No Service Tax On Expatriate Employees Working Under Employer–Employee Relationship: CESTAT

The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that salary reimbursements made to a foreign holding company for expatriate employees cannot be subjected to Service Tax where the employees were working under an employer–employee relationship with the Indian entity. The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) ruled that the employer–employee relationship does not amount to provision of “Management Consultancy Service” or manpower supply and therefore fall outside the scope of Service Tax. The dispute arose after Bharathi Cement entered into an agreement with VICAT S.A., France in December 2012 for advice and assistance relating to business strategies, research, training, and management support. The Indian company paid Service Tax under the Reverse Charge Mechanism (RCM) on such consultancy services and also availed CENVAT credit. During an excise audit, the department observed that certain employees of the French company had been deputed to work in India. While a portion of the expatriates’ salary was paid directly in India, another portion—covering statutory contributions in France and other components—was routed through VICAT S.A. and later reimbursed by the Indian company. The department treated these reimbursements as consideration for services allegedly provided by the foreign entity and issued a Show Cause Notice demanding Service Tax for the period December 2010 to June 2013. The adjudicating authority confirmed a demand of ₹53.55 lakh along with interest and equal penalty, which was later upheld by the Commissioner (Appeals). The appellant argued that the expatriates were directly employed by the Indian company and worked under its control, supervision, and management. According to the company: The foreign entity merely facilitated disbursement of certain salary components. The entire remuneration was borne by the Indian company. The expatriates were engaged in operational and executive roles rather than consultancy. Therefore, the arrangement constituted an employer–employee relationship, which is outside the ambit of Service Tax. The company also contended that the Supreme Court’s ruling in the Northern Operating Systems case should not apply because there was no secondment agreement and the employees were directly engaged by the Indian entity. The department argued that the expatriate employees were originally employees of the foreign holding company and were engaged in India through it. According to the department, the payments made to VICAT S.A. represented consideration for services provided by the foreign entity, making the arrangement taxable under Service Tax provisions. The department also relied on the Supreme Court’s judgment in Northern Operating Systems Pvt. Ltd., which held that certain secondment arrangements could amount to manpower supply services. The Tribunal examined the facts and concluded that the Supreme Court’s ruling in Northern Operating Systems could not be applied mechanically to every secondment or expatriate employment arrangement. The Tribunal also noted that the expatriates were performing operational roles rather than advisory or consultancy functions. Therefore, their activities could not be classified as Management Consultancy Service. Based on the factual matrix, the Tribunal held that the relationship between the expatriate employees and the appellant was that of employer and employee. Since services provided by employees to their employer in the course of employment are outside the scope of Service Tax, the Tribunal concluded that the demand was unsustainable. The Tribunal set aside the impugned order and allowed the appeal, granting relief to the appellant. Case Details Case Title: M/s Bharathi Cement Corporation Versus Commissioner of Central Tax Citation: JURISHOUR-264-CES-2026(HYD) Case No.: Service Tax Appeal No. 30525 of 2018 Date: 09.03.2026 Counsel For Appellant: Ch. Sumanth, Advocate Counsel For Respondent: M. Anukathir Surya, Authorized Representative Click Here To Read Order Read More: No Extended Limitation Without Proof of Suppression: CESTAT Quashes CENVAT Credit Demand Against Rajasthan Housing Board

No Service Tax On Expatriate Employees Working Under Employer–Employee Relationship: CESTAT

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