Custom, Excise & Service Tax Tribunal
Dhl Express (I) Pvt. Ltd vs Commissioner Of Service Tax on 8 July, 2015
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL,WEST ZONAL BENCH AT MUMBAI COURT No. I Appln. No.ST/MA(Ors)/97877 & ST/CO/91100/14 APPEAL No.ST/85770/14 (Arising out of Order-in-Original No.MUM-EXCUS-002-COM-004/13-14 dated 29/11/2013 passed by Commissioner of Central Excise, Mumbai-II) For approval and signature: Honble Mr.M.V. Ravindran, Member (Judicial) Honble Mr. Raju, Member (Technical) 1. Whether Press Reporters may be allowed to see :No the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982? 2. Whether it should be released under Rule 27 of the :Yes CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? 3. Whether Their Lordships wish to see the fair copy :Seen of the Order? 4. Whether Order is to be circulated to the Departmental :Yes authorities? ========================================
DHL Express (I) Pvt. Ltd., Appellant
Vs.
Commissioner of Service Tax, Respondent
Mumbai
Appearance:
Shri.N Venkatraman, Sr. Advocate
And Shri Anupam Dighe, Advocate for appellant
Shri.V.K.Singh, Spl. Councel, for respondent
CORAM:
Honble Mr. M.V. Ravindran, Member (Judicial)
Honble Mr. Raju, Member (Technical)
Date of Hearing : 08/07/2015
Date of Decision : /11/2015
ORDER NO
Per: Raju
1. DHL group has an integrated global network which consists of DHL International Gmbh, i.e. the network owner, DHL aviation companies, DHL hub companies (sorting centers where shipments from different countries are received, sorted and consolidated) and various DHL companies in each country across the word (network entities). According to appellant the courier network can be categorised into the origination leg, transit leg and destination leg. Each transportation step is not carried out on an isolated basis but all the steps are aligned and organised in such a manner of that the network entities undertake transportation activity within their own territory, either at origination or destination leg. In other words the collection and delivery of the consignments to individual clients is done by the network entities whereas movement of consignments from one country to another is handled by DHL International. The appellant is one such network entity operating in the territory of India.
1.1 They had entered into various contracts from time to time. Certain terms of the contract are as follows
2. THE COMPANYS OBLIGATIONS:
2.1 In consideration of DHL allowing the Company to access the Network the company undertakes and agrees with DHL as follows:
a) To use its best endeavors to promote and expand the Network in the Territory.
b) to provide efficient and reliable services in the territory and to this end receive consignments arriving in the territory check them against the manifest and deliver them to the parties of individual consignees against receipt;
c) in the case of transportation from the territory to destinations abroad through the Network, to collect consignments from the premises of individual consignors and to manifest the consignments in accordance with the documentation and procedures stipulated by DHL prior to delivering all consignments to the airport or other designated point of dispatch
d) to invoice its customers in the territory in accordance with the price and general conditions employed by the network, provided always that the company may in accordance with its commercial judgement set prices to reflect market conditions in the territory to achieve additional sales or to reward customers of the company who make extensive use of the network;
e) to pay to DHL the remittances calculated by and in accordance with clause 4 hereof
f) to file with DHL not later than thirty days following the end of each month financial statements and such reports and information from time to time prescribed by DHL in support of the costs incurred by the Company and of the remittances made or tobe made to DHL.
g) To allow DHL (at its own cost) the right of audit of the Companys books of account to determine the accuracy and proper categorization of the Local Costs.
2.2 In the performance of its obligations contained in clause 2.1 hereof the Company further agrees and undertakes that it shall:
a) maintain the highest operational and ethical standards in the running of its business in the Territory;
b) comply with all local national and international laws, ordinances, rules and regulations which are enforceable against the company in the territory;
c) provide efficient courteous and highly customer information and service;
d) utilize identifying characteristics of the Network in substantially the same combination arrangement and manner as developed and displayed by the network so that the companys business will be readily recognizable by customers or potential customers as having access to the network.
3. DHL OBLIGATIONS 3.1 In consideration of the performance by the company of the obligations set out in clause 2 hereof, DHL agrees and undertakes to allow the company to have access to the network and
a) to complete or to procure completion of the delivery of the consignments collected by the company in the territory to their ultimate destinations outside the territory supplying (if required and reused by the company) a signed receipt from each consignee;
b) to indemnify that save the company harmless from all claims, costs and damages arising in connection with the provision of the services;
c) to bear all costs and risks in relation to each consignment from the time it is delivered by the company into the custody of an airline chosen by DHL until the time it is delivered to the ultimate consignee;
d) as evidence of the companys access to the network to process the inclusion of the name, address and telephone number of the company in the networks worldwide express directory and details of the stations operated by the company in the territory.
4. COMPENSATION:
4.1 The company shall pay to DHL each month, from Companys revenue in the territory, such sum (the network fee) as represents the difference between (a) its bills delivered to Customers in the territory for the service (net of Value added tax or any similar sales turnover or like taxes) and (b) 107% of Local costs. The network fee has been established taking into account the responsibilities and activities which the company will provide in the territory as provided in this agreement.
4.2 In the event that 107% of Local costs exceeds the companys bills delivered (net of value added tax or any similar sales turnover or like taxes) then DHL shall pay to the company such sum as represents the excess within 30 days of DHL agreeing the companys computation of local costs.
4.3 For the avoidance of doubt, all the international costs shall be for the sole account of DHL and shall not be included in the calculation of local costs.
4.4 DHL shall render a monthly invoice to the company setting out the amount payable by the company in accordance with this clause 4 and based upon a statement of local costs agreed between the company and DHL.
Each invoice shall be delivered to the company on or before the 25th day of the month following the month to which the invoice relates and shall be expressed in the local currency of the territory. The liability of the company from the invoice date shall be to pay the stated local currency amount within 30 days of the invoice date or such longer period allowed by DHL. Any invoice rendered by DHL after the 25th day of the month as aforesaid shall be deemed to have been delivered on the 25th day of the month following the actual date of delivery.
4.5 DHL agrees that throughout the duration of this agreement consolidated monthly total payables and receivables viz. network fees, international costs paid on behalf of DHL by the company, EXB charges billed and collected elsewhere, and EXB charges billed and collected locally shall be net off thereby permitting a net monthly remittance.
1.3 Thus it is seen that in terms of the contract the job of the appellant was to perform all functions within the territory of India. For all consignments coming into the territory of India from abroad it was responsible for collection of the same from DHLI office and delivery to consignees in terms of clause 2.1 (b) of the agreement. In case of out of India bound consignments, the appellants were to collect the consignments from the consignors, do the necessary documentation and deliver the same to DHLI in India for transportation from the territory to destinations abroad through the Network in terms of clause 2.1 (c) of the agreement. They were also required to pay the DHLI remittances in terms of in terms of clause 4 of the agreement.
1.4 The Obligation of the DHLI are given in clause 3 of the agreement. It is seen from the clause 3.1 (a) of the agreement that the operational obligation of the DHLI was to complete or to procure completion of the delivery of the consignments collected by the company in the territory to their ultimate destinations outside the territory supplying (if required and reused by the company) a signed receipt from each consignee. In this regard DHLI was required to bear all costs and risks in relation to each consignment from the time it is delivered by the company into the custody of an airline chosen by DHL until the time it is delivered to the ultimate consignee. Thus it is seen that obligation of DHLI was only with regards to the consignments collected by the appellants in India. While the obligation of the Appellant was with respect to not only consignments collected by it in India but also in respect of consignments not booked by it but booked by other franchisees of DHLI located abroad.
1.5 The arrangement between them has been explained in simple terms in their additional submissions to the Commissioner dated 26th Nov 2013 (Exhibit 5 of this appeal). They have explained the contract as in para 2 of the letter as follows, 2 Network Agreement 2.1 DHL India has entered into a contract (Network Agreement) with DHLI on principal to principal basis 2.2 As per the Network Agreement DHL India is granted access to the global DHL Network so as to enable it to carry on its courier business in India and generate revenue 2.3 For such access, DHL India compensates DHLI in the form of monthly Network Fee, in order to fund the network costs. The network fee is computed as the difference between the revenues earned by DHL India from its customers and 110% of the local costs (direct and indirect costs, as defined in the network agreement).
2.4 DHL India is also responsible for delivering shipments billed by DHL entities outside India, to consignees located in India (Unbilled shipments).
2.5 DHL India discharges service tax on gross revenue earned from its customers. DHL India also discharges service tax under reverse charge on the Network fees paid to DHLI. From the above it would appear that appellants pay Network Fee to fund the cost of network, at avail access to global DHL network. Global DHL network is accessed by appellant to perform delivery or procurement of billed consignments, outside India. Again it is seen that while obligation of DHLI was only with regards to the consignments collected by the appellants in India, the obligation of the Appellant was with respect to not only consignments collected by it in India but also in respect of consignments booked by other franchisees of DHLI located abroad.
