Reimbursement of actual wages paid to laborers in manpower supply services, when separately identifiable and without profit, does not constitute consideration for taxable service and should be excluded from the taxable value, regardless of strict adherence to 'pure agent' rules.

This appeal has been filed by P. Padmavathi (hereinafter referred to as the appellant) against Order-in-Appeal dt.30.04.2013, whereby, the Commissioner (Appeals) partly upheld the OIO dt.30.11.2012 confirming demand of service tax for the period March, 2008 to March, 2011 along with interest under the category of ‘Manpower Recruitment or Supply Agency Service’ (MRSAS). The main dispute in the present appeal is whether the amount representing wages paid to labourers by the appellant while providing MRSAS is liable to be included in the taxable value or whether service tax is payable only on the commission/service charges retained by the appellant.

2. The facts are not in dispute. The appellant entered into an agreement with M/s Crown Beers India Ltd (CBIL) for supply of manpower. Separate invoices were admittedly raised towards (i) wages payable to labourers and (ii) service charges/commission. The department has demanded service tax on the entire amount including wages on the ground that the appellant was not acting as pure agent under Rule 5(2) of Service Tax (Determination of Value) Rules, 2006.

3. The appellant has submitted that wages were separately identified, reimbursed on actual basis and were never retained as its income. According to the appellant, only the commission represented the consideration for the taxable service.

4. The adjudicating authority as well as Commissioner (Appeals) rejected the contention by holding that the conditions prescribed under Rule 5(2) were not fulfilled and therefore, the entire amount constitutes gross value of taxable service.

5. Before examining rival submissions, it would be appropriate to notice the settled legal principles governing valuation under the Finance Act, 1994. Section 67 contemplates levy of service tax on the gross amount charged for the taxable service. However, only the amount which represents consideration for the service rendered can be subjected to tax. Reimbursement of expenditure, which does not constitute consideration for the service, cannot automatically become taxable merely because it flows through the service provider.

6. The Hon’ble Allahabad High Court in the case of Daurala Organics Vs CCE [2014 (35) STR 214 (All)], while dealing on manpower supply service, held that where the wages paid to the labourers are separately identifiable and the service provider merely retains the agreed service charges, the wages cannot automatically be treated as taxable consideration merely because they are routed through the contractor. The Hon’ble High Court recognized the distinction between reimbursement of wages and consideration for the service. Similarly, the principles were reiterated by the Bangalore Bench of the Tribunal in the case of Sri Bhagavathy Traders Vs CCE, Cochin [2011 (24) STR 290 (Tri-LB)], wherein it was held that where labour charges are reimbursed separately and only commission accrues to the contractor, the value attributable to reimbursement cannot be mechanically subjected to service tax.

7. Further, the Ahmedabad Bench of the Tribunal in the case of CCE & ST, Surat Vs Jalaram Security Services [2020 (37) GSTL 189 (Tri-Ahmd)] also examined valuation in manpower/security services and observed that where documentary evidence establishes separate reimbursement of salary and wages and only administrative charges constitute the contractor’s income, the taxable value has to be determined accordingly.

8. The Revenue has strongly relied on Rule 5(2) of the Valuation R