Finance Act 1994 (amended every year) provides the provisions relating to service tax. It is always the debatable issue as to such type of cost sharing arrangement between Group Companies is the service. If yes, whether it falls under:
- Management OR Business Consultant Services OR
- Business Auxiliary Service OR
- Support Service of Business or Commerce OR
- Manpower Recruitment & Supply Service OR
- None of the above.
Prior to introduction of negative list of services, there was no definition of service but number of services were defined and such definitions has been reintroduced even in the era of negative list and therefore let us understand definition of above services.
Services is defined under section 65B (44) as:
“Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include:
(a) an activity which constitutes merely,––
(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner ; or
(ii) a transaction in money or actionable claim;
(b) a provision of service by an employee to the employer in the course of or in relation to his employment;
(c) fees taken in any Court or tribunal established under any law for the time being in force.
Explanation 1. — For the removal of doubts, it is hereby declared that 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 local authorities who receive any consideration in performing the functions of that office as such member; or
(B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or
(C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section.
Explanation 2.–– For the purposes of this Chapter,
(a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons;
(b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons.
Explanation 3.- A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory;
* Management Business Consultant has been defined under section 65(65)
“Management OR Business Consultant” means any person who is engaged in providing any service, either directly or indirectly, in connection with the management of any organization or business in any manner and includes any person who renders any advice, consultancy or technical assistance, in relation to financial management, human resources management, marketing management, production management, logistics management, procurement and management of information technology resources or other similar areas of management;
* Business Auxiliary Service has been defined under Section 65(19)
“business auxiliary service” means any service in relation to, —
(i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or
(ii) promotion or marketing of service provided by the client; or
(iii) any customer care service provided on behalf of the client; or
(iv) procurement of goods or services, which are inputs for the client; or
Explanation
For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, “inputs” means all goods
or services intended for use by the client;]
(v) production or processing of goods for, or on behalf of the client; or
(vi) provision of service on behalf of the client; or
(vii) a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision, and includes services as a commission agent, but does not include any activity that amounts to “manufacture” of excisable goods.
Explanation. For the removal of doubts, it is hereby declared that for the purposes of this clause, —
(a) ”commission agent” means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person —
(i) deals with goods or services or documents of title to such goods or services; or
(ii) collects payment of sale price of such goods or services; or
(iii) guarantees for collection or payment for such goods or services; or
(iv) undertakes any activities relating to such sale or purchase of such goods or services;
* Support Services of Business or Commerce has been defined under Section 65 (104c):
“Support Services of Business or Commerce” means services provided in relation to business or
commerce and includes evaluation of prospective customers, telemarketing, processing of purchase orders and fulfilment services, information and tracking of delivery schedules, managing distribution and logistics, customer relationship management services, accounting and processing of transactions, Operational or administrative assistance in any manner, formulation of customer service and pricing policies, infrastructural support services and other transaction processing.
Explanation. —For the purposes of this clause, the expression “infrastructural support services” includes providing office along with office utilities, lounge, reception with competent personnel to handle messages, secretarial services, internet and telecom facilities, pantry and security;]
* Manpower Recruitment & Supply Service has been defined under Section (65) (68):
“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, temporarily or otherwise, to any other person
Generally Group Companies have common expenses on manpower, infrastructure, Administrative Support, etc. and share the cost based on the Cost Sharing Agreement and disputes are raised on applicability of service tax, since those shared cost either falls under any of the above categories considering the definitions of “Individual Service” except for “Management Consultancy”, since each of the company of the group Company is the separate legal entity (i.e. person).
Though it falls under the definition of “Individual Services” it needs to study, whether it falls under the definition of “Service”. Any activity carried by one person for another (includes the one of the Group Company shared the cost for another) for consideration will cover under the definition of service and therefore it is important to understand the definition of consideration.
“Consideration” is first time defined in the Finance Act on 18.04.2006 Section 67(4) by way of inserting explanation as:
- Valuation of taxable services for charging Service tax –
(1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall,—
(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;
(ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration;
(iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.
(2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.
(3) The gross amount charged for the taxable service shall include any amount received towards the tax able service before, during or after provision of such service.
(4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed.
Explanation.—For the purposes of this section,—
(a) “consideration” includes any amount that is payable for the taxable services provided or to be provided;
(c) “gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account, whether called “Suspense account” or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.
Definition of “Consideration” includes any form of payment by way of credit note / debit note of book adjustment and therefore all above transactions between the group companies albeit on Cost Sharing basis may also fall under the definition of “Service” and classification will be based on nature of expenses shared between them.
