Custom, Excise & Service Tax Tribunal
Modern Business Solutions vs Service Tax - Ahmedabad on 18 October, 2018
CUSTOMS EXCISE & SERVICE TAX APPELLATE TRIBUNAL,
West Zonal Bench, Ahmedabad
Appeal No. ST/120/2012-DB
(Arising out of OIO No. STC/52/COMMR/AHD/2011 dated 30.11.2011
passed by Commissioner of Service Tax-SERVICE TAX - AHMEDABAD)
Modern Business Solutions - Appellant
Vs.
C.S.T. Service Tax - Ahmedabad - Respondent
Represented by:
For the appellant : Shri S.J. Vyas, Advocate
For the respondent : Shri Jeetesh Nagori, Addl. Commr., (AR)
CORAM:
Hon'ble Mr. Ramesh Nair, Member (Judicial)
Hon'ble Mr. Raju, Member (Technical)
Date of Hearing: 09.10.2018
Date of Decision: 18.10.2018
ORDER NO. A/12175/2018
Per: Raju
This appeal has been filed by Modern Business Solutions against confirmation of demand and imposition of penalty.
2. Ld. Counsel for the appellant argued that the appellant is involved in providing services to ICICI Bank. The appellant had entered into agreement in the year 2004. Revenue sought to tax the services provided by the appellant to ICICI Bank under the head of Business Auxiliary Services relying on the agreement for the year 2009. He argued that the agreement of the year 2009 is not relevant in the instant case. The appellant also argued that the service provided by them does not constitute business auxiliary services but it constitutes only supplies of manpower services. He 2 ST/120/2012-DB argued that they had themselves mistakenly considered it as a business auxiliary services earlier and taken registration under BAS and paid tax under BAS. He argued that Revenue is seeking to include certain reimbursements in respect of office establishments for sale of different product.
2.1 Ld. Counsel argued that they are basically managing the sale team on behalf of the service recipient to extend the business of service recipient and for that they were being paid management fee as a certain agreed percentage of the amount of management fee. However, they are also receiving reimbursements of salaries, rent and incentives. He argued that the same are not included in their profit and loss account as income or as expense in their Balance Sheet. Ld. Counsel argued that Rule 5 (2)(vi) of Service Tax (Determination of Value) Rules, 2006 has been invoked to include the value of reimbursement in the assessable value. Ld. Counsel relied on the decision of the Hon'ble Apex Court in the case of Intercontinental Consultant and Technocrats Pvt. Ltd. 2018(10)G.S.T.L. 401 (S.C.) to assert that no such inclusion of reimbursement can be made for arriving at the assessable value. Ld. Counsel also relied on the decisions of Tribunal in the case of Malabar Management Services Pvt. Ltd. 2008 (9) STR 483 to assert that such reimbursement cannot be included in the assessable value.
2.2 Ld. Counsel further argued that they also provide service to Tata Teleservices under a different agreement. He pointed out that para 9.1.1 of the order in original elaborated a scope of the services provided by them. He pointed out that from the description of the services, it is apparent that the services provided by them is not BAS services but temporary supply of manpower service and on this basis the demand should fail.
3 ST/120/2012-DB
3. Ld. AR relied on the impugned order. He argued that the service provider never disputed that the service provided by them is BAS service and they had themselves registered under BAS service itself. Ld. AR pointed out that the appellant themselves started paying taxes on service provided by them to both these clients from April, 2008 onwards. He read out reply to question 15 from the letter of the appellant dated nil received on 11/03/2010:
"Q.15 In your statement dated 03.02.2010, you had stated that from April 2007 in case of M/s ICICI Bank and from June, 2007 in case of M/s TATA Teleservices, service tax is being paid on the entire gross amount. Please state who directed you to pay service tax on the entire amount? Is their any order in writing?
