Supreme Court Clarifies Job Work vs. Manpower Supply for Service Tax: Adiraj Manpower Services Pvt. Ltd. vs. Commissioner of Central Excise Pune II (2022)

Date of the Judgment: 18 February 2022

Citation: Civil Appeal No. 313 of 2021

Judges: Dr Dhananjaya Y Chandrachud, J and Surya Kant, J

Can a company providing personnel for specific tasks claim service tax exemption as ‘job work’ or is it simply a case of ‘manpower supply’? The Supreme Court of India addressed this question in a recent case, clarifying the crucial difference between these two types of services. The court examined the nature of the agreement between the parties and the extent of control over the personnel to determine whether the services qualified as ‘job work’ eligible for tax exemption.

Case Background

Adiraj Manpower Services Pvt. Ltd. (the appellant) was registered under the category of ‘Manpower Recruitment or Supply Agency Service’. On 1 January 2012, the appellant entered into an agreement with Semco Electric Pvt. Ltd. (later known as Sigma Electric Manufacturing Corporation Pvt. Ltd.) to provide personnel for various activities. Similar agreements were made on 1 January 2013 and 1 January 2014.

On 26 September 2014, the Commissioner of Central Excise issued a show cause notice to the appellant, demanding service tax, interest, and a penalty of Rs. 10,50,23,672. The notice alleged that the appellant had failed to pay service tax, had misreported taxable value, and had filed ST-3 returns late. The department’s investigation revealed that while the appellant had paid service tax for manpower supply until July 2012, they later claimed the services as ‘job work’ to avail of a service tax exemption, which the department contested.

Timeline:

Course of Proceedings

The Commissioner of Central Excise Pune -I, adjudicated the show cause notice on 24 February 2015, confirming the demand for service tax, interest and penalty. The Commissioner held that the appellant was merely supplying labour and that the work done by the appellant did not change the characteristics of manpower services. The appellant then appealed to the CESTAT, which upheld the Commissioner’s order on 15 July 2019. The CESTAT ruled that the services provided were in the nature of contract labour and not job work, based on the terms of the agreement and the provisions of the Contract Labour (Regulation and Abolition) Act 1970.

Legal Framework

The case revolves around the interpretation of Notification No. 25/2012-Service Tax dated 20 June 2012, which exempts certain taxable services from service tax under Section 66(B) of the Finance Act 1994. Specifically, the notification exempts:

“30. Carrying out an intermediate production process as job work in relation to … (c) any goods on which appropriate duty is payable by the principal manufacturer.”

This provision covers intermediate production processes done as job work on goods where the principal manufacturer pays duty. The court also considered the definition of “contractor” under the Contract Labour (Regulation and Abolition) Act 1970, which includes both those who produce a result and those who supply contract labor.

Arguments

Appellant’s Arguments:

• The appellant argued that the definition of “contractor” under the Contract Labour (Regulation and Abolition) Act 1970 (CLRA) includes both job workers and manpower suppliers. Therefore, their registration under CLRA does not automatically classify them as mere manpower suppliers.
• The agreements with Sigma included provisions for payment of wages and statutory dues, which are standard obligations under labor laws. These obligations do not negate the fact that they were job workers.
• The appellant provided specialized services such as felting, material handling, assembly, pouring, and painting. They controlled and supervised the work, and were not simply supplying manpower to Sigma.
• The invoices were based on piece rate, not on the quantity of manpower supplied. This indicates job work, not manpower supply. The appellant cited previous CESTAT rulings such as Om Enterprises v. Commissioner of Central Excise, Pune -I, Bhagyashree Enterprises v. Commissioner, Dhanashree Enterprises v. Commissioner, & S. Balasubramani v. Commissioner, where piece rate work was considered job work.

Respondent’s Arguments:

• The respondent argued that the exemption under Notification 25/2012 applies to intermediate production processes where the principal manufacturer pays duty on the final goods.
• The agreements between the appellant and Sigma were for manpower supply, disguised as job work. The agreements lacked details on the work to be performed, output, and delivery schedules, which are essential for a genuine job work contract.
• The appellant did not declare the services under “business auxiliary services” or claim the exemption, indicating that they knew it was not job work.

