Category: Indirect Taxes

Real
estate is undoubtedly one of the most complex sectors, be it from the
perspective of levy of tax, quantification of tax or the claim of input
tax credit. This is perhaps because there are different facets involved,
as a transaction of sale of constructed unit is not a simple
transaction of sale of goods or services but is a complex transaction
involving transfer of land / share in land, transfer of goods in the
execution of contract and the provision of services of construction.
From the perspective of indirect taxes, a contract for sale of unit, be
it residential / commercial, is a works contract also involving the
transfer of land / share in land.It is for this reason that
under legacy laws, i.e., VAT and service tax, a lower tax rate was
prescribed. For instance, in VAT, in Maharashtra, the sector had an
option to pay tax at a standard rate of 1 per cent of agreement value
while service tax was levied on 1/4th of the agreement value or 1/3rd of
the agreement value. While the rate prescribed under VAT law was a
composition scheme, meaning no corresponding input tax credit for the
dealers, under service tax, the taxpayer was eligible to claim CENVAT
credit, though only on input services, i.e., credit of tax paid on
capital goods and inputs was not available. This restriction on claim of
input tax credit was through a conditional notification, which provided
for an abatement in the value of taxable services resulting in an
effectively lower rate vide notification 26/2012-ST dated 20th June,
2012 as amended from time to time.On the other hand, under GST,
there was no upfront restriction on claim of input tax credit initially
as works contract was deemed to be a supply of service and the builder
was entitled to claim full input tax credit of tax paid on goods and
services received in the course or furtherance of business. However,
notification 11/2017-CT (Rate) dated 28th June, 2017 which prescribes
the rate of tax for services provided that in case of supply of service
involving transfer of land or undivided share of land, the value of
supply shall be 2/3rd of the total amount charged for such supply.Subsequently,
w.e.f 01st April, 2019, the tax regime for the real estate sector
underwent substantial changes. The projects were classified into two
categories, namely:

a)    Residential Real Estate Project: A
project in which carpet area of commercial apartments is not more than
15 per cent of total carpet area of all apartments in the REP. The
effective tax rate applicable on outward supply was reduced to 1 per
cent / 5 per cent with a condition of no corresponding input tax credit.

b)
Other than RREP: A project other than Residential Real Estate Project,
wherein the total carpet area of commercial apartments was more than 15
per cent of total carpet area of all apartments. While the tax rate on
residential apartments was reduced to 1 per cent / 5 per cent with no
corresponding input tax credit, the commercial apartments continued to
be taxable at 12 per cent with eligible input tax credit.

However,
for ongoing projects, the taxpayer had an option to continue pay tax
under the existing rates or pay tax under the new scheme. In case of
ongoing projects where the option to pay tax under the new tax rate was
applied, the developer was also required to reverse the input tax credit
attributable to construction which has time of supply on or after 1st
April, 2019. Simply put, the formula for determining the ITC reversible
is:

Essentially, therefore, the eligibility to claim input tax credit is now restricted
only for ongoing projects where the option to pay tax at lower rate of 1
per cent / 5 per cent was not exercised or commercial units in other
than RREP project where the tax rate continues to be 12 per cent.
Further, vide a Removal of Difficulty Order, Rule 42 was amended
prospectively requiring the taxpayer to, at the time of completion of
project / first occupation, whichever is earlier, reverse the input tax
credit proportionate to the unsold area at that time. The formula to
determine the input tax credit reversible, simply put is:

It may not be out of place to highlight that both under the legacy laws as
well as GST, no tax is leviable on sale of constructed units after the
receipt of completion certificate.

In this article, we have
attempted to identify the various issues which plague the industry and
probable resolutions available for the sector from the perspective of
input tax credit.

Input tax credit reversal on area sold after completion certificate / first occupation, whichever is earlier:

Controversy under service tax pre-GST regime
The
process of undertaking the activity of construction is a time-intensive
project. All the units which are sold up to the receipt of completion
certificate / first occupation, i.e., while construction activity is
underway are liable to tax. This means that when the taxpayer incurs
substantial expenditure on construction, including paying tax on the
inward supplies, he also gets the right to claim the credit of the taxes
so paid on the inward supplies as they are used / intended to be used
for making a taxable supply. If during this stage, the taxpayer sells
any unit, the said sale becomes taxable service / supply.

Under
the CCR, 2004, Rule 6 provided that the credit on inputs / input
services to the extent used for providing exempt services shall be
liable to be reversed in the prescribed manner. The said rules required
every taxable person engaged in providing taxable as well as exempt
services to determine the credit on inward supply of inputs / input
services availed and used for providing both, taxable as well as exempt
services and such person was eligible to claim credit only to the extent
such inward supplies were used for making taxable supplies based on the
ratio of taxable services to value of total services provided during
the relevant financial year. In other words, an assessee
was required to carry out an exercise on an annual basis to determine
the credit reversible u/r 6 to the extent inward supplies are used for
providing both, taxable as well as exempt services.

Despite Rule
6 clearly providing a method fordetermining CENVAT credit attributable
to exempt services, many taxpayers were served with notices raising
ademand by applying the provisions of Rule 6 on a project basis /
totality basis / area basis. For example, a builder starts a project in
2012 which is completed in 2016 (say 31st March, 2016). The various
details of the project are as under:

FY	Total area sold	Total value of service	CENVAT availed
2012-13	2,000	2,00,00,000	7,50,000
2013-14	5,000	5,00,00,000	6,50,000
2014-15	8,000	8,00,00,000	7,00,000
2015-16	1,500	1,50,00,000	4,25,000
2016-17	11,000	11,00,00,000	2,75,000
Total	25,000	25,00,00,000	28,00,000

Notices were issued to taxpayers demanding reversal of
credit u/r 6 of CCR, 2004. The reversal was towards the proportionate
CENVAT credit availed by them during the period of construction, which
was ultimately also used for providing non-taxable service, i.e., sale
of units after receipt of completion certificate / first occupation. For
example, in this case, sale of 44 per cent of units would be
non-taxable and therefore, credit claimed towards area which did not
attract service tax, i.e., 44 per cent of the total area sold was
alleged as being liable to be reversed. Accordingly, notice demanding
Rs.12,32,000 was raised on the taxpayers (Rs. 28,00,000*11,000/25,000).

The
matter came up before the Hon’ble Ahmedabad bench of the CESTAT in the
case of Alembic Ltd. vs. CCE & ST, Vadodara I [2019 (28) G.S.T.L. 71
(Tri.-Ahmd)] wherein it was held that the eligibility / entitlement to
credit has to be examined only at the time of receipt of input service
and once it is found to be availed at a time when output service is
wholly taxable, the same is availed legitimately and cannot be denied
and / or recovered unless specific machinery provisions are made.

The
Revenue appeal against the Tribunal’s decision was dismissed by the
Hon’ble Gujarat High Court in 2019 (29) G.S.T.L. 625 (Guj.) wherein it
was held that since at the time of receipt of input services, there was
no exempt service provided by the Appellant, the question of
applicability of Rule 6 does not arise. Rule 6 became applicable only
after the completion certificate was obtained.

Controversy under GST – pre-amendment scenario

At the time of introduction of GST, in a manner similar to Rule 6 of CCR,
2004, the provisions under GST, i.e., Rule 42 provided for reversal of
input tax credit based on turnover of exempted supplies to total
turnover, i.e., exempt plus taxable when an inward supply is used for
making both, taxable as well as exempt supplies.

