CESTAT Hyderabad Rules Out Service Tax on Reimbursed Labour Wages in Manpower Supply Contracts

The valuation of taxable services has perennially been a subject of intense litigation between revenue authorities and the assessee, particularly in the context of manpower supply and recruitment agencies. A central point of friction is whether the gross amount charged by a contractor—including the actual wages disbursed to the deployed workforce—should be subjected to service tax, or if the levy should be restricted solely to the commission or service fee retained by the contractor.

In a significant judicial pronouncement, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, in the matter of P. Padmavathi Vs Commissioner of Central Tax (CESTAT Hyderabad), has provided crucial clarity on this issue. The Tribunal ruled that actual wages reimbursed to a manpower supplier by the service recipient do not form part of the taxable consideration, provided these amounts merely pass through the contractor without any profit element. This comprehensive analysis delves into the factual matrix, the legal frameworks invoked, and the broader implications of this ruling for the industry.

Factual Matrix of the Dispute

The assessee, P. Padmavathi, was engaged in the business of providing 'Manpower Recruitment or Supply Agency Service' (MRSAS). During the course of business, the assessee entered into a formal manpower supply agreement with M/s Crown Beers India Ltd (CBIL).

The operational mechanics of this agreement were straightforward:

• The assessee deployed labourers to the premises of M/s Crown Beers India Ltd (CBIL).
• For the services rendered, the assessee raised two distinct sets of invoices. One invoice was specifically for the exact quantum of wages payable to the deployed labourers, while the second invoice exclusively captured the service charges or commission accruing to the assessee for facilitating the manpower.
• The wages collected from the client were disbursed to the labourers on an actual basis.

The jurisdictional Service Tax Department scrutinized the assessee's records for the period spanning from March 2008 to March 2011. The Department took an adverse view of the valuation methodology adopted by the assessee. According to the Revenue, the assessee was liable to discharge service tax on the consolidated amount collected from the client—which included both the commission and the reimbursed wages.