1.6 Billed Vs Unbilled transactions:-The cases where the appellants bill the retail clients, and receive money, are termed as billed transactions. In these cases the retail clients pay the appellants directly for the service of delivering or collecting consignments. These transactions were termed as Billed transactions by the appellants. The 2nd category are those cases where the network entities, i.e. DHLI Franchisees located outside India, are engaged by the retail clients for the service. In those cases the appellants undertake the activity of either collecting the consignments from the consignor and delivering the same to the DHLI hub in India, or of collecting the consignment from the DHLI hub in India and delivering the same to consignee in India. These transactions were termed as Unbilled transactions by the appellants. These were termed Unbilled because the appellants do not receive any amount from the retail clients. The billing in these cases is done by DHLI Franchisees located outside India. In short the billed transactions are those where the appellants receive the consideration from the retail clients directly and the unbilled transactions are where they receive no consideration from the retail client. The costs incurred by them in this regard are reimbursed along with a margin of 10% as consideration by DHLI.
1.7 The appellants are paying service tax on the amount received from the retail clients in respect of billed consignments. The show cause notice alleges that in addition to the services provided to the retail clients, the appellants are also providing services to DHL International in respect of unbilled consignments, which are booked with network entities outside India and are to be collected from clients or delivered to clients in India, in terms of the agreement between DHLI and the appellants. It was alleged that the activity of collecting the consignments from the DHLI hub in India and delivering to clients in India is Courier service provided by the appellants to DHLI International. Similarly it was alleged that the activity of collecting the consignments from the retail clients and delivering the same to DHLI hub in India is Courier service provided by the appellants to DHL International. It was alleged that no service tax has been paid on the services provided in respect of Unbilled transactions.
1.8 In order to Levy service tax it was necessary to arrive at the correct assessable value. In this case there was no separate payment made by the service receiver namely DHL International to the appellant. A consolidated payment was being paid on the Cost plus basis. The appellants were being paid 110% of the costs incurred by the appellants on its entire operations, by the DHL International Gmbh in terms of agreement. This amount was not only for the consignments for which the appellants were raising the bills to the retail clients (billed consignments) but also for the courier services of delivery/collection being provided to DHL International in respect of the consignments booked by the network entities located abroad (unbilled consignments). In order to arrive at the compensation being received by the appellants in respect of the courier services being provided by appellants to DHL International, the total compensation received from DHL International had to be apportioned between the billed and unbilled consignments. To arrive at the compensation received for the courier services given to DHL International in respect of the unbilled consignments the show cause notice suggested apportionment on the basis of the weight of the consignment. In other words it was proposed to apportion the total amount of cost plus 10% consideration received by the appellant in proportion of the weight of the billed and unbilled consignments. Thus if the total amount received by the appellants was rupees hundred and they had handled 10 kg of billed consignments and 15 kg of unbilled consignments then the total amount received by them was apportioned in the issue of 10 : 15. In other words it was proposed that in such a scenario the compensation received for billed consignments was Rs.40 and for unbilled consignments it was 60. For this calculation the necessary data was to be submitted by the appellant. However it was noticed that the appellants could not give the breakup of total out bound shipments and hence the notice calculated the demand without bifurcations of the outbound consignments resulting in an inflated demand on account of the fact that part of the outbound consignments had already suffered service tax. The notice also alleged that the compensation received by the appellant should also include the indirect compensation on account of investment rebate received from DHL International. The agreement between the appellants and the DHL International required DHL International to give 15% of the total investment made by the appellant as investment rebate. Thus the entire investment rebate received by the appellant was added to the amount received by the appellant from the DHL International for the year 2007 08.
1.9 The appellants were receiving services from DHL International in respect of billed consignments. In respect of billed consignments, either deliveries were being made abroad or collection of consignments from abroad was being done by DHLI, as a service provided to the appellants. The appellants were paying a certain fee to the DHLI for these services. According to appellants the network fee paid by them to DHLI is the consideration for the said service and they paid service tax on the same. The service tax was being paid by the appellant under the reverse charge mechanism treating network fee as Assessable Value. It was noticed that they were taking credit of the service tax paid on such services. It was also alleged in the notice that they had adjusted investment rebate required to be given by DHLI against the network fee payable by appellants to the DHLI. As a result of this while paying service tax, appellant had not paid service tax on an amount equivalent to investment rebate, which was set off against the network fee. It was noticed that while paying network fee certain other amounts were being deducted. These deductions on which no service tax was paid and the values excluded for the purpose of service tax on reverse charge matter were Customs clearance cost and finance cost. The custom clearance cost comprised mainly of CHA cost and other clearance charges. It was alleged that these deductions are not in nature of the reimbursement of expenses made on behalf of the DHLI and thus should not be deducted from the network fee for computation of assessable value. On that basis it was alleged that the appellants have undervalued the assessable value by wrongly claiming reduction of investment rebate, custom clearance charges and finance charges from the network fee.
1.10 The show cause notice was partially confirmed in the adjudication proceedings. While doing so the Commissioner rejected the contention that the services provided by the appellants to DHL International are in the nature of business support service and not courier service. On the basis of data of bifurcations of the outbound consignments provided by the appellants, the demand in respect of billed outbound consignments was dropped.
1.11 It was held in the order that W.E.F 16.05.2008, when the definition of courier service was amended by replacing the words service provided to customers by the words service provided to any person, the service provided by the appellant to DHL International would be correctly classifiable as courier service. The order referred to the circular issued from F.No 341/43/96 -TRU dated 31 October 1996, where it has been clarified that 15.?It has been pointed out that in some cases one courier agency, who undertakes to deliver the documents, goods or articles received from customers, utilises the services of another company for in-transit movement of such documents etc. from one point to another. These are, technically, called co-loaders. The co-loader undertakes to transport the documents, goods or articles on behalf of the courier agency and charges the courier agency for such services. A question has been raised whether under these circumstances the co-loaders are also liable to pay service tax.
16.?In this context, it is clarified that co-loaders provide service to the courier agencies as such. They do not provide directly any service to the customer who gives the documents, goods or articles to the courier agency for their delivery to the consignee. What is chargeable to service tax is the service provided by courier agency to the customer. In this case, the courier agency being not a customer as such, the service provided by co-loader to the courier agency is not chargeable to service tax. It is significant to point out that the charges of the co-loaders to the courier agency for in-transit movement of goods, documents or articles are in any case ultimately recovered by the courier agency from the customer and these charges are included in the gross amount charged by the courier agencies from customers on which the service tax is computed. The Commissioner observed that the circular was based on the definition of courier service and the said definition has been amended from 16.05.2008. The Commissioner reached a conclusion that the circular would not apply after the amendment in the definition of courier service. Thus he held that the said circular will not have any application after the amendment. As a result the Commissioner dropped the demand for the period prior to the amendment in respect of services provided to Co Loader. The demand of service tax on reverse charge basis was also modified on account of the change in the definition and the same was restricted to the period post amendment.
1.12 The Commissioner disallowed the adjustment of expenses on account of custom clearance and finance charges against the network fee. He also disallowed the adjustment of investment allowance against the network fee.
2 The appellants are in appeal against the said order of Commissioner. They challenged it on following grounds
i) The classification of service provided to DHLI by the appellant, in respect of unbilled consignments, is not courier service but Business Support service.
ii) The network agreement is not an agreement for provision of service but merely an agreement to ascertain network fee.
iii) No separate consideration is paid by DHLI to appellants for the services given by the appellants to DHLI in respect of unbilled consignments. Therefore there is no liability to service tax.
iv) DHLI is merely funding the operation and since there is no consideration for the service provided, therefore there is no service provided.
v) There is no law to determine the Assessable Value in the circumstances and therefore there no tax can be collected.
vi) They have paid service tax on entire consideration received from the retail client and on entire network fee paid to DHLI therefore there cannot be any more liability
vii) The service provided by them to DHLI is an export of service. The cost plus consideration adjusted against the Network Fee results in saving of foreign exchange for this purpose.
viii) Network fee is the consideration paid to DHLI for the services provided by the DHLI in respect of the billed consignments. The investment rebate, customs clearance charges and finance costs are deductible from the Network fee.
ix) Best judgement method cannot be used for assessment in this case
x) They have filed returns and submitted all details during audit and hence extended period cannot be invoked.
xi) No penalty can be imposed as there is no intention to evade. Default, if any, occurred because there was bona fide doubt, lack of understanding and lack of proper law.
xii) They are entitled to assessment on Cum-tax basis 2.1 The appellants have argued that they are engaged in the Business Support Service and not in Courier Service. They have argued that they are operating under a contract and doing an outsourced job on behalf of DHLI. It is pertinent to point out that they have not disputed the other aspects of the courier service. The courier service has been defined as follows courier agency means a [any person] engaged in the door-to-door transportation of time-sensitive documents, goods or articles utilising the services of a person, either directly or indirectly, to carry or accompany such documents, goods or articles;
Thus the activity being done by them is door-to-door transportation of time-sensitive documents, goods or articles utilising the services of a person, either directly or indirectly, to carry or accompany such documents, goods or articles. They have claimed that it is in the nature of Business support service as an outsourced job and thus the classification of the service should be Business Support Service. All services are in the nature of outsourced jobs. When a customer books a courier he is essentially outsourcing the delivery of his documents. When a company gives a works contract, it is outsourcing. When a company avails manpower recruitment agency, it is outsourcing. Service industry is generally an outsourcing industry. Thus it would be incorrect to classify every such service as Business Support Service, in preference to the specific services defined under the Act. The DHLI have engaged the appellants, in respect of unbilled consignments, for
i) collection from DHLI premises in India and delivery to their clients premises; or
ii) collection from their clients premises in India and delivery to DHLI premises in India In the instant case DHLI are the service receivers and they have hired the appellants for the job. The entire operation takes place within India. The support service for business are defined as follows (104c) support services of business or commerce means services provided in relation to business or commerce and includes evaluation of prospective customers, telemarketing, processing of purchase orders and fulfilment services, information and tracking of delivery schedules, managing distribution and logistics, customer relationship management services, accounting and processing of transactions, [Operational or administrative assistance in any manner], formulation of customer service and pricing policies, infrastructural support services and other transaction processing.
