Salary reimbursement not taxable “Manpower recruitment”

Facts of the case
The assessee had entered into an agreement with its overseas parent company in Japan for payment of salary and other perquisites for employees deputed from such parent company.

The employees deputed by the parent company operated under the control, direction and supervision of the assessee.

Further, the assessee withheld tax on the salary paid to such employees as per the requirements of the Income-tax Act, 1961.

The salary payment to such employees was disbursed by the overseas parent company. Subsequently, the salary cost was reimbursed to the parent company by the assessee.

The Revenue sought to tax such reimbursement of salary as manpower supply services and demanded service tax under the reverse charge mechanism.

The Tribunal ruled in favour of the assessee, after which the Revenue had filed an appeal with the Supreme Court (SC).

Supreme Court’s decision
The SC dismissed the appeal filed by the Revenue and upheld the Tribunal’s ruling. While determining the nature of service, it made the following key observations:

1. The deputed person works under the control, direction and supervision of the assessee, and the compliance to withhold tax was also undertaken as an employer by the assessee.

2. The assessee did not pay any direct or indirect compensation to its parent company for the deployment of employees, apart from the reimbursement of salary at cost.

3. The terms of the agreement makes it clear that the relationship between the assessee and the deputed employee is that of employer-employee.

4. Method of salary disbursement [through a group company] will not result in provision of service.

This decision is in favour of the industry where such type of transactions exists between Indian company and foreign company and put an end to the several pending litigations at various forums. This SC decision has laid down the essential principle that needs to be considered while determining an employer-employee relationship. Hence, the same is essentially dependent upon the contractual terms of the agreement entered between companies. The decision pertains to the service tax regime, the industry should assess whether the tax authorities will accept the said position in the GST regime also or not.

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