The Customs, Excise and Service Tax Appellate Tribunal, Hyderabad, has held that actual wages paid to labourers and reimbursed to a manpower supply contractor cannot automatically be included in the taxable value of manpower recruitment or supply agency services. Service tax is payable only on the consideration retained by the contractor as commission or service charges, subject to verification from the records.
The ruling was delivered in P. Padmavathi v. Commissioner of Central Tax, Medchal–GST, Service Tax Appeal No. 27390 of 2013, by the Hyderabad Division Bench comprising Shri P. Anjani Kumar, Member (Technical), and Shri Angad Prasad, Member (Judicial). The final order was pronounced on 28 July 2026.
Background of the Dispute
The appellant had entered into an agreement with M/s Crown Beers India Ltd. for the supply of manpower. Separate invoices were raised for wages payable to labourers and for the service charges or commission earned by the appellant.
The Department demanded service tax on the entire amount, including the wages reimbursed to the appellant. Its case was that the appellant did not satisfy the conditions prescribed for treatment as a pure agent under Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006.
The adjudicating authority and the Commissioner (Appeals) held that, since the pure-agent conditions were not fulfilled, the full amount received by the appellant formed part of the gross taxable value.
Reimbursement of Wages Is Not Automatically Consideration
The Tribunal observed that Section 67 of the Finance Act, 1994 authorises levy of service tax on the amount charged as consideration for the taxable service. However, an amount that merely represents reimbursement of expenditure does not become taxable consideration merely because it passes through the service provider.
The Tribunal held that the dispute could not be decided solely by examining whether every condition under Rule 5(2) had been satisfied. The more fundamental issue was whether the wages reimbursed to the appellant constituted consideration earned for providing the taxable service.
Where the contractor merely collects the wages and passes them on to the labourers without retaining any profit element, such wages cannot be treated as the contractor’s income. The taxable value must reflect the real consideration received for arranging, supplying and supervising the manpower.
Substance of the Contractual Arrangement Must Be Examined
The Tribunal emphasised that taxability must be determined by examining the real nature and substance of the contractual arrangement.
In the present case, the labourers rendered services to the recipient, while the appellant arranged and supervised the manpower. The appellant’s actual earning was the commission or service charge. The wages belonged to the labourers and did not form part of the appellant’s remuneration.
The Department had not produced material showing that any portion of the wages was retained by the appellant as income. The records instead showed that separate bills were raised for wages and commission and that the arrangement was supported by written documents.
Accordingly, the mere routing of the wage amount through the appellant did not convert it into taxable consideration.
Pure-Agent Conditions Not the Sole Test
The Tribunal rejected the proposition that failure to satisfy every ingredient of Rule 5(2) would, by itself, make all reimbursements taxable.
It held that the authorities must first determine whether the reimbursed amount forms part of the consideration for the service. Even where the service provider does not strictly qualify as a pure agent, an amount that is merely passed on to labourers and is not retained as income cannot automatically be included in the assessable value.
The valuation exercise must therefore distinguish between the contractor’s remuneration and amounts recovered only for onward payment.
Extended Limitation and Penalties Set Aside
The Tribunal further held that the extended limitation period under the proviso to Section 73(1) of the Finance Act, 1994 could not be invoked.
The appellant had maintained separate invoices showing wages and commission, and the arrangement was disclosed in the contractual documents. The dispute concerned the interpretation of valuation provisions, on which divergent judicial views had existed during the relevant period.
In these circumstances, the allegation of deliberate suppression with intent to evade service tax was not sustainable.
Consequently, the penalties imposed under Sections 76, 77 and 78 of the Finance Act, 1994 were also set aside.
Final Decision
The Tribunal held that actual wages reimbursed for payment to labourers could not be included in the taxable value merely because the amount was routed through the appellant.
Only the commission or service charges actually retained by the appellant were liable to service tax.
The impugned order was set aside to the extent that it included reimbursement of wages in the assessable value. The matter was remanded to the adjudicating authority for the limited purpose of re-quantifying the service tax payable on the commission or service charges retained by the appellant, after granting a reasonable opportunity of hearing.
The demand for the extended period and the penalties imposed under Sections 76, 77 and 78 were set aside. The appeal was allowed by way of remand with consequential relief in accordance with law.
Significance of the Ruling
The decision reinforces the principle that service tax valuation must be based on the actual consideration earned by the service provider. Amounts collected only for payment to labourers cannot be taxed merely because they appear in the contractor’s invoices or pass through the contractor’s accounts.
The ruling is relevant for manpower suppliers, security agencies, labour contractors, businesses, tax consultants, advocates and professionals dealing with legacy service tax disputes involving salary or wage reimbursements.