Ans. On 03.02.2010, through over sight the year was mentioned as 2007 which in actual is 2008. Accordingly, we started charging service tax on the entire amount from April, 2008 onwards. The decision of charging service tax on entire amount was as per agreement with our client. Copy of such agreement has also been submitted to you and if desired it can resubmitted. The law provisions are clear that no service tax is required to be charged and paid the reimbursable amount received from the client to be charged and paid on the reimbursable amount received from the client and we are also of the same opinion. The law provisions have not changed even today but just because it is not objected by the client rather agreed by the client that we charge service tax on the entire amount from April, 2008 onwards."
3.1 Ld. AR argued that the agreement with ICICI bank was entered in the year 2004 did not specify the scope of work. However, the agreement entered in the year 2009 clearly describes the scope of work. He argued that the agreement entered in the year 2009 was merely the continuation of earlier agreement and, therefore, the description of service provided as elaborated in the agreement of the year 2009 can be interpreted to be the nature of service provided under agreement of the year 2004. He further argued that the rent which has been claimed as reimbursable expense has nothing to do with ICICI Bank. He argued that the rent agreement is between the owner of the property and the appellant and not between the owner of the property and the ICICI Bank. In these circumstances, he argued, that rent cannot be considered as reimbursable expense as it was a 4 ST/120/2012-DB liability of the appellant. He particularly relied on the clause 6(g) & (i) of the agreement which reads as follows:
"(g) It shall provide such suitably qualified, experienced and competent personnel and sub-contrators as may reasonably be required for the performance of the services. If so requested by ICICI Bank, the Service Provider shall provide evidence of the previous experience, qualifications and competence of any personnel engaged in the performance of such services;
(i) subject to the terms of this Agreement, shall be responsible for the selection, hiring, assigning and supervising of the personnel and shall employ sufficient number of personnel to provide the services in prompt and efficient manner. The Service Provider agrees that the personnel shall work under the Supervision, control and direction of the Service Provider. The Service Provider shall be responsible for all negotiations with personnel relating salaries and benefits, and shall be responsible for assessments and monitoring of performance and for all disciplinary matters."
He argued that agreement was not a for the manpower supply but for the services under BAS. He further argues that even if it is considered as manpower supply services, still salaries of personnel needs to be included in the assessable value. Ld. AR argued that there is no specific agreement between the reimbursement of rent expenses and other expenses. If this is observed, he relied on the letter dated nil, received on 17.03.2010 wherein responses of classification no. 5 has been stated:
"Q.5 Is there an specific agreement regarding reimbursement of rent expenses and other expenses?
Ans.- No there is no specific written agreement regarding reimbursement of the expenses however as per verbal agreement rent expenses however as per verbal agreement rent expenses and other office expenses are reimbursed by the client at actual."
3.3 Ld. AR relied on the decision of the larger bench of Tribunal in the case of Bhagawathy Traders Vs. CCE 2011 (24) STR 290 (Tri- LB) to assert that only when the service recipient has an obligation, legal or contractual, to pay certain amount to any third party and the said amount is paid by service provider on behalf of the service recipient, the question of 5 ST/120/2012-DB reimbursement the expenses incurred on behalf of the recipient shall arise. Ld. AR also relied on the decision of Tribunal in the case of Impact Communications Vs. CST, New Delhi 2018 (8) GSTL 396 (Tri-Del). And on the decision of Tribunal in the case of Krishan Kumar Vs. CCE, Chandigarh 2014 (33) STR 60 (Tri-Del). Ld. AR also relied on the case of M/s Jecobs Engineering India Pvt. Ltd. Vs. CST Service Tax, Ahmedabad 2018-TIOL- 2914-CESTAT-AHM. Ld. AR pointed out that in this case extended period of limitations has rightly been invoked as the appellant has not disclosed gross amount received by them in their ST-3 returns. He argued that the appellant had disclosed only the commission received by them as taxable value without disclosing the gross amount received by them. In these circumstances there is a clear suppression of facts. Ld. AR further pointed out that the appellant had admitted the liability for the period April, 2008 onwards. He relied on the decision in the case of M/s Vasan Traders Vs. Commissioner of Central Excise And Service Tax Lucknow 2018-TIOl-2660- CESTAT-ALL wherein following has been observed:
"5. As regards limitation, we note that admittedly the show cause notice stands issued by invoking the longer period of limitation. It is undisputed fact that for the subsequent years, the appellant had taken registration and had paid duty on the same very activities. Even though we consider the appellant‟s plea that the same was the mistake on the part of the assessee, we really fail to understand as to why the same very mistake was not done for the period in question. Once assessee entertains a bona fide belief that the services provided by him are taxable and starts paying tax on the same for the subsequent period, a legal obligation lies upon him to discharge his tax liability for the previous year also. The fact that the appellant started paying duty for the subsequent period, even though the same was under a wrong belief, the same belief should have made him to pay duty for the previous year also instead of suppressing the value of the work done during that period. The fact that during the period 2005-06, appellant had done the same service came to the notice of the Revenue only by the audit conducted in subsequent years. In this scenario we hold that the appellant acted with a mala fide and suppressed the work done by him during the period 2005-06 in which case, the longer period stands rightly invoked by the Revenue."
