Indirect Tax Alert - CESTAT holds that salary cost reimbursement of seconded employees liable to Service Tax
16 March 2023
Facts of the case
- M/s. Dell International Services India Private Limited (Taxpayer), a subsidiary of Dell International LLC, is a 100% Export Oriented Unit, registered under the Software Technology Park Scheme.
- The Taxpayer provides Business Auxiliary Services and Information Technology Software Services and receives services such as Commercial Training & Coaching Services, Management or Business Consultant Services and Telecommunication Services, from outside India.
- The employees of group companies of the Taxpayer were deputed (or seconded) to India and salaries/expenses of such deputed employees paid by the overseas group companies were reimbursed by the Taxpayer to the respective group companies. The reimbursement of salaries was grouped under ‘Salary Cost’ in the Profit & Loss Account of the Taxpayer. It is also disclosed as ‘Expenditure Incurred in Foreign Currency’, under the head ‘Related party transactions’ in Notes to Annual Accounts/Reports.
- Seven Show Cause Notices(SCN) were issued on the Taxpayer, covering a period starting from April 2006 to March 2012, alleging that the transaction of secondment of employees from group companies to the Taxpayer is liable for Service tax on a Reverse Charge basis under the category of ‘Manpower Recruitment or Supply Agency’ service.
- All the SCNs were confirmed in adjudication and the appeals were filed before the CESTAT.
Observations and Ruling of CESTAT
- The CESTAT observed that the arrangement in the present case is similar to the facts, as recorded in the decision of the Supreme Court, in the case of Commissioner of Customs, Central Excise & Service Tax, Bangalore Vs. M/s. Northern Operating System Pvt. Ltd [2022-VIL-31-SC-ST], wherein it was held that while the control over the performance of the employees who were seconded and the right to ask them to return was with the service recipient, it was the overseas employer, concerning its business, deployed them to the service recipient, it was the overseas employer who paid them the salaries, the terms of employment even during the secondment were per the policy of the overseas company and at the end of the secondment period, the employees return to their original location for subsequent deployment or extension of secondment. Accordingly, relying on the above case, the CESTAT held that the Taxpayer is liable to pay Service Tax under Reverse charge for the normal period of limitation.
- The CESTAT rejected the contention of the Taxpayer that no interest shall be leviable in accordance with the judgment of the Supreme Court on the case of CCEx, Rohtak vs Merino Panel Products Ltd [2022 (12) TMI 453 - SC]. However, relying on another Apex Court judgment, in the case of Pratibha Processors v/s Union of India [(1996) 11 SCC 101], the Supreme Court upheld the levy of interest observing that interest is compensatory and automatic.
[Dell International Services India Pvt Ltd Vs The Commissioner of Central Excise & Customs, Bangalore Commissionerate - 2023-VIL-171-CESTAT-BLR-ST)
The Supreme Court, in the case of Northern Operating Systems supra, had confirmed the levy of Service tax under Reverse Charge on reimbursement of salary costs of seconded employees and the CESTAT heavily relied on this judgment to confirm the demand for the normal period of limitation. On a closer look, it appears that the judgment does not detail the basic planks on which the Taxpayer sought to resist the demand or distinguish their case on facts. However, para-15 of the judgment indicates that the Taxpayer wanted to defend only the invocation of a larger period and levy of interest, of which the latter was not accepted by the Apex Court. Considering the recent judgments, it is important that the taxpayers revisit their position and documentation for the secondment arrangements, not only from a GST perspective but also from direct tax and other regulatory mandates.