Custom, Excise & Service Tax Tribunal
Sony Music Enertainment India Private ... vs Commissioner Cgst-Mumbai West on 26 June, 2024
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL,
MUMBAI
REGIONAL BENCH - COURT NO. I
Service Tax Appeal No. 86233 of 2021
(Arising out of Order-in-Original No. MUM/CGST/MW/COMMR/AK/52-
55/2020-21dated 27.02.2021 passed by the Commissioner of CGST,
Mumbai West, Mumbai)
Sony Music Entertainment India Private Limited .... Appellants
3rd Floor, Raheja Centre,
Main Avenue, Linking Road
Santacruz (West)
Mumbai - 400 054.
Versus
Commissioner of CGST, Mumbai West .... Respondent
Mahavir Jain Vidhyalaya, C.D. Burfiwala Road
Juhu Lane, Andheri
Mumbai - 400058.
Appearance:
Shri D.B. Shroff, Senior Advocate a/w Shri Sunil Gabhawalla and Shri Parth Shah,
Chartered Accountants for the Appellants
Shri Mahesh Patil, Authorized Representative for the Respondent
CORAM:
HON'BLE MR. S.K. MOHANTY, MEMBER (JUDICIAL)
HON'BLE MR. M.M. PARTHIBAN, MEMBER (TECHNICAL)
FINAL ORDER NO. A/85630/2024
Date of Hearing: 28.02.2024
Date of Decision: 26.06.2024
PER : M.M. PARTHIBAN
This appeal has been filed by M/s Sony Music Entertainment India
Private Limited, Mumbai (herein after referred to, for short, as "the
appellants") assailing the Order-in-Original No. MUM/CGST/MW/COMMR/
AK/52-55/2020-21 dated 27.02.2021 (hereinafter referred to, for short, as
"the impugned order") passed by the Commissioner of CGST, Mumbai
West, Mumbai.
2
ST/86233/2021
2. The brief facts of the case are that the appellants herein is engaged in
providing taxable services under various categories such as Clearing and
Forwarding services, Broadcasting services, Maintenance or repair services,
Business Auxiliary Services, Sponsorship services etc. and for this purpose
they had registered with the jurisdictional departmental authorities.
Intelligence was gathered by the Directorate General of Central Excise
Intelligence (DGCEI), presently known as Directorate General of GST
Intelligence (DGGI), Zonal Unit, Mumbai that various Film Production
Companies (FPCs) have entered into commercial agreements with various
Music Production Companies (MPCs) including the appellants. Under such
agreement, the FPCs grant certain rights to MPCs for commercially
exploiting the music of the movie for which MPC agrees to pay specified
amounts to FPC. Further, DGGI also found that such agreement also
stipulate that MPC shall spend a specified amount for the purpose of
marketing, publicity and promotion of the film and film music across all
media. DGGI interpreted that since the marketing and publicity cost is
allowed to be retained by the MPC from the royalty earned by them from
selling the music or video, it appeared to DGGI that the amounts are for
promotion and marketing of the film produced by the FPC, and therefore
these activities are liable to service tax under the category of Business
Auxiliary Service (BAS) wherein the MPC is the service provider and the
FPC is the service receiver. As the appellants being MPC was not
discharging service tax leviable on the aforesaid activities, investigation
was initiated by the DGGI vide letters dated 11.09.2014. During the
investigation conducted by DGGI, the appellants have submitted to the
DGGI various documents through reply letters dated 05.01.2015,
10.04.2015 and e-mail reply dated 15.04.2015; besides this DGGI also
recorded statement of the Senior Manager Accounts who is also a qualified
Chartered Accountant representing the appellants on 13.04.2015. As a
result of the detailed investigation, DGGI concluded that the Film
Production companies/ original rights owners by permitting the use of
copyright of the musical work of the films to the appellants are providing
services which are not taxable being 'Copyright services' in respect of
original musical works; however, the appellants has to pay, in addition to
the monetary consideration namely 'Minimum Guaranteed Royalty
amount', a non-monetary consideration in the form of provision of service
of marketing, publicising and promoting the film/film music. Thus, DGGI
concluded that the service provided by the appellants to the FPCs are
taxable under the category of Business Auxiliary Service (BAS) as defined
3
ST/86233/2021
under Section 65(105) (zzb) of Chapter V of the Finance Act, 1994 for the
period up to 30.06.2012. Subsequent to the introduction of negative list
regime w.e.f. 01.07.2012, DGGI claimed that such services are taxable
under 66B ibid, inasmuch as these services are covered by the definition of
'service' being any activity carried by any person for another for
consideration and includes a declared service, and that such services are
not covered under the negative list under Section 66D ibid. On completion
of the investigation, DGGI had issued show cause cum demand notice
dated 20.04.2015, invoking extended period under Section 73(1) of the
Finance Act, 1994 for demand of non-payment of service tax along with
interest for the period 2009-2010 (from October, 2009) to 2013-2014,
besides proposing for imposition of penalties under Section 76, 77 and 78
ibid. Subsequently, periodical Statement of Demand notices were also
issued for demand of service tax for the subsequent periods covering the
financial years 2014-2015, 2015-2016, and 2016-2017. The SCNs issued
as above were adjudicated by the learned Commissioner of CGST, Mumbai
West, in confirmation of the adjudged demands. Being aggrieved with the
above order, the appellants have preferred this appeal before the Tribunal.
3.1 Learned Senior Advocate representing the appellants has submitted
that the appellants are engaged in the activity of acquisition and
exploitation of copyrights subsisting in sound recordings and audio visuals
of the same along with musical and literary works contained and embodied
therein. He submitted that this is done by the appellants by acquiring the
copyrights from the authors/owners and by paying the stipulated
consideration; these copyrights are then commercially exploited by
assigning/licensing their rights in the works of various clients. He further
submits that production of film and creation of film song video or an
album, which is independent of film, are independent art, literary, drama,
music works within the meaning of Copyright Act, 1957. By explaining
various clauses of the agreements entered into by the appellants with the
FPCs, learned Senior Advocate stated that the appellants only acquire
certain rights from FPCs in respect of sound recording and audio visuals
(songs) and not the rights in cinematographic film; the assignment of such
rights on an exclusive basis for the period mentioned in the agreement is
for consideration which is divided into two parts, one a lump-sum amount
payable which is known 'Minimum Guarantee' (MG) and the other is the
share of future profits earned by the appellants by exploitation of the rights
assigned, which is known as 'Overflow'. As the appellants become the
4
ST/86233/2021
owners of the copyrights of songs or audio visuals, it is in their own
interest that they undertake efforts to market their rights are required by
the appellant in the songs and audio visuals. Such marketing efforts are
undertaken by the appellants with intent to increase the popularity and
consequentially the demand for purchase of the songs and audiovisuals and
thereby earn more revenue. The advertising cost is paid by the appellants
to various channels where the respective service providers advertise the
songs/audio visuals and charge the advertisement fee to the appellants
along with applicable service tax paid by them. The amount so spent by
the appellants on its own marketing efforts undertaken for themselves is
known as 'Marketing Spend'. It is also provided in the agreement that
common business profits can be derived only after 'Recoupment' of all
costs from the gross revenue earned by the appellants. Further, it is also
clearly provided in the said the agreement that an upper cap of marketing
cost which can be recouped, which is termed as 'Marketing Commitment'.
On the above basis, learned Senior Advocate stated that for the
assignment of copyright/licensing rights from the FPC to MPC, full
consideration to the FPC comprises of the minimum guarantee plus share
in profits. There is no further consideration whatsoever is flowing between
parties to the contract and particularly there is no consideration flowing
from the FPC to the appellants as interpreted in Section 2(d) of the Indian
Contract Act, 1972.
3.2 In explaining about the various aspects of the contract, learned
Senior Advocate stated that there is no promotion activity undertaken by
the appellants for the FPC and the promotion activity is undertaken only in
respect of the their rights acquired by the appellant and for the business of
the appellant. It is neither the intent nor the purpose of the agreement that
the appellant would promote the film, the rights of which are not the
subject matter of this agreement executed by the appellant with FPC. Thus,
he stated that there is no element of rendition of service involved on which
any service tax would be leviable. Accordingly, he submitted that the
demand of service tax in the impugned order is without any basis in law
and contrary to the charging provisions of the Finance Act. Thus, he
claimed that there is no case for provision of Business Auxiliary services by
the appellants to the FPCs and therefore the demand of service tax on this
head is not sustainable.
5
ST/86233/2021
3.3 For the period w.e.f. 01.07.2012, levy of service tax is on all the
services except negative list of services, and the term 'service' is defined in
terms of Section 65B(44) ibid wherein the essential ingredient of services
are 'any activity carried out by a person for another' and 'consideration for
undertaking such an activity'. It is submitted by the learned Senior
Advocate that in their case, the activity has been undertaken by the
appellants on their own account for themselves and it cannot be said to be
an activity undertaken by the appellants for another. The aspect of
financial assistance, support of other person either partially or completely,
by mere receipt of an amount under the head 'marketing support received'
would not amount to any service, as there is no activity performed by one
person (appellants) for another (FPC). In support of the stand thereupon,
he relied upon the judgement of Coco Cola India in the case of Superior
Drinks Pvt. Ltd. Vs. Commissioner of Central Excise, Nagpur-I - 2019-
TIOL-2266-CESTAT-MUM.
3.4 On the issue of limitation, learned Senior Advocate had stated that as
the issue is relating to classification of services, interpretation of definition
of taxable service there cannot be any attribution of suppression of facts on
the appellant. Further, it is a settled position of law that where a bonafide
belief prevails about non-levy of service tax and in matters of
interpretation, extended period is not invocable and the appellant cannot
be blamed with wilful mis-statement or suppression of facts. In view of
this, he pleaded that the demand of service tax for extended period and
consequential penalties cannot be sustained.
3.5 Learned Senior Advocate relied upon the following orders of the
Tribunal in support of their stand: -
(i) Superior Drinks Pvt. Ltd. Vs. Commissioner of Central Excise,
Nagpur-I - 2019-TIOL-2266-CESTAT-MUM.
