By TIOL News Service

NEW DELHI , DEC 16, 2014: A Service Tax demand of Rs.3,51,19,838/- pertaining to the period from 01.09.2002 to 30.09.2005 has been confirmed by the CCE, Noida against the appellant along with interest and penalties and they are, therefore, before the CESTAT. The two categories under which the demand is confirmed are Management Consultancy Service and Business Auxiliary Service.

The appellants were allegedly engaged in the business of rendering Management Consultancy Service to M/s. Transocean and M/s. Tide Water during the period 01.09.2002 to 30.09.2005 and Business Auxiliary Service to M/s. Helicopter Asia Ltd. M/s. Standard Aero Ltd. M/s. S.T. Aerospace Systems, M/s. Aero Space Engineering and M/s Northstar Aerospace during the period 01.07.2003 to 19.11.2003 and 15.03.2005 to 30.09.2005.

Before the CESTAT the appellant summarized their submissions thus -

(i) Management Consultancy is an advisory service while the service rendered by them was in the nature of executionery service. They stressed the difference between the Managerial function and operations as well as the concept of 'management' and referred to certain judgments with regard thereto. They also contended that "Management Consultancy Service" is different from "Business Consultancy Service" which was incorporated as a taxable services w.e.f. 01.06.2007.However, their service is more appropriately covered under "Business Support Service" which came into effect from 01.05.2006 or under Business Consultancy Services which was incorporated with effect from 01.06.2007.

(ii) So long as the consideration was received in convertible foreign currency, the service was exempt during the entire period by virtue of it being export of service.

(iii) As regards a part of payment received by the appellants from ONGC in respect of service rendered to the foreign service providers ( M/s. Tidewater and M/s. Transocean ) the same is to be considered as payment received in convertible foreign currency because ONGC was required to pay a quantum of sum in foreign currency to the same foreign service providers who were to pay the appellants and the ONGC deducted an equivalent amount from the amount due to be paid by them to the foreign service providers and sent that amount to the appellants here in India. [relied upon J.B. Boda and Co. Pvt. Ltd. vs. CBDT- 2002-TII-10-SC-INTL that such payment is to be regarded as payment received in foreign exchange & Indian Hume Pipe Co. Ltd. Vs. CBDT [1987] 165 ITR 537 (Bom.) .]

(iv) The demand under Business Auxiliary Services for services rendered under sales representative agreement to M/s. Helicopter Asia (PTE) Ltd. and others would fall under category of export of service as the payments were received in convertible foreign exchange. They are also eligible for exemption under Notification 13/2003-ST dated 20.06.2003 since they were basically a commission agent.

The Bench after considering the submissions observed –

Management Consultancy Service

++ A careful perusal of the appellants' services to M/s. Transocean and M/s. Tide Water makes it clear that the appellants were advising the clients about various aspects relating to Management. The services are not executionery in nature and are clearly advisory in nature. The definition of "Management Consultant" is so worded that the services performed by the appellants clearly fall within its scope and for that one has to read the definition of "Management Consultant" vis-à-vis the description of impugned services to come to such finding. The expressions like "any service", "either directly or indirectly", "in-connection with the management", "in any manner" appearing in the definition of 'Management Consultancy Service' are expressions which are expansionary rather than restrictive. Thus, this definition is wide enough to include advisory services rendered in connection with the management of an organisation.

++ The impugned service clearly qualifies for the status of Management Consultancy Services; some of its minor fringes being subsumed there-under by virtue of Section 65A(2)(b) of Finance Act, 1994. The appellants' attempt to elucidate the meaning of Management Consultancy by reference to meaning of the word 'Management' is not really germane because the expression "Management Consultant" and "Management Consultancy Service" are clearly defined in the Finance Act, 1994 itself and, therefore, one doesn't have to, indeed one cannot, look beyond the statutory definition for the purpose of classification in this case. It is well settled that for the interpretation of statutes one has to go by the definition of a 'term' contained in the statute regardless of its dictionary or other meanings or its definitions in other statutes.

++ Regarding the appellants' contention that the said services would be appropriately covered in the category of Support services of business or commerce, or Business Consultancy Service, the same is not tenable because as per the definition of support service for business or commerce, the activities covered thereunder are essentially executionery in nature. The impugned service clearly fell under the scope of Management Consultancy service as analysed earlier and, therefore, the conversion of Management Consultancy Service into Management or Business Consultancy Service would make no difference whatsoever about the appellants' liability.

++ While interpretational support from later legislative developments is not to be spurned, such a support is unwarranted and unnecessary when there exists no ambiguity which is needed to be resolved. As has been discussed earlier, the impugned services rendered to Transocean/Tidewater categorically and unambiguously fall within the ambit of Management Consultancy Service. A perusal of the changes brought about in the definition when the "Management Consultant" was changed into "Management or Business Consultant" reveals that the impugned service to M/s. ONGC is not covered under "Management or Business Consultancy Service" any more than it was covered under "Management Consultancy Service"where it is/was fully covered.

++ The appellants strenuously argued that the amounts paid by ONGC to them should be treated as being tantamount to having been received in foreign exchange. This contention is not tenable because ONGC paid the amount in Indian Rupees. Such payments do not reflect in the Govt. records as foreign exchange received in the country nor such payments reflect in the trade statistics of import and export. These are not mere procedural aspects and have legal and policy consequences.

