Unreported Decisions – ST – June 2022
By Vinay Kumar Jain & Sachin Mishra, Advocates
1. Whether service tax is payable under reverse charge on reimbursement of salaries and allowances towards secondment of employees from foreign group companies to Indian group entity?
Facts and Pleading: : Northern Operating Systems Pvt Ltd. (hereinafter referred to as “Respondent”) is a service provider under the categories of "Manpower Recruitment Agency Service", "Business Auxiliary Service" etc. The Respondent entered into agreements with its various group companies located in the United States of America, United Kingdom, Dublin, Singapore etc. and provided Back Office and Operational support services to group companies. As per the understanding with group companies, the Respondent requested the group companies for Managerial and Technical personnel to assist the Respondent in its business and accordingly the employees were selected by the foreign group company and seconded / deputed to Respondent in India. The seconded employees would receive their salary, bonus, social benefits and other expenses from the overseas group company and thereafter the Respondent would reimburse the same to the group company on cost to cost basis. The employees would be under the control of the Respondent and the Respondent had the right to ask the employee to return if the performance was not as desired. The department demanded service tax under reverse charge mechanism from the Respondent under the category ‘Manpower Recruitment or Supply Agency Service’ for payments made to overseas group companies with respect to seconded personnel. The period of dispute pertained to October 2006 to March 2014.
The Hon’ble CESTAT Bangalore held that no service tax is payable on the said transaction since provision of service by an employee to the employer in the course of or in relation to his employment stands excluded from the definition of service
Supreme Court Judgement: On appeal by the Revenue, the Hon’ble Supreme Court affirmed the findings of the Adjudicating Authority and held that employer-employee relationship did not exist between the Respondent and seconded employees. It was observed that although the seconded employees were under visible control and worked under the direction of the Respondent in India, the seconded employees continued to be on the payroll of the overseas group company. If the Respondent was not satisfied with the seconded employee, the secondee returned to the overseas group company and continued their employment. Additionally, after successful completion of secondment, the seconded employee returned to the group company. Despite the reimbursement being on cost to cost basis, however, the consideration in the transaction was that the Respondent benefited from the skilled employees, assigned them with specific jobs or assignments and thereby benefited from increase in revenue and therefore there is quid pro quo in secondment of employees. Accordingly, the demand of service tax under the category “Manpower Supply Services” was confirmed on merits.
The Hon’ble Apex Court held that the invocation of extended period of limitation is unsustainable since merely non-payment of taxes is not equivalent to collusion or willful misstatement or suppression of facts with intent to evade taxes. The Apex Court observed that the issue was not free from doubt and various cases were relied by CESTAT in Respondent’s favor, therefore extended period of limitation is not invokable.
Commissioner of CCE Bangalore vs. Northern Operating Systems Pvt. Ltd. – Judgement dated 19 May 2022 in CA 2289-2293/2021, Supreme Court
Northern Operating Systems Pvt. Ltd.
2. Whether an Indian importer of goods can be subject to levy of Integrated Goods and Services Tax (‘IGST’) on the component of ocean freight in a CIF purchase contract wherein the freight has been paid by the foreign seller of goods to a foreign shipping line?
Facts and Pleading: Mohit Minerals Pvt. Ltd. (hereinafter referred to as “Respondent”) was importer of non-coking coal from overseas which is sold to domestic industries. The Respondent imported goods by ocean transport on a Cost-Insurance-Freight (‘CIF’) basis from a place outside India. The Respondent paid customs duties on the import of goods, which included the value of ocean freight. In the case of a CIF contract, the ocean transportation is arranged by foreign seller by engaging a shipping line, without the involvement of the importer. The CGST Act levied IGST at the rate of 5 percent on the supply of transportation of goods, in a vessel from a place outside India up to the customs station of clearance in India. Further, Sr. No. 10 of Notification 10/2017 categorized the recipient of services of supply of goods by a person in a nontaxable territory by a vessel to include an ‘importer’ under Section 2(26) of the Customs Act 1962.