(ii) McDonalds India Private Ltd. Vs. Principal Commissioner of
Service Tax, Delhi-I - Final Order No.51264/2019 dated 27.03.2019.
4.1 Learned Authorised Representative (AR) appearing for the
Department, reiterated the findings made by the learned Commissioner. He
further stated that in terms of the agreement the appellants as MPC shall
spend a specified amount known as marketing spend for the purposes of
publicity and promotion of the film and film music across all media; it
includes activities of marketing, publicity and promotion like sale,
6
ST/86233/2021
distribution, administration and payment for the television spots, radio
spots, press publicity, posters, hoardings and other point of sale materials.
Thus he claimed that these services also in the nature of provision of
Business Auxiliary Services provided to the FPCs. Therefore, he claimed
that the expenditure incurred for promotion and marketing of film music is
nothing but 'short film' to give the viewer engaged, to connect with the
film, in this manner it is in promotion and marketing of film produced by
the FPC and therefore the service tax is righty leviable on such services.
Thus, he pleaded that the impugned order is sustainable and the appeal
filed by the appellants may be rejected.
4.2 Learned AR further relied upon the following judgements in support
of their stand:
(i) Infosys Technologies Ltd. Vs. The Special Commissioner and
Commissioner of Commercial Taxes - 2008-TIOL-509-HC-MAD-CT.
(ii) Tata Consultancy Services Vs. State of Andhra Pradesh - 2004-
TIOL-87-SC-CT-LB
(iii) Housing & Dev. Corporation Ltd. (HUDCO) Vs. C.S.T. Ahmedabad
- 2012 (26) S.T.R. 531 (Tri. - Ahmd.)
(iv) Commissioner of C. Ex. Surat-I Vs. Neminath Fabrics Pvt. Ltd. -
2010 (256) E.L.T. 369 (Guj.)
5. Heard both sides and perused the records of the case. We have also
perused the additional written submissions in the form of paper books
submitted in this case by both sides.
6. The issues involved in this appeal is to determine the following issues
viz.,
(i) whether the services provided by the appellants are leviable to
service tax under the taxable category of 'Business Auxiliary Service'
(BAS) or not, in terms of Section 65 (105)(zzb) of the Finance Act,
1994, for the period prior to 01.07.2012;
(ii) whether the services provided by the appellant is leviable to
service tax under Section 66B ibid read with the definition of 'service'
under Section 65B(44) ibid from 01.07.2012 or not; and
(iii) whether the adjudged demands and penalties imposed by the
Commissioner of CGST, Mumbai West is legally sustainable or not,
under the Finance Act, 1994.
7
ST/86233/2021
7.1 We find from the impugned order dated 27.02.2021, that the learned
Commissioner had examined the agreements entered into by the
appellants have held as follows:-
"42. The SCNs have basically relied upon two such agreements. 1.
Between M/s Sony Music and Dharma Productions P. Ltd. dated
19.04.2012 and 2. Assignment of Copyright agreement dated
28.06.2013 between M/s. Viacom 18 Media Pvt. Ltd., M/s. Rakesh
Omprakash Mehra Pictures Pvt. Ltd. and M/s. Sony Music Entertainment
India Pvt. Ltd."
Further, by referring to the various clauses of the agreement, the
learned Commissioner had concluded as follows:-
"42.2 I observe that though Sony Music is entitled to draw up an
exhaustive marketing plan for promoting the Sales, Sony Music and the
FPC are deciding the marketing budget for the marketing, publicity and
promotion of the Film and Said Works. Further Sony Music shall incur
the Marketing Spend as per the marketing plan agreed with the
Producer in order to maximize the promotion and publicity of the Film
and the Said Works. Accordingly, I find that though the FPC has
transferred the copy rights in music to Sony Music, they still are
controlling the marketing strategy by way of deciding the quantum of
marketing budget or Marketing Spend and FPC also has a prime role to
play in the marketing plan. Further the purpose behind FPC to have the
control over the marketing strategy and decide the Market Spend is to
maximize the promotion and publicity of the Film and the Said Works.
Thus I find it is very obviously agreed by way of agreement to boost the
business of each other through the promotion and marketing of films
and songs. There exists a mutuality of interests, a symbiotic association
for the business proliferation. The Marketing Spend inter alia includes
the expenses incurred on payment for television spots, press publicity,
posters, hoardings and other point of sale material. It is very apparent
that the platform chosen for publicity is the virtual media where images
(visuals) are displayed and the publicity therefore is not limited merely
to audio content. In fact I find that the promotion of the music is
therefore incidental to the promotion of the film.
xxx xxx xxx xxx
44. Further, the time of release of music is also a vital factor in
deciding whether M/s Sony Music has caused the marketing and
promotion of the film The Noticee Company themselves in their replies
have stated that invariably, music is released prior to the release of the
film. The objective for the music company is make a few songs
extremely popular so that by the time the movie is released, the songs
are already playing across TV, radio and online. It is akin to the trailer
of the film which is played prior to film release, the sole purpose behind
it to publicize, market and promote the forthcoming feature film. Vide
letter dated 10.04.2015, M/s. Sony Music provided a copy of ledger
showing Media expenditure for marketing and promotion of Music in
respect of the movie ' Student of the Year' it is seen that expenditure
has been incurred for television spots for the period 28.08.2012 to
03.11.2012. Further, the movie 'Student of the Year' was released on
19.10.2012 and the last week of run was the week ending 08.12.2012,
8
ST/86233/2021
it therefore obvious that M/s. Sony Music have coincided the timing of
music promotion a month prior to the release of the movie and during
the time it was being played in the theatres, thus directly promoting the
film through the music whose rights they had purchased".
Therefore, he concluded that
"45. ....... What I find here is that the Noticee Company has failed to
appreciate that the music when played through virtual media carries out
a very crucial role in attracting the viewers /crowd pulling to watch the
movies. Hence the release of music is strategically timed prior to
release of film with the sole idea of promoting and marketing the film.
Further at times where events are held for promotion of film prior to its
release and show cased across different platforms like GEC, News,
Music Channels, Regional Channels etc., the star cast perform to
different songs from the film, music of which has already been
popularized by then by the MPCs."
Therefore, the exploitation of Music Right is so managed that the film
gets maximum promotion. He further concluded that
"46. M/s. Sony Music being copy right holders of Music should have
ideally had interest only in promotion of music and not promotion of
films. But by way of negotiable instrument they are under obligation to
even promote films. The promotion of films has been integrated with
promotion of film music and this too is at a cost, by way of Marketing
Spend which is allowed to be recouped by M/s. Sony Music. Further as
submitted by the Noticee Company in their submissions, the Movie
Marketing budget as a general yardstick is way higher than the Music
Marketing budget and hence it is an accepted fact that the FPCs are
always at a risk in case the movie falls at box-office. So I consider this as
a commercial acumen on part of FPCs to protect their interest by way of
flow back of service of film promotion by the Noticee Company through
the sale of Copyrights in Music at an agreed cost of Marketing Spend by
way of recoupment."
xxx xxx xxx xxx
"47.2 In the instant case, I observe that the Noticee company has
caused promotion and marketing of Feature Films (movies) which are
goods produced by the FPCs (client) and hence the services provided by
the Noticee Company to the FPCs fall under the category of Business
Auxiliary Services as defined under Section 65(19)(i)of the Finance Act,
1994. In this connection, I draw reference to Section 2(7) of Sale of Good
Act, 1930 whereby "Goods" means every kind of movable property other
than actionable claims and money; and includes stock and shares,
growing crops, grass, and things attached to or forming part of the land
which are agreed to be severed before sale or under the contract of sale.
Goods are in a deliverable state within the meaning of this Act when they
are in such a state that the buyer would, under the contract, be bound to
take delivery of them. Further I rely on the ruling in the case of M/s.
Infosys Technologies and Ltd (2008-TIOL-509-HC-MAD-CT) and that of
Hon'ble Supreme Court in the case of M/s. TATA Consultancy Services vs.
State of Andhra Pradesh (2004-TIOL-87-SC-CT-LB), Wherein, both these
9
ST/86233/2021
rulings warrant that utility/marketability/capacity of being brought and
sold, by whatever name called, is a key attribute for qualification of
goods. Since the Noticee company has indulged in promotion or
marketing of goods (Feature Films) belonging to the FPCs, they have
provided 'BAS' to the FPCs as defined under Section 65(19)(i) of the
Finance Act, 1994."
7.2 In order to deal with the above specific issues raised in the SCN
which have been confirmed by the learned Commissioner in upholding the
levy of Service tax on Business Auxiliary service, we need to refer to the
relevant provisions of the Finance Act, 1994 and the relevant clauses of the
above referred agreements.
7.3 Further, in order to address the disputed issues and in order to come
to a conclusion on the nature of such activities performed by the
appellants, whether it would be covered under the taxable service of
'Business Auxiliary service' or not, we would like to refer to the legal
provisions of levy of service tax under the Finance Act, 1994 and the rules
framed thereunder as it existed during the disputed period which are
extracted and given below:
Finance Act, 1994
"Definitions.
Section 65. In this Chapter, unless the context otherwise requires,--
1
(19) "business auxiliary service" means any service in relation to,--
(i) promotion or marketing or sale of goods produced or provided by or
belonging to the client; or
(ii) promotion or marketing of service provided by the client; or
(iii) any customer care service provided on behalf of the client; or
(iv) any incidental or auxiliary support service such as billing, collection or
recovery of cheques, accounts and remittance, evaluation of prospective
customer and public relation services,
and includes services as a commission agent, but does not include any
information technology service.
Explanation.--For the removal of doubts, it is hereby declared that for the
purposes of this clause "information technology service" means any
service in relation to designing, developing or maintaining of computer
software, or computerized data processing or system networking, or any
other service primarily in relation to operation of computer systems;
2
(19)"business auxiliary service" means any service in relation to--
(i) promotion or marketing or sale of goods produced or provided by or
belonging to the client; or
(ii) promotion or marketing of service provided by the client; or
(iii) any customer care service provided on behalf of the client; or
(iv) procurement of goods or services, which are inputs for the client; or
1
Prior to substitution by the Finance (No. 2) Act, 2004, w.e.f. 10-9-2004.
