The Authority for Advanced Ruling (AAR) has recently held that there should be no liability to pay service tax on the salary and allowances payable by expatriates in terms of the dual employment agreement.

In the case of North American Coal Corporation India Pvt. Ltd., Pune v. Commissioner of Central Excise, Pune, there was a tripartite agreement between North American Coal Corporation (“NAC”) USA, NAC India and Mr. Sloan. Under this agreement, Mr. Sloan’s (who is on the permanent roll of the NAC USA) services were to be utilized by NAC India for a particular term.

Based on the agreement, NAC India was supposed to pay all his salaries. The agreement further states that the social security interests of Mr. Sloan would be paid by NAC USA and there is no provision for reimbursement of the same by NAC India to NAC USA. The company argued that since Mr. Sloan is providing service in his capacity as an employee which is clear from the wordings of the agreement, there is no possibility of any service tax provision being applicable to the salary paid to Mr. Sloan. The revenue department however argued that NAC USA is bearing the social security, which tantamount to a consideration paid by the NAC India for employing the services of Mr. Sloan and, therefore, this will not amount to a pure service as contemplated in Section 65 (44)(b) of the Finance Act.

The judge concurred with the company’s reliance on the definition of service and more particularly on the exclusion provision which is under Section 65(44)(b), which suggests that a provision of service by an employee to the employer in the course of or in relation to his employment shall not be included in the definition of service. The judge stated that the agreement is very clear to suggest that so long as Mr. Sloan is serving in India, he will be treated to be the employee of the applicant though his interests as the employee of NAC USA, insofar as the social security interests are concerned, will be taken care of by NAC USA.

Source: THE AUTHORITY FOR ADVANCE RULINGS, (Central Excise, Customs & Service Tax) NEW DELHI, November 6, 2015, Ruling No.AAR/ST/13/2015 in Application No. AAR/44/ST/2/2014

VA View

Service tax authorities have been taking a view that where an employee of a group company is deputed to work in an associate company for a specified period assignment, the transaction amounts to creating a service provider-service recipient relationship between the two companies therefore amenable to service tax. In some recent instances, tax authorities have issued notices to MNCs where an expat employee who has received payments from the parent in his home country. They argue that salaries paid for work in India and transferred to foreign accounts by the parent company which then get reimbursed to it by the Indian subsidiary make it akin to supply of manpower and therefore should be taxable. The decision of AAR is significant as it brings some relief to MNCs that have been served with notices in similar cases.