By TIOL News Service

MUMBAI, OCT 24, 2014: THE appellant refines crude oil and markets petroleum products such as petrol, diesel and LPG. LPG is marketed through HPCL dealers/distributors. Various manufacturers engaged in the manufacture of goods namely rubber hoses (Trade mark Suraksha), Green label brand LPG stoves, pressure cookers, Clipper brand kitchen lighters etc. entered into marketing agreements with HPCL to market their own goods through HPCL distributors on payment of overriding commission to HPCL. The agreements provided for co-branding of hose pipes (by manufacturers and HPCL) as well as printing logo of both parties on the said goods as well as on the packing material. The manufacturers are to adhere to technical and quality specifications specified in the said agreements. In their statements, personnel of HPCL stated that HPCL promoted the Suraksha concept but not the brand per se; the manufacturers of stoves and hose pipes needed BIS approval and the premises of the manufacturers would be inspected to ensure that required standards are met before HPCL entered into agreements with the manufacturers. In the case of GM Pens International who manufactured kitchen lighters, the agreement specifically mentioned that GM Pens are paying overriding commission to HPCL inclusive of service tax as applicable.

It is the view of the Revenue that HPCL are undertaking promotional activities on behalf of the manufacturers of the said goods and earned over-riding commission on rates specified in the agreements with the manufacturers; that this activity is covered under "Business Auxiliary Service" & is chargeable to Service Tax.

HPCL themselves deposited service tax of Rs.3,75,03,657/- on 11.04.2008 for the period July 2003 to March 2008.

A SCN came to be issued on 29.04.2009 demanding service tax and seeking appropriation of the amount paid and imposition of penalty and interest.

The CCE, Mumbai confirmed the demand, appropriated the amount paid and imposed equivalent penalty and interest and, therefore, the appellant is before the CESTAT.

After initially disputing the leviability and demand of service tax and imposition of penalty and interest, the appellant finally limited his plea against imposition of penalty.

Nonetheless, the Bench after considering the submissions and referring to the various agreements entered by the appellant with the manufacturers of hoses, LPG stove etc. and the clause relating to marketing, business promotion, availing HPCL's distribution network, providing supports by HPCL etc., observed -

++ the only inescapable conclusion that may be drawn is that HPCL are very obviously and very visibly providing the service of promotion and marketing of the goods of the manufacturers. In fact, the words used explicitly in the agreement are endorsement, promotion, display of hoarding, promotion through TV, radio etc. All these clearly point to obvious promotional activities for enhancing the customer base in respect of the said goods. It is clear that the appellant not only promoted the sale of goods of the manufacturers by making available their marketing/distributor network but also add their brand value to the products which attract customers to buy the said goods. Even packing covers for the said goods such as Suraksha, LPG hose, (covers as depicted after para 11 of Adjudication order.) bear the words "promoted by HPCL, Ballard Estate, Mumbai." In our view the above is sufficient evidence to establish that HPCL are providing BAS to the various manufacturers.

++ the appellants have put a weak defence by saying that they are merely endorsing the safety requirements under various regulations cited above. Undoubtedly, the safety regulations which are statutory requirements have to be complied with and the oil companies indeed would have to recommend adherence to such safety regulations. But this does not detract from the fact that the promotion and marketing of goods is being definitely undertaken. Rather, had the purpose of advertisements been only to draw attention to safety requirements, HPCL would not have withdrawn from the responsibility for accidents in case of sub-standard goods. In fact the agreements clearly state that the quality of products will be the sole responsibility of the manufacturers and HPCL will be indemnified of losses on account of latent and patent manufacturing defects. HPCL have secured themselves and recused from any responsibility by requiring the manufacturers to submit indemnity bond favouring HPCL.

++ the agreements are for co-branding of the goods, sale through HPCL distributor network. The agreement with SUPER LPG states Super LPG approached HPCL for marketing their goods. The agreements clearly provide for specific overriding commission on per piece basis on or on ad valorem basis and such commission is payable over and above the commission payable to HPCL distributors. The commission is for the service rendered by HPCL towards marketing/promotion of goods manufactured by the manufacturers mentioned above. The service tax amount has been correctly demanded and the appropriation of the said amount already deposited is correct in law.

On the issue of suppression & penalty, after distinguishing the case laws cited by the appellant, the CESTAT held -

++ we have noted that the agreements between HPCL and the manufacturers GM Pen clearly provided for over-riding commission on a value which will be inclusive of service tax. It will be very naive to accept the contention that the appellant were under bonafide belief that service tax is not payable especially when they are a massive organisation with enough expertise to handle their taxation matters. The agreement specifically indicates that the overriding commission is inclusive of service tax. In the light of this stark fact, the plea of bonafide belief cannot be accepted. There is suppression of facts which enabled evasion of duty.

++ the appellants actually suppressed the fact that they had entered into agreements with the manufacturers and more so that the agreements provided for inclusion of service tax. The appellants being a registered assessee for a long time well versed in service tax matters chose not to declare the existence of the agreements. They did not take the advice of the department. In fact they did not even make any query to the department as to whether the service tax would be leviable on the service of promotion of business for manufacturers. Their activity very transparently reflects the Business Auxiliary Service provided by them. Therefore, the appellant cannot now take shelter of bonafide belief or that the issue was not free from doubt.

Holding that the matter stands settled by the decision of the Supreme Court in Rajasthan Spinning & Weaving Mills 2009-TIOL-63-SC-CX the Bench concluded -

++ in the present case under consideration it has been shown above that there was wilful suppression of facts. The act of non-disclosure of agreements and the glaring non-disclosure of fact that an agreement stipulated that commission includes service tax cannot find shelter under the plea of bonafide belief. The appellant could only have evaded duty intentionally by suppressing these facts. Hence the Section 78 leaves no discretion but to impose penalty equal to the duty confirmed.

In fine, the order of the CCE was upheld and the appeal was rejected.

(See 2014-TIOL-2070-CESTAT-MUM )