2
Substituted by the Finance (No. 2) Act, 2004, w.e.f. 10-9-2004.
10
ST/86233/2021
Explanation..--For the removal of doubts, it is hereby declared that for
the purposes of this sub-clause, "inputs" means all goods or services
intended for use by the client;
(v) production or processing of goods for, or on behalf of, the client; or
(vi) provision of service on behalf of the client; or
(vii) a service incidental or auxiliary to any activity specified in sub-
clauses (i) to (vi), such as billing, issue or collection or recovery of
cheques, payments, maintenance of accounts and remittance, inventory
management, evaluation or development of prospective customer or
vendor, public relation services, management or supervision, and
includes services as a commission agent, but does not include any
activity that amounts to manufacture of excisable goods.
(105) "taxable service" means any service provided 3or to be provided,_
(zzb) to a client, by 4any person in relation to business auxiliary service;"
Post Negative List regime after 01.07.2012
CHAPTER V
SERVICE TAX
Interpretations
Section 65B (44) service" means any activity carried out by a person for
another for consideration, and includes a declared service, but shall not
include--
(a) an activity which constitutes merely,--
(i) a transfer of title in goods or immovable property, by way of sale,
gift or in any other manner; or
(ii) such transfer, delivery or supply of any goods which is deemed to
be a sale within the meaning of clause (29A) of article 366 of the
Constitution; or
(iii) a transaction in money or actionable claim;
(b) a provision of service by an employee to the employer in the
course of or in relation to his employment;
(c) fees taken in any Court or tribunal established under any law for
the time being in force.
Explanation 1.-- For the removal of doubts, it is hereby declared that nothing
contained in this clause shall apply to,--
(A) the functions performed by the Members of Parliament, Members of State
Legislative, Members of Panchayats, Members of Municipalities and Members of
other local authorities who receive any consideration in performing the functions
of that office as such member; or
(B) the duties performed by any person who holds any post in pursuance of the
provisions of the Constitution in that capacity; or
(C) the duties performed by any person as a Chairperson or a Member or a
Director in a body established by the Central Government or State Governments
or local authority and who is not deemed as an employee before the
commencement of this section.
Explanation 2.-- For the purposes of this clause, the expression "transaction in money
or actionable claim" shall not include--
(i) any activity relating to use of money or its conversion by cash or by
any other mode, from one form, currency or denomination, to
another form, currency or denomination for which a separate
consideration is charged;
(ii) any activity carried out, for a consideration, in relation to, or for
facilitation of, a transaction in money or actionable claim, including
the activity carried out--
(a) by a lottery distributor or selling agent on behalf of the
State Government, in relation to promotion, marketing,
3
Inserted by the Finance Act, 2005, w.e.f. 16-6-2005.
4
Substituted for "a commercial concern" by the Finance Act, 2006, w.e.f. 1-5-2006.
11
ST/86233/2021
organising, selling of lottery or facilitating in organising
lottery of any kind, in any other manner, in accordance
with the provisions of the Lotteries (Regulation) Act, 1998
(17 of 1998);
(b) by a foreman of chit fund for conducting or organising a
chit in any manner.]
Explanation 3.-- For the purposes of this Chapter,--
(a) an unincorporated association or a body of persons, as the case
may be, and a member thereof shall be treated as distinct persons;
(b) an establishment of a person in the taxable territory and any of his
other establishment in a non-taxable territory shall be treated as
establishments of distinct persons.
Explanation 4.-- A person carrying on a business through a branch or agency or
representational office in any territory shall be treated as having an establishment
in that territory;
Section 66B. There shall be levied a tax (hereinafter referred to as the
service tax) at the rate of 5[fourteen] per cent on the value of all
services, other than those services specified in the negative list,
provided or agreed to be provided in the taxable territory by one person
to another and collected in such manner as may be prescribed.
Valuation of taxable services for charging service tax.
Section 67. (1) Subject to the provisions of this Chapter, where service
tax is chargeable on any taxable service with reference to its value, then
such value shall,--
(i) in a case where the provision of service is for a consideration in
money, be the gross amount charged by the service provider for such
service provided or to be provided by him;
(ii) in a case where the provision of service is for a consideration not
wholly or partly consisting of money, be such amount in money as, with
the addition of service tax charged, is equivalent to the consideration;
(iii) in a case where the provision of service is for a consideration which is
not ascertainable, be the amount as may be determined in the prescribed
manner.
(2) Where the gross amount charged by a service provider, for the
service provided or to be provided is inclusive of service tax payable, the
value of such taxable service shall be such amount as, with the addition
of tax payable, is equal to the gross amount charged.
(3) The gross amount charged for the taxable service shall include any
amount received towards the taxable service before, during or after
provision of such service.
(4) Subject to the provisions of sub-sections (1), (2) and (3), the value
shall be determined in such manner as may be prescribed.
Explanation.--For the purposes of this section,--
(a) "consideration" includes--
(i) any amount that is payable for the taxable services provided or to be
provided;
(ii) any reimbursable expenditure or cost incurred by the service provider
and charged, in the course of providing or agreeing to provide a taxable
5
Substituted for "twelve" by the Finance Act, 2015, w.e.f. 1-6-2015.
12
ST/86233/2021
service, except in such circumstances, and subject to such conditions, as
may be prescribed;
(iii) any amount retained by the lottery distributor or selling agent from
gross sale amount of lottery ticket in addition to the fee or commission, if
any, or, as the case may be, the discount received, that is to say, the
difference in the face value of lottery ticket and the price at which the
distributor or selling agent gets such ticket
(c) "gross amount charged" includes payment by cheque, credit card,
deduction from account and any form of payment by issue of credit notes
or debit notes and book adjustment, and any amount credited or debited,
as the case may be, to any account, whether called "Suspense account"
or by any other name, in the books of account of a person liable to pay
service tax, where the transaction of taxable service is with any
associated enterprise."
8.1 On careful reading of the definition of taxable service, under Section
65(19) ibid read with Section 65(105)(zzb) ibid, as applicable for the
period prior to 01.07.2012, it is clearly provided therein that the services
under the taxable category is 'Business Auxiliary service' and such services
are brought in the scope of service tax levy as taxable category of service
if such services, which are being provided or to be provided, by any person
to a client. In the definition of 'Business Auxiliary Service' the activity of
promotion or marketing or sale of goods produced or belonging to or
service provided by the client is included as one of the taxable service. In
the present matrix of the case, the appellants have obtained music and
song video rights from the Film Producer Companies (FPCs) under a
contract and the appellants have become the right holders during the
contractual period. Thus, prima facie, we find that the appellants are not in
the nature of service provider and client relationship with the persons to
whom they had contracted to and further, the appellants are in no way
promoting the sale of goods or services belonging to the rights assignor. It
is not the case of Revenue, that service tax demands have been confirmed
on the ground that such temporary transfer of copy rights is subjected to
service tax levy as 'intellectual property right'. But the case of Revenue is
by treating the various expenditures incurred by the appellants for
marketing, as consideration, and it is interpreted that the appellants have
rendered 'Business Auxiliary Service' to the FPCs.
8.2 In this regard, we would like to refer to the various activities
undertaken by the appellants, as explained in the appeal paper book of the
appellants, in the context of the agreement, which are as follows: (i)
obtaining temporary rights of music and song video rights, for which FPC
charges service tax on such temporary transfer of copyrights and the
13
ST/86233/2021
appellants upon payment of service tax have claimed credit of service tax
paid; (ii) music and song video is released for exploitation of music through
various audio, video channels, for which the channels charge service tax
and the appellants pay such tax and take credit of the same; (iii)
appellants starts receiving the incomes on account of monetization of
music rights, in physical form by way of selling CDs/VCDs/DVDs/ Blue Ray
etc. and in digital form such as streaming of songs in websites of
Savaan.com, Gaana.com etc., and downloading of music from iTunes,
YouTube and caller ring back tones. The appellants collects and pays
applicable service tax on such receipt of incomes; (iv) The receipts in the
form of income from monetization of music rights till it achieves the total of
minimum guarantee, marketing commitment and ad-hoc additional
percentage, no amount is remitted to the FPCs; and (v) the receipts when
they cross the above total amount at (iv) above, then agreed share
payable to FPCs are paid to them as recoupment charges, and the FPC pay
service tax on such overflow. From the above, it could be seen that the
various charges incurred in promotion of the music and song video rights
acquired by the appellants are purely in the nature of promoting the rights
acquired by them, for commercial exploitation in terms of the contractual
arrangements made between them and FPCs. These activities in no way
can be termed as 'business auxiliary service' provided by the appellants to
the FPC, as their client. Further, where ever service tax liabilities have
arisen it is stated by the appellants that they have duly discharged the
same and the same has not been disputed by the Revenue.
8.3 In order to further examine whether the services provided by the
appellants is covered under the scope of any other services or not,
particularly after introduction of negative list with effect from 01.07.2012,
wherein the levy of service tax on all services other than those contained in
the negative list, we have also examined the relevant provisions of the
Finance Act, 1994 and Rules framed thereunder. We find that in order to
qualify that the activities undertaken between the appellants and the FPCs
amounting to service for levy of service tax, such activities are to fulfil the
definition of service as provided under Section 65B(44) ibid. In terms of
such definition the activities shall be carried out by a person for another for
consideration. From the agreement entered into between the appellants
and FPCs, it is clearly spelt out that the marketing of music and song video
rights are undertaken for the cause of appellants and not for the cause of
FPCs. The finer distinction of music or song in a film and the film by itself is
14
ST/86233/2021
more distinguishable in the present day context, as consumers hear the
music through various mediums such as internet/web, mobile devices such
as mobile phones, ipad, laptop etc. and other audio devices; and similarly
view song videos through You Tube, dedicated channels of singers, music
albums etc., internet etc. However, when the consumers have to view the
movies they either may view the movie in theatres, home webcast, other
online service providers including TV channels, telecom dish service
providers, internet etc. But there is definitely clear distinction between a
consumer hearing music or viewing song videos and watching films. Thus,
promotion or marketing of music cannot be equated with promotion of
marketing of films. Even the premise that popularity of music through
promotion or marketing indirectly promotes viewing of films and thus the
appellants have rendered 'Business Auxiliary Service' is not either justified
in terms of the legal provisions of the Finance Act, 1994 or has been
established in terms of the factual evidences in the present case.
