Custom, Excise & Service Tax Tribunal
Ms Evolve Brands Pvt Ltd vs Gurgaon I on 31 January, 2022
CUSTOMS, EXCISE & SERVICE TAX
APPELLATE TRIBUNAL
CHANDIGARH.
REGIONAL BENCH.
SERVICE TAX APPEAL NO. 60934 OF 2019
[Arising out of the Order-in-Original No. GST-GGM/COM/SM/79-83/2018-19
dated 29/03/2019 passed by The Commissioner, Central Goods and Service
Tax, Gurugram, Haryana - 122 003.]
M/s Evolve Brands Pvt. Ltd. Appellant
Level 2, AIHP Towers, 249 G,
Udyog Vihar Phase - 4,
Gurgaon - 122 015.
VERSUS
Commissioner, Central Goods Respondent
and Service Tax, 1st Floor, Left Wing, Kendriya Utpad Shulk Bhawan, Plot No. 36 & 37, Sector - 32, Gurugram, Haryana - 122 003.
Appearance Shri Jitender Pal Singh, Advocate - for the appellant. Shri Bhasha Ram and Shri Rajeev Gupta, Authorized Representative (DR)- for the Respondent.
CORAM:HON'BLE MS. SULEKHA BEEVI C.S., MEMBER (JUDICIAL) HON'BLE SHRI P.V. SUBBA RAO, MEMBER (TECHNICAL) FINAL ORDER NO. 60042/2022 DATE OF HEARING : 01/12/2021 DATE OF DECISION : 31/01/2022 Per : SULEKHA BEEVI C.S. Brief facts are that the appellants, namely, M/s Evolve Brands Pvt. Ltd., are registered with the service tax department for providing Business Auxiliary Services under Section 65 (105) (zzb) of the Finance Act, 1994. During audit of the accounts of 2 ST/60934 OF 2019 the appellant by the officers of the Service Tax Commissionerate, Delhi on 22.11.2011 for the financial years 2006-2007 to 2010- 2011, certain infractions were noticed. It was observed that the income had been shown in two accounting heads, viz. service charges and sales. It was noticed from the balance sheets for the financial years 2006-2007 to 2010-2011, and relevant service tax returns for the period 2006-2007 to 2010-2011 that the appellant had not discharged their service tax liability on the gross amount received from their clients for providing Business Auxiliary Services (hereafter mentioned as BAS).
2. It appeared that appellant had not paid service tax on the cost of the goods used for distribution to their clients channel partners. The appellant had accounted cost of such deliverable goods and materials in two heads, viz.; "redemption" and "sale of goods" for the year 2007-2008 to 2010-2011. For the year 2006- 2007, the appellant accounted the cost of the deliverable goods and materials in the head viz.; "redemption and reimbursements". After detailed scrutiny of accounts it appeared that appellant had discharged service tax only on management fee and had not included reimbursable expenses in the taxable value for discharging their service tax liability. The appellant was issued show cause notices for different periods. Show cause notice dated 20.04.2012 was issued for the period 2006-2011. Subsequently, show cause notice dated 22.02.2013 (for the period 2011-2012), show cause notice dated 21.04.2014 (for the period 2012-2013) were issued by the Commissioner of Service 3 ST/60934 OF 2019 Tax, Delhi. Further, show cause notice dated 17.04.2015 (for the period 2013-2014) and show cause notice dated 13.04.2016 (for the period 2014-2015) was issued by the Commissioner of Service Tax, Gurgaon.
3. The above show cause notices were adjudicated by a common order dated 20.03.2019 whereby the adjudicating authority held :
(a) In respect of show cause notice dated 20.04.2012, the extended period is invokable and partly confirmed the service tax demand along with interest after dropping the demand in respect of sale of goods and also extending cum tax benefit. Equal penalty under Section 78 of the Act ibid was imposed ;
(b) In respect of show cause notice dated 23.03.2013, the service tax demand along with interest was partly confirmed after extending the cum tax benefit. Equal penalty under Section 78 was imposed, besides imposing penalty of Rs. 10,000/- under Section 77 of Act ibid ;
(c) In respect of show cause notice dated 21.04.2014, the demand was partly confirmed along with interest after extending the cum tax benefit. Penalty of Rs.
9,07,386/- was imposed under Section 76, besides imposing penalty of Rs. 10,000/- under Section 77 of the Act ibid ;
(d) In respect of show cause notice dated 17.04.2015, the demand was partly confirmed along with interest after extending the cum tax benefit. Penalty of Rs. 7,83,055/- was imposed under Section 76, besides imposing penalty of Rs. 10,000/- under Section 77 of Act ibid ;
(e) In respect of show cause notice dated 13.04.2016, the demand was partly confirmed along with interest after extending the cum tax benefit. Penalty of Rs. 10,34,660/- was imposed under Section 76, besides imposing penalty of Rs. 10,000/- under Section 77 of the Act ibid.
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4. Aggrieved by the above order, the appellants have preferred the appeal.
5. The learned Counsel Shri Jitender Pal Singh, appeared and argued for the appellant. He explained the services rendered by the appellants. The appellants were engaged in the activity of marketing and sales promotion, relationship management, brand promotion, etc. in relation to the products, services and brands of its‟ clients, who were based in India and abroad. The services were provided under agreement (s) executed with respective clients. In such agreements, the scope of work, reporting to the client, obligation of each of the parties, terms of remuneration, feedback, management fees, other costs, Government dues etc. were stipulated. The appellant was holding centralized registration for providing BAS to various Indian as well as overseas clients. The appellant discharged service tax on the consideration received for providing BAS and filed returns accordingly.