6 ST/120/2012-DB He asserted that the appellant should have paid on their own the entire liability for the period prior to that.
3.4 Ld. Counsel for the appellant in rebuttal pointed that in reply to question no. 10 & 12 of their letter no. received by the Revenue on 11/03/2010, they have clearly specified:
"Q.10. What are the incentives paid to the persons employed by Modern Business solution? Who decides such incentives? Whether the salary has been received on actual basis, if yes then produces evidence to the effect?
Ans. We do not employ any personnel as states above, we simply manage the personnel. The incentive to be paid to them is again decided by the client which is based on their performance. It is reiterated that incentives are decided by the client. The salary amount is received on actual basis and evidence to that is no TDS is deducted on the part of salary amount and other expenses which are incurred on behalf of the client and reimbursed at actual.
Q.12. Who pays the EPF contribution of the employees? Ans.- As the personnel are on out pay roll, EPF contribution is paid by us which is again reimbursed by the client."
He argued that the persons employed were persons of the service recipient that were merely managing those employees for a commission. He argued that since the employees were of Service Recipient, the liability to pay salaries to those employees would be of service recipient. Ld. Counsel further argued that larger bench on this issue was constituted as there was confusion on the issue of includability of amounts in the assessable value and thus, no malafide can be alleged. And, therefore, extended period of limitation cannot be raised. He argued that the matter was clarified with the decision of larger bench in the case of Bhagawathy Traders (supra).
4. We have considered the rival submission. First we take up the issue regarding the services provided by the appellant to ICICI Bank. There are two agreements on record. The agreement entered in the year 2004 and 7 ST/120/2012-DB the agreement entered in the year 2009. The agreement entered in the year 2004, para 2 records the scope of services as follows:
"SCOPE OF SERVICE The services to be provided hereunder by the Service Provider are more particularly described in Schedule A annexed hereto."
However, under the Schedule A, only following has been mentioned:
"SCHEDULE A SCOPE OF SERVICE Activities handled by the Service Provider and Guidelines issued by ICICI Bank."
It is apparent that the contract does not specify the nature of services provided by the appellant. In these circumstances the scope of services has to be interpreted by the terms of this agreement and the agreement entered in the year 2009 which is practically identical and which clearly described the scope by service as follows:
"8.1.3 The service provider shall perform/provide the following services:
A) the relationship between ICICI Bank and the service provider shall be on a principal-Principal basis. The service Provider shall perform the following functions/ provide the following services and such other services as may be assigned in writing by ICICI Bank to be performed by the Service Provider, from time to time. Upon such conditions and charges as may be stipulated by ICICI Bank in writing:
1. The service provider shall identify eligible customers for the purchase of retail finance products of ICICI Bank including credit cards/commercial cards/ prepaid cards/ merchant acquisition and other retail finance products. The Service Provider shall take into consideration the eligibility criteria notified by ICICI Bank from time to time.
2. The service provider shall provide certain services relating to issuance of credit cards, as mentioned in the following sections for on behalf of ICICI Bank, on the terms and conditions herein contained, in consideration of ICICI Bank agreeing to consider granting credit cards to the customers introduced by the Service Provider to the Bank."
