CESTAT upholds levy of service tax on payments to employees seconded from foreign affiliates

This Tax Alert summarizes a recent ruling of the Customs, Excise and Service Tax Appellate Tribunal, Chennai (CESTAT). The issue involved was whether the salary and other benefits paid to the employees seconded from the foreign affiliate can be considered towards receipt of “manpower recruitment or supply agency” services by the assessee.

The key observations of the CESTAT in this regard are as follows:

• On perusal of the Secondment Agreement entered by the assessee and its foreign affiliate, it is clear that payment of salaries and other benefits to the secondees is towards the cost for making services available to the assessee.
  
  
• The clauses of the Agreement in the present case are more or less identical to that of the assessee before the SC in case of Northern Operating System (NOS). Therefore, assessee cannot escape the service tax liability in respect of such services under reverse charge mechanism.
  
  
• There is no doubt that what is provided by foreign affiliate is nothing but manpower recruitment services.
  
  
• However, since all the activities were within the knowledge of the Revenue in view of the several audits undertaken during the relevant period, there is no scope to allege suppression of facts.
  

Basis above, CESTAT upheld service tax demand on amounts paid to foreign expatriates towards “manpower recruitment or supply agency” services by the foreign affiliates. However, demand for the extended period of limitation was set aside.

Comments

• While the CESTAT concluded on similarity in facts of present case with the matter in NOS before SC, in the said case, the entire salary and other benefits were paid by the foreign affiliate to the seconded employee which were reimbursed by the Indian company. 
  
  
• Another key parameter of cross-service arrangement between the entities that was present in NOS case before SC is however not there in the present appeal. 
  
  
• Earlier, even the Bangalore CESTAT [2023-TIOL-295-CESTAT-BANG] in case of Dell International upheld the taxability on similar arrangement following the SC ruling in NOS.
  
  
• It is pertinent to note that similar issue pertaining to taxability of secondment is pending before the SC in two other cases.