6. The appellant rendered its services to various clients by designing/executing various schemes, programs, strategies etc. as formulated or directed by the clients for the benefit of the clients by way of promotion of the sales of such clients. These schemes included loyalty and incentive schemes for promoting the business of the clients, such as distribution of gifts, rewards, etc. to the distributors and customers of the Appellant‟s clients. For distribution of the gifts under the promotional schemes, the 5 ST/60934 OF 2019 Appellant purchased the items or gifts on behalf of its clients and delivered them to the distributors/customers of such clients. The gifts were distributed to the distributors/customers of such clients and debit notes were raised by the Appellant to its clients towards the cost incurred towards procurement of the gifts, etc. After confirmation of delivery to the clients‟ distributors, etc., payment was released by the clients to the Appellant. The Appellant also organized various marketing campaigns, etc. on behalf of their clients. The Appellant was engaged in the business of getting familiar with its clients‟ customers and engaging with them in a unique, simplified and rewarding manner. The Appellant enabled its clients to expand their brand reach and retain customers by creating, deploying process driven and aspiration-based marketing programs.
7. For the services so provided by the Appellant, the clients paid management fees to the Appellant for managing all the activities in relation to such promotional activities. For the costs/ expenditures incurred by the Appellant on behalf of the clients, the Appellant was compensated by way of reimbursement/ redemption of expenditure (cost of purchase of items) on actual basis. The services provided to various clients were provided on the basis of contracts or agreements entered into with them and copies of these agreements for the relevant period were submitted along with the reply to the respective show cause notices.
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8. During the course of audit, the officers of the Department observed from the Balance Sheets and Service Tax returns for the said period, that the Appellant had not discharged Service Tax liability on the gross amount received from its clients for providing Business Auxiliary Service taxable under Section 65 (105) (zzb) of the Finance Act, 1994 ("the Act"). The officers of the Department observed that the Appellant had not paid Service Tax on the cost of the goods used for distribution to their clients‟ channel partners. The officers also observed that the Appellant accounted for the cost of such deliverable goods and materials under the heads "redemption" and "sale of goods" during the years 2007-2008 to 2010-2011, and under the heads "redemption" and "reimbursements" for the year 2006-2007.
9. The Appellant provided details of such reimbursable charges received on account of "reimbursements", "sale of goods" and "redemption for distribution of goods" as per the Books of Accounts for the said years, which are reproduced at Table II on page 3 of the Impugned Order. The Appellant also submitted a detailed note on the activities undertaken by them, vide letter dated 12.12.2011 (reproduced at Para 1.4 of the Impugned Order). It was also clarified that reimbursement of expenses were not booked to sales account since the parties were not debtors of the Appellant and the Appellant only charged management fees and booked it in the income account of the company.
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10. The learned Counsel submitted that the entire demand is raised on reimbursable expenses. It is very much clear from the show cause notice as well as the impugned order that the demand is raised and confirmed on reimbursable expenses. The appellant had incurred various expenses for providing BAS to its‟ clients. These expenses were reimbursed in different ways to the appellant. As per Section 67 of the Act, as it stood during the relevant period, only the consideration received is subject to levy of service tax. The reimbursements received from the client for the expenses incurred for providing the services is not to be included. This issue is settled by the decision of the Hon‟ble Supreme Court in the case of Union of India versus Intercontinental Consultants and Technocrats Pvt. Ltd. - 2018 (10) GSTL 401 (S.C.). In the said case, the Hon‟ble Supreme Court held that the value of taxable service cannot be anything more or less than the consideration paid as quid pro quo for rendering such service, and that service tax is to be paid only on services actually provided by the service provider.
11. The appellants had entered into agreements with its‟ clients to whom they had rendered various services in relation to sales and business promotion, customer management etc. Accordingly, the Appellant had also undertaken to incur all the expenditure/ costs in the course of providing taxable services on behalf of its clients. It was also submitted that the Appellant fulfilled all the conditions to qualify as a pure agent, and hence the Appellant ought to be treated as a pure agent of the various clients with 8 ST/60934 OF 2019 whom it had entered into agreements. Hence, in terms of Rule 5 (2) of the Valuation rules reimbursable expenditure incurred by the Appellant was not liable to Service Tax.
12. In respect of the client SSIPL, the appellant received consideration in Foreign Currency against Business Auxiliary Services falling under Section 65 (105) (zzh) of the Act, which were provided to Seagate Singapore International Pte. Ltd. ("SSIPL") which was located at Singapore. Hence, the services rendered to SSIPL were export of services. In terms of Rule 4 of the Export of Service Rules, 2005, any service, which was taxable under clause (105) of Section 65 of the Act, may be exported without payment of Service Tax. The demand pertaining to this client therefore cannot sustain o this ground also.
13. It is clear from the show cause notices that demand of Service Tax was sought to be raised on the ground that the reimbursable charges received on account of "reimbursement", "sale of goods" and "redemption for distribution of goods" were includible in taxable value in terms of Section 67 (1) of the Act read with Rule 5 (2) of the Valuation Rules. This is evident from Para 10.1 of the Impugned Order. Again, vide Para 22 of the Impugned Order, the learned Commissioner has dropped the tax demand, in so far as reimbursement on account of "sale of goods" are concerned. However, the learned Commissioner has confirmed the tax demand, on reimbursements received under 9 ST/60934 OF 2019 the heads "reimbursements" and "redemptions for distribution of goods".