Explanation. For the purposes of this clause, the expression infrastructural support services includes providing office along with office utilities, lounge, reception with competent personnel to handle messages, secretarial services, internet and telecom facilities, pantry and security;
The nature of services in BSS is totally different from the services provided by the appellant. The Section 65A deals with the classification of services. It reads as follows SECTION 65A.?Classification of taxable services. (1) For the purposes of this Chapter, classification of taxable services shall be determined according to the terms of the sub-clauses of clause (105) of section 65;
(2)?When for any reason, a taxable service is, prima facie, classifiable under two or more sub-clauses of clause (105) of section 65, classification shall be effected as follows :-
(a) the sub-clause which provides the most specific description shall be preferred to sub-clauses providing a more general description;
(b) composite services consisting of a combination of different services which cannot be classified in the manner specified in clause (a), shall be classified as if they consisted of a service which gives them their essential character, in so far as this criterion is applicable;
(c) when a service cannot be classified in the manner specified in clause (a) or clause (b), it shall be classified under the sub-clause which occurs first among the sub-clauses which equally merit consideration.] [(3)?The provisions of this section shall not apply with effect from such date as the Central Government may, by notification, appoint.] The activity being carried out by the appellants is transportation of time-sensitive documents, goods or articles utilising the services of a person, either directly or indirectly, to carry or accompany such documents, goods or articles from DHLI office to consignors premises or from consignees premises to DHLI premises. Since this is a more specific classification available it has to be preferred over a more general classification. Thus it is a clear case of courier service provided by the appellants to DHLI.
2.2 The learned counsel for the appellant explained the processes of courier business in detail. He argued that the network agreement should not be construed as an agreement for the provision of services. He argued that the agreement is merely to ascertain the network fee. He argued that it is very clear that no separate consideration is payable by DHL International to appellant. The DHL International will only pay to the appellant if the total recoveries of the appellant for short of the 110% of the costs as stipulated in the agreement. The funding cannot be considered as a consideration for any service provided. He argued that the Customs clearance costs and finance expenses are reimbursable local costs as per agreement. He argued that appellant do not undertake a separate activity for separate consideration and therefore are not liable to tax. He further argued that valuation rules do not prescribe a mechanism to determine the value of service where the consideration is unascertainable. He argued that the order is not a reasoned and speaking order. He further argued that the cost plus mark-up retained by the appellant is not consideration for undertaking shipments under the network contracts. He argued that in order delivery service tax bill has to be rendition of a service and receipt of consideration for the same. He argued that the network agreement does not provide for a separate consideration and the notice wrongly seeks to allocate costs as consideration. He further argued that as a result of this the local costs will be taxed twice. He argued that the value of the billed consignments, on which tax has been paid, already include the local costs incurred by the appellants. He argued that it is a case like that of warranty provider where the authorised dealer provides the services but the consideration is paid by the manufacturer. Similarly In the instant case, qua the customer, there is no cost as consideration in order to recover the tax. Similarly in case of airline industry the service tax authorities do no allocate cost of access by IATA agents to services of central reservation system and charge the tax on it. Thus he argued that since the tax can be levied only on a consideration received and no separate consideration attributable to the service is received in this case, no service tax can be levied.He argued that the appellants generate revenue only from the billed consignments and no separate revenue is generated from activities undertaken for the Shipments under the Network Contracts. He argued that the order seeks to tax the costs incurred in generating revenue from the customers in India. He argued that the only consideration received by the appellants is from the billed consignments in India. He argued that service tax is paid on the entire amount of billed consignments and the notice seeks to recover tax again on the said amount. Their appeal gives following chart as an illustration of the same Dr Cr Local Expenses 300 NA Revenue billed to local customers 1000 Service tax paid Mark up 30 Network fee payable to DHLI (Revenue billed less local cost plus markupieRs 1000 less Rs 330) 670 Service tax paid under reverse charge They have claimed that they have paid tax on the entire Network fee received by them (Rs 670 in the example cited by them) and on entire revenue (Rs 1000 in the example cited by them).
2.2.1 In short the arrangement between DHL operations BV (DHLI) and DHL worldwide express (India) Private Ltd (appellants) is of a kind of where DHLI conducts all the activities happening outside India in respect of all the consignments and appellants conducts all the activities happening within India. In simple terms when any consignment is either to be collected or to be delivered in India the same activity is done by appellants. When any consignment is either to be collected or to be delivered outside India the same activity is done by DHLI. The transfer of goods from India to outside India and vice versa is also done by DHLI. A Perusal of the clause 2 and 3 of the agreement shows (reproduced in para 1.1 above) the obligations of each of the parties. DHLI has similar agreements with franchisees outside India. DHLI pays consideration to appellants in terms of clause 4 of the agreement (reproduced in para 1.1 above). The agreement stipulates that DHL will pay the company for all its costs and over and above 10% extra. The international costs will be for the sole account of DHL and shall not be included in the local costs.
2.2.2 The appellant, when it receives the payment from retail client, terms it as a billed consignment, whereas when the appellants undertakes the activity of picking up or delivering for DHLI, they term it as an unbilled transaction. The actual amount payable by DHLI to the appellants is the costs plus 10% mark-up calculated as per memorandum of agreement. However since company is directly collecting certain amounts from the retail clients and it is entitled to a certain compensation as per the compensation arrangement, the net amount to be transferred is worked out and transferred to DHLI as Network Fee. In case the amount collected from the retail clients is less than the amount appellants are entitled to get as per compensation arrangement, DHLI pays the same to the company. If it is more, the same is termed as network fee, and paid by appellant to DHLI. The net difference between the billed amount and the cost plus consideration, if positive, is called network fee. If the same is negative it is not termed as network fee.
2.2.3 The appellants are paying serviced tax on all the billed transactions on gross value received from retail customer. Thus whenever the appellant is approached by a client to pick up or to deliver a consignment, and the client makes payment to the appellant, service tax is paid by the appellants. Notice has been issued for the activity which it undertakes in respect of unbilled transactions. In respect of unbilled transactions the appellant either
i) pick up the consignment from consignors premises and deliver it to DHLI or
ii) pickup the consignment from DHLI and deliver it to a consignee, in India.
For these activities no bills are raised to retail clients. For these activities whatever costs are incurred, the company is compensated 110% of costs by way of consideration from DHLI.
2.2.4 A notice was issued to the appellants for the courier service provided in respect of unbilled transactions. In respect of unbilled transactions either pickup or delivery is done from the premises of DHLI and corresponding delivery/pickup is done from the client. In the process of pickup/delivery of these unbilled consignments the appellant is compensated by 110% of the costs incurred by the company. It was alleged that the appellant was providing a Courier service to DHLI in so much as the appellant was either picking up consignments from the premises of DHLI and delivering it to the clients or picking up the consignments from the clients and delivering them to the premises of DHLI. In either case it was a service provided under the category of Courier service. It was alleged that no tax has been paid on these services provided by the company to DHL.
2.3.1 From the discussion it is clear that there are 4 activities being undertaken by the Appellant. These categories are Billed (Bills raised by Appellant) Unbilled (Bills not raised by Appellant but by DHLI or its franchisees abroad) Export of consignments Collection of consignments from clients in India and delivery to DHLI in India A C Import of consignments Delivery of consignments to consignees in India after collection of the same from DHLI in India B D A Collection of Consignments in India for delivery to consignee in any foreign country, but delivered to DHLI office in India for onward movement using DHLI network, where payment received by appellant.
B Consignments coming from any foreign country for delivery to consignee in India, collected and transported to India using DHLI network, where payment received by appellant.
C Collection of consignments from consignors in India and delivery of consignments to DHLI within India for onward delivery to consignee in any foreign country, where no separate payment is received by appellant D Delivery of consignments to Consignees in India, after collection of consignments from DHLI in India, received from any foreign country, where no separate payment is received by appellant 2.3.2 The detailed features of each category are given in the table below.
