The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Chandigarh has clarified that transporting goods on a per-kilometer basis, even when drivers are involved, does not constitute taxable 'Manpower Recruitment or Supply Agency Services' under the Finance Act, 1994. This ruling resolves a long-standing ambiguity in service tax classification and reinforces the principle that the nature of the contractual obligation, not the incidental use of labor, determines tax liability.
Background & Facts
The Dispute
The dispute centered on whether M/s Kamaldeep Enterprises and M/s Syal And Associates, both proprietary firms engaged in transporting tractors from manufacturing plants to dealer locations, were liable to pay service tax under the category of 'Manpower Recruitment or Supply Agency Services'. The Revenue contended that by providing drivers to move tractors, the appellants were supplying manpower to Punjab Tractors Ltd (now Mahindra Logistics), thereby attracting service tax under Section 65(68) of the Finance Act, 1994. The appellants maintained that they were engaged solely in transportation of goods under a contractual agreement, and the drivers were not supplied as a service but were integral to the performance of the transport contract.
Key Facts
- The appellants entered into a written agreement dated 02.01.2004 with M/s Punjab Tractors Ltd (PTL) to transport tractors from PTL’s factory to various dealerships across India.
- Payment was made strictly on a per-kilometer basis, inclusive of all expenses: diesel, driver wages, return travel fares, incidental costs, and statutory compliance.
- The agreement placed full responsibility on the appellants for:
- Safe delivery of tractors in good condition
- Arranging spot surveys and filing FIRs in case of accidents
- Obtaining court releases for seized vehicles
- Complying with road taxes, sales tax forms, and other statutory requirements en route
- During an audit of PTL in 2011, the department noticed payments made to the appellants and initiated proceedings.
- Show cause notices dated 21.10.2011 were issued under C.No. V(ST)SCN/JC(P)/Adj/CHD-I/65/11/4128 (Kamaldeep) and C.No. V(ST)SCN/JC(P)/Adj/CHD-I/66/11/4125 (Syal).
- Adjudicating authorities issued Order-in-Originals dated 29.11.2012, demanding service tax of Rs.17,98,864/- and Rs.20,85,358/- respectively under Section 73 of the Finance Act, 1994.
- Commissioner (Appeals) confirmed the demand on 06.07.2018 and 19.12.2018 but did not quantify interest or penalty.
- The appellants appealed before CESTAT Chandigarh.
Procedural History
- 02.01.2004: Contract executed between appellants and M/s Punjab Tractors Ltd
- 2011: Audit of PTL triggers investigation into payments to appellants
- 21.10.2011: Show cause notices issued to both appellants
- 29.11.2012: Order-in-Originals passed by Adjudicating Authority
- 06.07.2018: Commissioner (Appeals) confirms demand but leaves interest and penalty unquantified
- 19.12.2018: Commissioner (Appeals) issues similar order for Syal And Associates
- 28.11.2025: Hearing held before CESTAT Chandigarh
- 27.03.2026: Final Order passed by CESTAT
The Parties' Positions
For the Appellants
- Argued that the service rendered was transportation of goods, not supply of manpower.
- Emphasized that payment was tied to distance traveled, not number of drivers or man-hours.
- Cited prior CESTAT decisions, including their own case (M/s Syal & Associates and M/s Kamaldeep Enterprises v. CCE & ST, Chandigarh, 2023 (4) TMI 715), which had already held that such activities do not fall under 'Manpower Recruitment or Supply Agency Services'.
- Relied on multiple precedents from Bangalore, Ahmedabad, Mumbai, and Chennai benches affirming that job-specific contracts with per-unit or per-km payment are not manpower supply.
- Contended that the circular cited by the department (regarding payment of wages by agencies) was inapplicable since the appellants were not agencies supplying labor but transporters.
For the Respondent
- Maintained that the appellants were supplying drivers to PTL, even if indirectly.
- Argued that the appellants failed to register under service tax and file returns, violating Section 70 of the Finance Act, 1994.
- Asserted that non-registration and non-filing warranted penalty under Section 77.
- Did not dispute the per-km payment structure but insisted that the presence of drivers made it a manpower supply service.
Relief Sought
The appellants sought:
- Setting aside of the service tax demand of Rs.17,98,864/- and Rs.20,85,358/-
- Cancellation of interest and penalty as they were contingent on the validity of the demand
- In the alternative, reduction of penalty to a nominal amount if any liability was found
The Legal Issue
The central question was whether the transportation of tractors on a per-kilometer basis, with drivers employed by the transporter, constitutes a taxable service under the category of 'Manpower Recruitment or Supply Agency Services' as defined under Section 65(68) of the Finance Act, 1994.
