ITAT Mumbai Confirms Section 80JJAA Deduction for Manpower Supplier Despite Employee Deployment at Client Premises

1. Background of the Dispute

The case of JCIT Vs Prompt Personnel Private Limited (ITAT Mumbai) concerns the availability of deduction under Section 80JJAA of the Income Tax Act 1961 to a manpower-supply company whose employees are placed at client sites.

Prompt Personnel Private Limited, the assessee, operates in the business of providing manpower and allied human resource services. For Assessment Year 2020-21, it claimed a deduction of Rs. 3,16,68,362 under Section 80JJAA. This amount represented the eligible deduction out of a total of Rs. 3,93,97,626.90, calculated at 30% of aggregate emoluments of Rs. 13,13,25,423 paid to 696 “additional employees”.

The assessee’s total employee count moved from 11,987 as on 31.03.2019 to 13,256 as on 31.03.2020, and the relevant employees:

  • Were within the statutory wage ceiling,
  • Had worked for at least 240 days,
  • Were covered under a recognized provident fund, and
  • Received salary through banking channels,

with the claim duly certified in Form 10DA.

Despite these facts, the Assessing Officer (AO) disallowed the deduction in an assessment framed under Section 143(3) read with Section 144B, on the premise that the assessee was not truly bearing the “additional employee cost” because the employees were deployed to client premises and the salary outgo was recovered from those clients with a margin.

On appeal, the CIT(A)/NFAC examined all statutory conditions under Section 80JJAA and found them fulfilled:

  • The assessee’s books were liable to audit under Section 44AB.
  • Income was derived from profits and gains of business.
  • The business was not created by splitting up or reconstruction of an existing business.
  • There was a tangible increase in employee strength.
  • Wage ceiling, minimum 240 days’ employment, provident fund participation, and payment via bank channels were all satisfied for the 696 additional employees.
  • An audit report in Form 10DA was on record.

The CIT(A) further noted the following features of the employment setup:

  • Personnel were recruited by the assessee.
  • They were on the assessee’s payroll.
  • Salaries and all statutory dues (PF, ESIC, gratuity, etc.) were paid by the assessee.
  • The assessee bore responsibility for labour-law compliance.
  • Disciplinary and supervisory control in the employment-law sense lay with the assessee.

The fact that these employees physically worked at client premises was considered an inherent element of the assessee’s business model as a staffing entity, and not a factor that altered the employer-employee relationship in law.

The CIT(A) therefore:

  • Treated the assessee as the real employer.
  • Held that “place of deployment” is not a statutory condition under Section 80JJAA.
  • Emphasised that the claim had already been scrutinized and allowed under Section 143(3) in AY 2017-18, the first year of claim, and that there had been no material change in the business structure.

On this reasoning, the CIT(A) directed the AO to allow the deduction of Rs. 3,16,68,362 under Section 80JJAA.

The Revenue appealed this relief before the ITAT Mumbai.

3. Revenue’s Stand Before the Tribunal

The Revenue’s contention was sharply focused on the meaning of “additional employee cost”:

  • It argued that the cost must be borne by the claimant-assessee in substance.
  • According to the Department, employees deployed at client premises were not in reality an expense of the assessee because:
    • The salaries paid to such personnel were entirely recovered from clients.
    • The Profit & Loss Account reflected:
      • “Income from contractual receipts” corresponding to such deployments; and
      • “Direct expenses pertaining to contract receipts” representing the salaries.
    • The assessee’s “profit” offered to tax was said to be derived from other service income (consultancy, staffing fees, recruitment fees, etc.), without absorbing the salary cost of deputed staff.

On this basis, the Department maintained that the assessee did not “incur” additional employee cost within the meaning of Section 80JJAA, and that the deduction ought to be denied.

4. Assessee’s Arguments and Case Law Relied Upon

The assessee, through its Authorised Representative, anchored its submissions on established jurisprudence on contract labour and employer-employee relationships.

4.1 Steel Authority of India Ltd. v. National Union Waterfront Workers

Reliance was placed on Steel Authority of India Ltd. v. National Union Waterfront Workers, AIR 2001 SC 3527, where the Supreme Court recognised: