Dept. Failed to Establish Manpower Supply; CESTAT Chennai Quashes Entire Service Tax Demand Against TAFE
Pranav B Prem
The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Chennai has set aside the service tax demand raised against Tractors and Farm Equipment Ltd. (TAFE) after finding that the Department failed to establish that independent contractors engaged by the company were providing manpower supply services. The Tribunal held that liability under the reverse charge mechanism could not be fastened merely on presumptions without demonstrating an employer–employee relationship between the company and the workers engaged by the contractors.
The dispute arose after the Central Excise authorities formed the view that TAFE had received manpower supply services from several contractors and was therefore liable to pay 75% of the service tax under the reverse charge mechanism from 1 July 2012. Show-cause notices issued in 2014 and 2015 sought to recover more than ₹2.9 crore in service tax, interest and penalties under Sections 76 and 77 of the Finance Act, 1994. The adjudicating authority confirmed the demand and imposed penalties, prompting TAFE to appeal before the Tribunal.
During the hearing, TAFE submitted that the contractors were not manpower suppliers but independent job-workers engaged for specific tasks, compensated strictly on a piece-rate basis, and responsible for quality and damages arising out of the work performed. It was argued that the workers were under the exclusive control of the contractors and that the company neither supervised them nor exercised any disciplinary authority. It was also pointed out that the contractors had discharged service tax on their own classification as providers of "other taxable services," and that the Department’s attempt to reclassify the services as manpower supply lacked any factual basis.
The Tribunal observed that the Department had not conducted the mandatory legal inquiry into the nature of the relationship between the parties. It emphasised that determining whether a service amounts to manpower supply requires application of multifactor tests recognised by the Supreme Court, including tests relating to control and supervision, integration into business operations, mutual obligations, and provision of equipment. The Tribunal found that payments were made based on output rather than man-hours, contractors bore responsibility for defects and losses, and the agreements contained no provision requiring deployment of a fixed number of workers.
The Bench further noted that earlier CESTAT rulings involving the same contractors under identical agreements had already confirmed that these arrangements did not constitute manpower supply services. It rejected the Revenue’s contention that TAFE’s payment of partial reverse charge for one contractor implied knowledge of tax liability for all contractors, holding that tax classification cannot be determined on the basis of such isolated conduct.
Concluding that the Department had not discharged the burden of proving taxability, the Tribunal held that the entire demand was rooted in assumptions rather than evidence. It observed that once the classification of service fails on merits, related issues such as extended limitation, interest and penalty also fall automatically. Accordingly, the Tribunal set aside the impugned order in full and allowed the appeal, granting TAFE the consequential relief permissible under law.
Appearance
Counsel For Appellant: Raghav Rajeev, Advocate
Counsel For Respondent: O.M. Reena, Authorised Representative
Cause Title: Tractors and Farm Equipment Ltd. Versus Commissioner of GST & Central Excise
Case No: Service Tax Appeal No. 41328 of 2016
Coram: Ajayan T.V. (Judicial Member), M. Ajit Kumar (Technical Member)
