Secondment of employees from a foreign parent company to an Indian subsidiary, where the foreign entity retains payroll and policy control, constitutes 'Manpower Recruitment or Supply Agency Service' taxable under service tax, even if the Indian entity exercises operational control.

PER : R. BHAGYA DEVI

This appeal is filed by M/s. ARM Embedded Technologies Pvt. Ltd. against Order-in-Original No. 01/2012 ST (Commr.) dated 16.01.2012 passed by the Commissioner of Central Excise, Bangalore-I Commissionerate.

2. Briefly the facts are that the appellant failed to discharge service tax under Reverse Charge Mechanism (RCM) on the manpower services received by them from their parent company, accordingly, notice was issued and the Commissioner in the impugned order based on the agreement held that the services received by the appellant are in the nature of ‘Manpower Recruitment or Supply Agency Service’ and hence, liable to service tax. Accordingly confirmed a demand of Rs.1,76,79,723/- along with interest and imposed penalties under Section 77 and 78 of the Finance Act, 1994. Aggrieved by this order, the appellant is in appeal before us.

3. The Learned Sr. Counsel submits that the appellant is a 100% Export Oriented Unit (EOU) registered with Software Technology Parks of India (STPI) for exporting Information Technology Services (ITS). During the disputed period, it is submitted that the appellant had entered into Salary Cost Reimbursement Agreement with its overseas counterpart ARM Ltd. in England intending to employ certain employees from its foreign counterparts for the purpose of software development and commercial operations. Under this agreement, specific employees of the overseas entity at the request of the appellant were seconded to the appellant’s Indian operations for software development and commercial activities. The appellant paid the entire salary of such seconded employees with other benefits such as PF allowance, special allowances etc. while the foreign entity disperses the other part of the salary. It is stated that for administrative convenience, a part of the salary is paid by the parent-company which is reimbursed by the appellant. It is also submitted that these seconded employees during their tenure with the appellant regularly paid their taxes and the appellant had filed regular TDS returns for reporting tax deducted at source. During the period of secondment, the employees are considered as whole time employees of the appellant.

3.1 It is submitted that the appellant’s case is different from the case of CC, CE & ST, Bangalore (Adjudication) vs. Northern Operating System Pvt. Ltd.: 2022 (61) GSTL 129 (S.C.) dated 19.05.2022 decided by the Hon’ble Apex Court for the reasons stated below:

➢ The employees are on the pay role of the appellant.

➢ All salaries and social security benefits are also fulfilled by the appellant.

➢ The payments made by the parent-company are reimbursed by the appellant.

➢ The seconded employees are for the sole purpose of establishing the appellant’s company and are not hired for any specific task.

➢ There is no replacement of employees.

3.2 It is further submitted that the payments made by the appellant are reimbursable expenses and hence, not taxable as is held by the decision of the Hon’ble Supreme Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. vs. Union of India 2018 (10) GSTL 401 (S.C.) dated 30.11.2012. It is stated that the extended period of limitation also cannot be upheld as is held by the Hon’ble Apex Court in the case of Northern Operating System Pvt. Ltd (supra).

4. The Learned Authorized Representative (AR) on behalf of the Revenue submitted the issue is settled