his choice supply the raw materials or refuse to do so,the so-called contractor having no right to insist upon thesupply of raw materials to him. The so-called independentcontractor is even bound not to employ more than nine personsDin his so-called factory. The sale of raw materials to the so-called independent contractor and resale by him of themanufactured bidis is also a mere camouflage, the nature ofwhich is apparent from the fact that the so-called contractornever paid for the materials. All that happens is that whenthe manufactured bidis are delivered by him to the Appellants,Eamounts due for the so-called sale of raw materials isdeducted from the so-called price fixed for the bidis. In effectall that happened is that the so-called independent contractoris supplied with tobacco and leaves and is paid certainamounts for the wages of the workers employed and for hisFown trouble. We can therefore see no difficulty in holdingthat the so-called contractor is merely an employee or an agentof the Appellants as held by the appeal court and as suchemployee or agent he employs workers to roll bidis on behalfof the Appellants. The work is distributed between a numberof so-called independent contractors who are told not toGemploy more than nine persons at one place to avoidRegulations under the Factories Act.”

40. In Silver Jubilee Tailoring House v. Chief Inspector ofShops & Establishments[35 ]this court remarked how the test of control,

C.C., C.E. & S.T. – BANGALORE (ADJUDICATION) ETC. v. M/SNORTHERN OPERATING SYSTEMS PVT LTD. [S. RAVINDRA BHAT, J.]

or manner of performance of a task, by an employee by another is notconclusive to decide if an employer employee relationship subsists:

“This distinction (viz., between telling a servant what to doand telling him how to do it) was based upon the socialconditions of an earlier age; it assumed that the employer oflabour was able to direct and instruct the labourer as to thetechnical methods he should use in performing his work. In amainly agricultural society and even in the earlier stages ofthe Industrial Revolution the master could be expected to besuperior to the servant in the knowledge, skill and experiencewhich had to be brought to bear upon the choice and handlingof the tools. The control test was well suited to governrelationships like those between a farmer and an agriculturallabourer (prior to agricultural mechanization) a craftsmanand a journeyman, a householder and a domestic servant,and even a factory owner and an unskilled ‘hand’. It reflectsa state of society in which the ownership of the means ofproduction coincided with the profession of technicalknowledge and skill in which that knowledge and skill waslargely acquired by being handed down from one generationto the next by oral tradition and not by being systematicallyimparted in institutions of learning from universities down totechnical schools. The control test postulates a combinationof managerial and technical functions in the person of theemployer i.e. what to modern eyes appears as an imperfectdivision of labour. [See Prof. Kahn-Freund in (1951), 14Modern Law Review, at p. 505]

27. It is, therefore, not surprising that in recent years thecontrol test as traditionally formulated has not been treatedas an exclusive test.

28. It is exceedingly doubtful today whether the search for aformula in the nature of a single test to tell a contract ofservice from a contract for service will serve any usefulpurpose. The most that profitably can be done is to examineall the factors that have been referred to in the cases on thetopic. Clearly, not all of these factors would be relevant in allthese cases or have the same weight in all cases. It is equallyclear that no magic formula can be propounded, which factors ABC

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should in any case be treated as determining ones. The plainfact is that in a large number of cases, the Court can onlyperform a balancing operation weighing up the factors whichpoint in one direction and balancing them against thosepointing in the opposite direction [See Atiyah, PS. “VicariousLiability in the Law of Torts”, pp. 37-38].”

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41. The ruling in Silver Jubilee (supra) about the flexibility inregard to deciding the question of whether a contract is one for serviceor one of service, has been followed in other decisions, such as IndianBanks Association v. Workmen of Syndicate Bank[36]and IndianOverseas Bank v. Workmen[37]. The recent decision in SushilabenCIndravadan (supra) reviewed a large number of previous judgments,and observed that:

