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Monday, December 21, 2015

Advance Ruling is case specific but it serves as a good indication as to how a business transaction should be interpreted

Recently, North American Coal Corp. India, the local subsidiary of US-based North American Coal Corp, sought a ruling on the application of service tax on social security benefits given by the parent to an employee working in India on contract. Tax authorities are of the view that the practice of paying salaries for work in India that are then transferred to foreign accounts by the parent company and reimbursed to it by the Indian subsidiary make it akin to supply of manpower and hence taxable. 

It was contended that the service rendered was in the capacity as an employee as per the agreement and hence no question of any service tax provision is applicable to the salary paid by the local subsidiary to the employee. In the past regime, there was a specific Entry No. Section 65(68) read with Section 65 (105)(k). But after 2012 and after the advent of the Negative List, all those entries had gone into the oblivion and now there is a fresh definition of service under Section 65 (44). The applicant relied upon 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.

AAR is of the view that one must look from the perspective of the definition of service and if the definition of service excludes the service offered by an employee to the employer then it has to be so held. 

A view is expressed that this ruling must be taken into consideration for examining identical situations of other companies even though AAR ruling does not have binding effect on them. This can guide companies on potential tax liabilities. 

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