14. He adverted to para 10.1 of the impugned order and submitted that the adjudicating authority has noted that there is no dispute regarding payment of service tax on management fee. Further in para 13, the adjudicating authority has stated that "redemption receipts and reimbursable receipts" are interchangeable terms used by the noticee (appellant) representing charges received from their clients on account of cash rebate, gift items and other expenses on behalf of their clients. Having so held, the adjudicating authority erred in proceeding to confirm the demand disregarding the judgment of the Hon‟ble Apex Court.
15. Though the judgment of the Hon‟ble Supreme Court was brought to the notice of the adjudicating authority, the same was not considered and the adjudicating authority chose to selectively cite the judgment of the Hon‟ble Delhi High Court and proceeded to confirm the demand. The Apex Court has clearly held that Section 67 did not include reimbursable expenses for the period prior to 14.05.2015.
16. The judgment of the Apex Court in Intercontinental Consultants and Technocrats Pvt. Ltd. (supra) has been subsequently followed by the Tribunal in a number of cases to hold that reimbursable expenses could be included in the taxable value only w.e.f. 14.05.2015.
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17. In AUL Services versus Commissioner of CGST and Central Excise, Varanasi [F.O. No. 70454/2019 dated 27.02.2019 CESTAT, Allahabad] it was held as under :-
"Therefore, proceedings were initiated and culminated into passing of the impugned Order-in-Appeal wherein the learned Commissioner (Appeals) has upheld the Order-in-Original wherein the Original Authority has relied on the provisions of Rule 5 of the Service Tax Valuation Rules, 2006 to arrive at the conclusion that wages reimbursed by service recipient to the appellant were liable to be included in the assessable value. We note that the learned advocate appearing for the appellant has relied on the ruling by Hon‟ble Supreme Court in the case of Intercontinental Consultants & Technocrats Pvt. Ltd. reported at 2018 - TIOL - 76 - SC - ST and submitted that the Hon‟ble Supreme Court have held that reimbursable expenses could be included in assessable value only with effect from 14 May, 2015. We note that the learned Authorized Representative on behalf of the Revenue has reiterated the impugned Order-in-Appeal. We note that period involved in the present appeal is prior to 14 May, 2015 therefore by relying on the ruling of the Hon‟ble Supreme Court of India in the case of Intercontinental Consultants & Technocrats Pvt. Ltd. we hold that since prior to 14 May, 2015 reimbursable expenses were not includible in the assessable value, impugned order is not sustainable. In view of the said findings, we set aside the impugned order and allow the appeal".
18. In the case of Telenor Consult As versus Delhi - I - 2019 (2) TMI 955 - CESTAT New Delhi. It was held :
"10. Though the Parliament again amended Section 67 of the Act by Finance Act, 2015 w.e.f. 14-5-2015 adding an explanation which lays down that consideration includes the reimbursement of expenditure or cost incurred by the service provider but the period in question for the present appeal is prior [to] 14-5-2015 hence the said amendment cannot be given a retrospective effect. The principle of law known for the purpose is, "lexprospicic non respicit"
which means that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his balance have been retrospectively upset. The obvious basis of the principle against retrospectivity is the principle of fairness as it was observed in the case of L's Office Cherifien Des Phosphates v. Yamashita-Shinnihon Steam Ship Company Ltd. - 1994 (1) AC 466. It was clarified in this case that the Legislatures which modified accrued rights or which imposed obligations or imposed new duties or attached a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect unless the legislation is for the purpose of supplying an obvious omission in a former legislation or to explain a former legislation. Since the amendment in Section 67 in the year 11 ST/60934 OF 2019 2015 do not fall in any of the later categories as discussed, it cannot be applied retrospectively. As a result of entire above discussion it stands clear that according to legislative intent of the Finance Act for the impugned period the value of taxable service shall be the gross amount charged by the service provider for such service and the valuation of tax for the service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service".
19. In Bajaj Allianz Life Insurance Co. Ltd. versus Commissioner of C.E. & S.T., Pune - III - 2019 (6) TMI 104 - CESTAT Mumbai held that:-
"54. Hon‟ble Supreme Court in the above case, at Para 29 of the said judgment has concluded that Clause (a) of Section 67 (4) of Finance Act, 1994 which deals with „consideration‟ is suitably amended w.e.f. 14.05.2015 to include reimbursable expenditure or cost incurred by the service provider and charged in the course of providing the taxable service. Thus, only w.e.f. 14.05.2015, by virtue of provision of Section 67 itself, such reimbursable expenditure or cost would also form part of the value of taxable service for charging service tax. In other words, prior to 14.05.2015, such expenditure or cost incurred by the assessee in providing taxable service cannot be included in the value of service. Thus in the value commission paid by the Appellant to insurance agents such expenses cannot be included. In other words, pre and post training expenses, incurred by the Appellant cannot form part of the value of commission paid to the insurance agents".
20. In the case of Central Bank of India versus CCE & ST, Chandigarh - I - 2018 (8) TMI 4 - CESTAT - Chandigarh held that :-
"4. After hearing both the sides, prima facie, we find that the issue of calculation of service tax as per balance sheet prepared on actual basis for the period prior to 01.04.2011 is not legally sustainable as the Point of Taxation Rules, 2011 came into effect on 01.04.2011. The department has also accepted this position as is evident from the copy of the order of Commissioner (Appeals) dated 02.05.2018 in the case of appellants another branch. We also find that the issue of includability of reimbursable expenses or cost in value of taxable services prior to May 14, 2015 has been held in favour of the assessee by the Hon‟ble Supreme Court in the case of U.O.I. versus M/s Intercontinental Consultants and Technocrats Pvt. Ltd. (supra). In these circumstances, we find that, prima facie, the applicant appear to have the case in their favour. Therefore, there will be complete waiver of pre-deposit of service tax, interest and penalty and stay of recovery of the same during pendency of the appeal. The appeal may be listed in its turn".