Accordingly, as per GST provisions, the importer of goods located in India is deemed service recipient of ocean transportation service and accordingly liable to pay IGST under reverse charge on said services. The Respondent did not dispute the IGST liability under reverse charge on ocean transportation when it imported goods on Free on Board (FOB) basis since in such cases the Respondent contracted for ocean transportation services.
Supreme Court Judgement: The Hon’ble Supreme Court held that in a CIF contract, the supply of goods is accompanied by the supply of services of transportation and insurance, the responsibility for which lies on the seller (the foreign exporter in this case). The supply of service of transportation by the foreign shipper forms a part of the bundle of supply of goods between the foreign exporter and the Indian importer, on which IGST is payable under Section 5(1) of the IGST Act read with Section 20 of the IGST Act, Section 8 and Section 2(30) of the CGST Act at the time of import of goods. The additional levy of IGST on supply of the service component i.e. ocean transportation would contradict the principle enshrined in Section 8 and be in violation of the scheme of the GST legislation and lead to double taxation. Based on this reason, the Hon’ble Supreme Court held that while the notifications assuming the importer of goods as deemed service recipients are validly issued under Sections 5(3) and 5(4) of the IGST Act, it would be in violation of Section 8 of the CGST Act and the overall scheme of the GST legislation to levy IGST once again on ocean transportation service. The Court upheld the impugned judgment of the Hon’ble Gujarat High Court to the extent that tax on the supply of a service, which has already been included by the legislation as a tax on the composite supply of goods, cannot be allowed.
Further the Apex Court observed that the recommendations of the GST Council made under Article 279A is non-qualified and merely recommendatory in nature.
Union of India & Anr. v. Mohit Minerals Pvt. Ltd. Through Director– Judgment dated 19 May 2022 in Civil Appeal No. 1390 of 2022, Supreme Court
3. Whether the Mediclaim premium paid by the Appellant towards policies for employees who had opted for ‘Voluntary Separation Scheme’ would be covered under the definition of ‘input services’ under Rule 2(l) of CENVAT Credit Rules, 2004?
Facts and Pleading: Reliance Industries Ltd. (hereinafter referred to as the “Appellant”) is engaged in the business of manufacturing petrochemical products. The Appellant announced a Voluntary Separation Scheme (“VSS”) for employees with Indian Petrochemicals Corporation Limited (“IPCL”). As per the Scheme, certain compensation/benefits would be provided to such employees whose application is accepted. Further such employees would also be eligible for Mediclaim benefits. The Appellant availed CENVAT credit amounting to ` 1,33,37,699/- of the service tax paid on Mediclaim insurance premium under Rule 2(l) of the CENVAT Credit Rules, 2004 (“CCR”). The period of dispute relates to the period prior to 2011. However, the Department issued show cause notice disallowing cenvat credit on the ground that premium paid by the Appellant was towards mediclaim policies for IPCL employees who had opted voluntary separation and such employees were no more employees of the company and would, therefore, be not covered under the definition of “input service”.
Due to conflicting views, the matter was referred to Larger Bench of CESTAT. The Appellant argued that the amount paid as premium is not a gratuitous payment but towards the contractual obligation as per VSS scheme which was necessary to keep the business viable and thereby would come under Rule 2(l) which defines “input service”. The Appellant stressed on the fact that, all premiums were paid prior to the employees being relieved from service i.e. they were still under employment of the Appellant and hence, cannot be regarded as ex-employees. Further, the premium paid forms part of the cost of production of goods as per CAS-4.
The department argued that the Appellant has wrongly availed CENVAT credit on account of insurance premium paid for ex-employees and conten
ded that there is no nexus with the manufacturing activities of the Appellant and the service tax paid on the insurance premium. The department further contented that the expression ‘relating to business’ in Rule 2(l) of the 2004 would mean activities integrally related to business activity and the activity of VSS cannot be considered as an activity integrally related with the business of manufacture.