OVERVIEW OF THE TRANSACTIONS S No (A) (B) (C) (D) 1 Categories of transaction Consignments where payment received by appellant for collection of consignments in India and delivery of consignments to consignee in any foreign country Consignments where payment received by appellant for collection of consignments from Consignor abroad and delivery to consignee in India Collection of consignments in India and delivery of consignments to DHLI office within India, for onward delivery to consignee in any foreign country, at behest of DHL, on 110% of cost compensation model Delivery of consignments in India after collection of consignments from DHLI office in India, received from any foreign country, at behest of DHL, on 110% of cost compensation model 2 Consigner location India Abroad India Abroad 3 Consignee location Abroad India Abroad India 4 Payment received by the appellant From Retail client From Retail client From DHLI, as part of cost plus consideration From DHLI, as part of cost plus consideration 2.3.3 They have admitted in their appeal that they have engaged in the net transaction by setting off the receipts against payables. To bolster their claim that they have received the consideration (from DHLI) in Foreign Exchange they have stated in their appeal (Para 4.21) that 4.21 In this Connection, it is submitted that instead of receiving consideration from DHLI and paying consideration to DHLI, a net amount is paid by the appellant to DHLI on monthly basis. Accordingly, without prejudice to our arguments that there is no separate consideration, it is submitted that though the appellant is not receiving any foreign exchange, the balancing payment in order to prevent outflow of foreign exchange, can be considered as receipt of foreign exchange for the purpose of compliance with the export rules. In other words they have claimed that they have adjusted the not only the payments to be made by DHLI for billed and unbilled transactions against the Network fee, but also cost and incentives. As a result they had to pay Net amount as Network fee. In para 1.3 of the appeal the appellants have asserted that 1.3 In this regard, it is submitted that the Network Agreement only provides a formula to compute the network fee payable to DHLI for provision of access to DHL network. The retention of cost plus mark-up from the local revenue of the appellant cannot be construed as consideration for service rendered by appellant to DHLI. According to them the value of service provided by DHLI in respect of billed consignments, which they have chosen to call as network fee and on which they are discharging tax, also depends on the costs incurred on by appellant on unbilled consignments. The network fee is only an account of monthly settlement between appellants and DHLI. The mechanism of calculating Network fee is as follows Revenue from billed consignments less 110% of local Costs incurred on billed consignments less 110% of local Costs incurred on unbilled consignments less Investment rebate less Customs clearance costs less Finance costs Network Fee Thus it is seen that the network fee is only the calculation of setting off all receivables against payables, to arrive at monthly settlement. It sets off payables against receivables not only in respect of services given or taken but also in respect of incentives and reimbursable expenses and costs. Network fee is supposed to be the consideration paid by appellants to DHLI for their services in respect of Billed consignments. However above table shows that the network fee is not the amount paid for the services provided by DHLI. It is in fact the account of monthly settlement of receivables against payables.
2.3.4 The arrangement between them has been explained in simple terms in their additional submissions to the Commissioner dated 26th Nov 2013 (Exhibit 5 of this appeal). They have explained the contract as in para 2 of the letter as follows, 2 Network Agreement 2.1 DHL India has entered into a contract (Network Agreement) with DHLI on principal to principal basis 2.2 As per the Network Agreement DHL India is granted access to the global DHL Network so as to enable it to carry on its courier business in India and generate revenue 2.3 For such access, DHL India compensates DHLI in the form of monthly Network Fee, in order to fund the network costs. The network fee is computed as the difference between the revenues earned by DHL India from its customers and 110% of the local costs (direct and indirect costs, as defined in the network agreement).
2.4 DHL India is also responsible for delivering shipments billed by DHL entities outside India, to consignees located in India (Unbilled shipments).
2.5 DHL India discharges service tax on gross revenue earned from its customers. DHL India also discharges service tax under reverse charge on the Network fees paid to DHLI.
It has been admitted that the network fee is only in respect of the Billed shipments as a compensation for funding the network costs. In fact the appellants receive services of the DHLI only for billed shipments. For Unbilled shipments no services are provided by DHLI to appellants. In respect of the Unbilled shipments it is the appellants who provide services to the DHLI. However since a single consolidated account is maintained the amounts payable by appellant to DHLI and those payable by DHLI to appellant get adjusted against each other. While doing so they are maintaining a consolidated account of amounts to be paid and only net transaction are made on monthly basis. This is also apparent from the analysis, in para 2.4 to 2.7 below, of the example given by them in their own appeal.
2.3.5 The Network fee is payable by the appellants to the DHLI for access to the DHLI network outside India. The appellants access that network only for delivery or collection of billed consignments outside India. The network is not used for the by the appellants for the Unbilled consignments, where they are the service providers and not service users. A perusal of the invoice issued for the Network fee the description reads as under
Network fee due to us as per operating agreement for the use of our worldwide courier network for the period ending as above (Vat 0% according to Art 15 No. 13 6th EC VAT Directive) The only service that DHLI provides to the appellants is in respect of the billed consignments. In respect of the Unbilled consignments the DHLI is not providing any service to the appellants. In respect of the Unbilled consignments the appellants are providing service to DHLI.
2.3.6 The amount of investment rebate is an amount that the DHLI is required to pay to the appellants only as an incentive. The Schedule A to the Network agreement clarifies that 3 As a special incentive to ensure the upgrading of facilities and improvement of the Service in the Territory, during the term of the agreement, the Network Fee shall be rebated by an amount equivalent to 15% of the value of the fixed assets purchased by the company during the relevant period. This incentive is provided on an exceptional basis for a maximum period of three years starting from 31st day of December 2007. It is a rebate meant to facilitate the upgrading of the infrastructure, without any proprietary rights attached to it Investment rebate is by definition an incentive. It has nothing to do with the Network service provided by DHLI to appellant in respect of delivery of its consignments abroad. It is a subsidy, by way of rebate, given to the appellant for up gradation of its infrastructure. For the purpose of determining the value of service provided by Appellants to DHLI, or vice versa, the investment rebate has no role to play. The quantum of investment rebate does not depend on the service provided by the DHLI to appellant by on the value of the fixed asset purchased by the appellants. It is an amount given by DHLI to appellant as an incentive but they have decided to adjust it against the amounts payable by appellant to DHLI, resulting in understatement of the Network fee. Just because the appellants are maintaining a consolidated account, where all payables are adjusted against receivable, they are they cannot alter the assessable value for the purpose of service tax. Moreover clause 4 the network agreement does not talk about adjusting such incentives against the network fee.
2.3.7 In terms of the Network agreement the only deduction allowed from the revenue generated by using the Network is the local costs (trading costs in the above format) and a 10% mark-up on the same. In the instant case the investment rebate and the Customs clearance costs/Finance cost are not part of the local costs therefore the mark-up of 10% is not being given to the appellants. Had it been the local costs the appellants would have got the 10% mark-up on the same. This is what the Schedule A to the Network agreement also confirms. It clarifies that D) Reimbursible Costs shall mean the following costs, which will be reimbursed without any uplift
i) Interest expenses (income) excluding Hire Purchase Interests
ii) Customs clearance activities The local costs are the costs of the appellant, incurred in providing courier service, which are returned with a margin of 10% to the appellant by the DHLI. However the reimbursable costs are simply the liabilities of the DHLI incurred by the appellants and are simply reimbursed. The Network fee agreement only talks of deduction of only local costs of the appellant but not the reimbursable costs incurred on behalf of the DHLI. The Network fee is calculated only on the basis of difference between revenue and the 110% of the local costs. Just because the appellants are maintaining a consolidated account, where all payables are adjusted against receivable, they are they cannot alter the value for the purpose of service tax by deducting customs clearance cost or Finance costs. The clause reads as under
4 COMPENSATION:
4.1.1 The company shall pay to DHL each month, from Companys revenue in the territory, such sum (the network fee) as represents the difference between (a) its bills delivered to Customers in the territory for the service (net of Value added tax or any similar sales turnover or like taxes) and (b) 110% of Local costs. The network fee has been established taking into account the responsibilities and activities which the company will provide in the territory as provided in this agreement.
There is no provision for deducting the Reimbursable costs (like customs clearance costs or Finance charges ) from the Network fee. However it being reimbursable costs DHLI had to return it to the appellant. Instead of giving it separately it chose to deduct it from the Network fee, though the formula for network fee given in the clause 4 of the Network agreement did not provide for it. Thus they are calculating network fee as a means for setting off all receivables against payables, to arrive at monthly settlement. It sets off payables against receivables not only in respect of services given or taken but also in respect of incentives and reimbursable expenses and costs.
2.3.8 The appellants are paying service tax on the Network fee treating it as a value for the service received from DHLI. The Network fee is only the monthly adjustment of receivables against payables. It is net of the value of services received by appellant and services provided by appellant after adjustment of incentives and costs. Network fee is an adjusted amount. In this regard the appellants in their appeal have argued that service tax is to be paid on actual amount remitted. They have claimed that the Rule 5 of the Valuation rules provide for the reimbursement of expenditure or costs incurred by the service provider in the course of the provision of service to the service recipient. It has been claimed that there is no provision to deal with the costs incurred by the service recipient could be added. They have claimed that rule 7 of the Valuation rules provides that the value of taxable service provided by a service provider outside India to a service recipient in India will be the actual consideration charged for it. Their argument seems to be that irrespective of the assessable value determined under the law the actual amount remitted is the Assessable Value. This is a misplaced notion. The law is very clear in this regard. The Value for the purpose of Service tax is to be the gross amount charged for the service. So if one receives a service from a person and also provides a service to the same person, the service tax is payable on both the transactions independently. They cannot set off value of service provided against value of service availed to arrive at assessable value. In this case it appears that they have adjusted the amount payable for services received from DHLI in respect of services received for billed consignments, against amount receivable for services provided to DHLI for Unbilled consignments to arrive at Network fee. It is clear from analysis above that the network fee is only the calculation of setting off all receivables against payables, to arrive at monthly settlement. It sets off payables against receivables not only in respect of services given or taken but also in respect of incentives and reimbursable expenses and costs. They have also admitted it in para 4.21 of the appeal 4.21 In this Connection, it is submitted that instead of receiving consideration from DHLI and paying consideration to DHLI, a net amount is paid by the appellant to DHLI on monthly basis. Accordingly, without prejudice to our arguments that there is no separate consideration, it is submitted that though the appellant is not receiving any foreign exchange, the balancing payment in order to prevent outflow of foreign exchange, can be considered as receipt of foreign exchange for the purpose of compliance with the export rules. 2.4.1 To arrive at the correct assessable value each of the four activities are to be assessed for the purpose of service tax liability. The appellants have given their summary accounting statement as an example in para 2.20 of the appeal as follows Dr Cr Local Expenses 300 NA Revenue billed to local customers 1000 Service tax paid Mark up 30 Network fee payable to DHLI (Revenue billed less local cost plus markupieRs 1000 less Rs 330) 670 Service tax paid under reverse charge This statement has been made on net basis considering the net totality of operation, adjusting payables against receivables.
