Labour Contractor Liable For Service Tax Despite Production-Based Payments: CESTAT New Delhi

The New Delhi Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 31 July held that a labour contractor providing workers to a steel company was liable to pay service tax as the agreement was a manpower supply contract and not a job work arrangement for manufacturing.

A Bench of Judicial Member Binu Tamta and Technical Member P.V. Subba Rao dismissed the appeal filed by Padam Charan Guman Singh and upheld the demand of service tax, interest and penalty under Section 78 of the Finance Act, 1994 (penalty for suppression or wilful misstatement with intent to evade tax). It observed:

“Reading the above clauses as a whole leaves no manner of doubt that it was a work order for labour contract which is what the appellant applied for and after discussions which is what was offered to by SS Ispat and accepted by the appellant.”

Padam Charan Guman Singh had entered into an agreement with S.S. Ispat and received a show cause notice demanding service tax of Rs. 12.50 lakh for the period 2008-09 to 2010-11. The Department alleged that he had provided manpower recruitment and supply agency service without discharging the applicable service tax liability.

The adjudicating authority confirmed the demand along with interest and penalties. While the Commissioner (Appeals) set aside penalties under Sections 76 and 77 of the Finance Act, 1994, it upheld the demand, interest and penalty under Section 78, leading to the appeal before the Tribunal.

Singh argued that he had not supplied manpower but had undertaken the entire manufacturing process as a job worker by deploying his own labour. He contended that the payment was linked to the quantity of finished goods manufactured and not to the number of workers supplied.

He also challenged the reliance placed on his statement recorded during investigation, arguing that the procedure under Section 9D of the Central Excise Act (which governs the use of statements recorded during investigation as evidence) had not been followed. He further contended that the demand was time-barred and that penalties could not be imposed.

The Revenue submitted that the agreement was a labour contract under which Singh supplied labour to S.S. Ispat, collected service tax from the recipient but failed to deposit it with the Government. It argued that the work order itself described him as a labour contractor and that the true nature of the contract had to be determined by examining all its terms.

After examining the work order, the Tribunal found that the agreement repeatedly described Singh as a labour contractor, required submission of labour bills and imposed obligations relating to provident fund and ESI compliance.

It held that the mere fact that payment was calculated on a per-metric-ton basis did not change the nature of the agreement. It observed that the contract did not prescribe production targets or quality standards that are generally associated with manufacturing or job work contracts. It concluded that the agreement was essentially for supply of labour and observed:

“At any rate, the statement of the appellant only affirms the nature of the contract as a labour contract and the appellant as a labour contractor which are also evident from the various clauses of the contract referred to above.”

Rejecting the limitation challenge, the Bench held that Singh was aware that he was providing a taxable service but failed to disclose the same or pay service tax. It also rejected the contention that the demand could not be based on Form 16A. It held that where a taxpayer fails to produce complete records, the Department can rely on available documentary evidence, and it was for Singh to establish that the amounts reflected in the documents related to non-taxable activities.

Accordingly, the CESTAT found no infirmity in the impugned order and dismissed the appeal.

Counsel for Appellant: Shri Krishna Mohan K. Menon and Ms. Archita Ishani, Advocates

Counsel for the Revenue: Shri Rakesh Kumar, Authorized Representative