8 ST/120/2012-DB From the above description it is apparent that the contract entered with the appellant by ICICI Bank was for identifying eligible consumers for the retail products of ICICI including credit gross commercial/ product gross/ emergence and other retail finance products. The appellant was also required to provide certain services related to issuance of credit across as described in the said contract. From above it is apparent that the contract entered into by the appellant in the year 2009 was not a contract for supplying the manpower services but was a contract for promotion of the services provided to the service recipient. Para 4 of the agreement of the year 2004 clearly specifies that the service provider will be paid charges by ICICI for the services rendered on terms as shall be specified to the service provider in writing by ICICI bank from time to time. The appellant had produced an email dated 26.10.2004 from ICICI bank regarding the service agreement entered in the year 2004. The terms of the agreement had been clarified in the email as below:
"8.1.2. M/s MBS produces a copy of e-mail dated 26.10.2004 from ICICI Bank regarding this service agreement. The terms are reproduced as under"
1. Service Charges (Management fees) 5%
2. Service Tax of 8 % 10/2% to be on the Management fees.
3. Management fees applicable only on salaries and Incentives. It is not to be paid on petty cash.
4. Periodic audits to check on compliance with labour regulations (PF, ESIC, etc.)
5. No re-imbursement for TDS deduction. Onus of getting the TDS certificate from IT authorities to lie with Modern Business Solutions."
4.1 The argument of the appellant that no conclusion regarding nature of services provided can be reached on the basis of scope of the agreement of 2009 is misplaced. A perusal of the agreement of 2009, clearly indicates that it is a continuation of earlier arrangement. The fact that agreement of 2004 does not at all describe the nature of service to be provided cannot be used by appellant in his favour in these circumstanced. It is apparent that
9 ST/120/2012-DB the appellants were engaged in providing BAS where the remuneration was based on actual expenses by adding a percentage of margin over certain expenses. That does not convert the expenses into reimbursement. In terms of the decision of Hon'ble Apex Court in Intercontinental Consultant and Technocrats Pvt. Ltd. (supra) reimbursements cannot be included in the assessable value, however, what constitutes reimbursement has to be determined in light of the decision of larger bench in the case of Bhagawathy Traders (supra). The larger bench has clarified as follows:
"6.1 Having analyzed the various decisions cited on behalf of the assessee and on behalf of the department, it would be appropriate to consider the scope of the term "reimbursements" in the context of money realized by a service provider. A person selling the goods to another cannot treat cost of raw materials or the cost of labour or other cost components for inputs services, which went into the manufacture of the said goods as reimbursements. If the buyer enters into a contract for supply of raw materials after negotiating prices from the supplier for the raw materials and the raw materials are received by the manufacturer and the manufacturer pays the amounts to the supplier of raw materials and recovers the same from the buyer, it can certainly be considered as reimbursements. It is to be noted that in such a case, the manufacturer has no role about choosing the source of the materials procured or the price at which the materials procured and the manufacturer is not under any legal or contractual obligation to pay the amount to the supplier. However, if the manufacturer procures raw materials from a source of his choice at a price negotiated between him and supplier of the raw materials and uses the material for manufacture of the final products which he sells, the question of his collecting the cost of raw materials as reimbursement does not arise. The concept of reimbursement will arise only when the person actually paying was under no obligation to pay the amount and he pays the amount on behalf of the buyer of the goods and recovers the said amount from the buyer of the goods.
