Adiraj Manpower Services Pvt. Ltd. v. Commissioner of Central Excise Pune II

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Adiraj Manpower Services Pvt. Ltd. v. Commissioner of Central Excise Pune II

CASE NAME	*Adiraj Manpower Services Pvt. Ltd. v. Commissioner of Central Excise Pune II*
CITATION	2022 SCC ONLINE SC 203, 2022 INSC 201
DATE OF JUDGMENT	February 18, 2022
CASE NO	Civil Appeal No. 313 of 2021
CASE TYPE	Civil Appeal
APPELANT	Adiraj Manpower Services Pvt. Ltd.
RESPONDENT	Commissioner of Central Excise Pune II
BENCH	Dr Dhananjaya Y Chandrachud and Surya Kant
STATUTES REFERRED	Employees State Insurance Act 1948Contract Labour Regulation And Abolition Act 1970Section 70(1) of The Finance Act 1994 and Rule 7 of The Service Tax Rules 1994.Section 66 B Finance Act 1994ESI Act and Provident Fund Act.

INTRODUCTION

The realm of tax evasion has witnessed a persistent challenge in the form of contractors employing artful disguises within contractual agreements. In particular, a prevalent tactic involves attempting to sidestep service tax responsibilities by veiling contracts originally intended for the provision of manpower as agreements for job work. Such strategic maneuvers not only compromise the integrity of tax systems but also demand a sophisticated legal approach to differentiate authentic contractual relationships from those ingeniously crafted to manipulate tax obligations. The case currently under scrutiny before the Supreme Court serves as a compelling illustration, highlighting the pivotal role of the judiciary in navigating the complexities of contractual interpretation and tax implications. This landmark decision sets a significant precedent, providing guidance for future cases grappling with similar attempts at tax evasion through the strategic camouflage of contractual arrangements.

FACTS OF THE CASE

Here the appellant is Adiraj Manpower Services, hereinafter denoted as the appellant, formally enrolled itself under the service tax category of ‘Manpower Recruitment or Supply Agency Service.’ Subsequently, the appellant engaged in a contractual arrangement with Sigma Electric Manufacturing Corporation Pvt. Ltd.

The scope of the contract involved the provision of personnel for diverse activities, including felting, material handling, pouring, and supplying materials to the furnace. The pivotal contracts in question were executed on the dates 01.01.2012, 01.01.2013, and 01.01.2014, constituting the central focus of this legal case

The Commissioner issued a Show Cause Notice (SCN) alleging various violations by the Appellant on September 26, 2014

The charges included the Appellant’s failure to discharge service tax liabilities promptly from April 2012 to March 2014, incorrect filing of ST-3 returns, and delaying filing returns from April 2013 to September 2013.

In August 2012, the Appellant intentionally reclassified its activities as ‘job work with tonnage rates.’ This deliberate adjustment was made in an effort to avail service tax exemption under Serial No. 30(c) of Notification Number. 25 of 2012 – Service Tax dated June 20, 2012.

Even after the modification, the services’ fundamental nature, as outlined in both invoices and agreements, remained unchanged. Although the Appellant asserted the job work classification, they failed to substantiate this claim or undergo registration under the designation of business auxiliary services (BAS)

In defence for the allegations made the Appellant invoked Notification No. 25 of 2012- (Serial No. 30(c)), service tax to justify their position on service tax liabilities.

The relevance of the Contract Labour (Regulation and Abolition) Act 1970 was emphasized by Customs, Excise & Service Tax Appellate Tribunal (CESTAT) indicating its significance in understanding the nature of the services provided by the Appellant, especially in relation to labour regulations and employment practices.

The Commissioner made a demand of Rs. 10,50,23,672/- for the period from April 2012 to March 2014, accompanied by a penalty due to habitual delay in paying service tax.

On July 15, 2019, the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) determined that the rendered services constituted contract labour rather than job work. As a result, the Appellant was deemed ineligible for the exemption typically associated with job work contracts. Discontent with the CESTAT ruling, the Appellant lodged an appeal with the Supreme Court of India.

ISSUES RAISED

Do the agreements between the Appellant and Sigma constitute contracts for the supply of manpower services or contracts for the provision of services on a job work basis?

CONTENTION OF APPELLANT

The Appellant argues that the scope of the term ‘contractor’ in Section 2(c) of the Contract Labour (Regulation and Abolition) Act (CLRA) is extensive, covering both job workers and providers of manpower. Consequently, the Appellant’s registration under the law doesn’t automatically imply that their function is limited to supplying manpower.

The Appellant underscores the billing structure, claiming that their invoices follow a piece-rate system. They contend that the service charges are tied to the amount of work completed rather than the number of manpower supplied. According to their argument, this aspect signifies a relationship based on job work.