Rule 42
prescribed that the amount of input tax credit attributable towards
exempt supplies be denoted as D1 and the same be calculated as (D1=E÷F) x
C2. In the present context, E refers to the value of exempted supplies
i.e., the value of the flats sold post completion, F refers to the
aggregate value of exempted supplies as well as taxable supplies and C2
refers to the common credit pertaining to both exempted as well as
taxable supplies. It may further be noted that this formula is
applicable for each tax period. The term ‘tax period’ is defined to mean
the period for which the return is required to be furnished, which is
monthly in GSTR-3B and annually in GSTR-9. Therefore, each of the above
values needs to be calculated for each period and the disallowance
should be restricted to the period only after the taxable person starts
making exempt supplies. Necessarily, for effective implementation of
this Rule, the taxpayer should be simultaneously engaged in making
taxable and exempt supplies, which is likely to occur only when the
project is likely at the end stage.

In that sense, there is a
strong reason to believe that the decision of the Gujarat High Court in
the case of Alembic Ltd. shall apply to GST as well.

CONTROVERSY UNDER GST – POST-AMENDMENT SCENARIO

Rule
42 was amended w.e.f 01st April, 2019 to provide that for the value of
exempt supply shall be the aggregate carpet area of the apartments,
construction of which is exempt from tax plus aggregate carpet area of
the apartments, construction of which is not exempt from tax but are
identified by the promoter to be sold after issuance of completion
certificate or first occupation, whichever is earlier. Similarly, the
value of taxable supply shall be the aggregate carpet area of the
apartments in the project.

The above demonstrates that the
prescribed method for determining the amounts to be reversed on account
of input tax credit used for making exempt supplies shall be based on
area and not value, as provided for u/s 17 (3). Therefore, to overcome
this apparent conflict between the amended Rule and the provisions in
the Act, Removal of Difficulty Order No. April, 2019 – Central Tax dated
29th March, 2019 was issued vide which it was clarified that in case of
supply of services covered by clause (b) of paragraph5 of Schedule II
of the said Act, the amount of credit attributable to the taxable
supplies including zero rated supplies and exempt supplies shall be
determined on the basis of the area of the construction of the complex,
building, civil structure or a part thereof, which is taxable and the
area which is exempt.

The first question which arises is whether
the ROD is legally sustainable? To understand this aspect, we need to
refer to section 172 of the CGST Act, 2017 which empowers the Government
to issue such Order, which is reproduced below for reference:

(1)
If any difficulty arises in giving effect to any provisions of this
Act, the Government may, on the recommendations of the Council, by a
general or a special order published in the Official Gazette, make such provisions not inconsistent with the provisions of this Act or the rules or regulations made thereunder, as may be necessary or expedient for the purpose of removing the said difficulty:

Provided that no such order shall be made after the expiry of a period of three years from the date of commencement of this Act.

(2) Every order made under this section shall be laid, as soon as may be, after it is made, before each House of Parliament.

Reading
of the above provisions shows that section 172 empowers the Government
to make provisions to remove any difficulty which may arise in putting
the law into operation. However, the powers are to be exercised in such a
way that it does not change the basic policy of the Act in question. It
should not be inconsistent with the provisions of the Act. In the
present case, the ROD provides that ITC reversal in case of
constructions services shall be done based on carpet area of
construction of complex despite the section clearly providing that the
reversal of ITC shall be based on value. It is therefore clear that in
guise of ROD, a new provision has been introduced which creates hardship
or puts the taxpayer at a disadvantage. It is likely that such order
and amendment to Rule 42 may therefore be held to be unconstitutional as
ROD orders cannot be issued to change the basic provisions of the
section itself.

This principle has been followed by Courts on
multiple occasions. In Madeva Upendra Sinai vs. Union of India
[2002-TIOL-1189-SC-IT-CB], the Hon’ble Supreme Court has held that in
removal of difficulty, the Government can exercise the power only to the
extent it is necessary for giving effect to the Act. The basic or
essential provisions cannot be tampered with. Similar view has been
followed in Straw Products Ltd. vs. Income Tax Officer
[2002-TIOL-1564-SC-IT-CB] wherein it has been held that power to remove
difficulty can be exercised in the manner consistent with the scheme and
essential provisions of the Act. In Krishna Deo Misra vs. State of
Bihar and Ors. [AIR-1988-Pat 9], it has been held that ROD must not be
inconsistent with any provisions of the Parent Act. Also, ROD clause
cannot be used as a substitute for rule making power. In view of the
above, it can be said that the amendment to Rule 42 w.e.f 1st April,
2019 aided by the ROD 4/2019 is clearly unsustainable in law.

Even
if one opines to the contrary, i.e., the amendments introduced in Rule
42 for the sector are maintainable in law, the position can be
summarized as under:

PROJECTS UNDER THE OLD SCHEME

a)
Whether the amended provision would apply to ongoing projects where
the option to pay tax under the old scheme has been exercised will need
analysis. This is because the eligibility to claim input tax credit is
determined at the time of receipt of inputs / input services, as held by
the Larger Bench of Tribunal in the case of Spenta International Ltd.
vs. CCE, Thane [2007 (216) E.L.T. 133 (Tri. – LB)] wherein it has been
held as under:

10.    In the light of the above discussion, we
answer the reference by holding that Cenvat credit eligibility is to be
determined with reference to the dutiability of the final product on the date of receipt of capital goods.

b)
Further, when the input tax credit was claimed upto 31st March, 2019,
the same would have already been subjected to the provision of Rule 42,
as applicable at that point of time. Therefore, by a subsequent
amendment, the input tax credit already claimed by the developer cannot
be altered.

PROJECTS UNDER NEW SCHEME

c) The
amended provision would not have any relevance for ongoing projects
where the option to pay tax under new scheme have been exercised or new
project classified as residential real estate project. This is because
in case of ongoing projects where the builder pays tax under the amended
rates, the taxpayer would be liable to reverse the input tax credit as
per notification 11/2017 – CT(Rate) dated 28th June, 2017 (as amended)
which has been claimed upto 31st March, 2019 and there will be no fresh
claim of credits w.e.f 1st April, 2019.

d)    However, in case of
other than RREP project where the tax is payable under new rates, i.e.,
residential units are taxable at 5 per cent while commercial units
continue to be taxable at 12 per cent, Rule 42 will be applicable, and
the taxpayer will need to identify the input tax credit proportionate to
the taxable commercial units. There can always be a question as to how
to determine the input tax credit attributable to such residential
projects, which have been dealt with separately in the article.

CHALLENGES IN IMPLEMENTING AMENDED RULE 42

The amended Rule 42 is sought to be implemented in the following manner:

a)
On a monthly basis, the input tax credit claimed is deemed to be C2,
i.e., used for effecting taxable as well as exempt supplies.

b)
The taxpayer shall be required to calculate input tax credit
attributable to exempt supplies by applying the following formula:

c)    In the month in which the completion certificate is
received / first occupation takes place, whichever is earlier, the total
input tax credit attributable to exempt supplies is to be determined by
modifying the above formula as under:

d)    The cumulative of amount determined at (b) is to be
compared with amount determined at (c) above and the differential amount
is either to be reversed [if (b)<(c)] or to be reclaimed [if
(c)<(b)].