6.2 Similar is the situation in the transaction between a service provider and the service recipient. Only when the service recipient has an obligation legal or contractual to pay certain amount to any third party and the said amount is paid by the service provider on behalf of the service recipient, the question of reimbursing the expenses incurred on behalf of the recipient shall arise. For example, when rent for premises is sought to be claimed as reimbursement, it has to be seen whether there is an agreement between the landlord of the premises and the service recipient and, therefore, the service recipient is under obligation for paying the rent to the landlord and that the service provider has paid the said amount on behalf of the recipient. The claim for reimbursement of salary to staff, similarly has to be considered as to whether the staff were actually employed by the service recipient at agreed wages and the service recipient was under obligation to pay the salary and it was out of expediency,
10 ST/120/2012-DB the provider paid the same and sought reimbursement from the service recipient.
6.3 The various Circulars of the Board relied upon by the learned Advocate for the assessee clearly referred to amounts payable on behalf of the service recipient. For example, the Customs House Agent paying the Customs duty to the Customs Department, paying the charges levied by the Port Trust to the Prot Trust, paying the fee for testing to the Testing Organization are clearly on behalf of the importer/exporter and the same are recoverable by the CHA as reimbursement, that too on actual basis. These Circulars cannot be held to be in support of the claim of the assessee that they can split part of the amount as reimbursable expenses and the rest as towards service charges.
6.4 The claim for reimbursement towards rent for premises, telephone charges, stationery charges, etc. amounts to a claim by the service provider that they can render such services in vacuum. What are costs for inputs services and inputs used in rendering services cannot be treated as reimbursable costs. There is no justification or legal authority to artificially split the cost towards providing services partly as cost of services and the rest as reimbursable expenses."
In the instant case, in the context of BAS, the rent and cost of manpower is not a reimbursable expense but a cost of service. Just by terms of the contract, an assessee cannot convert a cost into a reimbursable expense. The Institute of Cost Accountants of India, a statutory body under an Act of Parliament has a Cost Accounting Standard Board. It has formulated procedure to determine the cost. The CASI prescribes classification of costs. It classified cost in under different head like:
1. Direct Material costs to factor in expenses on purchase of material.
2. Direct Labour Costs to factor in expenses in employees labor directly involved in production.
3. Overheads to factor in expenses on capital goods over a period of time.
And so on. All the costs have an associated expense not need to be factored in.
11 ST/120/2012-DB Now the question arises if all the expenses can be converted into reimbursable expense by way of a contract, or are there expenses which are so integral to the activities of the service provider that they cannot perform without incurring those expenses.
Here the distinction between the so called 'reimbursable expenses' and 'free supplies' become relevant. A free supply changes the nature of contract. For example a contract for 'painting of building' would became 'a labour contract' if paint and painting equipment is supplied free. However, a painting contract will remain a painting contract even if the agreement has clause where actual cost of paint and equipment is reimbursed. All expenses incurred by a service provider cannot be called reimbursable expenses, only the expenses that qualify the test laid down in the decision of Bhagawathy traders (supra) can be called reimbursable expenses.
In this backdrop, the appellants are not entitled to exclude the rent and salaries from the assessable value. The demand on this count in respect of services provided to ICICI is upheld on merit. 4.2 Now we examine the contract entered into by the appellant with Tata Teleservices Ltd. Annexure A to the agreement specifies the scope of services and obligation of the agency. Annexure A reads as follows:
" Annexure-A SCOPE OF SERVICES AND OBLIGATIONS OF THE AGENCY The Agency shall be responsible for the following"
a) Recruit and deploy at each office one Admin Executive who will be responsible for all administration/HR issues pertaining to this contract at the said office.
b) Recruit and deploy at its HO- needed people to be able to execute this outsourced contract.
c) Assist TTSL to the best of its abilities in fulfilling the scope of the Services entrusted to it viz supply of suitable and adequate number of manpower (to meet the requirements of TTSL from 12 ST/120/2012-DB time to time) for direct sales of the products by the TTSL‟s authorized personnel.
d) The Admin Executive at each office shall collate the needed data required for the billing of fees payable under this Agreement (inclusive of incentive payable, conveyances, deductions if any, etc.) which will be duly approved by the TTSL‟s authorized personnel.
e) On basis on this data the Agency shall raise the monthly bill for the contract and submit the same to TTSL‟s authorized personnel by every month.
f) Once the accepted invoice is handed over by TTSL on the 30th of the months to the Agency, the latter shall ensure that salaries are paid to all its employees on the 1st of every month.
g) The Agency shall facilitate all its employees‟ salaries to be paid through a bank account through a single cheque payment debiting its account and crediting the individual account holder. All employees shall be issued with an ATM card by making necessary arrangements with the concerned bank to allow all these accounts to be NIL Minimum Balance Accounts.