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21. It was argued by the learned Counsel that without prejudice to the above submissions, the demand in respect of expenses reimbursed by the client Seagate Singapore International Pvt. Ltd. (SSIRL) cannot be sustained as these services were rendered to overseas client and tantamount to export of services. The BAS rendered by the appellant to its‟ overseas client located outside India against consideration received in foreign currency qualified as export of service under the provisions of Export of Service Rules, 2005 which were in force upto 30.06.2012. The CBEC vide Circular dated 24.02.2009, has clarified that the relevant factor for determining whether the service (BAS) was exported was the location of the service recipient and not the place of performance of service. The appellant had also relied on the decisions rendered in the cases of IBM India (P) Ltd. - 2010 (19) S.T.R. 520 (Tri. - Bang.), Microsoft Corporation (I) (P) Ltd. - 2014 (36) S.T.R. 766 (Tri. - Del.), Vodafone Essar Cellular Ltd. - 2013 (31) S.T.R. 738 (Tri. - Mumbai) and Canon India Pvt. Ltd. - 2018 (2) TMI 936 (CESTAT, Chandigarh).
22. Though it was export of services, the Appellant had discharged service tax on the management fee received from SSIPL. Merely because the Appellant paid tax on the services rendered to SSIPL erroneously and under a mistake of law, the Appellant is not barred or precluded from claiming that the service rendered by Appellant was export of service Therefore, 13 ST/60934 OF 2019 the present demand of service tax on the reimbursements received by the Appellant from SSIPL is not tenable since the services provided by the Appellant to SSIPL during the relevant period constituted export of services.
23. The learned Counsel put forward arguments on the ground of limitation also. He submitted that the extended period of limitation can be invoked only in cases where there is fraud or collusion or willful mis-statement or suppression of facts with intent to evade payment of duty. The department has not alleged or established any specific act on the part of the appellant which constitutes suppression of facts or mis-statement. The entire demand has been raised from the accounts maintained by the appellant. The appellant has not suppressed anything. The appellant did not pay service tax on the reimbursable expenses on the bonafide belief that these are not includable in the taxable value. This belief was affirmed by the decision rendered by Hon‟ble Apex Court in M/s Intercontinental Consultants and Technocrats Pvt. Ltd. (supra). There was no deliberate and conscious act of omission or commission on the part of the appellant which indicates intention to evade payment of service tax. That the demand raised and confirmed invoking extended period in the first two show cause notices is against the provisions of law.
24. The learned Counsel prayed that the appeal may be allowed.
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25. The learned Authorized Representative Shri Bhasha Ram and Shri Rajeev Gupta appeared and argued for the Revenue. They also filed written submissions. He submitted that the issue pertains to demand of service tax for the period 2006-2007 to 2014-2015. The appellant undertakes the following activities in connection with sales promotion of the products of their clients :-
"(i) Promotion/marketing/sale of goods and services produced or provided by or belonging to its clients.
These activities include direct marketing, promo marketing, contact center solutions, loyalty, database management, relationship marketing, trade programs, CRM Consulting and Technology & Web based services.
(ii) Trade loyalty programs cover data base management, contact center, events and road downs and web based solutions across wide spectrum of segments for promoting their sales.
(iii) Management of projects business which can be of any of the services mentioned above and for a short duration. These services could be selling an event or profiling customers etc. These activities are characterized as "Business Auxiliary Services" as defined under Section 65 (105) (zzb) of the Finance Act, 1994 (hereinafter referred to as "The Act") upto 30.06.2012 and thereafter a "service" and "a taxable service" in terms of clause 44 and 51 of Section 65B of the Act.
The Appellant is providing the aforesaid services under agreements executed with its clients located in India and outside India. As per terms of agreements, Appellant gets consideration which described in books of accounts as :-
(i) Management fee; (ii) Redemption receipts ;
(iii) Reimbursement receipts; and (iv) Amount received against sale of goods".
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26. The findings of the adjudicating authority on „redemption receipts and reimbursable receipts are as under :-
"3.1 The redemption receipts and reimbursable receipts are interchangeable terms used by noticee representing charges received from their clients on account of cash rebate, gift items and other expenses on behalf of the clients namely; M/s JK Paper Limited, M/s JK Lakshmi Cement Ltd., M/s Symantee Software Solutions Pvt. Ltd., M/s Greenply Industries Ltd. and M/s Seagate Singapore International Headquarters Pte. Ltd., Singapore etc. have launched different sale promotion scheme/sale rewards for their distributors/dealers; such as volume incentive rebate scheme on achieving quarterly purchase target. On achieving the prescribed periodical purchase target, the distributor is given a rebate in cash. Likewise, these schemes also envisage giving gifts and other items to the distributors as incentive.