2.5 To explain how the transaction actually take place in gross manner we can make a separate statement for each of the four different situation (Categories A, B, C and D) by breaking up the above figures (given as a example) in equal part for assigning to each category. For the sake of example let us divide the expenses equally in all four scenarios A, B, C and D, and examine how the statement would look like for each of the transactions separately. Considering equal local expense (Rs 75 each) in all four categories and equal revenue (Rs 500 each) for both billed categories, there being no revenue for unbilled categories.
Dr Cr Local Expenses Cat A 75 Cat B 75 Cat C 75 Cat D 75 Total 300 NA Revenue billed to local customers Cat A 500 Cat B 500 Cat C 0 Cat D 0 Total 1000 Service tax paid Mark up Cat A 7.5 Cat B 7.5 Cat C 7.5 Cat D 7.5 Total 30
Network fee payable to DHLI (Revenue billed less local cost plus market price Rs 1000 less Rs 330) 670 Service tax paid under reverse charge 2.6 The situation becomes clearer when each situation is examined separately in isolation.
2.6.1 CATEGORY A Service tax liability if only activity listed in category (A) is carried out and no other activities are happening. It can be seen that the franchisee in India receives consignments in India and receives payment of entire courier charges. It carries it and delivers the same to DHL office in India. DHL carries it from its office in India to the consignees premises abroad. The entire courier charges received by the appellant from the client is for the courier services of carrying the consignment from the consignor in India to the consignee abroad, and that becomes the Assessable Value for the purpose of Service tax at the hands of the franchisee. The appellant receives the money from the client and pays the DHLI all of it, except the 110% of the appellants costs, as network fee. The appellant pay the service tax on the entire amount received from the retail client. Now let us take some figures given by them in the example given by appellants (cited in para 2.2.5 above) and work out the liability. The accounting statement for CATEGORY A will be as follows Dr Cr Local Expenses 75 NA Revenue billed to local customers 500 Assessable Value Mark up 7.5 Network fee payable to DHLI (Revenue billed less local cost plus mark up ie Rs 500 less Rs 82.5) 417.5 Assessable Value for the purpose of Service tax under reverse charge The total billing by appellant will be Rs 500/- . The expenses will be Rs 75/- and DHLI would pay a markup of Rs 7.5/- to the appellant. The Network fee would work out to Revenue billed (Rs 500/-) less local cost plus markup (Rs 82.5) ieRs 500 less Rs 82.5 or Rs 417.5/-.
2.6.2 CATEGORY B If only activity listed in column (B) is carried out and no other activities are happening. The appellants get a booking from the client for picking up the consignment abroad and delivery to client in India. The courier charges are received by the appellant and they pay service tax on these charges. It can be seen that the DHLI organises to receive the consignments abroad. It carries it to DHLI office in India and delivers the same to the appellants in India. The entire courier charges is received by the appellant from the client. The entire money received from the client is for the courier services of carrying the consignment from the consignor abroad to the consignee in India, and that becomes the Assessable Value for the purpose of Service tax at the hands of the franchisee. The appellant receives the money from the client and pays the DHLI all of it, except the 110% of the appellants costs, as network fee. The appellant pay the service tax on the entire amount received from the retail client. In accounting terms CATEGORY B will be Dr Cr Local Expenses 75 NA Revenue billed to local customers 500 Assessable Value Mark up 7.5 Network fee payable to DHLI (Revenue billed less local cost plus mark up ie Rs 500 less Rs 82.5) 417.5 Assessable Value for the purpose of Service tax under reverse charge The total billing will be Rs 500/- . The expenses will be Rs 75 and DHLI would pay a markup of Rs 7.5/- to the appellant. The Network fee would work out to Revenue billed (Rs 500/-) less local cost plus markup (Rs 82.5) ieRs 500 less Rs 82.5 or Rs 417.5/-.
2.6.3 CATEGORY C If only activity listed in column (C) is carried out and no other activities are happening. The consignments are booked by DHLI or its franchisees abroad. It can be seen that the franchisee in India collects the consignments in India from the consigner. Appellant carries it and delivers the same to DHLI office in India. DHLI carries it from its office in India to the consignees premises abroad (through franchisees abroad). The entire courier charges, for carrying the consignment, from the consignor in India to the consignee abroad, are received from the client by DHLI (or its franchisees abroad). The DHLI engages the appellants for picking up the consignment from the consignors premises and bringing the same to the DHLI office in India. The 110% of the appellants costs, is paid by DHLI to the appellant for this service as per the agreement. The DHLI (or its franchisees abroad) gets all the money from the client and DHLI pays the appellant the 110% of appellants costs. The money received by the appellant for picking up the consignment from the consignors premises and delivering the same to the DHLI office in India, i.e. 110% of the appellants costs, becomes the Assessable Value for the purpose of Service tax at the hands of the franchisee. No service tax is paid by the appellant on the consideration received by them from DHLI. For accounting purposes the DHLI gets all the money from the client and pays the franchisee the 107%/110% of the costs. In accounting terms CATEGORY C will be as follows Dr Cr Local Expenses 75 NA Revenue billed to local customers 0 Mark up 7.5 Network fee payable to DHLI (Nil, as revenue of appellant is Nil and expenditure exceeds revenue) 0 Revenue received by appellant from the customer, i.e. DHLI 82.5 Value for the purpose of Service tax 2.6.4 CATEGORY D If only activity listed in column (D) is carried out and no other activities are happening. It can be seen that the DHLI organises to receive consignments abroad and delivers the same to the appellant at the DHLI office in India. The appellant carries it and delivers the same to consignees in India. The entire courier charges, for carrying the consignment, from the consignor abroad to the consignee in India, are received from the client by DHLI (or its franchisees abroad). The DHLI engages the appellant for picking up the consignment from the DHLI office in India s and delivering the same to the consignors premise. The 110% of the appellants costs, is paid by DHL to the appellant as consideration for this service as per the agreement. The money received by the appellant for picking up the consignment from the DHLI office in India s and delivering the same to the consignors premise, i.e. 110% of the appellants costs, becomes the Assessable Value for the purpose of Service tax at the hands of the franchisee. For accounting purposes the DHLI gets all the money from the client and pays the franchisee the 110% of the costs. In accounting terms CATEGORY D will be as follows Dr Cr Local Expenses 75 NA Revenue billed to local customers 0 Mark up 7.5 Network fee payable to DHLI (Nil, as revenue of appellant is Nil and expenditure exceeds revenue) 0 Revenue received by appellant from the customer, i.e. DHLI 82.5 Value for the purpose of Service tax 2.7 If we total up these statements (in para 2.6.1, 2.6.2, 2.6.3 and 2.6.4 above) it becomes same as the statement given as an example by the appellants in their appeal memo, but only more elaborate and with gross figures. Statement after consolidation of statements made in Categories A to D Dr Cr Local Expenses Cat A Rs. 75 Cat B Rs. 75 Cat C Rs. 75 Cat D Rs. 75 300 NA Revenue billed to local customers Cat A Rs. 500 Cat B Rs. 500 1000 Assessable value of Billed consignments Mark up Cat A Rs. 7.5 Cat B Rs. 7.5 Cat C Rs. 7.5 Cat D Rs. 7.5 30 Network fee payable to DHLI (Nil as revenue of appellant is Nil and expenditure exceeds revenue) Cat A Rs. 417.5 Cat B Rs. 417.5 835 Assessable Value for the purpose of paying service tax on reverse charge basis Amount to be paid by DHLI to Appellants Category C Rs 82.5 Category C Rs 82.5 175 Assessable value of Unbilled consignments It can be seen that the service tax payable on the Network fee has also not been paid on full amount of Network Fee but on an amount of after adjustment of network fee against the amount payable to appellant. The service tax in the consolidated statement is paid only on Rs 670/- and in the detailed elaborate statement it required to be paid on Rs 835/-. The difference of Rs 175/- between the actual Network Fee of Rs 835/- and the adjusted Network Fee of Rs 670/- is on account of adjustment of the cost plus consideration paid to the appellants by DHLI. It has been paid only on amount appearing after adjustment. Not only they have not paid service tax on the transactions of Category C and D but also on Network fee payable. They have in their appeal also admitted to this adjustment and netting of transaction as can be seen in para 2.8 below.