The above exercise is to be done vis-à-vis the project.
A project has been defined to mean a Real Estate Project or a
Residential Real Estate Project.

Therefore, if a taxpayer has
multiple projects, he would be required to maintain a separate account
for each project. The same would not be an issue as even for RERA, a
developer is required to maintain separate accounts for each project.
However, when a project involves multiple buildings, say two buildings
of which one is commercial and second residential and separate accounts
are maintained within the same project, the developer will be faced with
a peculiar situation. This is because while the input tax credit
relating to residential building will be T3 and therefore, not eligible
for input tax credit, rule 42 deems the value of T4, i.e., the amount of
input tax credit attributable to inputs and input services intended to
be used exclusively for effecting supplies other than exempted supplies
to be zero. This inter alia means that the entire ITC shall be subjected
to the reversal and the option of excluding the same from the formula
will not be available.

In simpler words, while the builder will
not be eligible to claim input tax credit attributable to residential
units, the input tax credit attributable to commercial units will be
subjected to the reversal u/r 42, which appears illogical.

Similarly,
there may be instances where a builder receives multiple completion
certificates. For instance, a builder constructing 12 floor building
(with 4 floors commercial and 8 floors residential) receives Completion
Certificate in parts with simultaneous occupation, as under:

Date of CC	For floors
April 2020	1 – 4
April 2021	5 – 8
April 2022	9 – 12

The question that arises is how will the taxpayer implement Rule
42 in the above scenario where a single project entails multiple
completion certificates? The probable solution for this situation would
be that when the first and second completion certificates are received,
the corresponding area will have to be treated as exempt and the final
calculation will be required only when the third CC is received, which
indicates completion of the project.

Sale of units post
receipt of completion certificate / first application can be treated as
exempt occupation – whether exempt supply?

The
requirement for reversal of proportionate input tax credit is
necessitated in view of provisions of sub-sections (1) to (4) of Section
17 of the CGST Act, 2017. Section 17 (2) provides that where goods or
services or both are used partly for effecting taxable supplies and
partly for exempt supplies, the amount of credit shall be restricted to
so much of the input tax as is attributable to the said taxable
supplies. Section 17 (3) thereon deals with determination of value of
exempt supply for the purpose of section 17 (2) and includes supplies on
which the recipient is liable to pay tax under RCM, transaction in
securities, sale of land and subject to clause (b) of paragraph 5 of
Schedule II, sale of building.

It is by virtue of section 17 (3)
that the value of units sold after receipt of completion certificate /
first occupation (whichever is earlier) which are not leviable to tax is
included in the value of exempt supply. However, the important question
that remains is whether the sale of units post receipt of completion
certificate is classifiable as exempt supply for section 17 (2) to
trigger in the first place? The term “exempt supply” has been defined
u/s 2 (47) as under:

(47) “exempt supply” means supply of any
goods or services or both which attracts nil rate of tax or which may be
wholly exempt from tax under section 11, or under section 6 of the
Integrated Goods and Services Tax Act, and includes non-taxable supply.

As
can be seen from the above, the term exempt supply covers only such
transactions which are supply of goods or services but specifically
exempted or are classifiable as non-taxable supply, i.e., supply of
goods or services or both which are not leviable to tax.

Let us
first analyse if the sale of unit after receipt of completion
certificate / first occupation is exempted from the purview of tax or
not? The sale of unit after receipt of completion certificate / first
occupation is not exempted from the purview of tax as the same is
excluded from the scope of supply itself. Similarly, non-taxable supply
means such supply which is not leviable to tax, i.e., under section 9 of
the CGST Act, 2017. What is excluded from the levy of tax is only
supply of alcoholic liquor for human consumption. In that context, it
can be said that even the petroleum products are not excluded from the
levy of GST, but rather it is deferred to a future date u/s 9 (2) of the
CGST Act, 2017

Therefore, sale of unit after receipt of
completion certificate / first occupation may not qualify as “exempt
supply”. Infact, a view can be taken that in view of Schedule III, the
activity does not qualify as supply u/s 7. Hence, once an activity is
not covered within the purview of supply, the question of it being a
taxable / exempt supply does not arise. Therefore, section 17 (2) does
not get triggered as the same applies only when exempt supply is being
made by the taxpayer. Having said so, one may need to recognize that
Section 17(3) includes sale of buildings after receipt of completion
certificate in the value of exempted supply. However, it can be argued
that merely including the value of units sold after the receipt of
occupation certificate / first occupation in the value of exempt supply
in section 17 (3) is not sufficient to trigger the applicability of
section 17 (2), which is a must for demanding reversal of input tax
credit. Accordingly, the requirement of reversal of proportionate input
tax credit at the time of receipt of completion certificate can be said
to be litigative.

ABATEMENT FOR VALUE OF LAND – WHETHER EXEMPT SUPPLY?

Sale
of constructed unit not covered under Schedule III is liable to tax for
which the rates have been prescribed under notification 11/2017-
CT(Rate) dated 28th June, 2017. It is in this taxable transaction where
there is an embedded element of sale of land or undivided share in land.
The question that therefore arises is whether the explanation, which
provides for a lower taxable value can be treated as an exemption
provided u/s 11 of the CGST Act, 2017 to fall within the purview of
exempt supply?

As mentioned above, notification 11/2017-CT
(Rate) dated 28th June, 2017 which prescribes the rate of tax for
services provides that in case of supply of service involving transfer
of land or undivided share of land, the value of supply shall be 2/3rd
of the total amount charged for such supply. This has been provided for
by way of Explanation to the notification which is reproduced below for
ready reference:

[2. In case of supply of service specified in
column (3), in items (i), [(ia), (ib), (ic), (id), (ie) and (If)]
against serial number 3 of the Table above, involving transfer of land
or undivided share of land, as the case may be, the value of such supply
shall be equivalent to the total amount charged for such supply less
the value of transfer of land or undivided share of land, as the case
may be, and the value of such transfer of land or undivided share of
land, as the case may be, in such supply shall be deemed to be one third
of the total amount charged for such supply.
Explanation — For the purposes of this paragraph [and paragraph 2A below, “total amount” means the sum total of —

(a)    Consideration charged for aforesaid service.

(b)
Amount charged for transfer of land or undivided share of land, as the
case may be including by way of lease or sub-lease.]

The
question that needs analysis is whether the reduction for value of land
(deemed / actual) is granted u/s 11 of the CGST Act, 2017 or u/s 15 (5)
which provides for determining the value of specified supplies. Section
11 provides as under:

(1)    Where the Government is satisfied
that it is necessary in the public interest so to do, it may, on the
recommendations of the Council, by notification, exempt generally,
either absolutely or subject to such conditions as may be specified
therein, goods or services or both of any specified description from the
whole or any part of the tax leviable thereon with effect from such
date as may be specified in such notification.