“24. A conspectus of all the aforesaid judgments would showthat in a society which has moved away from being a simpleagrarian society to a complex modern society in the computerDage, the earlier simple test of control, whether or not actuallyexercised, has now yielded more complex tests in order todecide complex matters which would have factors both forand against the contract being a contract of service as againsta contract for service. The early ‘control of the employer’Etest in the sense of controlling not just the work that is givenbut the manner in which it is to be done obviously breaksdown when it comes to professionals who may be employed.A variety of cases come in between cases which are crystalclear-for example, a master in a school who is employed likeother employees of the school and who gives music lessonsFas part of his employment, as against an independentprofessional piano player who gives music lessons to personswho visit her premises. Equally, a variety of cases arisebetween a ship’s master, a chauffeur and a staff reporter, asagainst a ship’s pilot, a taxi driver and a contributor to aGnewspaper, in order to determine whether the person employedcould be said to be an employee or an independentprofessional. The control test, after moving away from actualcontrol of when and how work is to be performed to the rightto exercise control, is one in a series of factors which may36 2001 (1) SCR 1011H37 (2006) 3 SCC 729

lead to an answer on the facts of a case slotting such caseeither as a contract of service or a contract for service. Thetest as to whether the person employed is integrated into theemployer’s business or is a mere accessory thereof is anotherimportant test in order to determine on which side of the linethe contract falls. The three-tier test laid down by some of theEnglish judgments, namely, whether wage or otherremuneration is paid by the employer; whether there is asufficient degree of control by the employer and other factorswould be a test elastic enough to apply to a large variety ofcases. The test of who owns the assets with which the work isto be done and/or who ultimately makes a profit or a loss sothat one may determine whether a business is being run forthe employer or on one’s own account, is another importanttest when it comes to work to be performed by independentcontractors as against piece-rated labourers. Also, theeconomic reality test laid down by the U.S. decisions and thetest of whether the employer has economic control over theworkers’ subsistence, skill and continued employment can alsobe applied when it comes to whether a particular workerworks for himself or for his employer. The test laid down bythe Privy Council in Lee Ting Sang v. Chung Chi-Keung[1990] 2 A.C. 374, namely, is the person who has engagedhimself to perform services performing them as a person inbusiness on his own account, is also an important test, thistime from the point of view of the person employed, in orderto arrive at the correct solution. No one test of universalapplication can ever yield the correct result. It is aconglomerate of all applicable tests taken on the totality ofthe fact situation in a given case that would ultimately yield,particularly in a complex hybrid situation, whether thecontract to be construed is a contract of service or a contractfor service. Depending on the fact situation of each case, allthe aforesaid factors would not necessarily be relevant, or, ifrelevant, be given the same weight. Ultimately, the Court canonly perform a balancing act weighing all relevant factorswhich point in one direction as against those which point inthe opposite direction to arrive at the correct conclusion onthe facts of each case.”

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A42. The assessee’s contention before the CESTAT, inter alia,was that apart from it having control over the nature of work of theseconded employees, no consideration was charged by the foreign entitiesfrom it for providing the supply of manpower as the revenue alleged.

43. A plain reading of the definition of “manpower recruitmentBagency” (per Section 65 (68) of the unamended Act) requires that to fallwithin that description, (a) a person (the expression is not defined; however, by Section 3(42) of the General Clauses Act, the term includes “any companyor association or body of individuals whether incorporatedor not”);C

(b) provides service

(c) directly or indirectly,

(d) in any manner for recruitment or supply of manpower, (e) temporarily or otherwise D44. The question is what are the services provided to the assessee,and by whom? Do they include the provision of services, throughemployees, by its overseas group companies or affiliates? After01.07.2012, the definition of “service” underwent a change. Except listedcategories of activities excluded from, or kept out of the fold of thedefinition, every activity virtually is “service”. Now, by Section 65 (44),E“service” means (a) any activity (b) carried out by a person for another

(c) for consideration, and

F(d) includes a declared service (the term “declared service” isdefined in Section 66E).

45. Section 65 (44), however, excludes from its sweep [by clause(b)], “a provision of service by an employee to the employer in thecourse of or in relation to his employment.” The assessee contendsthat the secondment agreement has the effect of placing the overseasGemployees under its control, so to say, and enables it to require them toperform the tasks for its purposes. It emphasizes that the real nature ofthe relationship between it and the seconded employees is of employerand employee, and outside the purview of the service tax regime.

46. From the above discussion, it is evident, that prior to July 2012,Hwhat had to be seen was whether a (a) person provided service (b)

directly or indirectly, (c) in any manner for recruitment or supply ofmanpower (d) temporarily or otherwise. After the amendment, allactivities carried out by one person for another, for a consideration, aredeemed services, except certain specified excluded categories. One ofthe excluded category is the provision of service by an employee to theemployer in relation to his employment.