27. That as can be observed from Clause - IV of the agreement with M/s JK Paper Ltd., the noticee would receive fixed monthly service fee of Rs. 1,59,850/-, which include fixed monthly service fee for Program Manager, Database Manager - Shared cost, Process Executive-Dedicated, Data Entry Operator, Reward Management, Sourcing and Ful, Call center, Communication Cost of Cal Center, Communication cost for program team, paper stationary cost, along with a management fee of 15%. This monthly retainership is being paid by service receiver to the Appellant for providing various services like marketing and sales promotion, relationship management, brand promotion etc. to the clients, for which purpose they design and execute various schemes, programs, strategies etc. as formulated or directed by the clients for the benefit of clients/ client‟s distributors. As a part of the services being provided by appellant to its clients, they are also required to incur various expenses on marketing and 16 ST/60934 OF 2019 promotional activities including distributing cash rewards and gifts items to the distributors/ dealers of the clients, on which besides the actual expenses being incurred by them they are also adding a management fee of 15%, as is evident from Clause 14
(iii) of the Agreement. It is observed that appellant is receiving three types of payments from its clients; (i) fixed retainer fee/service fee per month; (ii) cost of cash reward/gift items/expenses at actual and (iii) a mark up in form of management fee @ 15% on these expenses. Since there is specific provision for fixed retainer/service fee per month for the services being provided by the noticee to their clients separately, which is over and above the cost of cash reward/gift item/expenses for distribution to their clients‟ dealers, it is observed that this management fee @15% is nothing but a mark up on the said expenses being incurred by the Appellant for providing the said services and therefore the total amount, including fixed monthly retainer/service fee, cost of cash reward/gift items/expenses and the mark up in form of 15% management fee, is in respect of service being provided by appellant to the clients and constitutes the value of such taxable service.
28. That as can be observed from Clause - V (A) of the agreement with M/s Symantec Software Solutions Private Ltd., it provides for a fixed service price of Rs. 70,500/- in a month in lieu of services provided by Appellant to M/s Symantec Software Solutions Private Ltd. Apart from this in terms of clause V (b) of 17 ST/60934 OF 2019 the agreement, Appellant also charges for the various expenses such as (i) Collateral or additional web development, travel, telecom, communication, courier costs a tactical promotional expenses; (ii) Selection, procurement and redemption of rewards /gifts to consumer and retail channel partners of the client; and
(iii) Purchase of media space in Indian print publications and web properties. The Appellant adds a mark up on the said expenses as per Clause V (B) of the Agreement in form of Management fee @10% in respect of (i) and (ii) above and @5% in respect of (iii) above. This management fee is over and above the cost of expenses on the services provided by Appellant as well as fixed service fee of Rs. 70,500/- per month to be paid by the client to Appellant for various services being provided by them to the clients as per Clause V (B) of the agreement, management fee of 10%/ 5% referred in Clause V (B) is nothing but the mark up on various expenses incurred by Appellant for providing the said services. Thus the total amount received by the Appellant from clients, including (i) Fixed monthly service fee of Rs. 70,500/-;
(ii) Cost of various expenses incurred by them for providing these services ; and (iii) Mark up of 10%/ 5% on the cost of the expenses named as Management fee in respect of services provided by them to clients. Accordingly, all the above amounts should be taken consideration for determining the value of taxable services provided by Appellant to the clients.
29. That in the invoices No. E2E/DL/0810/217 dated 09/08/2010 and E2E/DL/0810/218 dated 08.08.2010 issued to 18 ST/60934 OF 2019 M/s Symantee Software Pvt. Ltd. in addition to the cost of goods/materials, they have charged services charges for various services being provided by them to client. Over and above these amounts, they have also charged a management fee of 15% on these costs of goods/materials and service charges. While service charges are being separately charged by the Appellant in respect of services provided by them, the management fee of 15% on the cost of material/goods and service charge is nothing but a mark up on these expenses and all above amounts, including the cost of goods/materials, service charges and the mark up on the cost of goods/material and service charges named as Management fee are inherent part of value of the service being provided by the Appellant to the client.
30. That in view of above it is observed that Appellant provided the services to their clients and received payment on the cost of various goods/materials/services along with mark-up in form of management fee, in addition to fixed service fee in most of the cases. Accordingly total amount recovered from clients is includable in assessable value of the taxable service and therefore the contention of Appellant that they received the reimbursement without any mark up is not sustainable.
31. That as regards relying upon decision of Hon‟ble Supreme court in the case of M/s Intercontinental Consultants & Technocrats Pvt. Ltd. holding that reimbursable expenses are not includible in the value of taxable service, it is argued by Revenue 19 ST/60934 OF 2019 that the facts of the relied upon case are completely distinguishable from the present case. In the case of M/s Intercontinental Consultants & Technocrats Pvt. Ltd. the demand of service taxwas on the gross value including reimbursable and out of pocket expenses such as travelling, boarding and lodging, transportation, office rent, office supplies and utilities, testing charges etc. which, according to department, were essential expenses for providing the taxable services of consulting engineers under sub-rule (1) of Rule 5 of Valuation Rules. However, in the present case, the issue is that the Appellant has received amount from the service recipients on account of expenses for direct costs such as purchase of goods to be delivered to the distributors/dealers of its clients including a percentage of cost of goods/expenses and a separate fixed management fee/service fee for sale promotion activities.
32. further that, the appellant did not fulfill the conditions of pure agent as per Rule 5 (2) of Service Tax (Determination of Value) Rules, 2006 (hereinafter referred to as the "Valuation Rules") as conditions (ii), (vii) & (viii) ibid were not satisfied as the appellant distributes the merchandise goods by realizing the mark up on the cost of such goods and the activity of procurement of these merchandise goods is not in addition to the provisions of taxable service, but is an essence of such service. He prayed that the appeal may be dismissed.