From the
above, it is seen that section 11 empowers the Government to exempt
goods or services or both from the whole or any part of the tax leviable
thereon. However, the fact remains that land, being immovable property
is not goods for the purpose of GST as goods include only moveable
property within its’ purview. The question that remains is whether land
can be treated as service? The answer to the same would be negative as
service traditionally is referred to an activity. Immovable property per
se is not an activity and therefore, cannot be treated as service.
However, any activity on or relating to immovable property may be a
service, for instance, renting / leasing of immovable property.
Therefore, sale of land, which is neither goods nor service and excluded
from the scope of supply, cannot be exempted by section 11 of the CGST
Act, 2017. In this context, one may refer to the conclusion of the
Hon’ble Supreme Court in the case of Larsen & Toubro Ltd. [2015 (39)
S.T.R. 913 (S.C.)] wherein it has been held as under:

44.
We have been informed by counsel for the revenue that several exemption
notifications have been granted qua service tax “levied” by the 1994
Finance Act. We may only state that whichever judgments which are in
appeal before us and have referred to and dealt with such notifications
will have to be disregarded. Since the levy itself of service tax has
been found to be non-existent, no question of any exemption would arise.
With these observations, these appeals are disposed of.

Therefore,
it cannot be said that the Explanation intends to provide exemption
from the supply. On the other hand, since the activity sought to be
taxed is a transaction involving supply of services as well as supply of
land, the reduction is clearly for determining the value of supply and
therefore, the explanation is for determining the value of supply, i.e.,
u/s 15 of the CGST Act, 2017.

This aspect needs to be analyzed
since if a view is taken that the value of land, for which a deduction
is provided under notification 11/2017 – CT(Rate) dated 28th June, 2017
is towards exempt supply, the corresponding expenses incurred by the
taxpayer would be hit by section 17 (2) r.w. Rule 42 and would be liable
for reversal as under:

•     Input tax credit on expenses directly attributable towards acquisition of land / associated costs shall be classified as T2.

 

•     Input tax credit on expenses used for making both, taxable as well as exempt supplies shall be classified as C2.

Let
us understand this with the help of an example. A builder takes land on
100-year lease from CIDCO for a proposed residential / commercial
project which he intends to sell to customers. CIDCO charged a one-time
lease premium of Rs. 30 crore and 18 per cent GST on the same, i.e., Rs.
5.40 crore. The lease would be transferred to the co-operative housing
society upon completion of the project. In addition to the lease
payments, the builder also incurs various expenses relating to the
acquisition of land, such as legal payments, soil testing, etc.

The input tax credit implications in light of the above discussion can be summarized as under:

a)
The reduction towards value of land cannot be attributable to supply
u/s 7 and therefore, the question of there being a taxable / exempt
supply does not arise. Therefore, since section 17 (2) does not get
triggered, section 17 (3) becomes inconsequential.

b)    The
reduction towards value of land is not attributable to an exemption
provided u/s 11 and therefore, is not covered within the purview of
exempt supply.

c)    In view of the above, a taxpayer is entitled
to claim input tax credit on expenses incurred towards acquisition of
land on which construction activity is undertaken even though no GST is
leviable on the amounts recovered from the clients towards the same, be
it on the actual / deemed basis.

Contrarily, a builder may take a
view that in order to claim input tax credit on the land costs, he may
forego the deduction for value of land and pay GST on the gross value
and claim full input tax credit. However, this option may not be
available in view of the recent decision of the Hon’ble Supreme Court in
the case of Interarch Builders Pvt. Ltd. [(2023) 6 Centax 40 (S.C.)].
In this case, the facts were that the assessee had opted to pay tax on
works contract services provided on the whole value, i.e., without
excluding the value of goods involved in the execution of such contract
and claimed correspondingly full CENVAT credit, including on inputs and
capital goods which was otherwise not eligible. Upon Appeal by the
Department, the Hon’ble Supreme Court held that the contention of the
taxpayer that they have a legal right to pay tax even on the goods
portion as service tax and take input credit on the duty paid on the
goods is clearly contrary to para 25 of the decision in the case of
Larsen and Toubro [2015 (39) S.T.R. 913 (SC)] and Rule 2A of the
Valuation Rules, 2006 and proceeded to held that the taxpayer was liable
to pay tax only on the service component. This analogy can squarely be
extended to GST as the Court may very well hold that the liability to
pay tax was only on the construction services and not on the land
component.

Input tax credit on free area in re-development projects / government schemes

Land
in metro cities like Mumbai is a scarce commodity. Therefore, the
sector finds avenues to identify opportunities to recycle the land. This
is done by undertaking redevelopment projects wherein existing
structures are demolished and new structure is developed. While
undertaking this redevelopment activity, the builder is required to
provide alternate accommodation to the existing occupants. Similarly,
the Government also encourages the sector to take up slum rehabilitation
activities whereby the builder agrees to construct a new structure
where the slum occupants are rehabilitated in such buildings and the
developers are given construction rights to construct separate structure
for sale in open market.

When the builder undertakes
construction activity to the extent done for the existing occupants (in
case of re-development) / slum dwellers (in case of SRA project), the
question is whether the builder is eligible to claim input tax credit
corresponding to such free area in re-development / SRA projects?

Under
service tax regime, a dispute was raised on the taxability of such free
area and a demand was proposed on the taxpayers (on the output side).
The Tribunal in Vasantha Green Projects vs. Commissioner [2019 (20)
G.S.T.L. 568 (Tri. – Hyd.)] has held that no service tax was payable on
such free area as the price collected from the customers also factored
the cost incurred towards construction of the free area and therefore,
no service tax was separately leviable on such free area. The conclusion
of the Hon’ble Tribunal will squarely apply to the claim of input tax
credit since the builder can very well claim that the input services
attributable to the free area is ultimately used for providing taxable
service and therefore, input tax credit is eligible. This logic will
squarely apply under GST regime as well.

However, another issue
which may arise under GST is whether the claim of input tax credit to
the extent it pertains to free area is hit by section 17 (5) (h) which
restricts claim of input tax credit on goods lost, stolen, destroyed,
written off or disposed of by way of gift or free samples? The answer to
this would be in negative. This is because what is given free to the
existing occupants / slum dwellers is not any goods, but rather a
constructed area which is an outcome of a composite supply. Secondly, in
the course of undertaking this construction activity, the builder also
receives various input services to which this restriction does not
apply. Readers may kindly note that this discussion will be relevant
only for projects concluded up to 31st March, 2019 since input tax
credit is denied for RREPs after 01st April, 2019.

CONCLUSION

When
GST was introduced, input tax credit was expected to flow seamlessly
and avoid cascading effect of taxes. Till 31st March, 2019, the sector
did enjoy the benefit of input tax credit which was not available under
the legacy laws. However, the amendment w.e.f 01st April, 2019 keeping
the sector in mind has left the sector worse off as compared to the
legacy laws, i.e., service tax. It is therefore imperative that before
claiming any input tax credit, the various conditions and restrictions
prescribed for the sector be analyzed carefully to avoid subsequent
litigation.

UNDERSTANDING THE DISPUTE
In a landmark decision, the Larger Bench of the Hon’ble Supreme Court has dealt with the issue of taxability of secondment transactions under service tax in the case of Commissioner vs. Northern Operating Systems Private Limited (NOS) [2022-VIL-31-SC-GST].