Submissions Table:

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the services provided by the appellant to Sigma constitute job work eligible for exemption under Notification No. 25/2012-Service Tax dated 20 June 2012, or are they merely a supply of contract labour?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

Cases:

• Om Enterprises v. Commissioner of Central Excise, Pune -I [2018 (17) G.S.T.L. 260] (CESTAT): The appellant cited this case to argue that piece rate work should be considered job work and not manpower supply.
• Bhagyashree Enterprises v. Commissioner [2017 (3) G.S.T.L.515] (CESTAT): The appellant cited this case to argue that piece rate work should be considered job work and not manpower supply.
• Dhanashree Enterprises v. Commissioner [2017 (5) G.S.T.L.] (CESTAT): The appellant cited this case to argue that piece rate work should be considered job work and not manpower supply.
• S. Balasubramani v. Commissioner [2019 SCC OnLine CESTAT 480] (CESTAT): The appellant cited this case to argue that piece rate work should be considered job work and not manpower supply.

Legal Provisions:

• Section 66(B) of the Finance Act 1994: This section deals with the levy of service tax.
• Notification No. 25/2012-Service Tax dated 20 June 2012: This notification provides exemptions from service tax, including for job work.
• Section 2(c) of the Contract Labour (Regulation and Abolition) Act 1970: This section defines the term “contractor”.

Authority Consideration Table:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The CESTAT decisions cited by the appellant, such as Om Enterprises v. Commissioner of Central Excise, Pune -I, Bhagyashree Enterprises v. Commissioner, Dhanashree Enterprises v. Commissioner, & S. Balasubramani v. Commissioner, were distinguished as fact-specific and not applicable to the present case.
• The court relied on the interpretation of Notification No. 25/2012-Service Tax dated 20 June 2012 and Section 2(c) of the Contract Labour (Regulation and Abolition) Act 1970 to conclude that the appellant’s services were a supply of contract labour.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the nature of the agreement between the appellant and Sigma. The court emphasized the lack of specific contractual terms typically found in job work contracts, such as the nature of the process, quality control measures, and delivery schedules. The court noted that the agreement focused on the regulation of manpower supplied by the appellant, rather than the production of a specific result. The court also considered the fact that the appellant did not declare their services as “business auxiliary services” or claim the exemption, indicating that they were aware that their services did not qualify as job work.

Sentiment Analysis Ranking:

Fact:Law Ratio:

The court’s reasoning was based more on the factual analysis of the agreement and the conduct of the appellant rather than a purely legal interpretation. The court focused on the absence of key elements of a job work contract in the agreement and the appellant’s failure to claim the exemption, indicating a factual basis for the decision.

Logical Reasoning:

The court considered the factual aspects of the agreement and the appellant’s conduct, along with the legal framework, to arrive at its conclusion.

The court stated:

“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.”

“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.”

Key Takeaways

• Companies providing manpower services must clearly define the nature of their agreements to avoid disputes regarding service tax exemptions.
• Agreements for job work must include specific details about the work process, quality control, and delivery schedules to qualify for service tax exemptions.
• The mere use of piece rate billing does not automatically classify a service as job work.
• Companies should accurately declare their services under the appropriate category in their service tax returns.

Directions

No specific directions were given by the Supreme Court in this judgment.

Specific Amendments Analysis

There was no discussion of any specific amendments in this judgment.

Development of Law

The ratio decidendi of this case is that the nature of the contract, specifically the presence of key elements of a job work contract, is crucial in determining whether a service qualifies as job work or is merely a supply of contract labour. This judgment clarifies the distinction between job work and manpower supply for the purpose of service tax exemptions. It emphasizes that agreements must be read as a whole and that the absence of specific contractual terms for job work indicates a contract for the provision of contract labour. There is no change in the previous position of law, but it provides clarity on the interpretation of the existing provisions.

Conclusion

The Supreme Court dismissed the appeal, affirming the CESTAT’s decision that the services provided by Adiraj Manpower Services were a supply of contract labour and not job work. The court emphasized that the agreement lacked the necessary details of a job work contract and focused on the regulation of manpower supply. This judgment clarifies the distinction between job work and manpower supply for service tax purposes, highlighting the importance of clearly defined contractual terms.