Service TaxContract to be read as a Composite Whole to Determine the Nature of Services Supplied

In the case of Adiraj Manpower Services Pvt. Ltd. v. Commissioner of Central Excise Pune II, Civil Appeal No. 313 of 2021 dated 18.02.2022, the Supreme Court, while deciding an issue pertaining to the classification of services as manpower services or job works services, held that the Agreements are to be read as a composite whole so as to determine the true nature of services.

FACTS

Adiraj Manpower Services Pvt. Ltd. (hereinafter referred to as ‘the Appellant’) was registered as a ‘Manpower Recruitment or Supply Agency Service’ for the purposes of service tax registration. The Appellant entered into a contract with Sigma Electric Manufacturing Corporation Pvt. Ltd. (hereinafter referred to as ‘Sigma’) on 01.01.2012 for the provision of personnel for activities such as felting, material handling, pouring and supply of material to furnace. Fresh agreements were also executed between the Appellant and Sigma on 01.01.2013 and 01.01.2014.

On 26.09.2014, the Commissioner of the erstwhile Pune-I Central Excise Commissionerate (hereinafter referred to as ‘the Commissioner’) issued a Show Cause Notice (‘SCN’) to the Appellant demanding service tax along with interest with a proposed penalty, totalling to the tune of Rs. 10,50,23,672/-. The allegations raised in the SCN were that:

1. The Appellant did not discharge their service tax liability on or before the due date for the period from April, 2012 to March, 2014;
2. The Appellant failed to assess and discharge service tax with respect to the sales ledger related to Sigma from September, 2012 to March, 2014;
3. The Appellant suppressed material facts and filed incorrect ST-3 returns for the aforementioned period; and
4. The Appellant filed ST-3 returns after the due date for the period between April, 2013 to September, 2013.

The investigation conducted by the Department revealed that from 01.08.2012, the Appellant had categorised their activity as ‘job work with tonnage rates’, instead of supply of manpower services on the basis of the Agreement dated 01.01.2012 between the Appellant and Sigma.

The Appellant classified the services under ‘business auxiliary services’, thereby claiming benefit of service tax exemption under Serial No. 30(c) of Notification No. 25/2012-Service Tax dated 20.06.2012 (hereinafter referred to as ‘the Notification’).

However, as per the invoices raised by the Appellant and the Agreements dated 01.01.2012 and 01.01.2013, the nature of services rendered by the Appellant before and after August, 2012, remained the same. This was confirmed by the Director of the Appellant in his statement recorded on 06.02.2014. The Appellant had not substantiated its claim of job work, or obtained registration under the category of ‘business auxiliary services’.

The Commissioner, while adjudicating upon the SCN, held that the Appellant had habitually delayed in paying service tax from April, 2012 to March, 2014. Further, the supply of labour for felting, material handling, assembly and pouring on ‘piecemeal basis’ did not change the nature of manpower services provided by the Appellant. Thus, the Commissioner confirmed the demand of service tax and interest, and imposed penalty.

The Order passed by the Commissioner was challenged before the Customs, Excise & Service Tax Appellate Tribunal (‘CESTAT’). After duly considering the terms of the Agreements between the Appellant and Sigma, as well as the relevant provisions of the Contract Labour (Regulation and Abolition) Act 1970 (hereinafter referred to as ‘the CLRA’), the CESTAT in its judgement dated 15.07.2019, held that the services provided by the Appellant were in the nature of contract labour and not job work.

The purpose of the agreement was to provide requisite manpower, and hence, the benefit accorded to job work contracts under the Notification cannot be extended to the Appellant’s case.

Aggrieved by the decision of the CESTAT, the Appellant filed an appeal before the Hon’ble Supreme Court of India as the matter was pertaining to classification of the services provided by the Appellant.

ISSUE BEFORE THE SUPREME COURT

Whether the Agreements between the Appellant and Sigma are contract for supply of manpower services, or contract for provision of service on a job work basis?

CONTENTIONS OF THE PARTIES

The Appellant contended that the definition of ‘contractor’ under Section 2(c) of CLRA includes a job worker as well as a supplier of manpower. Hence, the registration of the Appellant under the statute does not indicate that it is only a supplier of manpower.