This way, salaries can be paid to the employees of the Agency within 4 hours from the time of receiving credit of payment from TTSL."
Ld. AR had relied on clause 'c' and 'e' of the agreement to assert that the appellants were not engaged in providing manpower services but were providing business auxiliary services to the service recipient. Clause 'c' and 'e' of the agreement reads as follows:
"(c) Alone determine the service conditions of persons engaged by the agency and be solely responsible and liable for hiring, supervising, controlling transferring to other establishments, replacing the persons arising out of transfers/ separations, and directly terminating their services and for payment of salaries, wages and other legal dues of the employees who are employed by the agency for the purpose of rendering the services under this agreement and shall maintain proper books of accounts, records and documents. The employees engaged by the agency shall always be under the agency‟s direct control or supervision and the agency shall be free to transfer agency‟s staff in accordance with the agency‟s needs provided that the agency ensures the fulfillment of the agency‟s obligations under this agreement.
(e) Ensure that the agency‟s employees while on the premises of TTSL/third parties or while carrying out their obligations under this agreement, observe the standards of decorum, safety and general discipline laid down by the agency or its authorized agents and the agency shall be the sole judge as to whether or not the agency and/ or agency‟s employees have observed the same."
13 ST/120/2012-DB 4.3 A perusal of the above terms clearly indicate that the service provided is in the nature of supply of manpower. In these circumstances the demand of service tax under the head of BAS cannot survive. 4.4 Now coming to the issue of limitations, we find that appellants had not declared the gross amount received in the returns filed by them. The Commissioner in his order has observed as follows:
"26.1 It has been contended by M.s MBS that the demand is barred by limitation considering the fact that they were regularly paying service tax and filing ST-3 returns and the department was fully aware of their business activities, I find that M/s MBS had in the ST-3 returns, periodically filed by them, declared the category of Service provided by them; Gross amount received by them; Taxable Value and the Service Tax paid by them. I find that the Gross Amount declared in the ST-3 returns was the same as taxable Value, which clearly means that they had only declared the amount received by them towards the management fees and did not declare the total amount charged and received by them from ICICI bank and TTSL.
They have also not declared the amount charged by them as „Pure Agent‟ in the ST-3 returns. I observe that in the present system of self-assessment documents like invoices and other transaction details are not supplied to the Department. Moreover, M/s MBS did not furnish the required details of amount of taxable value to the Department, the intention will have to be believed as that of evasion.
Once the details are not submitted to the Department, it amounts to mis-declaration or suppression which is rightly invoked in the case before me. I , therefore, conclude that the element of suppression with intent to evade payment of service tax is conspicuous by the peculiar facts and circumstances of the case as discussed above. In 14 ST/120/2012-DB view of the above discussion and findings, the ratio of cases relied by the said service provider cannot be applied in the case before me."
The argument of the appellant that they had bonafide belief is bases on the decision of LB of Tribunal in case of Bhagawathy Traders (supra). We do not find merit in the said argument. The ST-3 form prescribes disclosure of all amounts received in respect of service even if not part of Assessable value. Failure to disclose the same amounts to misdeclaration. Thus, the appellant's argument on limitation is dismissed. Even if they believed that the said amount claimed as reimbursed were not includible in taxable value they were required to declare the same in ST-3 return, in the column prescribed for it.
4.5 Simultaneous penalty under section 76 & 78 cannot be imposed in view of decision of the Hon'ble HC of Gujarat in case of M/s. Raval Trading Company 2016 (2) TMI 172-Gujarat High Court. The penalty under section 76 is set aside. Penalty under section 78 is revised to the amount of revised demand of duty.
5. The appeal is partly allowed in above terms.
(pronounced in the open Court on 18/10/2018)
(Raju) (Ramesh Nair)
Member (Technical) Member (Judicial)
DS