33. Heard both sides and perused the records carefully.
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34. From the facts and evidence narrated above as well as on perusal of Show cause notices it is seen that the demand of service tax is on redemption receipts/reimbursable expenses. The main argument advanced on behalf of the Revenue is that appellant has not discharged service tax on 15% of the expenses which was received in the nature of management fee. The Revenue argues this to be a markup on the cost/expenses, and that it has to be included in the taxable value, whereas the appellant contends that they have already discharged service tax on this 15% of expenses received by them as management fee. The appellant has strongly relied on the judgment of the Hon‟ble Apex Court in the case of M/s Intercontinental Consultants and Technocrats Pvt. Ltd. (supra) to argue that the demand is raised merely on reimbursable expenses and therefore cannot be included in the taxable value as these expenses are not in nature of consideration received for providing services.
35. To understand better, the demand of service tax raised as per various show cause notices are given in para 23.5 of the impugned orderwhich is reproduced as under:-
SCN Period Redemption Sales of Reimburse- Total Receipts Rate of Total tax Receipt Goods ments during the ST (incl payable receipts Receipts year cesses) SCN- 2006- 2,39,83,882 0 33,85,887 2,73,69,769 12.24% 33,50,060 I 07 2007- 4,18,13,191 452761 - 4,22,65,952 12.36% 52,24,072 08 2008- 4,70,83,777 0 - 4,70,83,777 12.36% 58,19,555 09 2009- 10,92,39,828 4403214 - 11,36,43,042 10.30% 1,17,05,233 10 2010- 12,21,85,352 15720564 - 13,79,05,916 10.30% 1,42,04,309 11 Total 34,43,06,030 2,05,76,539 33,85,887 36,82,68,456 4,03,03,229 21 ST/60934 OF 2019 for SCN-
I SCN- 2011- 16,13,17,124 - - 16,13,17,124 10.30% 1,66,15,664 II 12 SCN- 2012- 8,24,86,920 - - 8,24,86,920 12.36% 1,01,95,383 III 13 SCN- 2013- 7,11,84,507 - - 7,11,84,507 12.36% 87,98,405 IV 14 SCN- 2014- 9,40,56,967 - - 9,40,56,967 12.36% 1,16,25,441 V 15 Grand Total 77,73,13,974 8,75,38,122
36. The above table shows that demand is raised for the different periods on redemption receipts, sale of goods receipts and reimbursement receipts. In para 10.1 the adjudicating authority observes as under:-
"10.1 I observe that the while there is no dispute regarding payment of service tax on management fee, the show cause notices make allegation that the Noticee did not pay service tax on gross amount, i.e., „redemption receipts‟, „reimbursement receipts‟ and „cost of goods used for distribution to their clients‟ viz. channel partners (distributors/consumers), which was received by the Noticee in the course of providing the business auxiliary services. As per the show cause notice, the aforesaid constituents of gross amount appeared includible in the taxable value in terms of Section 67(1) of the Finance Act, 1994 read with the Rule 5 (2) of the Service tax (Determination of Value) Rules, 2006".
37. It is very much clear that the appellant has discharged service tax on the amounts received by them as management fee. The demand raised in SCN are only reimbursements and amounts received under the head sale of goods There is no doubt that the amount received under the head „sale of goods‟ cannot be subjected to levy of service tax. In para 22.8 of the impugned order, the adjudicating authority also has taken this view wherein he has stated that sale of goods is not covered under „service‟ in terms of the Finance Act, 1994 and hence not liable to levy of service tax. In para 22.9 the demand has been re-
22 ST/60934 OF 2019 quantified by dropping the demand of service tax on sale of goods to the tune of Rs. 21,28,710/-
38. The demands confirmed by the adjudicating authority as seen from the show cause notice is on redemption receipts and reimbursement receipts. In para 13 of the impugned order it is observed by the adjudicating authority that the terms redemption receipts and reimbursable expenses are interchangeably used by the appellant in their accounts representing the charges received in the form of cash rebate, gift items and other expenses on behalf of their clients. It is thus clear that these are receipts reimbursed for the expenses incurred for providing the services.
39. In page 239, the adjudicating authority has reproduced part of the agreement entered by appellant with their client JK Paper Ltd. Clause IV of the agreement stipulates the consideration and cost that is to be paid by the client to the appellant. It reads as under:-
"IV: Management Fees: A fixed Management Fee of Rs. 1,59,850/-
per month would be paid to EBPL on a monthly basis on top of the following cost heads :-
Fixed Retainer Program Manager 25,000 Database Manager - Shared Cost 15,000 Process Executive - Dedicated (2) 13,000 Data Entry Operator (2) 11,000 Reward Mgmt, Sourcing and Ful. 20,000 Call Centre - 2 Agent (6 days) 18,000 Communication Cost of Call Center 24,000 Communication Cost for program team 8,000 Paper Stationery Cost 5,000 Management Fees (15%) 20,850 1,59,850 23 ST/60934 OF 2019 V. Relationship Program to be run with the top performing dealers. The billing for that to be done on actual. The cost of merchandise to be used for the relationship activity will be as per annexure (Attached Annexure A).
VI. A Government/service Taxes at prevailing rates to be changed over and above the mentioned costs.
14. Other costs.
i. Collateral and Creative Designing Costs : The creative art works for the welcome kit, theme and booster branding, channel communication etc. would be designed by EBPL for every year and the same would be charged as separate cost.
ii. Any deviation/overspend on the Direct costs of Communication;
Stationary etc. will be notified to JK Paper and approval taken before billing.
iii. Any other direct cost of Printing, Gift procurement, relationship gifts etc. will be billed on actual and a management fees of 15% levied on the same.
iv. A Government/service Taxes at prevailing rates to be changed over and above the mentioned costs".