8.4 We have also noted that there are variant modes of business
transactions between the Film producer and distributor, distributor and
sub-distributor or area distributor or exhibitor (theatre owner) even though
claimed as "sale of goods" to fall under Entry 54 List II or Entry 92A List I,
it has been held by the Hon'ble High Court of Madras in the case of AGS
Entertainment Pvt. Limited Vs. Union of India - 2013 (32) S.T.R. 129
(Mad.) that Parliament is well within its legislative competence in levying
service tax resorting to Entry 97 of List I and the levy under Section
65(105)(zzzzt) in respect of Copyrights is not ultra vires the Constitution.
But the present set of facts do not relate to the service tax levy on
temporary transfer of copy rights, on which the appellants have claimed
that due service tax has also been discharged.
8.5 Further, the question of treating various amounts paid under a
contract as consideration by the department for determining the value of
service tax for imposition of service tax as 'Business Auxiliary Service', is
of no consequence when the levy of service tax itself has been discussed
in the above paragraphs and we had come to the conclusion that the
activities undertaken by the appellants are not covered under the category
of service for which levy under Section 66B ibid would apply. Further, such
amount in the absence of provision of any service, cannot convert a
consideration not wholly or partly consisting of money, to be taxable value
for payment of service tax.
15
ST/86233/2021
9.1 We have perused the relevant clauses of the aforesaid agreements
submitted as a part of the appeal paper book. The relevant clauses of the
said agreement are extracted and given below:
"MUSIC AND SONG VIDEO RIGHTS LIMITED PERIOD ASSIGNMENT
AGREEMENT
This Music and Song Video Rights Limited Period Assignment Agreement
("Agreement") made this day of April 19, 2012,
BY AND BETWEEN:
SONY MUSIC ENTERTAINEMENT INDIA PRIVATE LIMITTED, a
company incorporated under the Companies Act, 1956 and having its
registered office at Span Centre, South Avenue, Santacruz West, Mumbai
400 054, hereinafter referred to as "Sony Music" (which expression shall,
unless repugnant to the context or meaning thereof, be deemed to mean
and include its successors and permitted assigns) of the
ONE PART;
AND
DHARMA PRODUCTIONS PRIVATE LIMITED, a company incorporated
under the Companies Act, 1956 and having its registered office at 29, Jains
Arcade, 14th Road, Khar (West), Mumbai 400 052, hereinafter referred to as
"Producer" (which expression shall, unless repugnant to the context or
meaning thereof, be deemed to mean and include its successors and
assigns) of the OTHER PART.
"Sony Music" and "Producer" shall hereinafter jointly be referred to as
the " Parties" and severally as the "Party".
WHEREAS:
A. Sony Music is engaged in the business of marketing and sale of audio
records, audio-visual records and commercial digital exploitation of audio
and audio-visual products, in India and overseas:
B. The producer is engaged in the business of production of cinematograph
films and is in the process of producing a cinematograph film in Hindi
language, tentatively titled "Student of the Year" (Production No.25),
directed by Karan Johar, starring Siddharth Malhotra, Varun Dhawan,
and Alia Bhatt ("Film") and music by Vishal Shekhar;
C. Sony Music is desirous of procuring all rights of Songs and Songs Videos
(as hereinafter defined) and the producer has agreed to assign the
Rights (defined hereunder) for a limited period to Sony Music on the
terms and conditions hereinafter appearing.
NOW THIS AGRREMENT WITNESSETH AND IT IS HEREBY AGREED by
and between the parties hereto as follows:
1. DEFINITIONS:
In this agreement, unless the context otherwise admits, the following
expressions shall have the meaning assigned to them as under:
Xxx xxx xxx xxx
16
ST/86233/2021
1.4 "Broadcasting Right" shall mean the right to communicate the
Said Works to the public through the media of television (terrestrial or
cable, satellite, pay or free, cable TV, DTH, broadband, IPTV, and any other
form), radio (whether satellite or traditional, AM/FM/DAB. All India Radio
and Internet Radio) and in any and all manner and media now and
hereinafter known in the future.
1.7 "MG Amount" shall have the meaning as ascribed in Clause 7.1
herein.
1.8 "Marketing Spend" shall have the meaning as ascribed in Clause
9.2 herein.
1.17 "Said Works" shall mean the Song(s), its remix, dialogues in the
Songs and Song Video(s), whether singly or collectively as well as any
Background Music Score in the Film, if it comprises also of the Song(s) and
the works and performances embodied therein, song Videos is annexed in
Schedule 5. The list of the Songs and Song Videos shall be provided
separately in the Producer to Sony Music.
1.18 "Song(s)" shall mean sound recording of synchronized musical and
lyrical works being the song(s) incorporated in the Film.
1.19 "Song Video(s)" means the audio-visual(s) of the Song(s), i.e.
'song married print' forming part of the Film and includes the performances
and works contained therein. Song Video(s) includes part(s) thereof.
2. ASSIGNEMENT OF RIGHTS
2.1. In consideration of part MG Amount (defined hereinafter) paid on
the execution of this Agreement by Sony Music to the Producer, the receipt
of which the Producer hereby acknowledges, and part MG Amount (defined
hereinafter) to be paid to the Producer as herein provided, the Producer
hereby exclusively assign, for the Term, to Sony Music, all intellectual
property rights including copyright in the Said Works including but not
limited to the following rights on a worldwide basis ("Territory") for the
Term (collectively referred to as "Rights"):
2.1.1 Physical Rights.
2.1.2 Digital Rights;
2.1.3 Broadcasting Rights;
2.1.4 Public Performance Rights;
2.1.5 Publishing Rights including mechanical rights;
2.1.6 Synchronization Rights;
2.1.7 Future Rights.
2.2 The Rights assigned to Sony Music shall also include without
Limitation.
2.2.1 rights to exclusively reproduce, get manufactured and distribute, the
Said Works and manufacture the physical forms embodying the Said
Works for the purpose of exploitation of Rights exclusively assigned
to Sony Music for the Term.
2.2.2 Right to manufacture, get manufactured, produce the Said works as
part of complication with other works and sub-license this right.
17
ST/86233/2021
2.2.3 to use and license the film clip rights, music, Songs and Song Videos
of the Film for the purpose of publicity, marketing and promotion of
the Film.
2.2.4 to add, take from or remix the Said Works for the purpose of
reproduction of the Said Works in any from and may combine the
Said Work with any other work(s), and create re-mixes of the Said
Works, or for the purpose of exploitation of Digital Rights except that
Sony Music shall not violate the moral rights of the authors of lyrics,
music composers and music compositions of the Said Works,
including the Artists.
5. RESERVED RIGHTS.
5.1 The Rights not specifically assigned under this Agreement are being
retained by the Producer and the Producer shall be entitled to deal
with such rights in any manner as it may deem fit.
5.2 It is clarified that the Rights granted under this Agreement shall not
include the rights:
5.2.1 In relation to any and all intellectual property rights including
copyright of the Producer in the Film;
5.2.2 To exploit the Background Music Score;
5.2.3 To exploit the Film for the purpose of merchandising:
7. CONSIDERATON
7.1 In consideration of the Rights exclusively assigned herein, Sony
Music shall pay minimum guaranteed sum of Rs. 10,00,00,000/-
(Rupees Ten Crores only) ("MG Amount") in the manner and on the
dates specified in Schedule 1 but subject to receipt of invoice for the
MG Amount.
7.2 The MG Amount shall be exclusive of all applicable taxes including
service tax and Value Added Tax ("VAT"). It is clarified for
avoidance of any doubt that any and all such taxes (like service tax
and/ or VAT as and when applicable) shall be paid by Sony Music in
addition to the MG Amount. Sony Music shall be entitled to deduct
only the applicable tax deductible at source before making the
payment of the MG Amount to the Producer.
8. RECOUPMENT & ROYALTIES.
8.1. It has been agreed between the Parties that Sony Music shall be
entitled to recoupment of the MG Amount and other Marketing
Spend and advertising expenditure in the manner and as provided
for in Schedule2 herein.
9. OBLIGATIONS OF THE PARTIES
9.1 Delivery, Publicity and promotion material: The Producer agrees
to and shall deliver the publicity and promotional material, as set out
in Schedule 3 ("Delivery Material"), free of charge, to Sony Music at
least 4 (four) weeks prior to the release of the Said Works to the
public by Sony Music.
9.2 Sony Music will draw up an exhaustive marketing plan for promoting
the sales in all formats and exploitation of the various rights
mentioned herein throughout the Territory in consultation with the
Producer prior to the release of the Film. Sony Music and the
Producer have agreed that for this purpose Sony Music marketing
budget shall be of Rs. 2,50,00,000/- (Rupees Two Crores Fifty Lacks
Only) ("Marketing Spend") excluding service tax towards the
18
ST/86233/2021
marketing, publicity and promotion of the Film and the Said Works.
SCHEDULE I
Sony Music shall pay the MG Amount to the Producer in the following
tranches:
i. Rs. 5,00,00,000/- (Rupees Five Crores only) plus service tax and
VAT as maybe applicable. on the execution of this Agreement, the
receipt whereof is hereby acknowledged by the Producer; Rs.
ii. 3,00,00,000/- (Rupees Three Crores Only) plus service tax and VAT
as maybe applicable, shall be payable on, delivery of the CD/ Audio
Master DAT of the all the Songs, multi tracks, minus ones,
international tracks, unmixed master, minimum of number of Images
to enable manufacture of products.
iii. Rs. 1,00,00,000/- (Rupees One Crore Only) plus service tax and VAT
as maybe applicable shall be payable upon the delivery of original no
objection certificates of the lyricists, music composers and
performers / singers in the works / Publishing Rights and Master
Recordings.
iv. The balance of Rs. 1,00,00,000/- (Rupees One Crore Only) plus
service tax and VAT as maybe applicable shall be payable upon
delivery of the Song Video in the formats as agreed between the
Parties.
