By TIOL News Service

MUMBAI, DEC 17, 2015: THE CCE, Mumbai-II confirmed a service tax demand of Rs.60,69,54,713/- along with interest and imposed penalties.

The appellantsare undertaking courier activities in India and which involves the following four types of transactions:

(i) Export of shipment, where overseas customer pays consideration to overseas DHL entities;

(ii) Import of shipment, where overseas customer pays consideration to overseas DHL entities;

(iii) Export of shipments, where customer pays consideration to the local DHL entity such as the appellant;

(iv) Import of shipments, where the customer pays consideration to the local DHL entity, such as the appellant.

At the stay stage, the CESTAT had while ordering pre-deposit observed thus -

ST - Courier service - Export of shipments, where customer pays consideration to the local DHL entity - overseas customers pay consideration to overseas DHL entity - service provider and service recipient is within India though consideration for service is paid by the recipient of the shipment - such shipments were only 7 to 8% -  prima facie  applicants had not made out a case in respect of such shipments - Pre-deposit ordered of 10% of the demand confirmed: CESTAT [para 12]

ST - Courier Service - Import of shipment, where overseas customer pays consideration to overseas DHL entities - as service provider and service recipient is outside India,  prima facie  merit in the contention of the applicant that they are not liable to service tax in view of decision in  Paul Merchants Ltd  -  2012-TIOL-1877-CESTAT-DEL : CESTAT [para 11]

We had reported this order as 2014-TIOL-1972-CESTAT-MUM.

The appeal was heard in July and a 63-pages order was passed recently.

Billed & Unbilled transactions

The cases where the appellants bill the retail clients, and receive money, are termed as billed transactions . The 2 nd 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 consignees 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.

The charges:

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.

The submission made by the appellant under various heads and the observations of the CESTAT are as below –

Classification:

Primary submission of appellant is 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.

The Bench held:

+ 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.

+ 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 nature of services in BSS is totally different from the services provided by the appellant.

+ 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 consignor's premises or from consignee's 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. [section65A of FA, 1994 refers]

Taxability & Computation:

The Member (T) writing for the Bench crystallised the issue through the following Tabulations -

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

The network fee is only an account of monthly settlement between appellants and DHLI and the calculation of the same is as below -

The Bench observed –

+ 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 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.

+ 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 consignment 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 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.

The Bench then went on to explain how the transaction actually takes place for each of the categories on the basis of the summary accounting statement given by the appellant.

And the consolidated statement is reflected as under –

The Bench, thereafter, observed –

+ 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 is 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.

+ 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.

+ Thus it is held that adjustment of the receivables for service provided against the amounts payable 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.

Whether Export of Service?

Appellant have argued that in terms of the Circular 111/05/2009-ST dated 24 Feb 2009 the service provided by them would be export of service.

Observations of Bench:

+ It is seen that the service provide 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 Rules, 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 provided 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.

+ 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 appellant's 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.

Limitation

+ Appellants 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. 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. They have misrepresented the Network Fee as a co-loading fee.

Penalty:

+ 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.

+ It is a fact that the value declared by the appellants is not correct. Thus the defense of the appellants is without any basis.

+ 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.

Cum-tax benefit:

+ 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. [CCE vs Advance Media Consultants 2008 TIOL 548 CESTAT refers]

+ 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.

Conclusion:

The impugned order is modified as below -

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.

In passing : If I look confused it is because I am thinking – Samuel Goldwyn

(See 2015-TIOL-2695-CESTAT-MUM)