The brief facts of the case were that NOS is a company incorporated in India to provide various back-office support services to its group companies across the globe on a cost-plus basis, for which separate agreements are also entered into. In the course of providing the said services, NOS requests its group company to “second” skilled managerial and technical personnel to assist in NOS’s business activities under a secondment agreement entered into with its foreign group companies. This is a separate agreement between the two parties, important terms of which are summarised below (as referred to in the judgment):

a.    Upon request from NOS, the foreign group company shall select employees who possess the expertise required by NOS based on the description of skills and competencies required by NOS.

b.    Foreign group company shall second the employees to NOS for the time period.

c.    The employees seconded to NOS shall continue to be remunerated through the payroll of foreign group company only for the continuation of social security, retirement and health benefits. However, for all practical purposes, NOS shall be the employer.

d.    Foreign group company shall ensure that during the secondment period, the employee shall act in accordance with the instructions and directions of NOS and devote their time, attention and skills to the duties of their secondment.

e.    The seconded employees shall be reportable and responsible to NOS, and all the responsibility and risk for work undertaken by the employees shall remain with NOS during the secondment period.

f.    NOS shall have the right at any time to approve or reject the employee selected for secondment and to request the foreign group company the replacement of any employees who, in their opinion, are not qualified or do not meet the necessary requirements to fulfil their secondment.

g.    During the period of secondment, the terms and conditions of employment between the foreign group company and the seconded employee shall cease to be in force, and the terms and conditions, as stated in the employment agreement, between the employees and NOS will remain in force.

The consideration clause of the above agreement is equally important. Apart from specifically mentioning that during the secondment period, the role of the foreign group company shall be restricted to that of a payroll service provider only, it requires NOS to reimburse foreign group company the following amounts:

a.    All remuneration of employees, including but not limited to salary, incentives and employment benefits paid by the foreign group company.

b.    All out-of-pocket expenses incurred by the seconded employees and reimbursed by the foreign group company, including but not limited to business travel expenses and other miscellaneous expenses directly related to the secondment of the employee.

c.    In addition, NOS shall also pay the administrative cost to the foreign group company, which shall be 1% of actual costs incurred.

NOS believed that an employer – employee relationship existed with the seconded employees, and NOS exercised control over them. The employees also devoted all their time and efforts under the direction of the assessee and their remuneration was also fixed by NOS.

Further, NOS was also of the opinion that the above activity could be taxed under ‘manpower supply services’ only if the same was provided by a manpower recruitment or supply agency, which the foreign group company was not. They were engaged in providing personal financial services and corporate and institutional services along with investment products. Therefore, the foreign group company could not be considered a ‘manpower supply agency’.

Therefore, the reimbursement made to the foreign group company, to the extent of payroll costs and OPE reimbursement, was not a ‘manpower supply service’ (upto June, 2012) and a service (post July, 2012), and therefore, there was no liability to pay service tax under the reverse charge mechanism.

The above view was supported by the following decisions of the CESTAT, affirmed by the High Court on a couple of occasions:

a.    In Arvind Mills Ltd. vs. CST, Ahmedabad [2014 (34) STR 610 (Tri. – Ahmd.)], the Tribunal had set aside the demand of service tax on employee cost recovery from domestic group companies on the grounds that the assessee was not a ‘manpower supply agency’. This view was affirmed by the HC in 2014 (35) STR 496 (Guj), wherein the HC not only upheld the Tribunals’ view that the assessee was not a manpower supply agent to be liable to pay service tax, it also held that the deputation was in the interest of the assessee and they did not exclusively work under the direction or supervision or control of the subsidiary. Further, the HC also observed that since the actual cost incurred was recovered from the group companies, there was no profit element or financial benefit.

b.    In a case involving similar facts where the salary to seconded employees was paid by the foreign company, the Tribunal had in the case of Volkswagen India (Pvt.) Ltd. vs. CCE, Pune [2014 (34) STR 135 (Tri.-Mum.)] held that in such cases also, the seconded employees were working as employees and an employer – employee relationship existed, and therefore, there was no liability to pay tax under reverse charge. An appeal filed against this decision was dismissed by the Supreme Court, though not on merits, but on non-condonable delay, as reported in 2016 (42) STR J145 (SC).

c.    The Delhi Bench of Tribunal has in the case of Computer Science Corporation India Pvt. Ltd. vs. CST, Noida [2014 (35) STR 0094 (Tri. – Del.)] held that no service tax was liable even in cases where the salary was paid directly to the seconded employees and only the social welfare expenses incurred by the foreign company were reimbursed to the foreign company. This decision was also upheld by the Allahabad HC as reported in 2015 (037) STR 0062 (All).

d.    The Tribunal again in Nissin Brake India Pvt. Ltd. vs. CCE, Jaipur [2019 (24) GSTL 563 (Tri. – Del.)] again dealt with a similar issue. In this case, the Tribunal held that merely because the payment of salary and perks was made by the foreign company would not alter the fact that an employer – employee relationship existed between the seconded employee and the domestic employer. An appeal filed against this decision has also been dismissed by the Supreme Court on grounds that the same was without any merits as reported in 2019 (24) GSTL J171 (SC).

e.    In Ivanhoe Cambridge Investment Advisory (India) Private Limited vs. CST, Delhi [2019 (21) GSTL 553 (Tri. – Del.)], the Tribunal dealt with the levy of service tax under RCM in a transaction involving cross-border secondment where the seconded employees were paid the salary by the domestic company. In this case, the Tribunal held that there was an employer – employee relationship between the domestic company (assessee) and the seconded employee, and therefore, no service tax was payable under reverse charge. An appeal against this decision is pending before the Supreme Court.

CESTATS’ TAKE ON THE ABOVE ARRANGEMENT
This matter first reached before the Hon’ble CESTAT, Bangalore, wherein vide judgment reported in 2021 (52) GSTL 292 (Tri. – Bang.), the Tribunal allowed their appeal on the following grounds:

• There existed an employer – employee relationship between NOS and the seconded employee. The Tribunal relied on its decision in the case of Honeywell Technology Solutions Pvt. Ltd. vs. Commissioner [2020-TIOL-1277-CESTAT-BANG.].

• The method of disbursement of salary cannot determine the nature of the transaction, as held in Volkswagen India Pvt. Ltd. vs. CCE, Pune-I [2014 (34) STR 135 (Tri. – Mumbai)] and upheld 2016 (42) STR J145 (SC). In this case, facts were similar as the salary to the seconded employees was paid by the foreign company and reimbursed by the assessee.

• The Tribunal also relied on the decision in the case of Computer Sciences Corporation India Pvt. Ltd. vs. Commissioner of Service Tax, Noida [2014 (35) STR 94 (Tri. – Del.)] and affirmed in [2015 (37) STR 62 (All.)].

• The Tribunal also followed the decision of Gujarat HC in the case of Arvind Mills Ltd. [2014 (35) STR 496 (Guj.)], wherein the Court has held that even if the actual cost incurred by the appellant in terms of salary remuneration and perquisites is only reimbursed by group companies, there remains no element of profit or finance benefit. The arrangement is that of the continuous control and the direction of the company to whom the holding company has deputed the employee, and such an arrangement is out of the ambit to be termed ‘manpower supply service’.

REVENUE APPEAL AGAINST SUPREME COURT DECISION
Being aggrieved by the above Tribunal Order, the Revenue had preferred an appeal before the Supreme Court. The primary ground raised by the Revenue was that the conclusion of the Tribunal that there existed an employer – employee relationship merely because the domestic company exercised control over the seconded employees was erroneous. They highlighted on various decisions wherein it has been held that the existence of control is not the conclusive factor in determining whether an employer – employee relationship exists or not, key being the decision in the case of Silver Jubilee Tailoring House vs. Chief Inspector of Shops & Establishments [1974 (1) SCR 747] and the recent decision in the case of Sushilaben Indravadan Gandhi vs. New India Assurance Co Ltd [(2021) 7 SCC 151].

