Service Tax Payable on Secondment of Employees Under Manpower Supply: CESTAT

The Bangalore Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that secondment of employees by a foreign parent company to its Indian subsidiary constitutes “manpower recruitment or supply agency service” and is liable to service tax under the reverse charge mechanism. The bench of P.A. Augustian (Judicial Member) and R. Bhagya Devi (Technical Member) has restricted the tax demand to the normal limitation period and set aside penalties, granting partial relief to the assessee. The decision came in the case of M/s ARM Embedded Technologies Pvt. Ltd., which had challenged an Order-in-Original confirming a service tax demand of ₹1.76 crore along with interest and penalties under Sections 77 and 78 of the Finance Act, 1994. The appellant, a 100% Export Oriented Unit registered with Software Technology Parks of India (STPI), was engaged in exporting IT services. It had entered into a “Salary Cost Reimbursement Agreement” with its UK-based parent company, ARM Ltd., under which employees were seconded to India for software development and related operations. Under this arrangement, part of the salary was paid by the foreign entity and later reimbursed by the Indian entity. The secondees worked under the control of the Indian company, and the appellant argued that they were effectively its employees, making the payments mere reimbursements not liable to service tax. However, the department treated the arrangement as manpower supply service and invoked service tax under reverse charge. The core issue before the Tribunal was whether secondment of employees by a foreign parent company—where salaries are paid abroad and reimbursed—amounts to a taxable service of manpower supply or constitutes an employer-employee relationship excluded from service tax. The Tribunal relied heavily on the Supreme Court’s landmark ruling in Northern Operating Systems Pvt. Ltd. v. CCE, which clarified taxability in secondment arrangements. The tribunal noted that the secondees remained on the payroll of the foreign parent company. Salaries were paid by the parent company and reimbursed by the Indian entity. The secondment was temporary, and employees returned to the parent company after completion. The overall arrangement reflected deployment of skilled personnel by the overseas entity. The Tribunal observed that mere operational control by the Indian entity does not establish an employer-employee relationship. Instead, the real test lies in the overall structure and contractual terms. The Tribunal held that the arrangement qualifies as manpower recruitment or supply service. The Indian entity is liable to pay service tax under reverse charge. Reimbursement of salary does not change the nature of the transaction The CESTAT emphasized that such cross-border secondment arrangements are part of global business models where specialized employees are deployed temporarily, and the overseas entity effectively provides services through its personnel. Despite upholding taxability, the Tribunal granted partial relief. The demand was restricted to the normal limitation period. The extended period was not invoked, as there was no mala fide intent. Penalties were set aside, noting that any tax paid would have been available as CENVAT credit The Tribunal specifically observed that absence of intent to evade tax and revenue neutrality were key factors in denying penalties. Case Details Case Title: M/s. ARM Embedded Technologies Private Limited Versus The Commissioner of Central Excise Citation: JURISHOUR-995-CES-2026(BANG) Case No.: Service Tax Appeal No. 900 of 2012 Date: 24.04.2026 Counsel For Appellant: G. Shivadass, Senior Advocate Counsel For Respondent: M. A. Jithendra, Assistant Commissioner (AR) Click Here To Read Order Read More: Gold Chains in Running Length Classifiable as Jewellery, Not Semi-Manufactured Gold: CESTAT Quashes Rs. 15 Lakh Penalty

Service Tax Payable on Secondment of Employees Under Manpower Supply: CESTAT

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