THE SUPREME COURT CREATES A CHECK-LIST TO DETERMINE A TRUE CONTRACT FOR JOB WORK

THE SUPREME COURT CREATES A CHECK-LIST TO DETERMINE A TRUE CONTRACT FOR JOB WORK

Cause Title: Adiraj Manpower Services Private Limited v. Commissioner of Central Excise Pune II

Case Number: Civil Appeal No. 313/2021

Quorum: Justice Dr. Dhananjaya Y Chandrachud and Justice Surya Kant

Judgment Date: 18/02/2022

Counsel for Appellant: Mr. Tarun Gulati

Counsel for Respondent: Mr. N. Venkataraman, Additional Solicitor General

Author: Pragash B, Advocate, Madurai Bench of Madras High Court

Background of the Case

The appellant obtained service tax registration under the category of ‘Manpower Recruitment or Supply Agency Service’. On 01/01/2012, the appellant entered into an agreement with Semco Electric Pvt. Ltd. (later known as Sigma Electric Manufacturing Corporation Pvt.Ltd.) and was required to provide personnel for activities such as felting, material handling, pouring and supply of material to furnace. Similarly, on 01/01/2013 and 2014, fresh agreements were entered into between the appellant and Sigma.

On 26/09/2014, a Show-Cause Notice was issued by the Commissioner of the erstwhile Pune-I Central Excise Commissionerate demanding service tax along with interest and with a proposed penalty of Rs. 10,50,23,672. The allegations in the Show-Cause Notice were

1. The appellant had failed to pay the service tax from April 2012 to March 2014.

2. The appellant had failed to assess and discharge service tax liability in accordance with their sales ledgers relating to Sigma from September 2012 to March 2014.

3. The appellants had suppressed the facts and made a misinterpretation by filing the incorrect ST-3 returns.

4. The appellant had filed ST-3 returns for the period between April 2013 to September 2013 after the due date as stipulated under Section 70(1) of the Finance Act and Rule 7 of the Service Tax Rules, 1994.

The Show cause notice was adjudicated upon by the Commissioner of Central Excise Pune-I, Commissionerate by an order dated 24/02/2015. The adjudicating authority confirmed the demand of service tax and interest besides imposing penalty. The adjudicating authority held that

1. The appellant habitually delayed paying service tax every month from April 2012 to March 2014.

2. The appellant did not have any machinery or equipment of its own and was using the equipment and machinery of Sigma at appellant’s premises.

3. The supply of labour by the appellant to Sigma for doing the work did not alter the characteristics of the manpower services provided by the appellant to Sigma. The adjudicating authority confirmed the demand of service tax and interest besides imposing penalty.

The order of the adjudicating authority was challenged in an appeal before the Central Excise and Service Tax Appellate Tribunal, WZB, Mumbai. The Appellate Tribunal held that the service provided by Sigma is not in the nature of job work exempted under the Notification No. 25/2012- Service Tax dated 20/06/2012 and the services were in the nature of contract labour. The Tribunal also held that

i) Clause 10, 11 and 17 of the agreement required to obtain a licence under the Contract Labour (Regulation and Abolition) Act, 1970;

ii) The agreement imposed the responsibility of payment of wages to the employees/workmen and for payments under the Employees’ State Insurance Act, 1948 and Provident Fund in respect of the employees of the contractor on the appellant.

Hence, the Tribunal confirmed that the agreement between the appellant and Sigma is a Contract Labour Agreement executed for the purpose of providing requisite manpower and is not a job work contract to extend the benefit of the notification.

Issue

Whether the appellant is a job worker within the meaning of the exemption notification dated 20 June 2012 or is merely a supplier of contract labour for the work of the establishment?

Findings of the Court

The Honourable Supreme Court of India started with the discussion from the definition of contractor under the Contract Labour (Regulation and Abolition) Act. Under the Act, the expression “contractor” means i) A person who undertakes to produce a given result for the establishment, other than a mere supply of goods or articles of manufacture through contract labour; and ii) A person who supplies contract labour for any work of the establishment including a sub-contractor. The first part of the definition comprehends a person who undertakes to produce a result for the establishment other than a mere supply of goods and services, whereas the latter part covers the supply of contract labour for any work of the establishment. (Para 15).

The Honourable Apex Court of India observed

“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 the 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© 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 obligations”

(Para 16)

The Honourable Supreme Court of India then held that

“The decisions of CESTAT relied upon by the appellant also do not help their submissions as they are fact-specific and based on a reading of the contracts in those cases. In this case, though ostensibly, the agreement contains a provision for payment on the basis of the rates mentioned in Schedule II, the agreement has to be read as a composite whole. On reading the agreement as a whole, it is apparent that the contract is pure and simple a contract for the provision of contract labour. An attempt has been made to camouflage the contract as a contract for job work to avail of the exemption from the payment of service tax. The judgment of the Tribunal does not, in the circumstances, suffer from any error of reasoning.” (Para 17)

For the above reasons we have come to the conclusion that there is no merit in the appeal. The appeal shall accordingly stand dismissed. (Para 18)

Pending application(s), if any, stand disposed of. (Para 19)

To View/Download Judgment: Adiraj Manpower Services Private Limited v. Commissioner of Central Excise Pune II

Cases Referred

1. Om Enterprises v. Commissioner of Central Excise, Pune-I, 2018 (17) G.S.T.L. 260

2. Bhagyashree Enterprises v. Commissioner, 2017 (3) G.S.T.L.515.

3. Dhanashree Enterprises v. Commissioner, 2017 (5) G.S.T.L.

4. S. Balasubramani v. Commissioner, 2019 SCC OnLine CESTAT 480.