Deputation of employees on cost-sharing basis does not fall under Supply of Manpower Services
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Deputation of employees on cost-sharing basis does not fall under Supply of Manpower Services
We are sharing with you an important judgment of the Hon’ble High Court of Gujarat in the case of Commissioner of Service Tax Vs. Arvind Mills Ltd. [(2014) 45 taxmann.com 376 (Gujarat)] on the following issue:
Issue:
Whether the deputation of employees to subsidiary companies for limited period on cost-sharing basis covered under Manpower Recruitment or Supply Agency’s Services?
Facts & background:
Arvind Mills Ltd. (“the Respondent”) was engaged in manufacturing of fabrics and ready-made garments. The Respondent deputed some of its employees to its subsidiaries which were engaged in similar businesses for a limited period. The Revenue contended that the Respondent was a Manpower Recruitment & Supply agency rendering manpower supply services.
The Hon’ble Tribunal rejected the contention of the Revenue on the premise that the Respondent deputed its employees to its subsidiaries only. Further, the employees of the Respondent worked under the direction and supervision of the Respondent only.
Furthermore, the deputed employees were repatriated to the Respondent upon completion of their work. Therefore, the Hon’ble Tribunal concluded that the Respondent cannot be covered under Manpower Recruitment or supply agency Services.
The Revenue filed an appeal before the Hon’ble Gujarat High Court (“the HC”).
Held:
The HC upheld the view taken by the Hon’ble Tribunal. The HC observed that in terms of Section 65(68) of the Finance Act, 1994 (“the Finance Act”), the definition of Manpower Recruitment or Supply agency at the relevant time (prior to April 18, 2006) means as under:
"Manpower recruitment or supply agency means any commercial concern engaged in providing any service directly or indirectly, in any manner for recruitment or supply of manpower, temporary or otherwise to a client".
In the instant case, it was held that the Respondent deputed its employees to the group companies/ subsidiaries. Therefore, the Respondent cannot be said to be a commercial concern which is providing services to its client.
Further, the Respondent was not engaged in the business of providing recruitment or supply of manpower. The Respondent deputed its employees to the subsidiaries for limited period and they worked under the control and supervision of the Respondent only.
Furthermore, the cost incurred by the Respondent in terms of salary, remuneration, perquisites, etc., was reimbursed by the group companies. Accordingly, there was no financial benefit to the Respondent.
Therefore, the HC held that the Respondent cannot be said to be a Manpower Recruitment or Supply agency rendering manpower supply services. The appeal filed by the Revenue was dismissed.
Important to Note:
Subsequent amendments in the definition of Manpower Recruitment or Supply Agency:
Post April 18, 2006, the definition of Manpower Recruitment or Supply agency was amended further and reads as under:
"Manpower recruitment or supply agency means any person engaged in providing any service directly or indirectly, in any manner for recruitment or supply of manpower, temporary or otherwise to a client".
Further, this definition was again amended w.e.f. May 16, 2008:
"Manpower recruitment or supply agency means any person engaged in providing any service directly or indirectly, in any manner for recruitment or supply of manpower, temporary or otherwise to any other person".
Provisions with respect to Supply of Manpower Service after 1st July, 2012:
It is important to note that old definition of Manpower Recruitment or Supply Agency was rescinded w.e.f. July 1, 2012, and new definition of “Supply of Manpower” provided under Rule 2(1)(g) of the Service Tax Rules, 1994, which reads as under:
“Supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control.”
Conclusion: There was change in the definition of Manpower Recruitment or Supply Agency at several occasions and considering recent change in the definition of Supply of manpower effective from July 1 2012, essence of the said judgment still holds good on principle and Service tax should not be chargeable on deputation of employees to subsidiary companies for limited period on cost-sharing basis under Supply of Manpower services.
It is advisable to have proper agreement to substantiate that deputed employees sent for limited period on actual cost sharing basis and do not work under the supervision and control of the service recipient so as to be out of the ambit of supply of manpower service.
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Bimal Jain
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