Deputation of employees to subsidiaries not chargeable to service tax

The Hon’ble Gujarat High Court in the case of Commissioner of Service Tax vs. Arvind Mills Ltd., 2014 (4) TMI 132, has held that a company deputing some of its staff to work in a company which is under its control and there is no profit involved in it, shall not be liable to pay service tax for “manpower recruitment and supply services”. It cannot be said that the company is included within the scope of the definition of “Manpower Recruitment and supply Agency” and it shall not attract Service Tax.
The Hon’ble Gujarat High Court relied upon the judgment delivered in the case of Paramount Communication Ltd. v. Commissioner of Central Excise, Jaipur, 2013-TIOL 37, where it was held that a company which deputes its employees to work in its subsidiary company and collect salaries would not be liable to pay service tax under “manpower recruitment and supply services”, if it is not engaged in recruitment or supply of manpower. The appeal was decided against Revenue.

Facts of the case:

The Respondent, Arvind Mills Ltd. was engaged in manufacturing of fabrics and garments. The respondent deputed some members of its staff to its subsidiaries engaged in similar businesses for some time.
The Revenue considered the respondent as a “Manpower Recruitment & Supply agency” rendering services relating to manpower supply. The respondent moved before the Tribunal.
The Tribunal rejected the contention of the Revenue on the basis of the fact that the employees of the respondent worked under the supervision of the respondent. Furthermore, the deputed employees were sent back to the respondent after completing their job. The Tribunal held that the Respondent does not come within the purview of Manpower Recruitment or supply agency Services.
The Revenue preferred an appeal before the Hon’ble Gujarat High Court.

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Issue Involved in the case:

The most important issue appearing before the Gujarat High Court was whether the activity of the company in deputation of employees to its subsidiary company having no profit comes within the definition of “Manpower Recruitment Agency” as stated in section 65 of the Finance Act 1994.
Provisions contained in section 65 of the Finance Act 1994:
As per section 65 of the Finance Act 1994, “manpower recruitment or supply agency” refers to any person involved in providing any service by any means for recruitment or supply of manpower, to any other person.

The judgment:

The High Court upheld the decision of the Tribunal. It was observed that as per Section 65(68) of the Finance Act, 1994, “Manpower Recruitment or Supply agency” denotes any concern engaged in providing any service for recruitment or supply of manpower, whether temporary or not to a client.
In the instant case, it was found that the respondent deputed some of its staff to its subsidiaries. It was not engaged in providing recruitment or supply of manpower. For the said reasons the respondent cannot be considered to be a commercial company providing services to its client.
The employees worked in the subsidiaries for limited period under the total control of the respondent and not under the supervision or control of the subsidiary companies. The cost incurred by the respondent towards the salary of the staff members was reimbursed by the subsidiaries. As such, there was no financial gain to the respondent. The subsidiary companies were not the clients of the respondent. The object of deputation of the employees was only to protect the interest of the company. There was no relation of agency and client between the company and its subsidiaries.
The Gujarat High Court held that the respondent was not a “Manpower Recruitment or Supply agency” providing manpower supply services and therefore, was not liable to pay service tax.
In view of the above the appeal preferred by the Revenue was dismissed.

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