It view of the above, it is important to understand the judicial decisions :
* PALM GROVE BEACH HOTELS PVT. LTD. Versus COMMISSIONER OF C. EX., MUMBAI [2015 (38) S.T.R. 872 (Tri. – Mumbai)]
Manpower services provided by assessee on cost sharing basis to its group companies by employing various professionals like accountant, engineers, etc. – Whether taxable under business auxiliary service – In similar facts and circumstances of case in another group company of appellant wherein similar services were given to other group companies, the Commissioner appropriated the amount of Service Tax paid by appellant under business Support Service whereas he classified the service under Business Auxiliary Service without giving findings on such classification – Tribunal remanded the matter to Commissioner for decision on issue of classification as per the principles of classification in terms of sub-clauses of Clause (105) of Section 65 of Finance Act, 1994 – HELD : In view of similar facts and circumstances of activity/service in this appeal, matter remanded to Commissioner to pass a reasoned order. [paras 3, 4]
* GLAXO SMITHKLINE PHARMACEUTICALS LTD. Versus COMMR. OF S.T., MUMBAI-I [2014 (36) S.T.R. 349 (Tri. – Mumbai)]
Management Consultancy Service – Joint carrying out of day to day functions of business by Glaxo India and Burroughs Welcome India Ltd. as per agreement of merger between them, construed by Department as ‘Management Consultancy service’ provided by Glaxo India – HELD : Nothing in said agreement relates or refers to management consultancy service – Terms and conditions relating to rendering of executory services and sharing of cost proportionately for same in said agreement – No evidence produced by department of rendering of any consultancy in field of management by Glaxo – Decision of Tribunal in appellant’s own case [2006 (3) S.T.R. 711 (Tri.)], in identical matter, holding said services not classifiable under ‘Management Consultancy Service’, squarely applicable to present case also – Impugned order set aside – Section 73 of Finance Act, 1994. [paras 5.1, 5.2]
* MAHINDRA & MAHINDRA CONTECH LTD. Versus COMMR. OF S.T., MUMBAI-I [2014 (35) S.T.R. 634 (Tri. – Mumbai)]
Management Consultant service – Deputation of personnel such as executives, secretaries, receptionists, etc., to group companies – Recovery of 15% of wages/salaries as service charges – HELD : Collection of charges on account of deputation of staff – In view of Glaxo Smithkline Pharmaceuticals Ltd. [2006 (3) S.T.R. 711 (Tribunal)] and Daurala Organics [2009 (14) S.T.R. 620 (Tribunal)] services not classifiable under ‘Management Consultant service’ – In light of Sterlite Optical Technologies Ltd. [2009 (13) S.T.R. 582 (Tribunal)] and Carborandum Universal Ltd. [2010 (18) S.T.R. 473 (Tribunal)] impugned activities covered under ‘Manpower Supply Agency Service’. [paras 5.1, 5.2, 5.3]
Demand – Manpower Supply Agency service – Period involved prior to introduction of levy on ‘Manpower Supply Agency service’ – Demand raised unsustainable in law – Section 73 of Finance Act, 1994. [para 6]
* DAURALA ORGANICS Versus COMMISSIONER OF CENTRAL EXCISE, MEERUT [2009 (14) S.T.R. 620 (Tri. – Del.)]
Management Consultant service – Deputing staff to group company – Staff deputed to group company and engaged in day to day activities – Personnel paid by assessee and amounts representing salary and allowances recovered – Management Consultant is one engaged in providing service relating to conceptualising, devising, development, modification, rectification or upgradation of any working system of organisation – Submission that activity to be considered as supply of manpower which taxable w.e.f. 16-6-2005 whereas present demand is for earlier period – Facts similar to earlier decided case law in favour of assessee – Activity not falling under Management Consultant service – Section 65(65) of Finance Act, 1994. [paras 6.2, 6.3]
* RAHEJA REAL ESTATE SERVICES PVT. LTD. Versus COMMR. OF C. EX., MUMBAI [2015 (39) S.T.R. 867 (Tri. – Mumbai)]
Stay/Dispensation of pre-deposit – Business Auxiliary Services – Recruiting staff for the group companies and supplying them to the group companies to deal with the activities undertaken by group companies – Such an activity does not, prima facie, come under the purview of Business Auxiliary Services as defined under Section 65(90) of Finance Act, 1994 – Prima facie case made out for grant of stay – Unconditional waiver from pre-deposit of dues adjudged against appellant granted and recovery thereof stayed – Section 35F of Central Excise Act, 1944 as applicable to Service Tax vide Section 83 of Finance Act, 1994. [paras 5.1, 6]
* Continental Drugs Company Pvt. Ltd. v. Commissioner – [2015 (39) S.T.R. J368 (Bom.)]