Arguments Presented
For the Appellant
The appellants relied on the binding precedent set by CESTAT Chandigarh in their own case (M/s Syal & Associates and M/s Kamaldeep Enterprises v. CCE & ST, Chandigarh, 2023 (4) TMI 715), which had already held that the contractual terms clearly indicated a transportation contract, not a manpower supply arrangement. They emphasized that the consideration was linked to distance, not manpower, and that the appellants bore full operational responsibility - including vehicle maintenance, fuel, insurance, and statutory compliance - further distinguishing their role from that of a manpower agency. They cited multiple decisions from other CESTAT benches, including Rajhans Metals Pvt Ltd, M/s Fire Controls, and Talala Taluka Sahakari Khand Udyog Mandali, all of which held that job-specific, output-based contracts do not qualify as manpower supply. They also argued that the department’s reliance on the circular regarding wage payment was misplaced, as the appellants were not intermediaries supplying labor but independent contractors performing a transport function.
For the Respondent
The Revenue did not challenge the factual nature of the contract but argued that the involvement of drivers, even if employed by the appellants, rendered the service as one of manpower supply. They contended that the appellants’ failure to register under service tax and file returns constituted a violation of Section 70, thereby attracting penalty under Section 77. They relied on the general principle that any service involving the provision of personnel, regardless of payment structure, could be classified as manpower supply if the end-user benefits from the labor. However, they did not produce any precedent directly supporting the classification of vehicle transport as manpower supply.
The Court's Analysis
The Tribunal conducted a detailed review of the contractual terms, payment structure, and judicial precedents. It emphasized that the classification of a service must be determined by the substance of the transaction, not its form. The Tribunal noted that the agreement explicitly required the appellants to undertake end-to-end transportation, including all risks and responsibilities, and that payment was strictly per kilometer, inclusive of all costs.
"A perusal of the above conditions indicates that the terms of the contract were not for supply of the drivers. The appellants had to undertake the transportation of tractors from premises of Punjab Tractors Ltd to their dealers and in the bargain they may appoint drivers for the work. Appellants were required to take all responsibilities on the way."
The Tribunal further distinguished the present case from true manpower supply arrangements by referencing the circular cited by the department, which applies only when an agency supplies personnel whose wages are paid by the agency and who are under its control. In this case, the drivers were not supplied to PTL; they were employed by the appellants to perform a transport function. The Tribunal held that the mere fact that drivers were used did not transform the service into manpower supply.
The Tribunal also relied on the decision in M/s Fire Controls v. CCE & ST, Mysore, which held that packing services performed on a per-piece basis, even if involving labor, were ancillary to manufacturing and not manpower supply. Similarly, in Talala Taluka Sahakari Khand Udyog Mandali, the Tribunal held that harvesting and transportation on a per-ton basis were job-specific and not manpower-specific.
The Tribunal concluded that the demand for service tax under 'Manpower Recruitment or Supply Agency Services' was legally unsustainable. It further held that since the underlying demand was invalid, interest and penalty could not be sustained unless a separate violation of registration or return-filing obligations was established.
The Verdict
The appeals were partially allowed. The Tribunal set aside the service tax demand of Rs.17,98,864/- against Kamaldeep Enterprises and Rs.20,85,358/- against Syal And Associates. The interest and penalty were also cancelled insofar as they were linked to the service tax demand. However, the Tribunal imposed a penalty of Rs.10,000/- on each appellant under Section 77 of the Finance Act, 1994, for failure to register and file returns under Section 70. The penalty was imposed as a standalone violation, independent of the service tax demand. No interest was levied. Compliance with the penalty payment was directed within 30 days of the order.
What This Means For Similar Cases
Transportation Contracts Are Not Manpower Supply
- Practitioners must now argue that any contract where payment is tied to output (distance, units, weight) rather than manpower hours or headcount cannot be classified as 'Manpower Recruitment or Supply Agency Services'.
- The presence of drivers or laborers does not automatically trigger service tax under this category if they are integral to the performance of a transport or logistics contract.
- The key test is whether the client is paying for labor or for a result.
Registration Violations Are Separate from Service Classification
- Failure to register or file returns under Section 70 may attract penalty under Section 77, but this does not validate an incorrect classification of the service.
- Tax authorities cannot use non-compliance as a proxy for establishing tax liability.
- Practitioners should file for waiver or reduction of penalty under Section 77(2) if the underlying tax demand is quashed.
Precedents Are Binding Unless Overruled
- A decision by a tribunal bench on an identical issue, if not appealed by the department, attains finality and binds subsequent adjudications.
- Practitioners must cite prior favorable decisions from the same bench or jurisdictional tribunal to pre-empt adverse rulings.
- The CESTAT Chandigarh’s reliance on its own 2023 decision demonstrates the importance of consistent jurisprudence in tax litigation.