2.8 They have admitted that they are setting of the payables against receivables. They have claimed that they have adjusted the payments to be made by DHLI for unbilled transactions against the Network fee. The fact that the Network fee is solely for the billed operations has also been admitted by them. They have themselves described the arrangement as follows 2 Network Agreement 2.1 DHL India has entered into a contract (Network Agreement) with DHLI on principal to principal basis 2.2 As per the Network Agreement DHL India is granted access to the global DHL Network so as to enable it to carry on its courier business in India and generate revenue 2.3 For such access, DHL India compensates DHLI in the form of monthly Network Fee, in order to fund the network costs. The network fee is computed as the difference between the revenues earned by DHL India from its customers and 110% of the local costs (direct and indirect costs, as defined in the network agreement).
2.4 DHL India is also responsible for delivering shipments billed by DHL entities outside India, to consignees located in India (Unbilled shipments).
2.5 DHL India discharges service tax on gross revenue earned from its customers. DHL India also discharges service tax under reverse charge on the Network fees paid to DHLI.
It has been admitted that the network fee is only in respect of the Billed shipments as a compensation for funding the network costs. In fact the appellants receive services of the DHLI only for billed shipments. For Unbilled shipments no services are provided by DHLI to appellants. In respect of the Unbilled shipments the appellants provide services to the DHLI. While doing so they are maintaining a consolidated account of amounts to be paid and only net transaction are made on monthly basis. From above it is apparent that as a result of the setting off of amounts payable against receivables there has been a undervaluation of not only assessable value in respect of courier service provided by the appellants but also of the courier service received by the appellants.
2.9 The appellants in their appeal in para 4 have explained this as follows The local DHL entities earn their revenue from the courier business generated from billed shipments within the territory. The local DHL companies recoup their costs as well as an arms length margin (costs plus 10%) from the billed shipments contracted by them. However as part of the global DHL network, the local DHL entities also handle shipments of other DHL companies in other countries, for which they neither bill/charge customers in their territories nor any of the DHL entities i.e. the Network Contracts Thus admittedly, the appellants are recouping their compensation, i.e. costs as well as an arms length margin (costs plus 10%), from the billed shipments contracted by them. In other words the consideration for the services provided by the appellant are adjusted against the money payable to DHLI for the services received in respect of billed shipments.
2.10 The appellants, in para 4.1 of the written submissions filed in tribunal, have given following illustration as an example of cases where the domestic revenue is insufficient to cover the consideration to be paid to appellants. Illustration 2 is the scenario when the revenue from the billed consignment is less than the 110% of the local expenses Dr Cr Local Expenses (including expenses for billed and unbilled shipments, such as vehicle costs, IT, Manpower etc) 1100 NA Revenue billed to local customers 1000 Service tax paid Mark up @ 10% of the expense 110 Amount to be paid by DHLI (where cost plus mark-up cannot be recovered from revenue earned in India 210 Network fee (since the cost plus mark up is 1210, the revenue billed is in excess of the cost. Hence, no network fee is payable)
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In respect of the illustration 2 they have stated that if such a scenario arises where when the revenue from the billed consignment is less than the 110% of the local expenses, they would be required to compensate for it. They have also admitted that in such a scenario they would be liable to pay service tax on such compensation. These are the cases of category C and D explained in the para 2.6.3, 2.6.4 and 2.7 above, where in absence of any revenue from retail client the liability will arise as a result of provision of service to DHLI.
2.10.1 It can be seen from the above illustrations given by the appellants in their written submissions that the network fee is a fee to take care of expenses incurred by the DHLI on operations involving movement of the goods from/to foreign destinations to/from India. The appellants have in para 4.19 of the appeal the appellants have submitted as follows 4.19 If it is argued by the service tax authorities that the cost plus mark up reflects consideration, it is submitted that where the service provider nets off its foreign exchange remittance payable against its receivables, the same can be construed as foreign exchange received.
4.20 As provided in the preceding submissions, the following two transactions are
i) where services are provided by the appellants to DHLI; and ii where services are provided by DHLI to appellant 4.21 In this Connection, it is submitted that instead of receiving consideration from DHLI and paying consideration to DHLI, a net amount is paid by the appellant to DHLI on monthly basis. Accordingly, without prejudice to our arguments that there is no separate consideration, it is submitted that though the appellant is not receiving any foreign exchange, the balancing payment in order to prevent outflow of foreign exchange, can be considered as receipt of foreign exchange for the purpose of compliance with the export rules. There is an obvious admission by the appellant that they are setting off the consideration and a net amount is paid to DHLI. This is the net amount of what is payable from appellant to the DHLI for services provided by DHLI to appellant and the cost plus compensation that the DHLI is supposed to pay the appellants for the Unbilled consignments. For the billed consignments the consideration is directly received by the appellants from the retail clients.
2.10.2 Thus from the above analysis it emerges that the appellants are getting a consideration from the DHLI on the costs plus basis. The figures for the Network fee are arrived on net basis after deducting the appellants consideration, not only of billed consignments in respect of which they receive some services from DHLI, but also of Unbilled consignments in respect of which no services are provided by DHLI to appellants and other costs. Thus it is held that adjustment of the receivables for service provided against the amounts payables for the service received, or incentives and costs, is incorrect. The service tax in each case has to be paid on the Gross value of each service separately.
2.11 It was also argued that the Service tax law at the material time did not provide a mechanism to determine value of services in the instant case. They argued that the consideration received by them cannot be bifurcated in respect of the Billed and Unbilled Consignments. The appellants argued that at the material time there was no provision to deal with a situation where the consideration can not be determined. The appeal relies on the Section 67 which reads as under
SECTION [67. Valuation of taxable services for charging service tax. (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall,
(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;
(ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration;
(iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. It was argued that there is no method to determine the consideration in respect of unbilled consignments under clause (i) and clause (ii) of subsection 1 of section 67. Therefore the assessable value has to be arrived at in the manner prescribed in terms of clause (iii) of subsection 1 of section 67. He argued that at the material time the Valuation Rules prescribed the method of ascertainment only in cases where consideration not wholly or partly consisting of money in terms of Rule 3 of the said rules. It was argued that this method only applied to cases covered under clause (ii) of subsection 1 of section 67 and not to cases covered under clause (iii) of subsection 1 of section 67. No method has been prescribed to cover cases specified under clause (i) of subsection 1 of section 67. It was argued that since no method has been prescribed no tax can be charged. For this reliance was placed on
i) Govind Saran Ganga Ram Vs CST (1985 (Supp) SCC 205)
ii) L&T Vs State of Bihar (2004) 134 STC 354 (Pat)
iii) Voltas Vs State of Jharkhand (2007) 5 VST 492 (Jhar) 2.11.1 The commissioner has in the OIO has not taken support of the Service Tax Valuation rules to arrive at the Value for the purpose of the Service Tax. It is seen that the appellants have taken a position that the consideration for the unbilled consignments cannot be ascertained and therefore the assessable value cannot be ascertained under section 67 of the Act and therefore reliance has to be placed on the rules. The position of the appellant is that there are no rules to cover the situation and therefore assessable value cannot be determined and therefore no duty can be charged. The impugned order however relies on the Section 67 to arrive at the Assessable Value. An examination of the Section 67 and the Rules as they existed at the material time shows that, in case the provision of service is for consideration in Money, the Assessable Value is the gross amount charged for such service. Clause (i) of subsection 1 of section 67 specifically provides that in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him. In the instant case the entire consideration is in money terms. Thus value has to be arrived at in terms of Clause (i) of subsection 1 of section 67. The notice as well commissioner has chosen to provide deduction of the duty paid value from the gross amount charged, which is clearly determined as the cost plus compensation received from the DHLI. Thus in the instant case the consideration being solely in money terms the assessable Value has to be determined in terms of Clause (i) of the sub section (1) of section 67. It is a fact that the all transactions (and therefore amount charged) are solely in money terms. All cases where consideration is in Money have to be assessed in under Clause (i) of the sub section (1) of section 67. It is incorrect to say that the money received for the Billed and Unbilled transactions cannot be separately determined. It can be determined by the appellants if they so wish. It is regularly done by the industry by resorting to Cost and Works accountancy techniques. They have not chosen to determine themselves and therefore the Commissioner has determined by a basic method. The commissioner has taken the entire cost plus consideration received from the DHLI as Gross amount received and given a deduction of that portion of the consideration which pertained to billed transactions under the best judgment method prescribed under Section 72. The appellants have sought exclusion of certain costs amounting to Rs 331,62,16,184/-, claimed to be exclusively attributable to billed shipments from the calculations. These costs are in respect of retail functions and sales costs. It is obvious when certain costs are attributable solely to billed shipments there will be other costs attributable to unbilled shipments which need to be included in totality. If one has to be excluded then another needs to be fully included. This claim has not been made before the lower authority and cannot be entertained at this stage.
