The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore, has held that an organisation working to secure employment for economically disadvantaged women cannot be subjected to service tax as a “manpower recruitment or supply agency” when it is not acting as an intermediary supplying workers to clients.
The Bench of P.A. Augustian (Judicial Member) and R. Bhagya Devi (Technical Member) further ruled that the authorities could not calculate service tax on the entire amount received from clients when a substantial portion represented wages reimbursed to the organisation’s members.
The Tribunal consequently allowed the appeal filed by the Self Employed Women’s Association (SEWA) and granted consequential relief in accordance with law.
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The dispute concerned the sustainability of a service tax demand raised against SEWA by treating its activities as “manpower recruitment or supply agency service” under the Finance Act, 1994.
Based on intelligence gathered by officers of the Preventive Unit, the Service Tax Department initiated proceedings against the organisation for alleged failure to obtain registration and pay service tax. A show cause notice dated May 27, 2008 was issued for the period between June 16, 2005 and December 31, 2007.
The adjudicating authority, through an order dated September 30, 2009, confirmed the demand for the period from May 1, 2006 to December 31, 2007. However, the demand relating to the earlier period from June 16, 2005 to April 30, 2006 was dropped.
The authority also refrained from imposing any penalty after accepting that SEWA had acted under a bona fide belief regarding the non-taxability of its activities. The benefit of Section 80 of the Finance Act, 1994 was therefore extended to the organisation.
SEWA challenged the confirmed demand before the Commissioner of Central Excise (Appeals), but its appeal was rejected through an order dated February 19, 2015. The organisation thereafter approached the CESTAT.
The assessee submitted that the organisation was not operating as a commercial manpower supply agency. Its principal objective was to organise women workers and help them achieve full employment, including work security, income security, food security and social security.
The organisation also provided training to economically backward women to enable them to obtain suitable work and become economically independent. According to SEWA, its organisational structure was essentially similar to that of a trade union in which the workers themselves constituted and managed the organisation.
Its executive committee consisted of workers and a secretary. After receiving training, the members undertook assignments directly for different customers and clients.
SEWA argued that its institutional involvement was intended to ensure that members received correct and timely wages and were protected from exploitation. The organisation and its workers could not be treated as separately identifiable entities for the purpose of imposing tax under the category of manpower supply services.
The organisation contended that a manpower supply arrangement ordinarily involves an intermediary that employs individuals and supplies their services to a third-party client for consideration.
In SEWA’s case, however, the workers had collectively organised themselves and were directly undertaking assignments for clients. The organisation was, in effect, the workforce itself and was not supplying workers employed by it to another person.
Counsel relied upon a clarification issued by the Tax Research Unit on July 27, 2005 concerning artisans in the gems and jewellery industry. The clarification stated that where an organisation or business directly engages the services of artisans without using another person for recruitment or supply, the artisans are contractually employed by the organisation or business. Service tax becomes applicable only when the services of another person are engaged for recruiting or supplying artisans.
SEWA maintained that the same principle applied to its activities because the women workers, backed by the organisation, directly obtained employment from clients.
The organisation also referred to its registration under the Travancore-Cochin Literary, Scientific and Charitable Societies Registration Act and placed its bylaws before the Tribunal to demonstrate the nature and purpose of its activities.
The department argued that the definition of a “manpower recruitment or supply agency” under Section 65(68) of the Finance Act covered any person engaged, directly or indirectly and in any manner, in recruiting or supplying manpower temporarily or otherwise to a client.
It pointed out that manpower recruitment became taxable from July 7, 1997, while manpower supply was brought within the tax net from June 16, 2005.
According to the Department, the nature of the services performed by SEWA brought it within the statutory definition. It also relied on CBEC Circular No. 96/7/2007-ST dated August 23, 2007.
The circular explained that manpower supply occurs where individuals are contractually employed by a manpower recruitment or supply agency and the agency permits another person to use their services for consideration. In such cases, the employer-employee relationship continues between the agency and the individual and not between the individual and the person using the services.
The Revenue further pointed out that SEWA collected an annual membership fee of ₹10, training charges of ₹300 for cleaning activities and ₹500 for nursing activities. It also deducted ₹3 per day from wages towards employees’ provident fund and ₹5 from each member towards the cost of a passbook.
It was submitted that SEWA’s request for service tax exemption had previously been rejected by the Ministry of Finance through a letter dated September 14, 2007.
Another central issue before the Tribunal was the valuation adopted by the Service Tax Department.
The Department invoked Section 67(1) of the Finance Act to argue that where a service is provided for monetary consideration, its taxable value must be the gross amount charged by the service provider.
SEWA, on the other hand, contended that most of the money collected from clients was subsequently disbursed to its members as wages. The organisation merely facilitated the receipt and disbursement of wages to ensure that the women workers were not exploited.
Therefore, according to SEWA, the wages collected on behalf of members could not be treated as the organisation’s consideration for providing a taxable service.
After examining the organisation’s objectives and the available evidence, the CESTAT found that SEWA organised women to ensure that their families obtained full employment.
The Tribunal accepted that the organisation was not engaged in providing any service involving the supply of manpower. Its activities were aimed at helping women workers obtain work, economic security and institutional support rather than supplying employees to clients as a commercial intermediary.
The Bench also considered the alternative position that even if SEWA’s activities were assumed to constitute manpower supply, the demand would still be unsustainable on the valuation adopted by the authorities.
The evidence showed that a considerable portion of the amounts collected from clients was reimbursed to members as wages for the work performed by them. The remaining amount collected by SEWA as registration or related charges was negligible and fell below the monetary threshold for taxable services.
The Tribunal therefore held that assessing service tax on the entire gross amount without deducting the reimbursable expenses was unsustainable.
The CESTAT set aside the impugned order and granted SEWA consequential relief in accordance with law.
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