47. One of the cardinal principles of interpretation of documents,is that the nomenclature of any contract, or document, is not decisive ofits nature. An overall reading of the document, and its effect, is to beseen by the courts. Thus, in State of Orissa v. Titaghur Paper MillsCo. Ltd[38 ]it was held as follows:

“120. It is true that the nomenclature and description givento a contract is not determinative of the real nature of thedocument or of the transaction thereunder. These, however,have to be determined from all the terms and clauses of thedocument and all the rights and results flowing therefrom andnot by picking and choosing certain clauses and the ultimateeffect or result as the Court did in the Orient Paper Millscase (1977) 2 SCR 149)” .

This principle was reiterated in Prakash Roadlines (P) Ltd. v.Oriental Fire & General Insurance Co. Ltd.[39]

48. The task of this court, therefore is to, upon an overall readingof the materials presented by the parties, discern the true nature of therelationship between the seconded employees and the assessee, and thenature of the service provided – in that context - by the overseas groupcompany to the assessee.

49. A co-joint reading of the documents on record show that:

(i) Attachment 1 to the service agreement ensures that the overseasgroup company assigns, inter alia, certain tasks to the assessee, includingback office operations of a certain kind, in relation to its activities, orthat of other group companies or entities;

(ii) The assessee is paid a mark up of 15% of the overallexpenditure it incurs, by the overseas company (clause 2, read withattachment 1 of the Service Agreement); 38 1985 Supp SCC 28039 (2000) 10 SCC 64

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A(iii) By the Secondment Agreement, the parties agree that theoverseas employee is temporarily loaned to the assessee (Article Iread with the Schedule);

(iv) During the period of secondment, the assessee has controlover the employee, i.e. it can require the seconded employee to return,Band likewise, the employee has the discretion to terminate the relationship(Article II);

(v) The overseas employer (group company) pays the secondedemployee, which is reimbursed to the overseas company, by the assessee(Article III); C

(vi) The assessee is responsible for the work of the secondedemployee, i.e., the overseas employer, during the secondment period, isabsolved of any liability for the job or work of its seconded employees(Article VII);

(vii) The secondment is for a specified duration, and theDemployment with the assessee ceases upon the expiration of that period(Article II of the secondment agreement and the “Duration” clause inthe letter of understanding with the seconded employee);

(viii) The letter of understanding issued to the seconded employeespecifies that the tenure with the assessee is an assignment (in oneEplace, the term used is “At its conclusion, repatriation will be inaccordance with the Global Mobility Repatriation Policy”);

(ix) The terms include the salary payable as well as otherallowances, such as hardship allowance, vehicle allowance, servantallowance, paid leave, housing allowance, etc. The nature of salary andFother perks underscore the fact that the seconded employees are of acertain skill and possess the expertise, which the assessee requires.

50. The above features show that the assessee had operationalor functional control over the seconded employees; it was potentiallyliable for the performance of the tasks assigned to them. That it paidG(through reimbursement) the amounts equivalent to the salaries of theseconded employees – because of the obligation of the overseas employerto maintain them on its payroll, has two consequences: one, that theseconded employees continued on the rolls of the overseas employer;two, since they were not performing jobs in relation to that employer’sbusiness, but that of the assessee, the latter had to ultimately bear theH

burden. There is nothing unusual in this arrangement, given that theseconded employees were performing the tasks relating to the assessee’sactivities and not in relation to the overseas employer.To put it differently,it would be unnatural to expect the overseas employer to not seekreimbursement of the employees’ salaries, since they were, for theduration of secondment, not performing tasks in relation to its activitiesor business.

51. As discussed previously, there is not one single determinativefactor, which the courts give primacy to, while deciding whether anarrangement is a contract of service (as the assessee asserts thearrangement to be) or a contract for service. The general drift of caseswhich have been decided, are in the context of facts, where the employerusually argues that the person claiming to be the employee is anintermediary. This court has consistently applied one test: substance overform, requiring a close look at the terms of the contract, or the agreements.

