By TIOL News Service

MUMBAI, SEPT 09, 2014: THE appellant purchases various goods, such as, khadi, soap and detergents, etc. from various units situated in villages. These goods are purchased in bulk from village industries and sold by the appellants through their retail outlets. The appellant also sells these goods to various public sector undertakings.

As regards the supplies made by the appellant to PSUs, once the orders are procured from the PSUs, they are placed on the industrial units who are asked to supply the goods directly to the PSUs. However, the village industrial units raise invoices on the appellant and the appellant makes the payment to the village industrial units. In turn the appellant raises the bills on the PSUs and collects the sale proceeds of the goods supplied. The village industrial units, sometimes, give discount or trade margins of around 3% to the KVIC. The department was of the view that the activity undertaken by the appellant comes within the category of ‘support service of business or commerce' and therefore, on the trade margins collected by the appellant, service tax would be leviable.

This view point of the department got translated into a SCN demanding Service Tax of Rs.59,97,592/- and the CST, Mumbai did the rest.

And so the appellant KVIC is before the CESTAT.

The appellant submitted that they have been established for promotion of Khadi and Village Industries in the country and have 7,000 sales outlet across the country for this purpose; they purchase khadi and village products from village industries and undertake the sale through their retail outlet or to public sector undertakings; to cover the operational cost of organizing supplies of khadi to Government departments/PSUs, they get a trade discount of 3% from the various village industrial units. As this trade margin is only in respect of purchase and sales transaction the same cannot be considered as a business support services submitted the appellant. Moreover, trading activity does not come under any taxable service and so the demand is unsustainable in law. It is also submitted that the appellant was unable to produce documentary evidence in support of their contention that the activity undertaken by them was nothing but trading before the adjudicating authority, by way of purchase and sales bills in respect of transactions undertaken by the appellant and if given an opportunity, all these evidences could be placed before the adjudicating authority for reconsideration of the matter.

The Revenue representative submitted that the appellant should be put to terms.

The Bench observed -

"4.2 The appellant, M/s. Khadi & Village Industries Commission (KVIC) is a body established by an Act of Parliament, under the Ministry of Micro, Small and Medium Enterprises and the objective is to promote and develop khadi and other village industries in the rural areas. To achieve this objective, the appellant purchases Khadi and other village industry products from various units situated in the villages. Thereafter, they sell the same through their outlets situated far and wide in the country. They also undertake sale of Khadi products to public sector undertakings. For this purpose, they purchase the goods from the village industry units and supply the same to the PSUs. However, the goods are directly consigned by the village industrial units directly to the PSUs so as to minimize the cost of transportation. However, the village industrial units raise the bill on the appellant and the appellant in turn raises the bill on the PSUs. The appellant gets the trade discount of 3% of the values of their purchase. The said discount is for the purpose of meeting the operational costs of the appellant which is a non-profit organization. Nevertheless the transaction undertaken by the appellant is one of purchase and sale of goods; in other words it is simple trading. Therefore, the trade margin obtained by the appellant is not in the nature of a commission. Therefore, we are of the view that the activity undertaken by the appellant cannot be classified as business support services attracting levy of service tax. However, as contended by the appellant that they were not able to produce before the adjudicating authority, the documentary evidences (purchase and sales invoices) in support of their claim that the activity undertaken was trading. Therefore, the matter has to go back to the adjudicating authority for fresh consideration and the appellant should be given an opportunity to adduce evidence by way of purchase and sales invoices to establish their case that the transaction was one of trading which was not a taxable service at the relevant time. The appellant is directed to produce before the adjudicating authority all documentary evidences in this regard which shall be considered by the adjudicating authority who shall pass a fresh order after giving an opportunity to the appellant to present their case."

The appeal was allowed by way of remand.

(See 2014-TIOL-1703-CESTAT-MUM)