AND
ASSIGNMENT OF COPYRIGHT
THIS AGREEMENT is dated this 28th June, 2013, effective from 14th June
2013 made at Mumbai by and between Parties.
1. VIACOM 18 MEDIA PVT. LTD., having its office at Zion Bizworld,
Subhash Road-A, Vile Parle (E), Mumbai 400 057, bearing Pan Number
AAACM9164E
(hereinafter referred to as "Assignors/Viacom18" which expression shall,
unless repugnant to the context or meaning thereof, include its
successors-in interest, and assigns) of the FIRST PART.
2. RAKYESH OMPRAKASH MEHRA PICTURES PVT. LTD., a company
incorporated under the Companies Act, 1956, having its office at 14 Pali
Village, Bandra (West), Mumbai 400 050 bearing Pan Number
AADCM8879K (hereinafter referred to as "ROMPPL" Which expression
shall, unless repugnant to the context or meaning thereof, include its
successors in interest, and assigns) of the SECOND PART
3. SONY MUSIC ENTERTAINMENT INDIA PVT. LTD., having its office at
at 92, Main Avenue, Santacruz (West), Mumbai - 400 054, bearing Pan
Number AAICS1766Q (hereinafter referred to as "Assignee" which
expression shall, unless repugnant to the context or meaning thereof,
include its successors-in interest, legal representatives, administrators,
executors, nominees and assigns) of the THIRD PART.
The First Part and the Second Part are jointly referred to as Assignors.
19
ST/86233/2021
The First Part, Second Part and Third Part are jointly referred to as
Parties
BACKGROUND
(A) WHEREAS the Assignors are the equal and joint owners of the
copyright of the Audio & Audio-visual songs of the film "Bhaag Milkha
Bhaag" in the Hindi language along with underlying musical and
lyrical works.
(B) WHEREAS the Assignors are the equal and joint owners of the
Copyright in the original Songs, Song Videos etc as described in the
Contract Works, and more particularly identified and particularised in
Schedule 1 of the Cinematograph Film, details and particulars of
which are given in Schedule 2. WHEREAS the Assignors represent
and warrant to the Assignee that their ownership of the Copyright in
the Contract Works is equal and joint, unencumbered, free from any
claim of whatsoever nature and the Assignors have the absolute
right, title and interest in the same and have right to assign the
same in favour of the Assignors.
(C) AND WHERAS the Assignors are desirous of assigning copyright in
the Contract Works of the Cinematograph Film in favour of the
Assignee for the Assignee is desirous of acquiring the Copyrights in
the Contract Works of the agreed consideration and the
Cinematograph Film.
(D) AND WHEREAS the Parties have agreed to record the terms and
conditions of the Assignment of Copyrights in the Contract Works by
the present Deed of Assignment.
2. ASSIGNMENT
(a) Assignors hereby represent and warrant to be the equal and joint
owners under the copyright Act, 1957 in and to the Contract Works
[as defined] in Hindi of the cinematograph film titled "Bhaag Milkha
Bhaag". Assignors hereby assign transfer and grant the sole and
exclusive copyright and publishing rights / mechanical rights/
together with the public performances rights in and to the Contract
Works Contained in the said Film titled "Bhaag Milkha Bhaag in Hindi
Language, and Non Physical Formats for the Term and Territory
including in any Modes & Mediums and future Modes and mediums,
inter alia that get manufactured/ reproduced there from and all other
rights including but not limited to, radio and television broadcast
rights; Performers Rights; public performance rights; remix rights
cellular, internet and other digital transmission rights; all other
multimedia exploitation rights; adaptation editing, dubbing,
synchronization and all other rights, in the Modes & Mediums and for
the future Modes and mediums that are now recognized by the
Copyrights (Amendment) Act 2012 (including any amendments,
modifications and re-enactments thereof) or any other law governing
rights in intellectual property and exploitation thereof, as
independent rights, irrespective of whether such rights are
remunerative or non-remunerative Assignee shall be the owner of
the original plate, within the meaning of the Copyright Act 1957 and
any extensions or modifications thereof, and of each Contract Works
for the Term and Territory.
20
ST/86233/2021
3. CONSIDERATION
3.1 In lieu of the Copyrights in the Contract Works assigned hereby by
the Assignors to the Assignee, the Assignee agrees to pay to
Viacom18 a non-refundable (subject to termination clause below)
sum of Rs. 6,50,00,000/- (Rupees Six Crore Fifty Lack only)
exclusive of all taxes as a minimum guaranteed Royalty amount
(Royalty MG Amount), Which sum shall be payable in the following
manner and treated as a debt, which will cease, on the delivery of
the deliverables by the Assignors;
4. DELIVERABLES
4.1 The Assignors shall deliver the following delivery material, publicity
and promotional material free of charge to the Assignee on or before
the Delivery Date:
4.2 The Masters containing all the Songs, forming part of the Film, in CD
format, perfectly edited shall be delivered 8 weeks prior to the
theatrical release of the Film and the music release of the Film shall
be 5(five) to 6 (six) weeks prior to the theatrical release of the Film,
i.e. on or before 12th July, 2013, with a grace period of 3 months,
provided the Master DAT has been delivered six weeks prior to music
release date.
4.3 CD Masters containing International Tracks / Music Tracks Minus 1s,
multi-tracks, (mixed already covered in Master in 4.1) and unmixed
tracks of all Songs inlay designs and images from the Audio Visual
Songs shall be delivered within 8 weeks prior to theatrical release of
the film and the music release of the Film shall be at least 5 (five)
weeks prior to the theatrical release of the Film, i.e. the theatrical
released date being 12th July, 2013 by the Assignors in writing and
such date shall have a grace period of 3 months, provided the
delivery of Master DAT is eight weeks prior to music release date.
5. MARKETING AND PROMOTION ACTIVITIES
5.1 The Assignors shall on best effort basis endeavour that the artist
actors/ music composer/lyricist/director etc. related to the Film are
available upon sufficient notice, for promotional and publicity
activities which includes Music Channel studio visits, Radio station
visits, and Store Visits and for Mobile promotion.
5.3 Marketing. The Assignee agrees to expend an amount of Rs.
1,50,00,000/- (Rs. One Crore Fifty Lakh only), for the purposes of
promotion/publicity of the exploitation o of thee rights assigned
hereunder, across TV, online etc. ("Marketing Spend"). This
Marketing Spend shall be expended in consultation with Viacom18,
as per a media plan to be jointly agreed between Assignee and
Viacom18. The media plan for the above, in the format of the
Viacom18, shall be provided by the Assignee to Viacom18.
7.2 RECOUPMENT AND OVERFLOW ROYALTY -
a) The rate for recoupment and overflow royalty is as follows:
i. 50% of Net Receipts on Physical Formats and;
ii. 50% of Net Receipts on all Non Physical Income with Assignors.
b) Post recovery of the Recoupment Amount comprising of
i) Royalty MG Amount and Marketing, spend plus tax, stamp duty.
ii) Sony Music will take a Royalty break of 25% on the MG and
Marketing plus tax and Stamp duty.
21
ST/86233/2021
iii) After recoupment of the above Assignee shall pay Assignor
overflow royalty will be shared between Assignee and the Assignor
equally in the ratio of 50:50. The overflow royalty is inclusive of
all applicable taxes.
SCHEDULE 1
The Contract Works
1. Master / Songs of the film wherein 8 Songs shall be original Song
(along with the underlying Musical and Lyrical works) owned by
Assignors (Particulars and details of the Film are given in
Schedule2).
xxxx xxxx xxxx xxxx
2. Song Video / s of the film (Particulars and details of the Film are
given in Schedule 2) (Song Video / s based on the songs listed
above)
3. And all the Literary (lyrics of the Songs) and Musical work contained
and embodied in the Songs and Song Videos, in the Film or created /
composed / embodied / contained in the film.
4. Minimum 150 images derived from the Film and Song videos and
those delivered hereunder as part of artworks and promotional
material.
5. Dialogues subject to a maximum of 15 minutes (on the audio cinema
property, where dialogues will be on exclusive basis, but otherwise
dialogues will be on non-exclusive basis), Background score of the
Film.
6. Or parts thereof of any of the above.
9.2 From plain reading of the aforesaid agreement entered into by the
appellant, it transpires that the said arrangement is between the appellants
and Film Producer Companies (FPCs) for a specified period, and the scope
of activities or work to be performed by the appellant is provided in the
Article 2 - Assignment of Rights and Article 5 - Reserved Rights, clearly
brings out the rights that have been offered to the appellants as defined
under clause 1.17, as 'said works' relate to only songs and song videos of
the film; whereas the rights retained by FPCs include all other rights in
exploiting the film for various purposes including merchandising, gaming,
animation films, remaking etc.; Intellectual Property Rights (IPR) including
copyrights of the producer in the film. Thus, the basis for treating the rights
obtained by the appellants in the agreement and marketing of music and
song video as the activity of marketing and promotion of films, in the
impugned order is factually incorrect and is not based on any evidence.
Similarly, the other Articles of the said agreement comprehensively provide
22
ST/86233/2021
for the manner of the arrangement for various matters connected with the
scope of work. These include obligation of both the parties, marketing,
reporting and accounting, consideration, recoupment, royalties etc. and
other general clauses to standard agreement along with Schedules
containing Minimum Guarantee amount; Recoupment Schedule;
Recoupment and sharing; Deliverables and delivery schedules; Places of
public performances. From the various clauses of the agreement and the
number of activities carried out by the appellants, it could be clearly
concluded that the appellants are carrying out the permitted activities in
respect of the assigned rights of music and song videos for certain
consideration detailed therein and is not providing any service for the FPCs,
in any manner, and more specifically for marketing of film. Thus, we are of
the considered view that such activities of the appellants cannot be
considered as 'Business Auxiliary Service' rendered for the FPCs, as their
clients.