40. From the agreement it can be seen that the Appellant has received fixed amount per month as management fee and also gets reimbursed the costs incurred for providing the services. Besides these, the Appellant also receives 15% of the costs as management fee. Although the demand raised in the SCN are only on reimbursement receipts /redemption receipts, the entire discussion by the adjudicating authority has been on a different angle stating that the amount shown as 15% of the costs as management fee is a markup on the costs and therefore leviable 24 ST/60934 OF 2019 to service tax. There is no such whisper in the SCN. The discussion made by the adjudicating authority as to how the various expenses are leviable to service tax. The relevant portion in page 240 reads as under :-
"As a part of the services being provided by the Noticee to its clients, they are also required to incur various expenses on marketing and promotional activities including distributing cash rewards and gift items to the distributors/dealers of the clients, on which besides the actual expenses being incurred by them, they are also adding a management fee of 15%, as is evident from Clause 14
(iii) of the Agreement referred above. I accordingly observe that the noticee is receiving three types of payments from its clients;, (i) Fixed Retainer fee/Service Fee per month; (ii) Cost of cash reward/gift items/expenses at actual and (iii) a mark up in form of Management fee @ 15% on these expenses. Now, since there is specific provision for fixed retainer/service fee per month for the services being provided by the Noticee to their clients separately, which is over and above the cost of cash reward/gift items/expenses for distribution to the clients‟ dealers, I observe that this management fee @ 15% is nothing else but a mark up on the said expenses being incurred by the Noticee for providing the said services and therefore, the total amount, including fixed monthly retainer/service fee, cost of cash reward/gift items/expenses and the mark-up in form of 15% management fee, is in respect of the service being provided by the Noticee to the clients and constitutes the value of such taxable service".
41. Form the above it is seen that the finding by the adjudicating authority is confined to the alleged mark up on the expenses incurred being 15% of the cost and shown as management fee in the table of the agreement. At the cost of repetition it has to be stated that the SCN does not specifically say that the appellant has not included this 15%management fee in the taxable value. In the SCN , the demand is only on reimbursements.
42. It is seen from the agreement, that there is a fixed management fee as well as variable management fee. The variable management fee is 15% of the costs billed on actual.
25 ST/60934 OF 2019 The percentage differs from agreement to agreement. The entire argument of the Revenue also has been harping upon this variable management fee and contending that this amount has to be included in the taxable value. We have to say that there is no such allegation (or figure) in the show cause notice that the appellant has not included in their taxable value this 15% management fee for discharging their liability. When the figures and description with regard to this amount in the nature of 15% management fee is so clear in the agreements, invoices, and accounts, we do not understand why the table in the show cause notice has not specified this description of 15% management fee. The SCN speaks about reimbursements only. In the show cause notice, the allegation is that the appellant received markup from the client on the purchase cost of deliverables and materials used for distribution. That as they have received mark up on the cost of such goods they cannot be considered as pure agents and therefore the reimbursable expenses are to be included in the total taxable value. There is nothing mentioned in the show cause notice that appellant did not discharge service tax on the variable management fee (15% of cost) received by them. The relevant part in para 4.2 of show cause notice dated 19.04.2012 is as under :-
"4.2 Further on scrutiny of assessee‟s invoices (RUD-6 supra), it is observed that the assessee provided these services and received their charges from the clients after adding mark up/margin on the cost of the deliverable goods and materials. The assessee does not appear to fulfill all the conditions of pure agent as per Rule 5 (2) of Service Tax (Determination of Value) Rules, as the assessee has received the mark up from the client on the purchase cost of the deliverables and materials used for distribution. Therefore, the
26 ST/60934 OF 2019 assessee does not appear to qualify as a pure agent in terms of Rule 5 (2) of Service Tax (Determination of Value) Rules, as the assessee has received the mark up from the client on the purchase cost of the deliverables and materials used for distribution. Therefore, the assessee does not appear to qualify as a pure agent in terms of Rule 5 (2) of Service Tax (Determination of Value) Rules, 2006 as the conditions (ii), (vii) & (viii) ibid do not satisfy as much as that the client distributes the merchandise goods by realizing the mark up on the cost of such goods and the activity of procurement of these merchandise goods is not in addition to the provision of taxable service, but is an essence of such service".
43. The learned Counsel appearing for the appellant has asserted that they have discharged service tax on both the fixed management fee as well as variable management fee. He adverted to the invoices in page 245 and 246 of the appeal paper book.
Purposely left blank 27 ST/60934 OF 2019 28 ST/60934 OF 2019 29 ST/60934 OF 2019
44. It is seen from the above invoices that the appellant has collected and accounted the service tax on variable management fee also. Department who has conducted extensive scrutiny of the accounts do not have a case that the service tax collected under these invoices are not deposited to the Government. There is no such allegation in the show cause notice. The Department has accepted and admitted in the show cause notice as well as impugned order that appellant has discharged service tax on management fee. Further, the table of show cause notice itself describes the amounts on which tax is demanded as reimbursements and not as management fee. In table II of show cause notice dated 19.04.2012 it is specifically and expressly shown in the fifth column that the demand is raised on the reimbursements received by the appellant. Interestingly though the adjudicating authority records a finding that the 15% variable management fee has to be subjected to service tax, has proceeded to confirm the demand on reimbursements as raised in the SCN. He does not discuss anything with regard to the argument of the appellant that they have paid service tax on these amounts as evidenced by the invoices. On examination of the records as well as considering the submissions of both sides, we find that the entire demand is raised on costs/expenses incurred by the appellants for providing the Business Auxiliary Service which was reimbursed by the clients.