Further, as per the Agreements between the Appellant and Sigma, the latter is the principal employer in terms of Section 21(4) of the CLRA, under which the principal employer has to pay wages in the event of default by the contractor. The Agreements between the parties only replicate what is stipulated by the legislation.

The Appellant submitted that as per the Agreements, the Appellant has to provide specialised services in respect of felting, material handling, assembly, pouring, supply of machine parts, and painting. The Appellant not only decides upon the persons to be engaged, but also their service conditions, as well as supervises the work done. Hence, the Appellant is not supplying manpower, but working for Sigma on a job work basis.

The Appellant also stated that the invoices issued by the Appellant were on piece rate basis, and service charge was levied on the quantity of work done, instead of the quantity of manpower supplied.

In this regard, the Appellant relied on the decisions in the cases of Om Enterprises v. Commissioner of Central Excise, Pune-I [2018 (17) G.S.T.L. 260], Bhagyashree Enterprises v. Commissioner [2017 (3) G.S.T.L. 515], Dhanashree Enterprises v. Commissioner [2017 (5) G.S.T.L.], and S. Balasubramani v. Commissioner [2019 SCC OnLine CESTAT 480], where the CESTAT held that “when a contractor carries out a process work and charges the principle employer on rate per piece, the nature of work would be considered as a job work and not manpower supply”.

The Respondent submitted that as per the Agreements between the Appellant and Sigma, the former is required to supply manpower services, and not perform job work. The details and specifications related to the work itself are absent from the contracts, which raises doubts on their nature as a genuine job work contract. Hence, the Appellant is trying to disguise contract for supply of manpower as a job work contract.

Further, Entry 30(c) of the Notification covers a situation of carrying out of “intermediate production process as job work in relation to any goods on which appropriate duty is payable by the principal employer.”

The Respondent stated that if the Appellant was indeed providing services of this kind, it would have declared the same under the category of ‘business auxiliary services’ or claimed exemption to the extent of the value of services under the Notification. However, the Appellant tried to undermine the taxable value and neither amended its service tax registration, nor declared the services in the Appellant’s ST-3 returns as business auxiliary services.

DECISION AND FINDINGS

The Supreme Court analysed Entry 30(c) of the Notification which exempts “carrying out an intermediate production process as job work in relation to any goods on which appropriate duty is payable by the principal manufacturer.” Several clauses of the Agreements between the Appellant and Sigma were also taken into consideration, whereby, the Supreme Court, noted that important contractual terms which would have been present in a true job work contract are suspiciously absent from the Agreements between the parties.

The Supreme Court observed that there was no clause in the Agreement regarding:

1. The nature of work which the Appellant is supposed to carry out and specifications related to the same;
2. Provisions for ensuring the quality of work, facilities to be used, or infrastructure to be deployed for carrying out the work;
3. The schedule of delivery; and
4. Consequences of breach of contractual obligations.

The Supreme Court noted that the decisions relied upon by the Appellant was fact-specific and based on the terms of the Agreements between the contracting parties. Hence, they are not applicable in the present case in any manner.

The Supreme Court further observed that even though Schedule I and Schedule II of the Agreements laid down the services to be provided by the Appellant, and contained provisions for payment of services on the basis of mentioned rates, the absence of the aforementioned crucial contractual terms cannot be disregarded.

The Supreme Court held that in such circumstances, “the agreement has to be read as a composite whole.” In doing so, it becomes amply clear that the purpose of the Agreements is supply of contract labour, and not provision of services on job work basis.

Hence, the Supreme Court held that impugned judgement of the CESTAT does not suffer from any error of reasoning, and the Agreements, upon being read as a composite whole, is clearly in the nature of a contract for provision of manpower.

AMLEGALS REMARKS

The Supreme Court through this judgment has halted attempts made by contractors to evade service tax liability by camouflaging contracts for supply of manpower as contracts for job work.

The Supreme Court highlighted the settled principle in law that a contract should be read as a whole in order to ascertain its true nature, rather than fixating on the contractual terms individually.

The Supreme Court, through this decision, laid down certain requisites of an Agreement which must be satisfied for the service to be classified as job works. This will serve as an important precedent in future cases to determine the applicability of exemptions granted to job works services.

-TEAM AMLEGALS, assisted by Ms. Gazal Sancheti (Intern)

For any queries or feedback, please feel free to get in touch with chaitali.sadayet@amlegals.com or riddhi.dutta@amlegals.com.