The Bombay High Court Bench comprising Hon’ble Mr. Justice S.C. Dharmadhikari and Hon’ble Mr. Justice G.S. Kulkarni on 27-7-2015 admitted the Central Excise Appeal No. 194 of 2014 filed by Continental Drugs Company Pvt. Ltd. against the CESTAT Final Order No. A/5/2014-WZB/C-I(CSTB), dated 11-12-2013 as reported in 2015 (39) S.T.R. 154 (Tri.-Mumbai) (Continental Drugs Company Pvt. Ltd. v. Commissioner). While admitting the appeal, the High Court passed the following order :
“1. Having heard both sides, we find that the appeal raises a substantial question of law. It is admitted on the following substantial questions of law :
(1) Whether the Hon’ble Tribunal, in the facts of the present case, was justified in holding that Appellant was providing “Security agency services” to its group companies?
(2) Whether the Hon’ble Tribunal, in the facts of the present case, was justified in holding that Appellant is “commercial concern” having regard to the fact that the activity undertaken by the Appellant was on a no profit basis?
(3) Whether in the facts and circumstances of the case, the Hon’ble Tribunal was right in sustaining the demand for extended period holding that the Appellant had suppressed the facts with intent to evade Service Tax?
2. Respondents waive service.”
The Appellate Tribunal in its impugned order had held that assessee rendered security services to various group companies for which they received consideration showing it as business income in their balance sheet and group entities which made payments to assessee’s firm had claimed these as expenditure, thereby enjoying the benefit of income tax by reducing their profits. Claim of assessee that he was operating on no profit basis was not accepted and it was held that Service Tax was payable by him.
On limitation, it was held that bona fide belief is not blind belief but has to be based on reasonable measures taken to entertain such belief. Since assessee had not taken registration or followed statutory procedures, they had suppressed the facts and accordingly extended period of limitation was invocable in demand.
* OF CENTRAL EXCISE VersusCOMPUTER SCIENCES CORPN. INDIA P. LTD. [2015 (37) S.T.R. 62 (All.)]
Manpower recruitment or supply agency – Section 65(105)(k) of Finance Act, 1994 – Service which is provided or to be provided, must be by a manpower recruitment or supply agency – Such a service has to be in relation to supply of manpower – Assessee obtained from its group companies directly or by transfer of employees, the services of expatriate employees – Assessee paid salaries of employees in India, deducted tax and contributed to statutory social security benefits such as provident fund – Assessee was also required to remit contributions, which had to be paid towards social security and other benefits that were payable to the account of employees under laws of foreign jurisdiction – No basis whatsoever to hold that in such a transaction, a taxable service involving the recruitment or supply of manpower was provided by a manpower recruitment or supply agency – Unless the critical requirements of clause (k) of Section 65(105) ibid are fulfilled, element of taxability would not arise. [paras 8, 9]
* MAHINDRA & MAHINDRA CONTECH LTD. Versus COMMR. OF S.T., MUMBAI-I [2014 (35) S.T.R. 634 (Tri. – Mumbai)]
Management Consultant service – Deputation of personnel such as executives, secretaries, receptionists, etc., to group companies – Recovery of 15% of wages/salaries as service charges – HELD : Collection of charges on account of deputation of staff – In view of Glaxo Smithkline Pharmaceuticals Ltd. [2006 (3) S.T.R. 711 (Tribunal)] and Daurala Organics [2009 (14) S.T.R. 620 (Tribunal)] services not classifiable under ‘Management Consultant service’ – In light of Sterlite Optical Technologies Ltd. [2009 (13) S.T.R. 582 (Tribunal)] and Carborandum Universal Ltd. [2010 (18) S.T.R. 473 (Tribunal)] impugned activities covered under ‘Manpower Supply Agency Service’. [paras 5.1, 5.2, 5.3]
Demand – Manpower Supply Agency service – Period involved prior to introduction of levy on ‘Manpower Supply Agency service’ – Demand raised unsustainable in law – Section 73 of Finance Act, 1994. [para 6]
* COMMISSIONER OF SERVICE TAX Versus ARVIND MILLS LTD. [2014 (35) S.T.R. 496 (Guj.)]
Manpower Recruitment or Supply Agency – Scope of – Deputation of some staff to subsidiaries/group companies for stipulated work or for limited period – All throughout direction/control/supervision remained continuously with assessee, who were not in business of providing recruitment or supply of manpower – Actual cost incurred by assessee in terms of salary, remuneration and perquisites was only reimbursed by group companies – There was no element of profit or finance benefit – HELD : Subsidiary companies could not be said to be client of holding company – Deputation of employees was only for and in interest of company – There was no relation of agency and client – Employee deputed did not exclusively work under direction of supervision/control of subsidiary company, and all throughout they would be under continuous control and direction of assessee – Assessee could not be said to be a commercial concern engaged in providing specified services to a client – Hence, they were not liable to Service Tax under Sections 65(68) and 65(105)(k) of Finance Act, 1994. [paras 5, 6]
* COMPUTER SCIENCES CORPN. INDIA PVT. LTD. Versus COMMR. OF S.T., NOIDA [2014 (35) S.T.R. 94 (Tri. – Del.)]
