Customs, Excise and Gold Tribunal - Delhi
Basti Sugar Mills Co. Ltd. vs Cce on 24 April, 2007
Equivalent citations: 2007(119)ECC299, 2007ECR299(TRI.-DELHI), [2007]10STJ51(CESTAT-NEW DELHI), 2007[7]S.T.R.431, [2007]10STT107, (2007)9VST175(CESTAT-NEW DELHI)
ORDER C.N.B. Nair, Member (T)
1. The appellant Basti Sugar Mills Co. Ltd. is engaged in the manufacture of sugar in its sugar mill. Under an agreement dated 28th September 2001 with Indo Gulf Industries Ltd., it took over the management of the sugar mill of the latter at Maizapur. Central Excise Authorities treated the above agreement as a Management Consultancy agreement and demanded the service tax. The present appeal challenges that demand as well as the penalty imposed for failure to pay the said tax.
2. The contention of the appellant is that the agreement was not a Consultancy Agreement but a Management Agreement and the revenue authorities are in error in treating the agreement as a Consultancy Agreement. It is also being pointed out that this Tribunal dealt with a similar case in its decision in the case of Rolls Royce Industries Power (I) Ltd. v. CCE, Vishakhapatnam as and held that Service Tax as consultant is not attracted to a case where, under a contract, the operation and management of an industrial unit is taken over by a party.
3. The learned SDR would rely on CBEC's order No. (60) 1/1/2001-ST (Section 37-B) dated 27th June 2001 issued vide F. No. 177/2/200l-CX/4 and point out that 'management' being vast in scope, the scope of a management consultant also is to be understood in its broadest sense. It is the submission of the learned SDR that it is after elaborately considering the various clauses of the agreement and the true meaning of management and management consultancy that the learned Commissioner has passed the order and that order is required to be upheld. Learned SDR would also emphasize that the Commissioner has considered the relevant judicial pronouncements on the subject also while passing the order.
4. The true nature of the agreement is to be ascertained from the clauses of the agreement itself. We may therefore, reproduce the relevant clauses of the agreement:
1. The party of the First Part hereby entrusts the operation of the Factory to Party of Second Part for its functioning at optimum efficiency under the overall supervision of Dr. K.R. Narang and Dr. S.K. Garg who will constitute for the purpose of day-to-day operation of the Factory, a management committee to achieve the desired results.
2. To run the Factory continuously and to achieve optimum efficiency for the full sugar season, the Party of the Second Party will identify, recruit and appoint capable and efficient, technical, administrative and financial staff, wherever required, in consultation with the Party of the First Part.
3. The staff recruited and appointed as referred in para 2 of this agreement shall be on the pay rolls of the Factory and shall be paid remuneration as employees of the Party of the First Part.
4. That the workmen and staff already employed in the Factory and the new staff appointed by the Party of the Second Part will continue to remain the employees of the Party of the First Part.
5. That both Parties have agreed that nothing contained in this agreement shall create employer - employee relationship between Party of the Second Part and any officer or workmen employed in the Factory at Maizapur.
6. That the loan application for sanction of facility for liquidation of cane price is at an advanced stage with a Bank/Financial Institution. Joint efforts will be made for expeditious sanction and liquidation of cane price of last season (Rs. 700 lacs) as quickly as possible.
7. That both the Parties have agreed that joint effort may be made to ensure the allotment of 40 Lac quintals of cane to Factory during the ensuing season from the reserved/assigned area of the Factory for which they have submitted the reservation proposal to the Cane Commissioner (U.P.).
8. That the management committee, as constituted above, will take appropriate steps to complete the repair and required modification work in the Factory for efficient operation of the plant, within time to ensure the start of Factory latest by November 15, 2001 keeping in view the maturity of cane and will also ensure the timely availability of funds for procuring pre-start stores.
9. That the ownership of movable and immovable assets of the Factory shall remain vested in the Party of the First Part. Similarly the liabilities in respect of the Factory shall remain with the Party of the First Part.
10. That it is clearly understood that by this agreement no right of ownership, assignee, pledgee or mortgagee in respect of any asset of the Factory accrue to the Party of the Second Part in any manner whatsoever.
11. That the Party of the Second Part has agreed to identify all the administrative and technical bottlenecks in the Factory and shall remedy them before the start of the crushing season.
12. That it has been agreed that for the smooth running of the Factory, proper and timely arrangements of finance is the essence. To provide leverage in liquidity, the Party of the First Part has agreed to allow the operation of an account with a designated bank to one nominee of the Party of the Second Part as joint signatory with the Party of the First Part. The modus operandi will be decided mutually.
13. The party of the Second Part has agreed to use funds provided by the Party of the First Part and generated in the Factory or loan raised for the Factory shall exclusively be used for the functioning of the Factory and no diversion of funds for any other purpose shall take place.
14. That the Party of the Second Part will not provide any security /guarantee for any loan/financial assistance from Banks/FI's. This obligation will remain with the Party of the First Part.
15. That the Party of the Second Part has agreed to make thorough study about technical, financial and administrative aspects of the Factory and if required take up the restructuring wherever necessary, in consultation with the Party of the First Part.
16. Both the Parties have agreed that after first year of successful operation and after obtaining necessary approvals of government authorities, financial institutions, banks, etc., wherever required, the capacity of the plant shall be expanded to 5000 TCD for which arrangement/tie-up with FI's and SDF will be responsibility of the Party of the Second Part. The scheme of expansion will be finalized and carried out under the supervision of the Party of the First Part. A scheme for better utilization of the by-products will be worked out and implemented under the new agreement to be entered separately on mutually agreed terms.
17. In consideration of technical and financial services the Party of the First Part has agreed to compensate the Party of the Second Part minimum charges of Rs. 42.5 Lacs per annum every year subject to the ceiling of 20% of the net profit of the sugar division whichever is higher.
18. This agreement will be for the term of five years from the date of execution of this agreement, terminable nevertheless at the option of the either Party by giving to the other three months notice in writing. But the Parties shall be entitled to serve notice only during the month commencing from the 1stApril to 31st day of July.
5. The perusal of the above clauses make it clear that under the agreement with Indo Gulf Industries Ltd. the appellant has been "entrusted the operation of the factory" (Clause '1'). The remaining clauses of the agreement are to enable the appellant to perform the operation of the factory smoothly and well. The agreement is not for any advice or consultancy.
6. The definition of management consultant under the taxing statute may be noted:
Management Consultant' means any person who is engaged in providing any service, either directly or indirectly, in connection with the management of any organization in any manner and includes any person who renders any advice, consultancy, devising, development, modification, rectification or upgradation of any working system of any organization.
7. The above definition makes it clear that what is envisaged from a consultant is advisory service and not the actual performance of the management function. In the present case, the appellant was in-charge of the operation of the factory and thus was performing the management function.
8. An ocean separates a manager from a management consultant, a performer from an advisor or a coach. That ocean exists in the present case also. We dealt with a similar case in Rolls Royce Industries Power (I) Ltd. (Supra) and held that where the agreement conferred operational autonomy and responsibility on the contracted party, the relationship is not one of consultancy. The ratio of that decision covers the present dispute also. There is no management consultancy in the facts of the present case and the demand is clearly beyond the scope of the statute.
9. In the result, the impugned order is set aside and the appeal is allowed with consequential relief to the appellant.
(Pronounced in the open court on 24/4/07)