9.3 We find that the dispute in respect of the services provided by the
appellants as taxable under Business Auxiliary services, has been decided
by the Co-ordinate Bench of the Tribunal in the case of McDonalds India
Private Ltd. Vs. Principal Commissioner of Service Tax, Delhi-I - Final
Order No.51264/2019 dated 27.03.2019, by holding that the amount
incurred by franchisees towards advertisement expenses cannot be said to
be consideration paid by the franchisee to the McDonalds, as it is the
franchisee themselves who are benefitting out of such expenses and not
the McDonalds. The relevant paragraph of the said order is extracted and
given below:
32. In the instant Appeal, as noticed above, the franchisee had to expend
not less than 5% of the gross sales in a particular year towards the
advertisement of its Restaurant. The amount was not required to be
deposited in any fund of the franchisor for advertisement or promotion of
the franchisor. Thus, the decision of the Tribunal in Subway Systems will
not come to the aid of the Department.
33. What further transpires from the agreement is that there is no
obligation cast upon the franchisee to incur any expenditure on
advertising the brand name, service marks and trademarks of the
franchisor. Any indirect result, because of advertisement cannot,
therefore, be called an extra consideration in terms of section 67 of the
Act. Unless an amount is charged by the service provider to the service
recipient, it does not enter into an equation for determining the value on
which Service Tax is payable.
23
ST/86233/2021
34. A Larger Bench of the Tribunal in Bhayana Builders (P) Ltd. vs
Commissioner of Service Tax - 2013 (32) S.T.R. 49 (Tri. - LB) observed
that "implicit in the legal architecture is the concept that any
consideration whether monetary or otherwise, should have flown or
should flow from the service recipient to the service provider and should
accrue to the benefit of the latter." In the said decision, the Larger Bench
made reference to the concept of „consideration‟, as has been expounded
in the decision pertaining to Australian GST Rules, wherein a categorical
distinction has been made between "conditions‟ to a contract and
„consideration‟. It is prescribed under the said GST Rules that certain
„conditions‟ to the contract cannot be seen in the light of „consideration‟
for the contract and the fact that the service recipient has to fulfil such
conditions under the contract cannot form part of the value of the taxable
services that are provided. The impugned order, however, enhances the
value of taxable services by adding expenses of advertisement incurred
by the franchisees, which expenses have to be incurred because of the
condition set out in the agreement.
35. The Supreme Court in the appeal filed by the Department against the
aforesaid decision of the Tribunal also explained the scope of Section 67
of the Act both before and after the amendment in the following words :
"12. On a reading of the above definition, it is clear that both prior and
after amendment, the value on which service tax is payable has to satisfy
the following ingredients :
a. Service tax is payable on the gross amount charged :- the words
"gross amount" only refers to the entire contract value between the
service provider and the service recipient. The word "gross" is only
meant to indicate that it is the total amount charged without deduction
of any expenses. Merely by use of the word "gross" the Department
does not get any jurisdiction to go beyond the contract value to arrive at
the value of taxable services. Further, by the use of the word "charged",
it is clear that the same refers to the amount billed by the service
provider to the service receiver. Therefore, in terms of Section 67,
unless an amount is charged by the service provider to the service
recipient, it does not enter into the equation for determining the value
on which service tax is payable.
b. The amount charged should be for "for such service provided" :
Section 67 clearly indicates that the gross amount charged by the
service provider has to be for the service provided. Therefore, it is not
any amount charged which can become the basis of value on which
service tax becomes payable but the amount charged has to be
necessarily a consideration for the service provided which is taxable
under the Act. By using the words "for such service provided" the Act
has provided for a nexus between the amount charged and the service
provided. Therefore, any amount charged which has no nexus with the
taxable service and is not a consideration for the service provided does
not become part of the value which is taxable under Section 67. The
cost of free supply goods provided by the service recipient to the service
provider is neither an amount "charged" by the service provider nor can
it be regarded as a consideration for the service provided by the service
provider. In fact, it has no nexus whatsoever with the taxable services
for which value is sought to be determined."
36. The aforesaid view was reiterated by the Supreme Court in
Intercontinental Consultants, wherein it was observed:
24
ST/86233/2021
"23. Obviously, this Section refers to service tax, i.e., in respect of those
services which are taxable and specifically referred to in various sub-
clauses of Section 65. Further, it also specifically mentions that the
service tax will be @ 12% of the „value of taxable services‟. Thus,
service tax is reference to the value of service. As a necessary corollary,
it is the value of the services which are actually rendered, the value
whereof is to be ascertained for the purpose of calculating the service
tax payable thereupon.
24. In this hue, the expression „such‟ occurring in Section 67 of the Act
assumes importance. In other words, valuation of taxable services for
charging service tax, the authorities are to find what is the gross
amount charged for providing „such‟ taxable services. As a fortiori, any
other amount which is calculated not for providing such taxable service
cannot a part of that valuation as that amount is not calculated for
providing such „taxable service‟. That according to us is the plain
meaning which is to be attached to Section 67 (unamended, i.e., prior to
May 1, 2006) or after its amendment, with effect from, May 1, 2006.
Once this interpretation is to be given to Section 67, it hardly needs to
be emphasised that Rule 5 of the Rules went much beyond the mandate
of Section 67. We, therefore, find that High Court was right in
interpreting Sections 66 and 67 to say that in the valuation of taxable
service, the value of taxable service shall be the gross amount charged
by the service provider „for such service‟ and the valuation of tax
service cannot be anything more or less than the consideration paid as
quid pro qua for rendering such a service.
25. This position did not change even in the amended Section 67 which
was inserted on May 1, 2006. Sub-section (4) of Section 67 empowers
the rule making authority to lay down the manner in which value of
taxable service is to be determined. However, Section 67(4) is expressly
made subject to the provisions of sub-section (1). Mandate of sub
section (1) of Section 67 is manifest, as noted above, viz., the service
tax is to be paid only on the services actually provided by the service
provider."
37. The order has grossly erred in interpreting the franchise agreement,
thereby, including the cost of advertisement in the franchise fee received
by the Appellant. The amount incurred by the franchisees towards
advertisement expenses, cannot, therefore, be said to be „consideration‟
paid by the franchisee to the Appellant, as it is the franchisee themselves
who are benefitting out of such expenses and not the Appellant.
xxx xxx xxx xxx
42. It was, therefore, in the business interest of the franchisee to
enhance its sale by causing advertisements. The advertisement,
therefore, was for promotion of the Restaurant operated by the
franchisee and merely because the trade names, service marks,
trademarks of the franchisor also appear in the advertisement, no extra
consideration flows to the franchisor. The order of the Principal
Commissioner, therefore, suffers from a fundamental error as it rejects
the contention of the Appellant that the advertisement was for the
business promotion of the franchisee.
49. In the first instance, as noticed above, the Appellant did not receive
any consideration for advertisement made by the franchisee in terms of
Clause 5 of the agreement. The Principal Commissioner, therefore, fell in
25
ST/86233/2021
error in concluding that some non-monetary consideration had been
received by the Appellant towards the advertisement made by the
franchisee, which non monetary consideration was required to be
determined under Rule 5(1) of the 2006 Rules. Even if it is assumed that
some non monetary consideration had been received by the Appellant,
thentoo the same could not have been determined under Rule 5(1) of the
2006 Rules. Rule 5(1) of the 2006 Rules was struck down by the Delhi
High Court in Intercontinental Consultant, which judgment was upheld by
the Supreme Court. 50. Section 67 of the Act deals with valuation of
taxable services for charging Service Tax. Sub-section (1) of section 67
provides that where Service Tax is chargeable on any taxable service
with reference to its value, then such value shall, where the provision of
service is for a consideration in money, be the gross amount charged by
the service provider for such service provided or to be provided by the
service provider. It is, therefore, clear that only such amount is subject to
Service Tax which represents consideration for provision of service and
any other amount which is not a consideration for provision of
service cannot be subjected to service tax.
xxx xxx xxx xxx
51. Section 67 of the Act was considered and explained by the Delhi High
Court in Intercontinental Consultants. The Appellant therein was
providing consulting engineering services. It received payment not only
for the services provided by it but was also reimbursed for the expenses
incurred by it on air travel, hotel stay, etc. It paid Service Tax on the
amount received by it for services rendered to its clients but did not pay
any Service Tax in respect of expenses incurred by it which were
reimbursed by theclients. A show cause notice was issued to it to explain
why Service Tax should not be charged on the gross value including
reimbursable and out of pocket expenses. The provisions of Rule 5(1) of
the Rules were resorted to for this purpose. A Writ Petition was filed
challenging the vires of Rule 5 as being unconstitutional as well as ultra
vires the provisions of section 66 and 67 of the Act. The Delhi High Court
accepted the said contention and declared Rule 5 to be ultra vires the
provisions of section 66 and 67 of the Act. The High Court noted that
both the amended and the un-amended section 67 authorized the
determination of value of taxable services for the purpose of charging
Service Tax under section 66 as the gross amount charged by the service
provider for such services provided or to be provided by him in a case
where consideration for such service is money. The High Court placed
emphasis on the words "for such service" and took the view that the
charge of Service Tax under section 66 has to be on the value of taxable
service i.e. the value of service rendered by the assessee and the
quantification of the value of service can, therefore, never exceed the
gross amount charged by the service provider for the service provided by
him. On that analogy, the High Court opined that the scope of Rule 5
goes beyond the scope of section 67 which was impermissible as rules
could be framed only for carrying out the provisions of Chapter 5 of the
Act. In taking this view, the High Court observed that the expenditure or
cost incurred by the service provider for providing the taxableservice can
never be considered as the gross amount charged by the service provider
"for such service" provided by him.
26
ST/86233/2021
52. In the Appeal filed by the Department, the Supreme Court noticed
the various reimbursable claims which were included in the gross value.