Demand – Manpower Recruitment or Supply Agency Service – Overseas employees were either directly employed or transferred from other group companies – In addition to deductions from salaries towards provident fund and income tax, remittances made to group companies certain social security and other benefits payable under law of foreign jurisdiction – No amount over and above the remittances to seconded employees were paid to overseas group companies – HELD : Issue squarely covered by Volkswagen India Pvt. Ltd. [2014 (34) S.T.R. 135 (Tribunal)] – Tribunal in said case held that global employees working as employees and employee-employer relationship present – Section 73 of Finance Act, 1994 – Section 65(68) and 65(105)(k) ibid. [paras 2, 4]
* VOLKSWAGEN INDIA (PVT.) LTD. Versus COMMISSIONER OF C. EX., PUNE-I [2014 (34) S.T.R. 135 (Tri. – Mumbai)]
Manpower Recruitment or Supply Agency service – Employment of foreign nationals, i.e., Global employees, previously employed with foreign/holding company – Payment of salaries through foreign/holding company – HELD : Global employees working as employees and employee-employer relationship present – No supply of manpower service rendered by foreign company – Method of disbursement of salaries not to determine nature of transaction – Orders-in-Original set aside – Sections 65(68) and 65(105)(k) of Finance Act, 1994. [2013 (29) S.T.R. 387 (Tribunal); 2013 (29) S.T.R. 317 (Tribunal) followed]. [paras 5.1, 5.2]
* GEICO PAINT SHOP INDIA P. LTD. Versus COMMR. OF C. EX. & S.T., PUNE-III [2013 (32) S.T.R. 746 (Tri. – Mumbai)]
Stay/Dispensation of pre-deposit – Manpower Recruitment or Supply Agency service – Assessee entered into agreement with their holding company in Italy for secondment of personnel to assessee – Part of salary paid in Indian Currency and part paid through holding company – Department contended that transaction involved is of supply of labour by foreign entity to Indian entity and liable to Service Tax – HELD : Inter-company secondment agreement provided that International Assignees shall be at the disposal of assessee as their direct employee and will work under direct control of assessee and their salary would also be paid by assessee – Prima facie deputation of employees within group companies would not come within the purview of supply of labour service – Sections 65(68) and 65(105)(k) of Finance Act, 1994 – Section 35F of Central Excise Act, 1944 as applicable to Service Tax vide Section 83 of Finance Act, 1994. [paras 2, 5, 6]
There are different views in the judicial pronouncement but decision of Gujarat High Court & Allahabad High Court have reached to the finality and therefore such deputation of manpower will not fall under the definition of services. However other expenses needs to be considered on following basis
| Heads of Expenses | Nature / Basis of Cost Sharing |
| Salary | Deputation |
| Rent | Based on area |
| Electricity | Actual meter reading |
| Capital Assets like AC, Furniture, Office Equipments | Not to be considered in Cost Sharing Agreement |
| Mobile | Based on deputed manpower |
| Landline | On receipt of bill (detailed bill) only mark abbreviation of companies and debit |
| Telegram | Actuals on reimbursement basis |
| Fax services | On receipt of bill (detailed bill) only mark abbreviation of companies and debit |
| Postage | Actuals on reimbursement basis |
| Courier | Actuals on reimbursement basis |
| Traveling Conveyance | Based on deputed manpower |
| Insurance Coverage | Based on area |
| Communication Expenses | Actuals on reimbursement basis |
| Data Card, Leased Line, Online Transmission System | Actuals on reimbursement basis |
| Legal & Professional Fees | Actuals on reimbursement basis |
| Advertisement Expenses | Actuals on reimbursement basis |
In case, even the litigations needs to be totally avoided then it is advisable to follow the practice of actual payment by the company where the person is deputed to another group company and employed in another group company by way of agreement. There is no bar in any labour laws that salary and other statutory payments cannot be made by any other persons on behalf of employer.
It will not be out of place to appreciate the advance ruling in the case of North American Coal Corporation India Pvt. Ltd., Pune Ruling No. AAR/ST/13/2015, Application No. AAR/44/ST/2/2014 dtd. 6th November, 2015, wherein it has been held that there shall be no liability to pay service tax on the salary and the allowances payable by the applicant to the employee in terms of the dual employment agreement and such salary will not be eligible to levy the service tax as per the provisions of the Finance Act.
]]>