The Revenue further emphasised the fact that the terms of the secondment were also decided by the foreign company, including salary, allowances, the duration of secondment, etc., and that upon completion of the assignment, the seconded employees were to revert to their original positions in the parent company. Therefore, the control, if any of NOS was for a very limited period which also did not enable NOS to take actions against the seconded employee, if it was unsatisfied with his/ her performance. The only recourse available with NOS in such a case was to terminate the secondment of such employees who would return to their original positions upon termination. In view of the same, the Revenue concluded its argument that the entire transaction of secondment agreement was to provide service by the foreign company to NOS and therefore, it was a taxable service.

COUNTER SUBMISSION ON BEHALF OF NOS
The position of law, prior to June, 2012 and post July, 2012 as well was the same. The category of supply of manpower by an agency covers those cases where the manpower so supplied comes under the direction and control of the recipient without contractual employment, a view clarified by CBIC vide circulars B1/6/2005-TRU dated 27th July, 2005 and Master Circular No. 96/7/2007-ST dated 23rd August, 2007. It was also reiterated that the intention of the legislature, not only in India but also globally was to not levy indirect tax on employer – employee relationship.

It was also argued that an employer – employee relationship existed between NOS and the seconded employees on account of the following:

• The seconded personnel are contractually hired as NOS’s employees.

• Control over them is exercised by NOS.

• The employees devote their time and effort exclusively to NOS, under the direction of NOS.

• The remuneration of employees is also fixed by NOS.

• The employees are required to report to NOS’s designated offices and are accountable to NOS.

The various decisions of the Tribunals on a similar issue were relied upon. Emphasis was placed on the decisions of the Tribunal in the case of Nissin Brake and Volkswagen India, revenue appeals against which were dismissed by the SC.

It was also argued that the foreign group company were not in the business of supply of manpower and, therefore, cannot be considered a ‘manpower supply agency’.

The following alternate arguments were also raised:

• The salary costs were reimbursed to foreign group company, and therefore, relying on the decision in the case of UOI vs. Intercontinental Consultants & Technocrats Private Limited [2018 (10) GSTL 401 (SC)], the amounts reimbursed as salary cost was to be excluded from the gross value of taxable services provided.

• The ground of revenue neutrality was also raised, and reliance was placed on the decision in the case of SRF Ltd. vs. Commissioner [2016 (331) ELT A138 SC] and CCE vs. Coca Cola India Private Limited [2007 (213) ELT 490 (SC)]. It was highlighted that if the tax was paid under reverse charge, they would have been eligible to claim as CENVAT credit and, further, claim the same as a refund.

SUPREME COURT DECISION
The Supreme Court has summarized the issue to determine who should be reckoned as the employer of the seconded employee? While doing so, the Court has resorted to a co-joint reading of the two agreements between NOS and the foreign group company to discern the true nature of the relationship between the seconded employees and the assessee, and the nature of service provided by the foreign group company to NOS.

In determining this question, the Court has first referred to the decision in the case of Director Income Tax vs. Morgan Stanley & Co. Inc [(2007) 7 SCC 1]. The Court has also referred to the decision in the case of Commissioner of Income Tax vs. Eli Lily & Co India Pvt. Ltd. [(2009) 15 SCC].

The Court has then referred to various decisions which dealt with the issue of determining whether an employer – employee relationship existed or not in the following order:

• Firstly, the Court has referred to the decision in the case of Dharangadhara Chemical Works Ltd. State of Saurashtra [1957 SCR 158], wherein the Supreme Court has held that it was well settled that the prima facie test of such relationship was the existence of the right in the employer not merely to direct what work was to be done but also to control the manner in which it was to be done, the nature or extent of such control varying in different industries and being by its nature, incapable of being precisely defined. The correct approach, therefore, was to consider whether, having regard to the nature of the work, was there due control and supervision of the employer or not?

• The Court then referred to the decision in the case of D C Dewan Mohideen Sahib & Sons vs. Secretary, United Beedi Workers Union [1964 (7) SCR 646] in a matter pertaining to the applicability of Factories Act, 1948 as the decision where the control test was diluted by the Courts while determining the existence of employer – employee relationship.

• The Court has then referred to the decision in the case of Silver Jubilee Tailoring House vs. Chief Inspector of Shops & Establishments [1974 (1) SCR 747], wherein the Court has diluted the applicability of the test of control while determining the existence of employer-employee relationship and held that it cannot be used as a conclusive factor while deciding on the same.

• The Court then referred to its recent decision in the case of Sushilaben Indravadan Gandhi vs. New India Assurance Co Ltd [(2021) 7 SCC 151], wherein the decision in the case of Silver Jubilee was reiterated, and it was held that the test of control was not a determining factor for employer-employee relationship and referred to the Courts’ observations at para 24 to this effect.

Basis this, the Court has arrived at a conclusion that the control test is not the decisive factor for employer – employee relationship and proceeded to determine if the foreign group company has provided any services to NOS.

The Court has then proceeded to analyse all the agreements in totality by concluding that an overall reading of the agreement and its effect is to be seen by the Courts. This means that the two agreements between NOS and the foreign group company, i.e., the service agreement and the secondment agreement, are read collectively while determining the nature of the transaction in the secondment agreement. The Court has, thereafter, concluded that the foreign group company has a pool of highly skilled employees at their disposal and are seconded to the group companies for the use of their skills. This deployment is in relation to the business of the foreign group company. Lastly, the Court has held that there is a quid pro quo in the secondment agreement, wherein NOS has received the benefit of experts for a limited period for a consideration being paid to the foreign group company in the form of reimbursement.

The Court also rejected the reliance placed on the decisions in the case of Volkswagen India (where revenue appeal on a similar issue was rejected) and SRF Limited (on revenue neutrality) on the grounds that there was no independent reasoning in this judgment and therefore, the same had no precedential value. The Court has, however, held that the extended period of limitation was not invocable in this case as there was a substantial question of law involved.

IMPORTANT POINTS EMANATING FROM THE JUDGMENT

Implications on reading multiple agreements jointly

The decision very succinctly brings out the journey of factors which needs to be looked into while determining the existence of an employer – employee relationship. It also explains the need to look into the agreements as a whole, and at times, the need to read the agreements together to determine the intention of the transacting parties. However, such an approach may have a direct bearing on the recent decision of the Gujarat HC in the case of Munjaal Manish Bhatt vs. Union of India [2022-TIOL-663-HC-AHM-GST], wherein the HC had refused to link two separate agreements, one for sale of developed land and another for construction of bungalow on the said land and held that only the later was to be included for the purpose of determining the value of supply.

Dual employment: Which contract is superior?

However, when one looks into the intention of the parties, it is apparent that this is a case where NOS intended to use the services of employees employed by foreign group company and therefore, the flow of contract somewhere stood as under:

1)    Employment contract between the the foreign group company and the employee.

2)    Letter of secondment to be issued by foreign group company to its employee selected for secondment.

3)    Letter of Understanding between NOS and the seconded employee.

