C.C., C.E. & S.T. – Bangalore (Adjudication) etc. vs M/s Northern Operating Systems Pvt Ltd.

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) for consideration, and (d) includes a declared service (the term “declared service” is defined in s.66E) – However, s.65 (44)excludes from its sweep [by clause (b)], “a provision of service by an employee to the employer in the course of or in relation to his employment”. Deeds and Documents – Interpretation of documents – Held: One of the cardinal principles of interpretation of documents, is that the nomenclature of any contract, or document, is not decisive of its nature – An overall reading of the document, and its effect, is to be seen by the courts.

Contract – Contract of service or Contract for service – Held: There is not one single determinative factor, which the courts give primacy to, while deciding whether an arrangement is a contract of service (as the assessee asserts the arrangement to be) or a contract for service – The general drift of cases which have been decided, are in the context of facts, where the employer usually argues that the person claiming to be the employee is an intermediary –Supreme court 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

HELD: 1.1 The issue which this court has to decide is whether the overseas group company or companies, with whom the assessee has entered into agreements, provide it manpower services, for the discharge of its functions through seconded employees.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 frequently seconded to affiliated or group companies based on business considerations. In a typical secondment arrangement, employees of overseas entities are deputed to the host entity (Indian associate) on the latter’s request to meet its specific needs and requirements of the Indian associate. During the arrangement, the secondees work under the control and supervision of the Indian company and in relation to the work responsibilities of the Indian affiliate. Social security laws of the home country (of the secondees) and business considerations result in payroll retention and salary payment by the foreign entity, which is claimed as reimbursement from the host entity. The crux of the issue is the taxability of the cross charge, which is primarily based on who should be reckoned as an employer of the secondee. If the Indian company is treated as an employer, the payment would in effect be reimbursement and not chargeable to tax in the hands of the overseas entity. However, in the event the overseas entity is treated as the employer, the arrangement would be treated as service by the overseas entity and taxed.[Paras 33, 34][933-D-H]

1.2 A plain reading of the definition of “manpower recruitment agency” (per Section 65 (68) of the unamended Act) requires that to fall within that description, (a) a person (the expression is not defined; however, by Section 3 (42) of the General Clauses Act, the term includes “any company or association or body of individuals whether incorporated or not”);

(b) provides service (c) directly or indirectly, (d) in any manner for recruitment or supply of manpower, (e) temporarily or otherwise. The question is what are the services provided to the assessee, 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 out of 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” is defined in Section 66E).Section 65 (44), however, excludes from its sweep [by clause (b)], “a provision of service by an employee to the employer in the course of or in relation to his employment.” The assessee contends that the secondment agreement has the effect of placing the overseas employees under its control, so to say, and enables it to require them to perform the tasks for its purposes. It emphasizes that the real nature of the relationship between it and the seconded employees is of employer and employee, and outside the purview of the service tax regime.[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 any manner for recruitment or supply of manpower (d) temporarily or otherwise. After the amendment, all activities carried out by one person for another, for a consideration, are deemed services, except certain specified excluded categories. One of the excluded category is the provision of service by an employee to the employer in relation to his employment. One of the cardinal principles of interpretation of documents, is that the nomenclature of any contract, or document, is not decisive of its nature. An overall reading of the document, and its effect, is to be seen by the courts.The task of this court, therefore is to, upon an overall reading of the materials presented by the parties, discern the true nature of the relationship between the seconded employees and the assessee, and the nature of the service provided – in that context - by the overseas group company to the assessee.A co-joint reading of the documents on record show that: (i) Attachment 1 to the service agreement ensures that the overseas group company assigns, inter alia, certain tasks to the assessee, including back office operations of a certain kind, in relation to its activities, or that of other group companies or entities; (ii) The assessee is paid a mark up of 15% of the overall expenditure it incurs, by the overseas company (clause 2, read with attachment

1 of the Service Agreement); (iii) By the Secondment Agreement, the parties agree that the overseas employee is temporarily loaned to the assessee (Article I read with the Schedule); (iv) During the period of secondment, the assessee has control over the employee, i.e. it can require the seconded employee to return, and likewise, the employee has the discretion to terminate the relationship (Article II); (v) The overseas employer (group company) pays the seconded employee, which is reimbursed to the overseas company, by the assessee (Article III); (vi) The assessee is responsible for the work of the seconded employee, i.e., the overseas employer, during the secondment period, is absolved of any liability for the job or work of its seconded employees (Article VII); (vii) The secondment is for a specified duration, and the employment with the assessee ceases upon the expiration of that period (Article II of the secondment agreement and the “Duration” clause in the letter of understanding with the seconded employee); (viii) The letter of understanding issued to the seconded employee specifies that the tenure with the assessee is an assignment (in one place, the term used is “At its conclusion, repatriation will be in accordance with the Global Mobility Repatriation Policy”); (ix) The terms include the salary payable as well as other allowances, such as hardship allowance, vehicle allowance, servant allowance, paid leave, housing allowance, etc. The nature of salary and other perks underscore the fact that the seconded employees are of a certain skill and possess the expertise, which the assessee requires.[Paras 46-49][940-H; 941-A-B, E-G]