The Supreme Court noted that Rule 5 does bring within its sweep the
expenses which are incurred while rendering the service and are
reimbursed and, therefore, what was required to be decided was whether
section 67 of the Act permits subordinate legislation to be enacted as was
done by Rule 5. It needs to be noted that prior to 19 April, 2006, in the
absence of a Rule, the valuation was required to be done as per the
provisions of section 67 of the Act. The Supreme Court noticed that the
charging section 66 provides that there shall be levied Service Tax @
12% of the value of taxable services referred to in the sub-clauses of
Section 65 and collected in such manner as may be prescribed. Thus, the
Service Tax is on the "value of taxable services" and, therefore, it is the
value of the services which are actually rendered which has to be
ascertained for the purpose of calculating the Service Tax. It is for this
reason that the Supreme Court observed that the expression "such"
occurring in section 67 of the Act assumes importance. It is in this
context that the Supreme Court in paragraph 26 observed that the
authority has to find what is the gross amount charged for providing
"such" taxable services and so any other amount whichpart of that
valuation as the amount is not calculated for providing "such taxable
service." This, according to the Supreme Court, is the plain meaning
attached to section 67 either prior to its amendment on 1 May, 2006 or
after this amendment and if this be so, then Rule 5 went much beyond
the mandate of section 67. The Supreme Court, therefore, held that the
value of material which is supplied free by the service recipient cannot be
treated as "gross amount charged" as that is not a "consideration" for
rendering the service. The Appeal filed by the Department was, therefore,
dismissed.
9.4 We further find that the case laws relied upon by the learned AR,
mainly relate to software as a goods for the purpose of levy of sales
tax/VAT; liquidated damages under a contract and the consideration
received is taxable to service tax. As the factual matrix of the present case
are different from the facts of those case, we are unable to appreciate the
relevant of such case laws in support of the stand of the Revenue.
9.5 We also find that Hon'ble Supreme Court, in the case of Philips India
Ltd. Vs. Collector of Central Excise, Pune - 1997 (91) E.L.T. 540 (S.C.) had
held that the provisions of contract between a manufacturer and its
distributor relating to advertising and the like were in furtherance of the
desire on the part of both the manufacturer and distributor and in no way
affected the real nature of the transaction which appeared to be of sale on
principal to principal basis. Accordingly, the Hon'ble Supreme Court had
held that advertisement expenses incurred by dealer/distributor at its own
cost, half of it borne by the manufacturer, does not call for deduction out of
the trade discount and it is uncalled for.
27
ST/86233/2021
9.6 The above orders of the higher judicial forum clearly provide that the
activities undertaken by the appellants with the FPCs under a contract such
as marketing and promotion of music and song videos of film under a
temporary transfer arrangement are not liable to service tax as 'Business
Auxiliary Service'. Further, we also find that the agreements entered by the
appellants also provide for certain expenses to be incurred by them which
could be an adjustment from the revenues. Thus, we do not find that
sharing of part of the consideration alone under the contractual obligations
would tantamount to provision of service towards Business Auxiliary
Services, provided by appellants by treating the rights owner as their
clients.
10.1 As regards the penalties proposed in the show cause notice, the
learned Commissioner had imposed penalty equal to the amount of service
tax demanded under Section 78 ibid.
10.2 The legal provisions contained in Section 73(1) ibid provide that
extended period can be invoked for demand of service tax, in situations
where there is any involvement of fraud, or collusion, or wilful mis-
statement, or suppression of facts, or contravention of any of the
provisions of this Chapter or of the Rules made thereunder with intent to
evade payment of service tax, by an assessee. We find that neither in the
show cause notice nor in the impugned order, there is any specific
allegation or finding for invoking such legal provisions. On the other hand,
we find that from the details submitted by the appellants and records of
the appellants, the departmental authorities have arrived at the total
demand of service tax. The above factual position indicates that there was
no suppression of any information, inasmuch as the appellant have
provided complete details in respect of the audited accounts and the
balance sheets for the disputed period. We find from the factual details
that the entire data having been provided to the investigation officers of
the DGGI, there is no justification to claim suppression of facts in such a
situation. Further, we find that there is no evidence or any document to
indicate that the appellants in any manner had attempted to evade service
tax.
10.3 We further find that the Hon'ble High Court of Delhi in the case of
Bharat Hotels Ltd. Vs. Commissioner of Central Excise (Adjudication) -
28
ST/86233/2021
2018 (12) G.S.T.L. 368 (Del.) had elaborately discussed about the
meaning of the words 'wilful mis-statement', 'suppression of facts' and
the situations in which the extended period can be invoked for demand
of service tax. The relevant paragraphs in the said Order of the Hon'ble
High Court is extracted and given below:
"21. The meaning of the words 'wilful misstatement' and 'suppression of
facts' has been a subject matter of judicial scrutiny in various Supreme
Court judgments which are necessary to be discussed before proceeding to
the merits of this case. However, these words have been interpreted as
given in Sections 28 of the Customs Act, 1962 (hereinafter referred to as
"the Customs Act") and 11A of the [Central] Excise Act, 1944 (hereinafter
referred to as "the Excise Act"). In order to determine if the same
interpretation extends to Section 73 of the Act the following decisions of the
Supreme Court have to be looked at. In the case of Uniworth Textiles
Ltd. v. Commissioner of Central Excise, Raipur [(2013) 9 SCC 753 = 2013
(288) E.L.T. 161 (S.C.)] the Supreme Court discussed its previous
judgments to determine the applicability of the proviso to Section 28 of the
Customs Act for extension of limitation period for issuing notice for payment
of duties that have not been levied, short-levied or erroneously refunded.
The relevant paragraphs of the judgment are excerpted below :
"9. The show cause notice was issued on 2-8-2001, more than six months after
the appellant had imported furnace oil on behalf of Uniworth Ltd. in January,
2001. This time period of more than six months is significant due to the proviso
to Section 28 of the Act. The Section, at the relevant time, read as follows :
28. Notice for payment of duties, interest, etc. -
(1) When any duty has not been levied or has been short-levied or erroneously
refunded, or when any interest payable has not been paid, part paid or erroneously
refunded, the proper officer may, -
(a) in the case of any import made by any individual for his personal use or by
Government or by any educational, research or charitable institution or hospital, within
one year;
(b) in any other case, within six months, from the relevant date, serve notice on the
person chargeable with the duty or interest which has not been levied or charged or
which has been so short-levied or part paid or to whom the refund has erroneously
been made, requiring him to show cause why he should not pay the amount specified
in the notice :
Provided that where any duty has not been levied or has been short-levied or the
interest has not been charged or has been part paid or the duty or interest has been
erroneously refunded by reason of collusion or any wilful misstatement or suppression
of facts by the importer or the exporter or the agent or employee of the importer or
exporter, the provisions of this sub-section shall have effect as if for the words "one
year" and "six Months", the words "five years" were substituted.
Explanation. - Where the service of the notice is stayed by an order of a court, the
period of such stay shall be excluded in computing the aforesaid period of one year or
six months or five years, as the case may be. (Emphasis supplied)
10. The section imposes a limitation period of six months within which the
concerned authorities must commence action against an importer/assessee in
case of duties not levied, short-levied or erroneously refunded. It allows the said
limitation period to be read as five years only in some specific circumstances,
viz. collusion, wilful misstatement or suppression of facts. Since the said show
cause notice was issued after the elapse of six months, the revenue, for its
action to be legal in the eyes of law, can only take refuge under the proviso to
the section."
29
ST/86233/2021
22. Section 28 of the Customs Act like Section 73 of the Act (in this case)
relates to notice for payment of duty that has not been levied, short-levied
or erroneously refunded. The proviso to Section 28 of the Customs Act and
the proviso to Section 73(1) of the Act, both set out conditions for extension
of limitation period for issuing of a Show Cause Notice. The difference
between the two sections lies in the insertion of conditions of 'fraud' and
'contravention of any of the provisions of this Chapter or of the rules made
thereunder with intent to evade payment of Service Tax' in Section 73 of
the Finance Act, 1994. In Uniworth (supra), the Supreme Court discussed
the interpretation of the proviso of a similar provision in Section 11A of the
Excise Act and held that it is parimateria to the proviso to Section 28 of the
Customs Act. The relevant paragraphs are excerpted below :
"13. This Court, in Pushpam Pharmaceuticals Co. v. Collector of Central Excise,
Bombay [1995 Supp (3) SCC 462], while interpreting the proviso of an
analogous provision in Section 11A of The Central Excise Act, 1944, which
is parimateria to the proviso to Section 28 discussed above, made the following
observations :
xxxxxx xxxxxx xxxxxx
18. We are in complete agreement with the principle enunciated in the above
decisions, in light of the proviso to Section 11A of the Central Excise Act, 1944.
However, before extending it to the Act, we would like to point out the niceties
that separate the analogous provisions of the two, an issue which received the
indulgence of this Court in Associated Cement Co. Ltd. v. Commissioner of
Customs [(2001) 4 SCC 59] 3, at page 619 in the following words :
53. ... Our attention was drawn to the cases of CCE v. Chemphar Drugs and
Liniments [(1989) 2 SCC 12], Cosmic Dye Chemical v. CCE [(1995) 6 SCC
117], Padmini Products v. CCE [(1989) 4 SCC 275], T.N. Housing
Board v. CCE [1995 Supp (1) SCC 50] and CCE v. H.M.M. Ltd. (supra). In all
these cases the Court was concerned with the applicability of the proviso to
Section 11A of the Central Excise Act which, like in the case of the Customs Act,
contemplated the increase in the period of limitation for issuing a show cause
notice in the case of non-levy or short-levy to five years from a normal period of
six months....
54. While interpreting the said provision in each of the aforesaid cases, it was
observed by this Court that for proviso to Section 11A to be invoked, the
intention to evade payment of duty must be shown. This has been clearly
brought out in Cosmic Dye Chemical case where the Tribunal had held that so far
as fraud, suppression or misstatement of facts was concerned the question of
intent was immaterial. While disagreeing with the aforesaid interpretation this
Court at p. 119 observed as follows: (SCC para 6)
6. Now so far as fraud and collusion are concerned, it is evident that the
requisite intent, i.e., intent to evade duty is built into these very words. So far as
misstatement or suppression of facts are concerned, they are clearly qualified by the
word 'wilful' preceding the words 'misstatement or suppression of facts' which means
with intent to evade duty. The next set of words 'contravention of any of the provisions
of this Act or Rules' are again qualified by the immediately following words 'with intent
to evade payment of duty'. It is, therefore, not correct to say that there can be a
suppression or misstatement of fact, which is not wilful and yet constitutes a
permissible ground for the purpose of the proviso to Section 11A. Misstatement or
suppression of fact must be wilful.