The above events occur sequentially and if the agreement at 1 fails, the resultant agreements also become void. In other words, though the seconded employee would be under dual employment, his agreement with the foreign group company always remains superior as compared to the agreement with NOS, which was more of a nature of understanding with the seconded employee of the terms of the secondment. An important point which also needs to be kept in mind is that NOS had no right to dismiss an employee. The only right available with NOS was to terminate the secondment, which would mean that the employee would revert to the foreign group company, his original and perhaps, the full-time employer. More importantly, even in the event of misconduct of an employee, this is the only recourse which would have been available with NOS. The right to fire the employee would vest only with the foreign group company.

Morgan Stanley case

The SC has in this judgment relied on the decision in the case of Morgan Stanley, though in the context of Income-tax, wherein it has been held as under:

15. As regards the question of deputation, we are of the view that an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with the MSCo the said company retains control over the deputationist’s terms and employment. The concept of a service PE finds place in the U.N. Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entails it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge. Applying the above tests to the facts of this case we find that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCo as he retains his lien and in that sense there is a service PE (MSAS) under Article 5(2)(l). We find no infirmity in the ruling of the ARR on this aspect. In the above situation, MSCo is rendering services through its employees to MSAS. Therefore, the Department is right in its contention that under the above situation there exists a Service PE in India (MSAS). Accordingly, the civil appeal filed by the Department stands partly allowed.

The above decision was followed by the Delhi HC in the case of Centrica India Offshore Private Limited vs. Commissioner of Income Tax [W.P. (C) No. 6807/2012], wherein it has been held as under:

35. The concept of a legal and economic employer, as considered by Vogel (relied upon by CIOP), is when “a local employer wishing to employ foreign labour for one or more periods of less than 183 days recruits through an intermediary established abroad who purports to be the employer and hires the labour out to the employer.” In this case, the temporal element of the three-way employment relationship is crucial. The secondees were – originally – employees of the overseas entities. They were not hired by that entity as a false façade, whose productivity is to be ultimately traced to CIOP. Rather, the secondees were regular employees of the overseas entities. There is no dispute with this fact. They have only been seconded or transferred for a limited period of time to another organization, CIOP, in order to utilize their technical expertise in the latter. The secondment agreement between CIOP and the overseas entity, and the agreement WP(C) No. 6807/2012 Page 41 between CIOP and the employees, envisages an end to this exception, and a return to the usual state of affairs, when the secondees return to the overseas entities. The employment relationship between the secondee and the overseas organization is at no point terminated, nor is CIOP given any authority to even modify that relationship. The attachment of the secondees to the overseas organization is not fraudulent or even fleeting, but rather, permanent, especially in comparison to CIOP, which is admittedly only their temporary home. Today, CIOP attempts to cast that employment relationship as a tenuous link because, for the duration of the secondment, CIOP pays the salary of these. Even here, the salary is ultimately paid through the overseas entity, which is not a mere conduit. Crucially, the social security, emoluments, additional benefits etc. provided by the overseas entity to the secondee, and more generally, its employees, still govern the secondee in its relationship with CIOP. It would be incongruous to wish away the employment relationship, as CIOP seeks to do today, in the face of such strong linkages. Whilst CIOP may have operational control over these persons in terms of the daily work, and may be responsible (in terms of the agreement) for their failures, these limited and sparse factors cannot displace the larger and established context of employment abroad.

The SLP against the above decision was dismissed by the Supreme Court. It, therefore, appears that the Supreme Court has already settled the dispute in the context of secondment transactions that there does not exist an employer – employee relationship between the domestic company and the seconded employee, but rather it is a contract for service between the foreign company and the domestic company.

Interestingly, very recently (after the decision in the case of NOS was pronounced), the Karnataka HC has in the case of Flipkart Internet Private Limited vs. Dy. Commissioner of Income Tax [2022-VIL-156-KAR-DT] dealing with secondment transactions, held as under:

37. Accordingly, the findings in the impugned order and the conclusion regarding the employer-employee relationship is based on a wrong premise and is liable to be set aside. As observed by this Court in Director of Income Tax (International Taxation) vs. Abbey Business Services India (P.) Ltd.((2020) 122 Taxmann.Com 174 (Kar)), “it is also pertinent to note that the Secondment Agreement constitutes an independent contract of services in respect of employment with assessee.” Hence, the DCIT in the impugned order has missed this aspect of the matter and has proceeded to consider the aspect of rendering of service as to whether it was ‘FIS’.

In this case, the HC has distinguished the NOS judgment as under:

(x) It needs to be noted that the judgment rendered was in the context of service tax and the only question for determination was as to whether supply of manpower was covered under the taxable service and was to be treated as a service provided by a Foreign Company to an Indian Company. But in the present case, the legal requirement requires a finding to be recorded to treat a service as ‘FIS’ which is “make available” to the Indian Company.

It, therefore, remains to be seen if the decision in Flipkart survives before the Supreme Court or not on appeal, if preferred by the Revenue.

Valuation: Does pure agent apply?

The decision is also glaringly silent on the valuation point raised by NOS. It was argued on behalf of NOS that the costs reimbursed to the foreign group companies should be excluded from the value of taxable service in view of Rule 5 of Service Tax (Determination of Value) Rules, 2005. They had also relied upon the decision in the case of Intercontinental Consultants.

It is imperative to note that in the current case, NOS makes the following payments to the foreign group company:

a) Reimbursement towards various payments made to the seconded employees by the foreign group company at cost.

b) Administrative cost, being 1% of the total payment made by the foreign group company to the seconded employees.

As such, there is a strong basis to argue that the value of service, if any provided by the foreign group company, should have been restricted to 1% of the service fees and the reimbursement component should have been excluded from the value of taxable supply, especially for the period upto 13th May, 2015.

The conclusion in the case of Centrica Offshore on the valuation front may also bear relevance to the current case. The SC has held as under:

38. The mere fact that CIOP, and the secondment agreement, phrases the payment made from CIOP to the overseas entity as reimbursement? cannot be determinative. Neither is the fact that the overseas does not charge a mark-up over and above the costs of maintaining the secondee relevant in itself, since the absence to mark-up (subject to an independent transfer pricing exercise) cannot negate the nature of the transaction. It would lead to an absurd conclusion if, all else constant, the fact that no payment is demanded negates accrual of income to the overseas entity. Instead, the various factors concerning the determination of the real employment link continue to operate, and the consequent finding that provision of employees to CIOP was the provision of services to CIOP by the overseas entities triggers the DTAAs. The nomenclature or lesser-than-expected amount charged for such services cannot change the nature of the services. Indeed, once it is established, as in this case, that there was a provision of services, the payment made may indeed be payment for services – which may be deducted in accordance with law – or reimbursement for costs incurred. This, however, cannot be used to claim that the entire amount is in the nature of reimbursement, for which the tax liability is not triggered in the first place. This would mean that in any circumstance where services are provided between related parties, the demand of only as much money as has been spent in providing the service would remove the tax liability altogether. This is clearly an incorrect reasoning that conflates liability to tax with subsequent deductions that may be claimed.

One may interpret the above as under:

a) If the reimbursement is on a pure cost basis, without there being any element of charges for the “service” rendered, the claim of reimbursement may fall through.

b) However, if there is a service charge levied along with the reimbursement of cost, a taxpayer may claim the benefit of excluding such reimbursement from the scope of value of supply provided the pure agent conditions are satisfied to do so.

Other points

The judgment is also silent on the reliance placed on the decision in the case of Nissin Brake, where the revenue appeal was dismissed as being without merits. While admittedly, the Volkswagen India appeal was delayed on account of delay in filing, which was not condoned and, therefore, could not be said to have precedential value, the same logic may not extend to the Nissin Brake decision.

