The Principal Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), New Delhi, has upheld a service tax demand of ₹12.50 lakh, along with interest and penalty, against a labour contractor after holding that payment linked to production output (per metric tonne) does not alter the true nature of a contract if it is essentially one for manpower supply.
The bench of dismissed the appeal and reaffirmed that the substance of the agreement, rather than the method of payment, determines tax liability.
The dispute arose from a service tax demand raised against the appellant/assessee who had entered into an agreemen. Following an audit of the records of the service recipient, the department alleged that the appellant had provided “manpower recruitment or supply agency service”but had failed to discharge the applicable service tax liability.
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A show cause notice issued on 6 December 2012 culminated in an Order-in-Original confirming a service tax demand of ₹12,50,639, together with interest and penalties. Although the Commissioner (Appeals) subsequently removed penalties imposed under Sections 76 and 77 of the Finance Act, 1994, he sustained the demand, interest, and penalty under Section 78. The appellant thereafter approached CESTAT.
The principal defence of the appellant was that it had not supplied manpower but had undertaken the entire manufacturing process as a job worker. According to the appellant, labour deployed at the factory remained under its own supervision and control. Payment was calculated on the basis of finished goods produced (per metric tonne) and not on the number of workers supplied. Compliance with labour laws, including PF and ESIC, remained its responsibility. Since the contract related to manufacture rather than manpower supply, no service tax was payable.
The appellant also argued that the department improperly relied upon a statement recorded during investigation without complying with the procedure prescribed under Section 9D of the Central Excise Act and contended that the demand was barred by limitation.
The Revenue argued that forensic audit of the recipient’s records revealed that the appellant had rendered manpower supply services. During investigation, searches were conducted and documents were recovered. The department also relied upon the appellant’s statement recorded during investigation in which he allegedly admitted that he was engaged in labour supply services.
According to the department, the appellant had collected service tax from the recipient but failed to deposit the same with the Government.
Since contracts pertaining to the relevant period were unavailable, the Tribunal examined an earlier work order produced by the appellant, accepting the submission that subsequent contracts were substantially similar.
The work order described the appellant as a “Labour Contractor” and required deployment of labour for activities such as: Sand mixing, Coring, Moulding, Heating and baking, Casting, Grinding, Cleaning slag, and Dispatch-related work.
Although remuneration was fixed on a per metric tonne basis, the agreement repeatedly described the bills as “labour bills”. The contractor was also responsible for deducting and depositing PF and ESIC contributions and producing challans before S.S. Ispat.
A central issue before the Tribunal was whether payment based on production output transformed the arrangement into a manufacturing contract.
Rejecting this argument, the Bench observed that the measure of consideration alone cannot determine the character of a contract. It relied upon the Supreme Court’s decision in Adiraj Manpower Supply Pvt. Ltd. v. Commissioner of Central Excise, Pune-II, which held that a contract must be interpreted in its entirety.
The Tribunal found that the agreement itself described the arrangement as a labour contract. The appellant had applied for appointment as a labour contractor. Bills were expressly characterised as labour bills. The recipient insisted upon PF and ESIC compliance because labour was being supplied.
Accordingly, the Bench concluded that the agreement was fundamentally one for supply of labour and not for independent job work.
The appellant argued that his statement recorded during investigation could not be relied upon because the adjudicating authority had not followed the procedure under Section 9D.
The Tribunal rejected this contention, observing that the appellant himself had failed to attend multiple personal hearings despite repeated opportunities. Having neither retracted his earlier statement nor appeared before the adjudicating authority to dispute it, he could not later seek to invalidate its evidentiary value.
The Bench further observed that the statement merely corroborated what was already evident from the written agreement.
The Tribunal also rejected the appellant’s plea that the extended period of limitation had been wrongly invoked.
It held that the appellant was fully aware that he was rendering taxable manpower supply services but chose neither to disclose the activity nor pay service tax. The Tribunal further noted the Revenue’s submission that service tax had been collected from the recipient but not deposited with the Government.
On the appellant’s objection regarding reliance on Form 16A (TDS certificates), the Tribunal held that when an assessee fails to produce complete records, the department is entitled to rely upon available evidence. Since the appellant failed to demonstrate that the payments reflected in Form 16A related to any activity other than manpower supply, the objection was rejected.
Finding no infirmity in the appellate order, the CESTAT upheld the service tax demand, interest, and penalty under Section 78 of the Finance Act, 1994, and dismissed the appeal.
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