The aforesaid observations show that the words "with intent to evade payment
of duty" were of utmost relevance while construing the earlier expression regarding
the misstatement or suppression of facts contained in the proviso. Reading the proviso
as a whole the Court held that intent to evade duty was essentially before the proviso
could be invoked.
30
ST/86233/2021
55. Though it was sought to be contended that Section 28 of the Customs Act is
in parimateria with Section 11A of the Excise Act, we find there is one material
difference in the language of the two provisions and that is the words "with
intent to evade payment of duty" occurring in proviso to Section 11A of the
Excise Act which are missing in Section 28(1) of the Customs Act and the proviso
in particular....
56. The proviso to Section 28 can inter alia be invoked when any duty has not
been levied or has been short-levied by reason of collusion or any wilful
misstatement or suppression of facts by the importer or the exporter, his agent
or employee. Even if both the expressions "misstatement" and "suppression of
facts" are to be qualified by the word "wilful", as was done in the Cosmic Dye
Chemical case while construing the proviso to Section 11A, the making of such a
wilful misstatement or suppression of facts would attract the provisions of
Section 28 of the Customs Act. In each of these appeals it will have to be seen
as a fact whether there has been a non-levy or short-levy and whether that has
been by reason of collusion or any wilful misstatement or suppression of facts by
the importer or his agent or employee. (Emphasis supplied)"
23. It is important to note the proviso to Section 11A of the Excise Act at
this stage. It states that :
"Where any duty of excise has not been levied or paid or has been short-
levied or short-paid or erroneously refunded, by the reason of -
(a) fraud; or
(b) collusion; or
(c) any wilful misstatement; or
(d) suppression of facts; or
(e) contravention of any of the provisions of this Act or of the rules made
thereunder with intent to evade payment of duty,
by any person chargeable with the duty, the Central Excise Officer shall,
within five years from the relevant date, serve notice on such person requiring
him to show cause why he should not pay the amount specified in the notice
along with interest payable thereon under Section 11AA and a penalty
equivalent to the duty specified in the notice."
24. As noticed in the excerpted portions of the Supreme Court's judgment,
the material distinction between the provisos of Section 11A of the Excise
Act and Section 28 of the Customs Act was contemplated in Associated
Cement Co. Ltd. v. Commissioner of Customs (supra) [2001 (128) E.L.T. 21
(S.C.)]. The only material difference in the language of the two provisions is
that the phrase 'with intent to evade payment of duty' is not used in Section
28 of the Customs Act. The Court held that the words 'fraud' and 'collusion'
inherently imply the requirement of an intent, which in this case is the
intent to evade payment of duty. With respect to misrepresentation and
suppression of facts the Court held that the fact that these words are
preceded by the word 'wilful' means that there should be an intention to
evade payment of duty behind these acts. And, therefore,
in Uniworth (supra), the judgments of the Supreme Court interpreting the
proviso to Section 11A of the Excise Act were applied in the interpretation of
the proviso to Section 28 of the Customs Act.
25. The meaning of the phrase parimateria has been explained in an
American case in the following words: "Statutes are in parimateria which
relate to the same person or thing, or to the same class of persons or
things. The word par must not be confounded with the word simlis. It is
31
ST/86233/2021
used in opposition to it - intimating not likeness merely but identity. It is a
phrase applicable to public statutes or general laws made at different times
and in reference to the same subject." [United Society v. Eagle Bank,
(1829) 7 Connecticut 457, p. 470, as cited in CRAIES, Statute Law, p. 134
(7th Edition)]. The provisos to Sections 11A of the Excise Act, 28 of the
Customs Act and Section 73 of the Finance Act, refer to the same class of
persons, i.e., persons from whom tax has been not been levied, or has been
short-levied or erroneously refunded. The subject matter of these provisos
is issuance of a Show Cause Notice in order to collect such tax. Further,
there seems to be no difference in language of the proviso to Section 11A of
the Excise Act and Section 73(1) of the Finance Act. Since, the pith and
substance of both these provisions is the same, the various judgments of
the Supreme Court discussing the interpretation of proviso to Section 11A of
the Excise Act can be extended to interpret Section 73(1) of the Finance
Act. Further, since proviso to Section 28 of the Customs Act
is parimateria to proviso to Section 11A of the Excise Act (as held in
Uniworth), the interpretation of proviso to Section 28 may also be extended
to interpret the proviso to Section 73 of the Finance Act. Uniworth (supra) is
also authority on the meaning of 'wilful misstatement' and 'suppression of
facts'; the Court held that :
"...
12. ... The conclusion that mere non-payment of duties is equivalent to
collusion or wilful misstatement or suppression of facts is, in our opinion,
untenable. If that were to be true, we fail to understand which form of non-
payment would amount to ordinary default? Construing mere non-payment as
any of the three categories contemplated by the proviso would leave no situation
for which, a limitation period of six months may apply. In our opinion, the main
body of the Section, in fact, contemplates ordinary default in payment of duties
and leaves cases of collusion or wilful misstatement or suppression of facts, a
smaller, specific and more serious niche, to the proviso. Therefore, something
more must be shown to construe the acts of the appellant as fit for the
applicability of the proviso.
.......
14. In Sarabhai M. Chemicals v. Commissioner of Central Excise, Vadodara [(2005) 2 SCC 168], a three-judge bench of this Court, while referring to the observations extracted above, echoed the following views :
"23. Now coming to the question of limitation, at the outset, we wish to clarify that there are two concepts which are required to be kept in mind for the purposes of deciding this case. Reopening of approvals/assessments is different from raising of demand in relation to the extended period of limitation. Under Section 11A(1) of the Central Excise Act, 1944, a proper officer can reopen the approvals/assessments in cases of escapement of duty on account of non-levy, non-payment, short-levy, short- payment or erroneous refund, subject to it being done within one year from the relevant date. On the other hand, the demand for duty in relation to extended period is mentioned in the proviso to Section 11A(1). Under that proviso, in cases where excise duty has not been levied or paid or has been short-levied or short-paid or erroneously refunded on account of fraud, collusion or wilful misstatement or suppression of facts, or in contravention of any provision of the Act or Rules with the intent to evade payment of duty, demand can be made within five years from the relevant date. In the present case, we are concerned with the proviso to Section 11A(1).
24. In the case of Cosmic Dye Chemical v. Collector of Central Excise, Bombay [(1995) 6 SCC 117], this Court held that intention to evade duty must be proved for invoking the proviso to Section 11A(1) for extended period of limitation. It has been further held that intent to evade duty is built into the expression "fraud and collusion" but misstatement and suppression is qualified by the preceding word "wilful". Therefore, it is not correct to say that there can be suppression or misstatement of fact, which is not wilful and yet constitutes a permissible ground for invoking the proviso to Section 11A.32
ST/86233/2021
25. In case of Pushpam Pharmaceuticals Co. v. C.C.E. [1995 (78) E.L.T. 401 (S.C.)], this Court has held that the extended period of five years under the proviso to Section 11A(1) is not applicable just for any omission on the part of the assessee, unless it is a deliberate attempt to escape from payment of duty. Where facts are known to both the parties, the omission by one to do what he might have done and not that he must have done does not constitute suppression of fact."
26. Again, the Supreme Court in Continental Foundation Joint Venture Holding v. Commissioner of Central Excise, Chandigarh-I [(2007) 10 SCC 337 = 2007 (216) E.L.T. 177 (S.C.)], held that :
"10. The expression "suppression" has been used in the proviso to Section 11A of the Act accompanied by very strong words as 'fraud' or 'collusion' and, therefore, has to be construed strictly. Mere omission to give correct information is not suppression of facts unless it was deliberate to stop the payment of duty. Suppression means failure to disclose full information with the intent to evade payment of duty. When the facts are known to both the parties, omission by one party to do what he might have done would not render it suppression. When the Revenue invokes the extended period of limitation under Section 11A the burden is cast upon it to prove suppression of fact. An incorrect statement cannot be equated with a wilful misstatement. The latter implies making of an incorrect statement with the knowledge that the statement was not correct. "
27. Therefore, it is evident that failure to pay tax is not a justification for imposition of penalty. Also, the word 'suppression' in the proviso to Section 11A(1) of the Excise Act has to be read in the context of other words in the proviso, i.e. "fraud, collusion, wilful misstatement". As explained in Uniworth (supra), "misstatement or suppression of facts" does not mean any omission. It must be deliberate. In other words, there must be deliberate suppression of information for the purpose of evading of payment of duty. It connotes a positive act of the assessee to avoid paying excise duty. The terms 'misstatement' and 'suppression of facts' are preceded by the expression 'wilful'. The meaning which has to be ascribed is, deliberate action (or omission) and the presence of an intention. Thus, invocation of the extended limitation period under the proviso to Section 73(1) does not refer to a scenario where there is a mere omission or mere failure to pay duty or take out a license without the presence of such intention."
11. In view of the factual position of the case as discussed above in paragraphs 10.2 and 10.3, and on the basis of the judgement of the Hon'ble High Court of Delhi as above, we are of the considered view that invocation of extended period for demand of service tax in the present cases is not sustainable. Consequent to this, we also find that the penalty imposed on the appellants under Section 78 ibid also does not survive on the above grounds.
12. In view of the foregoing discussion and analysis, we are of the considered view that activities undertaken by the appellant in the present set of facts is not liable to service tax under the taxable category Business Auxiliary service. Therefore, the impugned order dated 27.02.2021 is liable to be set aside to the extent it had confirmed the adjudged demands 33 ST/86233/2021 proposed in the SCN. Accordingly, by setting aside the impugned order dated 27.02.2021, the appeal filed by the appellants is allowed in favour of the appellants.
13. In the result, the appeal is allowed in favour of the appellants by setting aside the impugned order.
(Order pronounced in open court on 26.06.2024) (S.K. Mohanty) Member (Judicial) (M.M. Parthiban) Member (Technical) Sinha