IMPLICATIONS UNDER GST
Coming to GST, the first question that may arise is the applicability of this decision under GST. This may need analysis from the perspective of cross-border transactions as well as domestic transactions.

In the case of cross-border transactions, it can be said that the decision in the context of NOS will squarely apply since the provisions under service tax and GST, so far as pertaining to the import of service, are identical. Further, it should be kept in mind that the SC has dismissed the plea of revenue neutrality, i.e., tax paid under RCM was eligible for credit, and therefore, demand fails. In such a circumstance, when a person is entitled to claim credit, a prudent tax position would be to pay tax under reverse charge and claim credit, even if the same leads to a temporary cash flow issue.

When it comes to domestic transactions, there are two scenarios which may prevail, one being inter-company and the second being intra-company in view of the deeming fiction provided under Schedule I, Entry 2, which deems supply of services between related persons or distinct persons as supply, even if made without consideration. This deeming fiction creates a liability on the supplier to pay tax on the value to be determined as per the prescribed Rules. However, not all cases will fall under secondment in the case of domestic transactions.

For example, a holding company handles the administrative aspect of all its group companies through its staff. This may not be treated as “secondment” or “deputation”. When can the case of “secondment” arise may be understood with the help of the following example.

A hospital chain, having a presence in multiple states, may deploy its specialist doctor who is based in a particular state (say Maharashtra) to its hospital in another state (Gujarat) for an emergent case and returns after completion of treatment. This may not qualify as manpower supply service, but rather health care services. However, when an employee stationed in Maharashtra is sent to Gujarat for a specified period and treats all the patients there, it may be said that the Maharashtra branch has actually supplied manpower to the Gujarat branch, and the same may be perhaps treated as manpower supply services. The following decisions under service tax may be relevant for this discussion:

a) In Future Focus Infotech India (P) Ltd. vs. CST, Chennai [2010 (18) STR 308 (Tri.-Che.)], the Tribunal has, while determining if a particular service constitutes manpower supply service or IT Software Service, held as under:

11. The learned special counsel further points out that the manpower supplied have to work under the guidance and control of TCS and Infosys. The appellants have no mandate to execute any work independently as normally a consulting engineer would do. He also brings it to our notice that if a person leaves, the appellants are required to provide suitable substitute. This indicates that the appellants are responsible only for supplying manpower, and they are not responsible for completion of any software project per se.

13. No doubt there are clauses relating to deliverables and quality of work in the contracts but these by themselves do not indicate that the appellants are providing information technology software services to TCS and Infosys. Any person or organization obtaining skilled personnel has to ensure that such men deliver work of standard quality. No one would employ a person who is not skilled enough and no one would pay for shoddy work even if done by a skilled man. The relevant clauses in the contract in this regard on which much emphasis was sought to be put by the learned senior counsel for the appellants have to be viewed in the light that TCS and Infosys are merely seeking to obtain personnel from the appellants with necessary skill who will work diligently on the projects undertaken by TCS and Infosys.

b) Interestingly, on the very same day, the same bench has in another case, Cognizant Tech Solutions (I) Pvt. Ltd. vs. Commissioner, Chennai [2010 (18) STR 326 (Tri.-Che.)], has held in a case involving slightly different facts, that services provided would not constitute manpower supply services, as under:

10. We find force in the contentions made by the appellants that the work force recruited and retained by the appellants are required to work under a project manager appointed by the appellants who has to act as single point of contact being responsible for overall management of the project. From the arguments advanced from both sides, it is clear that the learned special counsel for the Department is not disputing that in the second stage of the project, the appellants would be providing functional service to Pfizer. It is also not in dispute that such functional service relating to data management, bio statistics and reporting will be provided through the very same manpower which has been recruited, retained and trained during the first phase. It has to be appreciated that recruitment and training precedes provision of specialized services. If it is accepted that the same manpower will be providing specialized functional services to Pfizer in the second phase of the contract, it is logical to conclude that the manpower has been retained with the appellants during the first phase and not supplied to Pfizer though recruitment of manpower has no doubt been done at the instance of Pfizer. The assistance in recruitment provided by Pfizer to select suitable personnel and subsequent training provided by Pfizer is also understandable considering the strict standards Specified by FDA of USA, the export market for the pharmaceutical products of Pfizer. The assistance in recruitment and imparting of specialized training for the recruited personnel cannot be held against the appellants’ claim that they have not supplied the manpower but have merely recruited and retained the same for providing specialized services to Pfizer utilizing such manpower. Moreover, we find that the nature of services required to be provided by the appellants are in the nature of information technology services as the same relates to data management. Consequently, we hold that the appellants are not liable to pay Service tax in respect of the services provided by them to Pfizer under the impugned contract. Therefore, we also hold that they are eligible for the small scale exemption in respect of the small value of services provided by them to M/s. SAP LABS India Pvt. Ltd. which is below the exemption limit of Rs. 4 lakhs.

c) Lastly, in a recent decision, the Supreme Court dealt with the issue of whether a particular activity constituted job-work or manpower supply in the case of Adiraj Manpower Services Private Limited vs. CCE, Pune [2022-VIL-12-SC-ST] and held as under:

16. The substratum of the agreement between the appellant and Sigma deals with the regulation of the manpower which is supplied by the appellant in his capacity as a contractor. The fact that the appellant is not a job worker is evident from a conspicuous absence in the agreement of crucial contractual terms which would have been found had it been a true contract for the provision of job work in terms of Para 30(c) of the exemption notification.

There is a complete absence in the agreement of any reference to:

(i) the nature of the process of work which has to be carried out by the appellant;

(ii) provisions for maintaining

(a) the quality of work;

(b) the nature of the facilities utilised; or

(c) the infrastructure deployed to generate the work;

(iii) the delivery schedule;

(iv) specifications in regard to the work to be performed; and

(v) consequences which ensue in the event of a breach of the contractual obligation.

It can always be argued in the case of intra-company supplies that the employer – employee relationship exists between the employee and the legal entity, and therefore, even if there is intra-company secondment, the same cannot be treated as supply. However, it should be noted that for the purpose of GST law, the branches in different states/ UT of the same entity are deemed to be distinct persons. Generally, for the purpose of accounting as well as profession tax compliances, an employer is required to tag each employee to a particular branch. Therefore, if an employee in one branch is deputed to another branch, there would be a supply, and therefore, if the cost is booked in one branch, the same should also be factored in determining the value of intra-branch supplies. This aspect has also been clarified by AAAR in the case of Columbia Asia Hospitals Private Limited [2019 (20) GSTL 763 (AAAR-GST-Kar.)]. However, when the benefit of proviso to Rule 28 is available, i.e., the receiving branch is entitled for full input tax credit, since the transaction value is to be accepted, inclusion/exclusion of employee cost from the value of supply may not matter.

CONCLUSION
With the Supreme Court negating the revenue–neutrality argument, which was considered a strong response to demands for cases where credit was available, this decision will trigger the need to re-look at positions not only in the case of cross-border transactions, but also in domestic transactions, where the GST law deems existence of a supply and need to pay tax. Especially, where the input tax credit is available, it is always prudent that businesses pay the tax upfront and avail the credit, rather than awaiting a confrontation with the tax authorities.