Larger Bench Interim Order: The Hon’ble Larger Bench of CESTAT observed that ‘input service’ as per Rule 2(l) means any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and includes services used in relation to activities relating to business. The Tribunal observed that the term “input service” is very exhaustive in nature and is not confined to mere manufacture of the product. It not only covers services, which fall in the substantial part, but also covers services, which are covered under the inclusive part of the definition. Further, on close examination of VSS, the Tribunal observed that the scheme was an option for existing employees to cut short their service tenure for which they would receive certain benefits/compensation. The Tribunal accepted the contention of the Appellant that the premium amount paid is a part of the "golden handshake" between the Appellant and its employees who agree to take premature termination, aimed at keeping the business operations of the Appellant cost effective and viable. Moreover, such payment is borne out of contractual obligation and cannot be termed as gratuitous payment. Therefore, the Scheme certainly has a direct nexus to the manufacturing operations of the Appellant. Furthermore, the Tribunal relied on the definition of ‘employee’s cost’ defined under Cost Accounting Standards and observed that medical benefits pertaining to employees and dependents is an integral part of the employee cost even if they are in terms of VSS/retirement/separation schemes.
Accordingly, the Hon’ble Tribunal held that the Appellant would be entitled to avail CENVAT credit on the service tax paid on insurance premium for employees who had opted for the VSS on the ground of it being related to manufacturing operations of the Appellant.
Reliance Industries Ltd. vs. Commissioner of Central Excise (LTU), Mumbai decided on 18.04.2022 by CESTAT Larger Bench vide Interim Order No. 5/2022
4. Whether the extension of limitation period as per Supreme Court order dated 8.3.2021 be applicable to refund claims under Section 54 of the CGST Act, 2017?
Facts and Pleading: Vyplavi Granites Ltd. (hereinafter referred to as “Petitioner”) is engaged in the business of processing of raw granite blocks and export of polished granite slabs/tiles. The Petitioner filed refund claim of ` 46,72,862/- towards tax period commencing from April, 2018 to March, 2019 in Form RFD-01 dated 13.03.2021. The Department (“Respondent”) rejected the refund claim of the Petitioner for the period April, 2018 to January, 2019, on the ground that the same is time barred as claim is filed beyond the time limit of two years. Aggrieved by the Order in Original passed by adjudicating authority, the Petitioner filed a Writ Petition before Andhra Pradesh High Court.
The department contended that as the Petitioner did not make any claim within the time stipulated in the statute, the Petitioner is not entitled to any relief under Article 226 of the Constitution of India. The Petitioner contended that the Respondent has failed to take into consideration the Order of the Hon’ble Supreme Court in Suo Motu Writ Petition (Civil) No. 3 of 2020 dated 8.3.2021 and has wrongly rejected the claim made by the Petitioner under Section 54 of the GST Act, 2017.
Judgment: The Hon’ble High Court of Andhra Pradesh observed that in order to get entitlement for refund for the period from April, 2018 to March, 2019, one should have filed an application on or before 19.05.2020, however, the Petitioner filed the application on 13.3.2021. However, the Hon’ble High Court placed reliance on the Order of the Hon’ble Supreme Court in Suo Motu Writ Petition (Civil) No.3 of 2020 dated 8.3.2021 wherein the Apex Court has directed that while computing the period of limitation for any suit, appeal, application or proceeding, the period from 15.3.2020 till 14.3.2021 is to be excluded. Accordingly, the High Court held that if the said period is excluded from computation of the period of limitation, the entire claim of the Petitioner is within time limit. Consequently, the Hon’ble High Court set aside the impugned order dated 30.4.2021 to the extent of rejecting the refund claim for the period from April, 2018 to January, 2019 and remanded the matter for fresh consideration to the authorities.
Vyplavi Granites Vs. The Deputy Commissioner Of Central Tax & Ors., High Court of Andhra Pradesh decided on 25.4.2022
The Deputy Commissioner Of Central Tax & Ors.