2.11.2 Best Judgement method In this regard it is pertinent to point out that the Section 72 of the Act permits an officer to adopt the best judgement method under certain circumstances. These circumstances being
a) The assessee fails to furnish return under section 70;
b) Having made a return , fails to assess the tax in accordance with the provisions of the Act or rules made thereunder The appellants have claimed that the circumstances prescribed in the said section do not exist in the instant case to enable the Commissioner to adopt the best judgement method. They claimed that they have indeed filed the returns and have assessed their liability correctly. The appellants have filed the returns but have, according to the Order, failed to assess the tax in accordance with the provisions of the Act or rules made thereunder. They have not paid tax on the Unbilled transactions in respect of provision of service to the DHLI. Thus it is possible to determine the assessable value on the best judgement method by virtue of clause (b) of the section 72 of the Act. The appellants have clearly adjusted the payables against receivables in the figures given in the return in respect of services. The law requires them to declare the Gross amount charged for services. They have instead declared the net amount in the returns. They have adjusted the amount payable for the services received against the amount receivable for services provided to arrive at assessable value. Not only that they have adjusted even costs and incentives against these values. Thus it is clear that they have failed to assess the tax in accordance with the provisions of the Act or rules made thereunder.
2.11.3 An argument has been made that to adopt the best judgement method the material on record can only be relied. For this the appellants have relied on the following decisions
i) CIT Vs LaxminarainBadridas 1979 (005) ITR 0170 PC
ii) State of Orissa Vs Maharaja B P Singh Deo 1969 (076) ITR 0690 SC The crux of both the decisions is that the best judgement is not an arbitrary power. It has to be exercised reasonably on the basis of material on record, and not local knowledge or repute in regard to assessees circumstances. It is agreed that the best judgement is no an arbitrary power and has to exercised in a reasonable manner. In para 12 of the SCN it is clearly stated that detailed bifurcation of the consideration for billed and unbilled transactions was called from the appellants but they failed to give the same. Under these circumstances the revenue adopted the alternate method of approximation by apportioning it on the weight basis. I do not find that this method is arbitrary in any manner. The option to give details of consideration was open to the appellants but they did not avail the same.
2.12 They have argued that the in terms of the circular 111/05/2009-ST dated 24 Feb 2009 the service provided by them would be export of service. The said circular reads as under
In terms of rule 3(2)(a) of the Export of Services Rules 2005, a taxable service shall be treated as export of service if such service is provided from India and used outside India. Instances have come to notice that certain activities, illustrations of which are given below, are denied the benefit of export of services and the refund of service tax under rule 5 of the Cenvat Credit Rules, 2004 [Notification No. 5/2006-C.E. (N.T.), dated 14-3-2006] on the ground that these activities do not satisfy the condition used outside India, -
(i) Call centers engaged by foreign companies who attend to calls from customers or prospective customers from all around the world including from India;
(ii) Medical transcription where the case history of a patient as dictated by the doctor abroad is typed out in India and forwarded back to him;
(iii) Indian agents who undertake marketing in India of goods of a foreign seller. In this case, the agent undertakes all activities within India and receives commission for his services from foreign seller in convertible foreign exchange;
(iv) Foreign financial institution desiring transfer of remittances to India, engaging an Indian organisation to dispatch such remittances to the receiver in India. For this, the foreign financial institution pays commission to the Indian organisation in foreign exchange for the entire activity being undertaken in India.
The departmental officers seem to have taken a view in such cases that since the activities pertaining to provision of service are undertaken in India, it cannot be said that the use of the service has been outside India.
2.?The matter has been examined. Sub-rule (1) of rule 3 of the Export of Services Rule, 2005 categorizes the services into three categories :
(i)?Category I [Rule 3(1)(i)] :?For services (such as Architect service, General Insurance service, Construction service, Site Preparation service) that have some nexus with immovable property, it is provided that the provision of such service would be export if they are provided in relation to an immovable property situated outside India.
(ii) Category II [Rule 3(1)(ii)] :?For services (such as Rent-a-Cab operator, Market Research Agency service, Survey and Exploration of Minerals service, Convention service, Security Agency service, Storage and Warehousing service) where the place of performance of service can be established, it is provided that provision of such services would be export if they are performed (or even partly performed) outside India.
(iii) Category III [Rule 3(1)(iii)] :?For the remaining services (that would not fall under category I or II), which would generally include knowledge or technique based services, which are not linked to an identifiable immovable property or whose location of performance cannot be readily identifiable (such as, Banking and Other Financial services, Business Auxiliary services and Telecom services), it has been specified that they would be export, -
(a) If they are provided in relation to business or commerce to a recipient located outside India; and
(b) If they are provided in relation to activities other than business or commerce to a recipient located outside India at the time when such services are provided.
3.?It is an accepted legal principle that the law has to be read harmoniously so as to avoid contradictions within a legislation. Keeping this principle in view, the meaning of the term used outside India has to be understood in the context of the characteristics of a particular category of service as mentioned in sub-rule (1) of rule 3. For example, under Architect service (a Category I service [Rule 3(1)(i)]), even if an Indian architect prepares a design sitting in India for a property located in U.K. and hands it over to the owner of such property having his business and residence in India, it would have to be presumed that service has been used outside India. Similarly, if an Indian event manager (a Category II service [Rule 3(1)(ii)]) arranges a seminar for an Indian company in U.K. the service has to be treated to have been used outside India because the place of performance is U.K. even though the benefit of such a seminar may flow back to the employees serving the company in India. For the services that fall under Category III [Rule 3(1)(iii)], the relevant factor is the location of the service receiver and not the place of performance. In this context, the phrase used outside India is to be interpreted to mean that the benefit of the service should accrue outside India. Thus, for Category III services [Rule 3(1)(iii)], it is possible that export of service may take place even when all the relevant activities take place in India so long as the benefits of these services accrue outside India. In all the illustrations mentioned in the opening paragraph, what is accruing outside India is the benefit in terms of promotion of business of a foreign company. Similar would be the treatment for other Category III [Rule 3(1)(iii)] services as well. It is seen that the service provided by the appellants is courier service specified under clause 105 (f) of section 65 of the Act. This falls under the category under clause (ii) of Sub-rule (1) of rule 3 of the Export of Services Rule, 2005. In respect of this category the place of performance is critical in determining the factum of export. In the instant case the entire courier service provide by appellants to DHLI was performed in India. The documents to be couriered are delivered in India and the same are received in India. It is immaterial if the payment of the same is received in Foreign Currency.
2.12.1 The appellants have also relied on the Decision of Tribunal in the case of Paul Merchant Vs CCE Chandigarh 2012 TIOL 1877 CESTAT DEL. In the said case the service under consideration was Business Auxiliary Service (BAS). BAS falls under clause (iii) of Sub-rule (1) of rule 3 of the Export of Services Rule, 2005 where the location of service receiver or provider is relevant. The appellants case is of Courier service falling clause (ii) of Sub-rule (1) of rule 3 of the Export of Services Rule, 2005, where the place of performance is the relevant criterion. In view of that the decision cited is not relevant to the case. Their claim that the recipient of service is located outside India or that the foreign exchange is received as a consideration is irrelevant.
2.13 Limitation 2.13.1 The appellants have claimed that they have declared all the necessary details. They claimed that they have disclosed the necessary details of the Network agreement and payments made to DHLI in the service tax returns. They have been filing the service tax returns regularly. They have been paying the service tax on the Network fee regularly and disclosed the same in the service tax returns. They claimed that the audit for the period FY 2002-03 to 2006-07 was completed. During the said audit they claimed that the objection regarding the non payment of service tax on Network Fee vide letter dated 29 April 2008 and 12 January 2009. In response to the said letter they had explained the provisions of Network Arrangement between them and DHLI vide letters dated 28 May 2008 and 30th January 2009.
2.13.2 A perusal of the letter dated 29th April 2008 shows it contains certain objections but there is no mention of any Network agreement being submitted by them. In fact in reply to this letter vide letter dated 28th May 2008 they mentioned that the Network agreement has been taken by Service Tax Department by issue of Summons dated 24th September 2007 and subsequent visit later. They informed that since the government withdrew the circular, whereby the services of co-loader were brought into service tax net, they have started paying the service tax on the Network Fee paid to DHLI from September 2007 onwards. However the appellants, in their reply, described the transaction flow as under in the said letter The transaction flow as per the agreement is as follows:
- The customer in India gives the shipments to DHL India
- DHL India despatches the shipments to the local regional airports or customs port for further transportation
- The shipments collected by DHL India from customers located in India for delivery to consignees located outside India are accumulated at various hubs as per pre-decided routing operated by DHL ops.
- At the hubs, DHL Ops carries out the activities of sorting the shipments and ultimately delivering the same to final destinations.