52. A vital fact which is to be considered in this case, is that thenature of the overseas group companies business appears to be to securecontracts, which can be performed by its highly trained and skilledpersonnel. This business is providing certain specialized services (backoffice, IT, bank related services, inventories, etc.). Taking advantage ofthe globalized economy, and having regard to locational advantages, theoverseas group company enters into agreements with its affiliates orlocal companies, such as the assessee. The role of the assessee is tooptimize the economic edge (be it manpower or other resourcesavailability) to perform the specific tasks given it, by the overseas company.As part of this agreement, a secondment contract is entered into, wherebythe overseas company’s employee or employees, possessing the specificrequired skill, are deployed for the duration the task is estimated tobe completed in. This court is not concerned with unravelling the natureof relationship between the overseas company and the assessee.However, what it has to decide, is whether the secondment, for thepurpose of completion of the assessee’s job, amounts to manpower supply.

53. Facially, or to put it differently, for all appearances, the secondedemployee, for the duration of her or his secondment, is under the controlof the assessee, and works under its direction. Yet, the fact remainsthat they are on the pay rolls of their overseas employer. What is leftunsaid- and perhaps crucial, is that this is a legal requirement, sincethey are entitled to social security benefits in the country of their A

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Aorigin. It is doubtful whether without the comfort of this assurance,they would agree to the secondment. Furthermore, the reality is that thesecondment is a part of the global policy – of the overseas employerloaning their services, on temporary basis. On the cessation of thesecondment period, they have to be repatriated in accordance with aglobal repatriation policy (of the overseas entity).B

54. The letter of understanding between the assessee and theseconded employee nowhere states that the latter would be treated asthe former’s employees after the seconded period (which is usually12-18 months). On the contrary, they revert to their overseas employerand may in fact, be sent elsewhere on secondment. The salary package,Cwith allowances, etc., are all expressed in foreign currency (e.g., US $330,000/- per annum in the letter produced before court, extracted above).Furthermore, the allowances include a separate hardship allowance of20% of the basic salary for working in India. The monthly housingallowance in the specific case was 366,700. In addition, an annualDutility allowance of 3,97,500/- is also assured. These are substantialamounts, and could have been only by resorting to a standardized policy,of the overseas employer.

55. The overall effect of the four agreements entered into by theassessee, at various periods, with NTS or other group companies, clearlyEpoints to the fact that the overseas company has a pool of highly skilledemployees, who are entitled to a certain salary structure- as well associal security benefits. These employees, having regard to their expertiseand specialization, are seconded (a term synonymous with the commonlyused term in India, deputation) to the concerned local municipal entity(in this case, the assessee) for the use of their skills. Upon the cessationFof the term of secondment, they return to their overseas employer, orare deployed on some other secondment.

56. This court, upon a review of the previous judgment inSushilaben Indravadan (supra) held that there no one singledeterminative test, but that what is applicable is “a conglomerate of allGapplicable tests taken on the totality of the fact situation in a givencase that would ultimately yield, particularly in a complex hybridsituation, whether the contract to be construed is a contract ofservice or a contract for service. Depending on the fact situationof each case, all the aforesaid factors would not necessarily beHrelevant, or, if relevant, be given the same weight.”

57. Taking a cue from the above observations, while the control(over performance of the seconded employees’ work) and the right toask them to return, if their functioning is not as is desired, is with theassessee, the fact remains that their overseas employer in relation toits business, deploys them to the assessee, on secondment. Secondly,the overseas employer- for whatever reason, pays them their salaries.Their terms of employment – even during the secondment – are inaccord with the policy of the overseas company, who is their employer.Upon the end of the period of secondment, they return to their originalplaces, to await deployment or extension of secondment.

58. One of the arguments of the assessee was that arguendo,the arrangement was “manpower supply” (under the unamended Act)and a service [(not falling within exclusion (b) to Section 65 (44)] yet itwas not required to pay any consideration to the overseas group company.The mere payment in the form of remittances or amounts, by whatevermanner, either for the duration of the secondment, or per employeeseconded, is just one method of reckoning if there is consideration. Theother way of looking at the arrangement is the economic benefit derivedby the assessee, which also secures specific jobs or assignments, fromthe overseas group companies, which result in its revenues. The quidpro quo for the secondment agreement, where the assessee has thebenefit of experts for limited periods, is implicit in the overall scheme ofthings.