1.4 The above features show that the assessee had operational or functional control over the seconded employees; it was potentially liable for the performance of the tasks assigned to them. That it paid (through reimbursement) the amounts equivalent to the salaries of the seconded employees – because of the obligation of the overseas employer to maintain them on its payroll, has two consequences: one, that the seconded employees continued on the rolls of the overseas employer; two, since they were not performing jobs in relation to that employer’s business, but that of the assessee, the latter had to ultimately bear the burden. There is nothing unusual in this arrangement, given that the seconded employees were performing the tasks relating to the assessee’s activities and not in relation to the overseas employer. To put it differently, it would be unnatural to expect the overseas employer to not seek reimbursement of the employees’ salaries, since they were, for the duration of secondment, not performing tasks in relation to its activities or business. There is not one single determinative factor, which the courts give primacy to, while deciding whether an arrangement is a contract of service (as the assessee asserts the arrangement to be) or a contract for service. The general drift of cases which have been decided, are in the context of facts, where the employer usually argues that the person claiming to be the employee is an intermediary. This court has consistently applied one test: substance over form, requiring a close look at the terms of the contract, or the agreements.A vital fact which is to be considered in this case, is that the nature of the overseas group companies business appears to be to secure contracts, which can be performed by its highly trained and skilled personnel. This business is providing certain specialized services (back office, IT, bank related services, inventories, etc.). Taking advantage of the globalized economy, and having regard to locational advantages, the overseas group company enters into agreements with its affiliates or local companies, such as the assessee. The role of the assessee is to optimize the economic edge (be it manpower or other resources availability) to perform the specific tasks given it, by the overseas company. As part of this agreement, a secondment contract is entered into, whereby the overseas company’s employee or employees, possessing the specific required skill, are deployed for the duration the task is estimated to be completed in. This court is not concerned with unravelling the nature of relationship between the overseas company and the assessee. However, what it has to decide, is whether the secondment, 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, the seconded 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 overseas employer. What is left unsaid- and perhaps crucial, is that this is a legal requirement, since they are entitled to social security benefits in the country of their origin. It is doubtful whether without the comfort of this assurance, they would agree to the secondment. Furthermore, the reality is that the secondment is a part of the global 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 repatriation policy (of the overseas entity). The letter of understanding between the assessee and the seconded employee nowhere states that the latter would be treated as the former’s employees after the seconded period (which is usually 12-18 months). On the contrary, they revert to their overseas employer and may in fact, be sent elsewhere on secondment. The salary package, with allowances, 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 hardship allowance of 20% of the basic salary for working in India. The monthly housing allowance in the specific case was 366,700. In addition, an annual utility allowance of 3,97,500/- is also assured. These are substantial amounts, and could have been only by resorting to a standardized policy, of the overseas employer.[Paras 53, 54][943-G-H; 944-A-D]

1.6 The overall effect of the four agreements entered into by the assessee, at various periods, with NTS or other group companies, clearly points to the fact that the overseas company has a pool of highly skilled employees, who are entitled to a certain salary structure- as well as social security benefits. These employees, having regard to their expertise and specialization, are seconded (a term synonymous with the commonly used term in India, deputation) to the concerned local municipal entity (in this case, the assessee) for the use of their skills. Upon the cessation of the term of secondment, they return to their overseas employer, or are deployed on some other secondment. While the control (over performance of the seconded employees’ work) and the right to ask them to return, if their functioning is not as is desired, is with the assessee, the fact remains that their overseas employer in relation to its 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 in accord with the policy of the overseas company, who is their employer. Upon theend of the period of secondment, they return to their original places, to await deployment or extension of secondment.[Paras 55, 57][944-E-F, 945-A-B]

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

1.8 The assessee was the service recipient for service (of manpower recruitment and supply services) by the overseas entity, 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 extended period of limitation in both cases, by the revenue is not tenable. In light of the above, the assessee is liable to pay service tax for the periods spelt out in the SCNs. However, the invocation of the extended period of limitation, in this court’s opinion, was unjustified and unreasonable. Resultantly, the assessee is held liable to discharge its service tax liability for the normal period or periods, covered by the four SCNs issued to it. The consequential demands therefore, shall be recovered from the assessee. The impugned common order of the CESTAT is set aside. The commissioner’s orders in original are accordingly restored, except to the extent they seek to recover amounts for the extended period of limitation. The demand against the assessee, for the two separate periods, shall now be modified, excluding any liability for the extended period of limitation. [Paras 65-67][947-C-F]

Commissioner of Income Tax v. M/s. Eli Lilly & Company India 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 of Nilgiri Cooperative Marketing Limited v. State of Tamil Nadu & Ors. (2004) 3 SCC 514 : 2004 (2) SCR 159; Hussain Bhai Calicut v. Alath Factory Thozhilali (1978) 4 SCC 257 : 1978 (3) SCR 1073; Sushilaben Indravadan Gandhi v. New India Assurance Co. Ltd. (2021) 7 SCC 151 : 2020 (9) SCR 32; Intercontinental Consultants 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. Magus Metals (2017) 16 SCC 491; Director Income Tax v. M/S 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. Dewan

Mohideen Sahib and Sons v. Secretary, United Beedi Workers’ Union 1964 (7) SCR 646; Silver Jubilee Tailoring House v. Chief Inspector of Shops & Establishments 1974 (1) SCR 747; Indian Banks Association 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 of Central Excise (1995) 6 SCC 117; Uniworth Textiles v. Commissioner of Central Excise (2013) 9 SCC 753 – referred to.

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 Technology Solutions Pvt. Ltd. v. CST, Bangalore 2020-TIOL-1277CESTAT-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 Corporation India Pvt. Ltd. v. Commissioner of Service Tax, Noida 2014-TIOL-434-CESTAT DEL – referred to.

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