45. The issue as to whether reimbursable expenses are to be included in the taxable value during the disputed period was 30 ST/60934 OF 2019 considered by the Apex Court in the case of M/s Intercontinental Consultants and Technocrats Pvt. Ltd. (supra). The relevant part of the judgment of the Hon‟ble Apex Court reads as under :-
"21. Undoubtedly, Rule 5 of the Rules, 2006 brings within its sweep the expenses which are incurred while rendering the service and are reimbursed, that is, for which the service receiver has made the payments to the assessees. As per these Rules, these reimbursable expenses also form part of „gross amount charged‟. Therefore, the core issue is as to whether Section 67 of the Act permits the subordinate legislation to be enacted in the said manner, as done by Rule 5. As noted above, prior to April 19, 2006, i.e., in the absence of any such Rule, the valuation was to be done as per the provisions of Section 67 of the Act.
22. Section 66 of the Act is the charging Section which reads as under:
"there shall be levy of tax (hereinafter referred to as the service tax) @ 12% of the value of taxable services referred to in sub-clauses of Section 65 and collected in such manner as may be prescribed."
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 emphasized 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.
31 ST/60934 OF 2019
26. It is trite that rules cannot go beyond the statute. In BabajiKondajiGarad, this rule was enunciated in the following manner :
"Now if there is any conflict between a statute and the subordinate legislation, it does not require elaborate reasoning to firmly state that the statute prevails over subordinate legislation and the byelaw, if not in conformity with the statute in order to give effect to the statutory provision the Rule or bye-law has to be ignored. The statutory provision has precedence and must be complied with."
27. The aforesaid principle is reiterated in ChenniappaMudaliar holding that a rule which comes in conflict with the main enactment has to give way to the provisions of the Act.
28. It is also well established principle that Rules are framed for achieving the purpose behind the provisions of the Act, as held in Taj Mahal Hotel :
"the Rules were meant only for the purpose of carrying out the provisions of the Act and they could not take away what was conferred by the Act or whittle down its effect."
29. In the present case, the aforesaid view gets strengthened from the manner in which the Legislature itself acted. Realising that Section 67, dealing with valuation of taxable services, does not include reimbursable expenses for providing such service, the Legislature amended by Finance Act, 2015 with effect from May 14, 2015, whereby Clause (a) which deals with „consideration‟ is suitably amended to include reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service. Thus, only with effect from May 14, 2015, by virtue of provisions of Section 67 itself, such reimbursable expenditure or cost would also form part of valuation of taxable services for charging service tax".
46. The Hon‟ble Apex Court has categorically held that prior to 14.05.2015 reimbursable expenses for providing taxable service are not includable in the assessable value.
47. Another contention raised by the Revenue is that the appellant is not a pure agent as they have received mark up on the sale value of goods. Though the decision of the Hon‟ble Apex Court applies on all its‟ four to the facts of the case before us, we may proceed to address this contention of the Revenue.
48. The first argument on the above allegation is that the goods/gifts procured by the appellant were not given to the 32 ST/60934 OF 2019 service recipients (Appellant‟s clients) but were directly given to the dealers/distributors and that therefore the appellant cannot be considered as pure agent. Here ,it has to be noted that the appellant provides services as per the stipulations in the agreement with the client. There is a contractual agreement with the client as to how to provide the service and also to incur expenditure or costs for providing the services. There is no requirement that the goods procured have to be delivered to the client only. It cannot be expected that the goods have to be first given to the client and then delivered to the actual parties. It depends on the nature and kind of service agreed between the parties.
49. Another allegation is that the appellant has received mark up on the costs and expenses. This mark up as noted by the Revenue is variant management fee upon which service tax has already been discharged. From the agreements it is clear that the appellants were entrusted for providing a host of services. One of them was to procure goods from third parties for the client and deliver to the necessary parties. The amounts received were only reimbursement of expenses and we do not find any grounds by which the decision of the Hon‟ble apex Court is not applicable to the facts of this case.
50. From the foregoing we have no hesitation to conclude that the demand is raised on reimbursable expenses and that these cannot be included in the taxable value for the disputed period.
33 ST/60934 OF 2019 The decision of the Hon‟ble Apex Court in Intercontinental Consultants and Technocrats Ltd. (supra) has been consistently followed by the Tribunal. Applying the decision of the Apex Court in the above case we hold that the demand cannot sustain. The issue on merits is answered in favor of appellant and against the Revenue.
51. The learned Counsel for appellant has argued on the ground of limitation also. The Revenue has not been able to establish any evidence of positive act on the part of the appellants for willful suppression or misstatement of facts. The demandsin the show cause notice are prepared after scrutiny of the accounts, balance sheet, service tax returns of the appellant. There is no evidence to show that the appellant had suppressed receipts in their accounts. Moreover, the issue as to whether reimbursable expenses are includable in the taxable value is an interpretational in nature and has travelled upto the Apex Court. For these reasons we hold that the demand raised for the extended period cannot sustain. The appellant succeeds on the ground of limitation also.
52. The learned Counsel has argued that the receipts received in respect of their client SSIPL are not subject to levy of service tax as these are export of services. The issue on merits and limitation having been answered in favor of appellant we do not think it necessary to delve into this issue.
34 ST/60934 OF 2019
53. In the result, we hold that the demand of service tax cannot sustain. The impugned order is set aside. The appeal is allowed with consequential reliefs, if any.
(Order pronounced in open court on 31.01.2022) (SULEKHA BEEVI C.S.) MEMBER (JUDICIAL) (P.V. SUBBA RAO) MEMBER (TECHNICAL) PK