59. As regards the question of revenue neutrality is concerned,the assessee’s principal contention was that assuming it is liable, on reversecharge basis, nevertheless, it would be entitled to refund; it is noticeablethat the two orders relied on by it (in SRF and Coca Cola) by this court,merely affirmed the rulings of the CESTAT, without any independentreasoning. Their precedential value is of a limited nature. This court hasbeen, in the present case, called upon to adjudicate about the nature ofthe transaction, and whether the incidence of service tax arises by virtueof provision of secondment services. That a particular rate of tax- or no tax, is payable, or that if and when liability arises, the assessee, canthrough a certain existing arrangement, claim the whole or part of theduty as refund, is an irrelevant detail. The incidence of taxation, is entirelyremoved from whether, when and to what extent, Parliament chooses torecover the amount.

60. This court is also of the view, for similar reasons, that theorders of the CESTAT, affirmed by this court, in Volkswagen and AB

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AComputer Sciences Corporation, are unreasoned and of no precedentialvalue.

61. In view of the above discussion, it is held that the assesseewas, for the relevant period, service recipient of the overseas groupcompany concerned, which can be said to have provided manpowerBsupply service, or a taxable service, for the two different periods inquestion (in relation to which show cause notices were issued).

Invocation of the extended period of limitation

62. The revenue’s argument that the assessee had indulged inwilful suppression, in this court’s considered view, is insubstantial. TheCview of a previous three judge ruling, in Cosmic DyeChemical v. Collector of Central Excise[40] - in the context of Section11A of the Central Excise Act, 1944, which is in identical terms withSection 73 of the Finance Act, 1994 was that:

“Now so far as fraud and collusion are concerned, it is evidentDthat the requisite intent, i.e., intent to evade duty is built intothese very words. So far as misstatement or suppression offacts are concerned, they are clearly qualified by the word“wilful” preceding the words “misstatement or suppressionof facts” which means with intent to evade duty. The next setof words “contravention of any of the provisions of this ActEor rules” are again qualified by the immediately followingwords “with intent to evade payment of duty”. It is, therefore,not correct to say that there can be a suppression ormisstatement of fact, which is not wilful and yet constitute apermissible ground for the purpose of the proviso to SectionF11-A. Misstatement or suppression of fact must be wilful.”

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63. This decision was followed in Uniworth Textiles v. Commissioner of Central Excise[41] where it was observed that “(t)heconclusion that mere non-payment of duties is equivalent to collusionor willful misstatement or suppression of facts” is “untenable”. Thisview was also followed in Escorts v. Commissioner of Central Excise[42],GCommissioner of Customs v. Magus Metals[43] and other judgments.

40 (1995) 6 SCC 11741 (2013) 9 SCC 75342 (2015) 9 SCC 10943 (2017) 16 SCC 491H

64. The fact that the CESTAT in the present case, relied upontwo of its previous orders, which were pressed into service, and alsothat in the present case itself, the revenue discharged the later two showcause notices, evidences that the view held by the assessee about itsliability was neither untenable, nor mala fide. This is sufficient to turndown the revenue’s contention about the existence of “wilful suppression”of facts, or deliberate misstatement. For these reasons, the revenue wasnot justified in invoking the extended period of limitation to fasten liabilityon the assessee.

Conclusions

65. It is held, for the foregoing reasons, that the assessee was theservice recipient for service (of manpower recruitment and supplyservices) by the overseas entity, in regard to the employees it secondedto the assessee, for the duration of their deputation or secondment.Furthermore, in view of the above discussion, the invocation of theextended 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 theSCNs. However, the invocation of the extended period of limitation, inthis court’s opinion, was unjustified and unreasonable. Resultantly, theassessee is held liable to discharge its service tax liability for the normalperiod or periods, covered by the four SCNs issued to it. The consequentialdemands therefore, shall be recovered from the assessee.

67. The impugned common order of the CESTAT is accordinglyset aside. The commissioner’s orders in original are accordingly restored,except to the extent they seek to recover amounts for the extendedperiod of limitation. The demand against the assessee, for the twoseparate periods, shall now be modified, excluding any liability for theextended period of limitation.

68. The appeals are partly allowed, to the above extent, with noorder on costs.

Divya Pandey and Amarendra Kumar(Assisted by : Ajay, LCRA)

Appeals partly allowed.

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