The Chandigarh Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that Punjab Roadways, a government transport department performing statutory public functions, cannot be treated as a ‘Manpower Recruitment or Supply Agency’ for service tax purposes, setting aside a service tax demand of ₹7.91 crore along with interest and penalties.
The bench of S. S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member) further ruled that the department had wrongly invoked the extended limitation period after having already issued an earlier show cause notice on the same set of facts.
The appeal arose from an Order-in-Original passed by the Commissioner, CGST, Chandigarh, confirming a service tax demand of ₹7,91,04,000, along with applicable interest, an equivalent penalty under Section 78 of the Finance Act, 1994, and an additional penalty of ₹10,000 under Section 77. Punjab Roadways challenged the order before the Tribunal.
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The Department alleged that Punjab Roadways, while operating public transport services in the State of Punjab, hired buses and deployed its personnel to operate them. According to the Revenue, this amounted to providing “Manpower Recruitment or Supply Agency Service” under the Finance Act, 1994, making the activity liable to service tax both before and after the introduction of the negative list regime. On this basis, a show cause notice was issued demanding service tax for the relevant period.
Punjab Roadways submitted that the controversy had already been settled by the same Tribunal in its own case through Final Order Nos. 61023-61025/2025, which dealt with an earlier period from April 1, 2005, to March 31, 2010. In that decision, the Tribunal had held both that the activity was not taxable as manpower supply service and that the extended period of limitation could not be invoked.
The appellant further argued that once the Department had already invoked the extended period in an earlier show cause notice based on identical facts, it could not once again invoke the same extended period for a subsequent notice. In support, reliance was placed on the Supreme Court’s decision in Nizam Sugar Factory, which prohibits repeated invocation of the extended limitation period where the Department is already aware of the relevant facts.
The Tribunal examined its earlier ruling and found that Punjab Roadways merely assigned its drivers, conductors, and other staff to work for PUNBUS, while PUNBUS reimbursed the operational expenses.
It noted that PUNBUS had been established to provide safe, reliable, and efficient public transport using the route permits of Punjab Roadways. The Government of Punjab had decided that employees of Punjab Roadways would be deployed to PUNBUS on an assignment basis without any additional remuneration or deputation allowance, while continuing to remain employees of the State Government. Their salaries were paid by the Government, with PUNBUS only reimbursing a part of those salary expenses.
The Tribunal also referred to the opinion of the State Legal Advisor, who clarified that Punjab Roadways is not a company but a government department functioning under the Department of Transport and discharging statutory obligations of providing public transport services. Since both Punjab Roadways and PUNBUS function under the control of the same Transport Department, deployment of staff between them was merely an administrative arrangement and not a commercial manpower supply activity.
The Bench observed that both Punjab Roadways and PUNBUS are under the administrative control of the Principal Secretary, Department of Transport, Government of Punjab. The employees of Punjab Roadways were simply performing additional duties to ensure efficient functioning of PUNBUS, without any separate consideration being paid for supplying manpower.
Accordingly, the Tribunal held that Punjab Roadways was not engaged in the business of manpower recruitment or supply and therefore fell outside the scope of taxable service under the Finance Act, 1994.
Apart from deciding the matter on merits, the Tribunal also ruled in favour of Punjab Roadways on the question of limitation. Following its earlier decision and the Supreme Court’s ruling in Nizam Sugar Factory, it held that the Department had failed to justify invocation of the extended period after already issuing an earlier notice on identical facts.
Consequently, the Tribunal concluded that the impugned order confirming the tax demand could not survive in law.
Allowing the appeal, the CESTAT Chandigarh Bench set aside the Order-in-Original and quashed the service tax demand of ₹7.91 crore, together with interest and penalties, holding that Punjab Roadways was performing statutory governmental functions and was not rendering taxable manpower recruitment or supply services. It also held that the Department had wrongly invoked the extended limitation period.
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