The network fee is paid to DHL Ops for carrying the above activity of delivering the shipments to the final destination. The said activity undertaken by DHL Ops to facilitate the business undertaken by DHL India. In our view the service provided by DHL Ops would qualify as service provided by co loader. Thus clearly implying that the Network fee is a fee of co-loader. They have not mentioned that the network fee is not fee for the services of DHLI but the calculation of net amount payable/receivable from DHLI after adjusting the not only service charges but also costs. They have not informed that the amounts receivable for service provided are getting adjusted for the amounts payable for services availed for arriving at network fee. Co-loaders is paid from out of revenue collected by service provider. Since service provider pays tax on entire revenue collected, the co-loader was not levied service tax since his revenue is part of tax paid revenue. However the operations of DHLI are not of co-loader in respect of Unbilled consignments, as all unbilled operations there is no revenue collected by appellants and thus they cannot be hiring the DHLI as co-loaders. In fact for unbilled consignments the appellants are the service providers and the DHLI service recipients. There is no Network fee for the operations of DHLI in respect of Unbilled consignments. Thus Network fee does not represent a fee for co-loader as claimed by them. Network fee is net amount paid received by DHLI after netting gross amount it has to receive as co-loader with the amount payable to appellants as service charges for services received. Representing the Network fee as a fee for co-loading is a misrepresentation. It is seen that that what has been disclosed to audit is incorrect. They have not disclosed all the four kind of operations i.e. billed export and imports, and the Unbilled export and imports. Moreover the appellants have not disclosed that the entire consideration received for all kinds of operations (i.e. both Billed and Unbilled) is being set off against the revenue generated for the purpose of calculating the network Fee. Since the consideration that is paid to co-loader can only be exempt in respect of the billed consignments where tax has been paid on gross amounts received, the claim that DHLI is a co-loader in respect of Unbilled consignments is incorrect. The exemption to co-loader is also on the basis of the fact that the co-loader receives only part of the value of service, on which the service tax has already been paid. This can happen only in case of billed consignments. In respect of unbilled consignments the DHLI was not the co-loader but a service recipient has not been disclosed. Thereafter the audit in their letter dated 12 January 2009 the audit calls for the agreements to examine the aspect of taxability of Network fee received from 2003-04 to 2006-07. In reply to that too the same explanation as given to the earlier letter is given. However, a copy of the agreement was enclosed. The explanation given by them again fails to disclose all the four kind of operations i.e. billed export and imports, and the Unbilled export and imports. Moreover the appellants have not disclosed that the entire consideration received for all kinds of operations (i.e. both Billed and Unbilled) is being set off against the revenue generated for the purpose of calculating the network Fee. They have misrepresented the Network fee as co-loading fee.
2.13.3 The appellants have relied on following decisions in support of their claim on limitation.
I) SDL Auto Pvt Ltd Vs CCE Delhi 2013 (294) ELT 577 where it has been held that when audit is conducted the audit officers are required to examine every issue in relation to audit period. The audit conducted in the instant case was for the period 2002-03 to 2006-07. This is beyond the audit period. Furthermore the explanation given by the appellants in respect of Network fee is incorrect and misleading. They have claimed that the Network fee is only in respect of billed export consignments. In respect of these consignments the DHLI qualify as co-loaders. They have not disclosed that Network fee is not for Co-loading operations, but the net amount received after adjusting co-loading fee with the amounts receivable from DHLI on account of services provided for Unbilled consignments. The assessable values in the service tax returns have been declared after netting payables against receivable as against the requirement of declaring the Gross amounts charged.
II) Indian Hume Pipe Co Ltd Vs CCE 2004 (163) ELT 273 where tribunal observed sufficient documents have been given to indicate the fact that no tax on freight is being paid. In the instant case there has been an express misrepresentation of the fact that Network fee is not same as co-loading fee. It is in fact an amount arrived at by setting off the amount receivable by the appellant against the co-loading fee payable by the applicant. The assessable values in the service tax returns have been declared after netting payables against receivable as against the requirement of declaring the Gross amounts charged.
III) Essar Projects Vs CCE 2011 (31) ELT 188 where the assessee has been filing the service tax returns and audit is being conducted in disputed period, suppression cannot be alleged. It is noticed that the audit conducted in the instant case was for the period 2002-03 to 2006-07, which is before the disputed period. However in audit the appellants have clearly misrepresented facts regarding the adjustment of payables of co-loading against receivable for service provided. The assessable values in the service tax returns have been declared after netting payables against receivable as against the requirement of declaring the Gross amounts charged.
IV) The appellants have also relied on the decision of tribunal in case of Knit Foulds Vs CCE 2008 (230) ELT 442, wherein it has been held that non disclosure was due to lack of understanding of provisions of the notification, intention to suppress cannot be alleged. The said decision, the appellants claimed, has been approved by Hon High Court of Punjab and Haryana. In the instant case the appellants are well aware that they are netting the payable against receivables and costs. They have admitted it. There is no confusion in law that service tax is to be discharged on Gross amounts charged and not on net amount charged. Their argument seems to be that the services provided by appellants to DHLI in respect of Unbilled consignments are free of consideration is clearly mischievous and with intent to evade.
2.13.4 The appellants have argued that the penalty under section 78 is not leviable as no circumstances prescribed under the section exist. They claimed that
i) they have filed returns regularly.
ii) They have disclosed all documents during audit
iii) The notice seeks to levy tax on a consideration where no consideration exists
iv) They are remitting the network fee to DHLI and paying service tax on the same They relied on the following decisions
i) Hindustan steel Vs State of Orissa 1978 (2) ELT J159 (SC) and Akbar BadrudinVs CC 1990 (47) ELT 161 (SC). They argued that penalty can be imposed only in cases of deliberate acts. They argued that they were not receiving any consideration and therefore the question of paying service tax does not arise.
ii) They argued that it was a question of interpretation and therefore penalty cannot be imposed. They relied on the decision of Tribunal in case of Zee Telefilms Vs CCE 2004 (166) ELT 34 wherein the Tribunal held if the dispute related to interpretation of statute and appellants had obtained service tax registration and filed returns, penalty cannot be impose.
The Section 67 reads as under
SECTION [67. Valuation of taxable services for charging service tax. (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall,
(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;
(ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration;
(iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.
In the returns filed by the appellants they were required to give declare the Gross amount charged. It is seen that they have not declared the Gross amount charged but the net amount after adjusting payables against receivables. They have also admitted it in para 4.21 of the appeal 4.21 In this Connection, it is submitted that instead of receiving consideration from DHLI and paying consideration to DHLI, a net amount is paid by the appellant to DHLI on monthly basis. Accordingly, without prejudice to our arguments that there is no separate consideration, it is submitted that though the appellant is not receiving any foreign exchange, the balancing payment in order to prevent outflow of foreign exchange, can be considered as receipt of foreign exchange for the purpose of compliance with the export rules. Thus it is clear that the value declared in the returns is not the Gross amount charged as required under law. They have simply given the actual net amount, after adjusting value of services provided against not only the value of services received but also costs and incentives.
2.14.1 The appellants argued that Service tax demand under reverse charge, even if applicable, would be revenue neutral. The appellants have claimed the benefit of cum-tax price. They have claimed that if the consideration received from DHLI is indeed treated as consideration for services provided by them to DHLI then that amount may be treated as Cum Tax amount. They relied on the decision of CCE Vs Advance Media Consultants 2008 TIOL 548 CESTAT wherein it has been held that the service tax being an indirect tax the consideration needs to be considered as Cum-Tax consideration. The said decision has been maintained by the Hon Apex court 2009 (14) STR J49 (SC). The argument of the appellants have force. The amount received by them is an all inclusive cost plus consideration in which everything is included. Thus it has to be treated as Cum-Tax amount and the demand needs to be quantified accordingly. The appellants have also relied on the following decisions in this regard
i) Aurobindo Pharma V CCE 2007 216) ELT 389
ii) Sundram Fastners V CCE 2009 (237) ELT 55
iii) PR rolling V CCE 2010 (249 ELT 232 (maintained by Hon SC) There is a certain part of demand in which pertains to services provided by DHLI to appellants in respect of Billed transactions. The service tax in that case was paid by appellants on reverse charge basis. The appellants themselves were entitled to get the benefit of CENVAT credit for such duty paid, since these services were received by appellants for provision for services provided to retail customers in respect of billed transactions. Therefore the liability created under this notice on account of the services received, on reverse charge basis, would be revenue neutral. This argument will, however, not apply to the services provided by the appellants to the DHLI in respect of unbilled shipments.
2.15 The appellants also claimed that penalty under section 77 of the Act cannot be imposed on the appellant for not filing proper service tax returns. They claimed that no grounds have been specified for imposing penalty under section 77. It is seen that there is a specific charge of not filing proper service tax returns in the SCN. It is a fact that the value declared by the appellants is not correct. Thus the defense of the appellants is without any basis.
2.16 The appellants claimed Benefit of Section 80. They argued that there was a reasonable cause for failure as they had a bona fide belief that the services provided to DHLI were not chargeable to tax. We do not find merit in this submission. The law is very clear that gross amount charges is to be declared in the returns and service tax is to be paid on the same. There is no ambiguity in the law in this regard. There is no provision where the amount payable for a service can be set off against amount receivable for the services provided to arrive at assessable value. There is no case for invoking Section 80.
3 In view of above the impugned order is modified.
i) The demand in respect of services received by appellant and where service tax has been demanded on reverse charge basis is set aside for the period beyond the normal period of limitation.
ii) For the demand in respect of services provided by appellant to DHLI in respect of Unbilled consignments the benefit of calculation of tax on cum duty basis is allowed.
iii) The penalty under section 78 is reduced correspondingly to the revised amount of demand worked out after allowing Cum duty benefit and limitation worked out above.
iv) Penalty under section 77 is upheld.
4. Miscellaneous application and CO is also disposed of.
(Pronounced in Court on ..) (M.V. Ravindran) Member (Judicial) (Raju) Member (Technical) pj 1 2 Appeal No.ST/85770/14