By TIOL News Service

MUMBAI, JULY 13, 2015: THIS is a Revenue appeal against the order of Commissioner (Appeals) who set aside the order of the adjudicating authority rejecting the refund claim of Rs.16,40,79,318/- filed by the respondent.

The respondents are engaged in providing taxable services under the categories of 'Maintenance or Repairs' and 'Business Auxiliary Service'. They filed refund claim on the ground that they had inadvertently paid service tax during the period from 16.6.2005 to 31.3.2006 on the entire amount paid to them by M/s. ONGC to whom they had provided services whereas the service tax was actually payable only on the commission received by them and not on the total cost reimbursed to them by M/s. ONGC.

The facts: The respondent and ONGC had entered into a Master Contract on 9 th June 2005 under which the respondent provided “Operation and Maintenance Management of Well Stimulation Vessel” owned by ONGC.

Inasmuch as it is the contention of the respondent that service tax was payable only on the amount of 5% fees received by them and not on the amount which is only a reimbursement of the actual expenses incurred. Respondent also informed the department that they had not received refund of service tax from ONGC and, therefore, the doctrine of unjust enrichment is not applicable as the amount was shown in their balance sheet as service tax receivable.

The adjudicating authority, while rejecting the refund held that the entire expenditure incurred by the respondent forms an integral part of the taxable value. He also rejected the contention of the respondent that the costs incurred on reimbursable basis have to be excluded, that the respondent had not fulfilled the conditions of Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006 to be qualified as a pure agent of the service recipient. He also rejected the contention that the activity is covered under "Ship Management service" which became taxable w.e.f 1.5.2006.

The Commissioner (Appeals) held that the activity under the said contract was not confined to 'Maintenance or Repair' but was a composite service comprising Operations and Maintenance Management. Taking support of Section 65A(2) of the Finance Act, 1994, he held that the 'Ship Management' service gives the essential character to the service rendered by the respondent. Therefore the tax paid inadvertently by the respondent under the 'Maintenance or Repair' service for the period prior to 1.5.2006 is refundable.

After hearing both sides, the Member (Technical) held thus -

Merits:

+ There appears to be no doubt that after the introduction of the 'Ship Management' Service w.e.f. 1.5.2006, the activity as a whole is most aptly covered under this service.

+ Therefore the issue which requires a decision is whether the activity undertaken by the ONGC would be covered under the 'Management, Maintenance or Repair Service'. It is significant to note that the word 'Management' in the above category of service was also introduced w.e.f on 1.5.2006. Prior to this date, the service was categorized as 'Maintenance or Repair' service.

+ It is seen that only management of immovable property was covered under the definition of 'Maintenance or Repair'.

+ From the terms of the Contract, it is clear that some activities related to 'Operations' which were not taxable, during the impugned period and some activities related to Maintenance Management which were taxable under the category of 'Maintenance or Repair service'.

+ The entire scope of work deserves to be split up into two categories namely 'Maintenance or Repair' service which was taxable during the impugned period and 'Operations' which was not taxable during the impugned period. We note that, prima facie, there appears to be a composite contract between ONGC and the respondent. However, on venturing into details of the contract we find that it is composed of a range of distinct and separately identifiable activities which are paid for and reimbursed by ONGC, activity-wise. Therefore as the value of each activity undertaken is based on the actual value for which invoices are raised by various Sub-Contractors on SCI, there should have been no difficulty in determining the value corresponding to each of the 'Maintenance or Repair' activities provided by the respondent i.e. SCI. The Service Tax law does not bar the splitting of a contract into distinct activities each of which has a separate value.

+ We find it appropriate to remand the matter to the Commissioner to identify the activities in the contract which get covered by the 'Maintenance or Repair' service.

Valuation:

+ The appellant apparently are merely a conduit for getting the work done and passing on the reimbursement of expenses incurred by ONGC to the agencies to whom the work is outsourced. The Board circular relating to reimbursement of expenses incurred by CHA's and Manpower Recruitment agencies will apply, by analogy, to the present case. There have to be sound reasons to deny the benefit of notification 12/2003 which allows deduction of value of material component from the gross value of service provided.

+ The Explanation to Section 67 states in the exclusion provision, that the cost of parts or other material, if any, sold to the customer during the course of providing maintenance or repair service is excluded from the value of Taxable service. …We have noted above that the spares etc. are bought with the approval of ONGC and monthly advance is paid for reimbursement by ONGC. In the circumstances, the matter needs a comprehensive examination...

The matter is remanded .

The Member (Judicial) had a differing view.

It was observed thus -

+ I agree with the finding of the Commissioner (Appeals), so far as classification of these services involved in the present appeal under the head 'ship management service' under Section 65(96a) of the Finance Act, 1994. Admittedly ship management service was brought under the statute w.e.f. 1.5.2006 and the period in dispute relates to June,05 to March, 06, in which period 'ship management service' was not taxable.

+ I hold that in the present case also, the contract for 'ship management' cannot be vivisected to tax the other taxable components, including repair and maintenance. [Gujarat Chemical Port Trust Co. Ltd. - 2007-TIOL-1898-CESTAT-AHM & Rolls Royce Indus Power (I) Ltd. - 2004-TIOL-529-CESTAT-DEL refers]

+ There is no question of charging Service Tax on the various costs incurred for and on behalf of the principal - ONGC by the respondent-asssessee as a Pure agent. This finding also stand fortified in view of the CBE&C Circular No. 5/97-ST which clarified that the Service Tax shall be payable on the agency commission earned by the CHA in respect of services rendered. Reimbursable expenditure incurred on behalf of the client should not fall under the 'taxable services' rendered.

+ The ground of the Revenue that the assessee had raised a new ground in appeal before the Commissioner (Appeals) that they are not chargeable to tax, for the period in dispute being prior to 1.5.2006, when 'ship management service' become a taxable service, is also not tenable and rejected as a ground of law, can be raised at any stage, by a part to a dispute,

+ Thus, the appeal is dismissed.The respondent assessee will be entitled to consequential relief, if any, in accordance with law. The adjudicating authority is directed to grant refund expeditiously preferably within a period of two months from the date of production of copy of this order, with interest as per Rules.

In view of the difference in opinion, the matter has been referred to the President for reference to the third Member.

(See 2015-TIOL-1415-CESTAT-MUM)