++ The appellants have stated that the impugned payments should be treated as payments received in foreign exchange in view of the Hon'ble Supreme Court's judgment in case of J.B. Boda and Co. Pvt. Ltd. Vs. CBDT - 2002-TII-10-SC-INTL and Hon'ble Bombay High Court judgment in case of Indian Hume Pipe Co. Ltd. Vs. CBDT [1987] 165 ITR 537 (Bom.) . The judgment in case of G.B. Boda was in connection of Income Tax Act and in that case the Reserve Bank of India (RBI) was kept in the loop. The Bombay High Court judgment in the case of India Hume Pipe (Supra) was also in relation to Income Tax Act and there too RBI had been kept in the loop. Thus, the ratio of these judgements particularly of the judgment of Supreme Court in the case of GB Boda (supra) is that for treating such payments as payments received in foreign exchange, RBI's nod should be there which is absent in the present case. It is pertinent to mention that once the RBI is taken in the loop, such transactions will not go unnoticed for the purpose of the relevant databases of India's international trade and foreign exchange transactions and will also not remain under the radar of the laws relating thereto. Thus, the impugned payments made by ONGC to the appellants do not merit to be treated as payments received in foreign exchange.

Business Auxiliary Services

++ The agreement clearly and conspicuously covers promotion of the service recipients' goods/services in given territory and, therefore, squarely falls within the definition of Business Auxiliary Service which specifically includes service in relation to promotion and marketing of goods and services. Thus, there is no ambiguity about the impugned service being squarely covered under the category of Business Auxiliary Service making their contention for classification under support service for business or commerce untenable. Their claim for exemption under Notification No. 13/2003-ST on the ground of being commission agent is obviously untenable as they clearly do not fall under the definition of commission agent ( a person who causes sale or purchase of goods, on behalf of another person for a consideration which is based on the quantum of such sale or purchase) as the appellants' role includes promotion of the services recipients' goods/services and is thus clearly different from that of a commission agent's as defined above.

Limitation

++ The appellants did not take registration, did not file any returns and also did not pay service tax due. They have merely stated in their defence that they had bonafide belief that they were not liable to pay the impugned service tax. They have however not given any basis as to how they developed/entertained such a belief. They are not some small time operators. There is not a word as to what reasonable steps they took to arrive at their claimed bona fide belief; whether they sought any legal advice or whether they consulted some professional/trade associations or ascertained the industry practice.

++ Admittedly, if the assessee fails to take registration or fails to pay service tax under a bonafide belief that they are not liable to service tax, allegation of suppression/willful misstatement can't be sustained. But mere uttering of the words "bonafide belief" does not even make it a belief, leave alone bonafide belief. Bonafide or reasonable belief has to be an informed belief of a reasonable person.

++ For a service provider of this stature, something positive has to be shown to demonstrate that they had made reasonable efforts or had taken reasonable steps to ascertain legal position with regard to taxability of their impugned activities for the purpose of forming their purported reasonable belief. Mere presumption of non-taxability can never be equated to "reasonable belief" in that regard. Thus, the conclusion is inescapable that they deliberately did not take registration and pay the impugned service tax with a view to escaping the liability and when caught, pretended to be having reasonable belief about the non-taxability. Thus invocability of extended period and mandatory penalty is unexceptionable.

Export of Services

++ The appellant's contention that no Service Tax is payable on services rendered by them for which the proceeds were received in convertible foreign currency is valid in view of the CESTAT Larger Bench judgment in case of M/s. Paul Merchants Ltd. - 2012-TIOL-1877-CESTAT-DEL read with Notification 6/99-ST, 21/2003-ST and Export of Services Rules but for the intervening period from 01.03.2003 to 19.11.2003 during which too the service tax is not to be recovered in terms of Board's Circular No.65/5/2003-ST dated 25.04.2003 which categorically declared that "service tax being destination based consumption tax is not applicable on export of services" and which we are willing to follow as it has been followed by the field formations for the said purpose. However, as discussed earlier, the payments made by ONGC in Indian Rupees cannot be treated, or deemed to be, payments received in (Convertible) foreign exchange. Such payments amount to Rs.27,35,41,716/- and the (corresponding) service tax amounting to Rs.2,07,96,620/- is thus leviable and recoverable.

Business Auxiliary Service/Management Consultancy Service - Export

++ In the light of preceding paragraph the impugned service tax on Business Auxiliary Service amounting to Rs.34,90,671/- is not sustainable. Similarly impugned service tax demand relating to Management Consultancy Service for which payment was received in foreign exchange (which does not include the payment received from ONGC) amounting Rs.1,08,32,547/- also does not survive. Resultantly, only demand of Rs.2,07,96,620/- is sustainable alongwith interest and mandatory equal penalty.

Penalty

++ Even if at the relevant time the penalties under Section 76 & 78 were not mutually exclusive, once penalty under Section 78 has been imposed, penalty under Section 76 ibid may not be justified.

Conclusion:

The appeal is partially allowed inasmuch as impugned order is modified only to the extent that the demand confirmed is reduced to Rs.2,07,96,620/-; penalty under Section 78 ibid is reduced to Rs.2,07,96,620/-; penalty under Section 77 is reduced to Rs.1000/- and penalty under Section 76 is set aside.

(See 2014-TIOL-2535-CESTAT-DEL)