According to the Appellant cases like S. Balasubramani v. Commissioner. set a precedent where work is deemed as job work when a contractor is involved in process work and charges on a rate-per-piece basis, rather than being classified solely as the provision of manpower.

Citing Section 21(4) of CLRA, the Appellant maintains that Sigma is explicitly acknowledged as the principal employer in the contracts. In accordance with this provision, the principal employer takes on the obligation of wage payments if the contractor defaults. The Appellant contends that these agreements align with legislative provisions, emphasizing the job work nature of their involvement.

The Appellant underscores that the services specified in the agreements extend beyond simple manpower supply. They are assigned specific responsibilities, which encompass tasks such as material handling, felting, pouring, and provision of machine parts, assembly and painting. The Appellant asserts their active participation in decision-making regarding personnel, service conditions, and supervision of work, this indicates a job work arrangement rather than a simple manpower supply.

CONTENTION OF RESPONDENT

The respondent contends that the agreements between the appellant and Sigma do not involve job work but rather mask the provision of manpower services.

The respondent argues that the terms of the agreements indicate that the appellant is obligated to provide manpower services to Sigma rather than engaging in job work. The contracts are perceived as pure labour contracts lacking essential details and specifications typical of genuine job-work agreements.

Entry 30(c) of the Notification is highlighted by the Respondent. This entry specifically pertains to the carrying out of an “intermediate production process as job work in relation to any goods on which appropriate duty is payable by the principal employer.” The Respondent argues that the Appellant’s activities should have been declared under the category of ‘business auxiliary services’ or claimed exemption under this entry if they indeed fell within its scope.

The Respondent asserts that if the Appellant were genuinely engaged in providing the services covered by Entry 30(c) of the Notification, it would have appropriately declared and categorized these services. However, the Respondent alleges that the Appellant attempted to undermine the taxable value. The Appellant neither amended its service tax registration nor declared the services in the ST-3 returns under the category of ‘business auxiliary services.

JUDGEMENT

The Supreme Court meticulously examined Entry 30(c) of the Notification, which provides an exemption for “undertaking an intermediate production process as job work.” The Court’s analysis extended to the contractual agreements between the appellant and Sigma, revealing a significant absence of essential contractual terms commonly associated with authentic job work arrangements.

Despite the inclusion of detailed schedules outlining various services and payment rates, the Court stressed that the exclusion of vital terms essential to legitimate job work contracts could not be disregarded. The Court’s detailed scrutiny brought to light the fact that the Agreements lacked specific details such as the nature of work, anticipated output, and delivery schedules – elements crucial to establishing a genuine job-work relationship.

Rejecting the appellant’s reliance on precedent decisions, the Court delivered a conclusive verdict. It asserted that, upon comprehensive evaluation, the primary intent of the Agreements was the provision of contract labour. In upholding the CESTAT’s judgment (Customs, Excise, and Service Tax Appellate Tribunal), the Court determined that, based on their substance and purpose, the Agreements constituted contracts for the provision of manpower services.

ANALYSIS

From an analytical perspective, this ruling not only safeguards against potential abuse of contractual arrangements but also provides clarity on the criteria that must be fulfilled for a service to legitimately fall under the category of job works. It reinforces the judiciary’s commitment to ensuring that statutory exemptions are granted judiciously and in accordance with the true intent and substance of contractual relationships.

It emphasizing the importance of interpreting a contract as a cohesive whole to discern its true essence, rather than isolating and focusing on individual contractual terms. This judgment by the Supreme Court constitutes a significant deterrent against contractors attempting to circumvent their service tax obligations by disguising contracts meant for the provision of manpower as contracts for job work.

CONCLUSION

In conclusion, the Supreme Court’s meticulous examination of the contractual agreements and the interpretation of Entry 30(c) of Notification 25/2012-Service Tax has yielded a landmark decision with far-reaching implications. By emphasizing the importance of considering contracts in their entirety and scrutinizing the substance over mere terminology, the Court has curtailed attempts by contractors to evade service tax responsibilities through the camouflage of manpower supply contracts as job work agreements. Overall, the ruling contributes to jurisprudence, ensuring a robust evaluation of exemptions and upholding the true intent of contractual relationships for tax purposes.

REFERENCES

DECLARATION

This Article is written by Fathima Zohra, student of Kristu Jayanti College of Law, Intern at Legal Vidhiya.

Disclaimer: The materials provided herein are intended solely for informational purposes. Accessing or using the site or the materials does not establish an attorney-client relationship. The information presented on this site is not to be construed as legal or professional advice, and it should not be relied upon for such purposes or used as a substitute for advice from a licensed attorney in your state. Additionally, the viewpoint presented by the author is of a personal nature.