By TIOL News Service

MUMBAI, MAR 14, 2016 : THE appellant has entered into contractual agreements with its participating Group Companies to procure certain services on their behalf so as to share the cost among the Participating Group Companies. The role of the appellant is limited to monitoring and coordinating the arrangement for all participants. Such procurement inter alia includes provision of Aircraft Hiring Services, Branding Services, Professional Services, Custodian Services etc. The expenses/cost incurred by the Appellant in procuring the specified services on behalf of the Participating Group Companies are separately charged to and reimbursed by the Participating Group Companies.

As per the Agreements entered by the appellant, the Participating Group Companies would jointly pay fixed fee of Rs. 1 Crore per annum as remuneration to the appellant for acting as a manager and carrying out the activities envisaged under the agreement.

The appellant has classified these services under the category of "Support Services of Business or Commerce" and have been paying service tax since 2008-09 onwards.

Revenue alleges that in the FY 2006-07 and 2007-08 the appellant had provided similar services for an amount of Rs.33,01,29,105/- and Rs.1,13,53,17,136/- respectively but had neither taken ST registration nor discharged their tax liability.

A SCN dated 20.10.2011 was issued to the appellant demanding tax of Rs.15,14,14,192/- for the impugned period alleging that services rendered by the Appellant to its Group Companies is classifiable under ‘Business Support Services' u/s 65(105)(zzzq) of the FA, 1994.

As the tax demand was confirmed along with an equivalent penalty, the appellant is before the CESTAT.

The Bench, after considering the elaborate submissions made by both sides, in a marathon observed –

++ The Appellant does not provide any services to the Participating Group Companies except coordinating and monitoring the cost sharing arrangement.

++ The Appellant shall be entitled for a fixed remuneration of Rs. One Crore per annum for acting as a manager. The Appellant has agreed to act as such Manager on the basis that the cost of obtaining and employing the Resources would be distributed to and borne by the Participating Group Companies by sharing of costs of arrangement.

++ It is clear ( from the Notes to the accounts in the balance sheet for the period ending 31.03.2008 ) that common services are not ‘provided' by the appellant but these are only ‘procured' by the appellant from the Service Providers. Costs thereof are shared by the recipient Participating Group Companies by making reimbursements to the Appellant. The Appellant merely carries out the agency function of procurement of services for the Participating Group Companies which share the costs and expenses thereon.

++ The reimbursements of the cost/expenses incurred by the Appellant cannot be regarded as consideration flowing to the Appellant towards the taxable service provided by the Appellant rather the receipts are towards the reimbursements of the cost/expenses incurred by the Appellant in terms of the cost sharing agreement with the Participating Group Companies.

++ The activities carried out by the Appellant enables the Participating Group Companies to share the common services, the best available talent and resources required for carrying out their business activities. No taxable service is provided by the Appellant and, therefore, in absence of rendition of such service by the Appellant to the Participating Group Companies, the demand of Service tax cannot sustain.

++ There is no dispute on the fact that no additional fees or profits or consideration for Pure Agent services is received by the appellant, who has merely recovered actual costs incurred from the Participating Group Companies.

++ The definition of ‘Business Support Services' covers only specific activities in its inclusive part of the definition. Only if such specific activities are carried out, it would be classifiable as Business Support Services. The Appellant per se in its own capacity has not provided any of the specified services to the Participating Group Companies.

++ There is no dispute on the fact that w.e.f. 1.5.2011, the words ‘operational assistance for marketing" earlier appearing in clause 104 (c) of section 65 were substituted with "operational or administrative assistance in any manner", to enhance the scope of the definition of "support services of business or commerce". This amendment is only prospective in operation. Therefore, in any event, prior to 1.5.2011 any such assistance by the appellant cannot be within the scope of the definition of "support services of business or commerce" , and consequently, neither any such assistance was a "taxable service" within the scope of section 65 (105) under clause (zzzq), nor was any person providing such assistance was falling within the term "service provider" under section 65(105).

++ The adjudicating authority erred in refusing to treat the Appellant as ‘Pure Agent' under Rule 5(2) of the Valuation Rules merely because the service procured by the Appellant are not attributable to any one particular Group Company. The Rule 5(2) of the Valuation Rules does not stipulate any condition as to one on one identification of service recipient and service provider in order to fall within the ambit of ‘Pure Agent".

++ The amount recovered by the Appellant from the Participating Group Companies is precisely the same as has been paid by the Appellant to the third party vendors/service providers. The goods or services procured by the Appellant for the use of participating Group Company are not availed by the Appellant for its own use or consumption, and the Appellant has no function or existence other than as Trustee / Manager (agent) of the Participating Group Companies cost sharing arrangement. We therefore find no bones in observing that the Appellant completely satisfies the conditions of a ‘Pure Agent' as set out in Rule 5(2) of the Valuation Rules.

++ The adjudicating authority [in para 4.26] categorically recorded a finding on lack of any intention on the part of the assesse not to pay the Service Tax. He also recorded a finding that the case is revenue neutral. The Tribunal in Daman Ganga Board Mills Pvt. Ltd. Vs CCE, 2011-TIOL-1227-CESTAT-AHM held the show cause notice as barred by limitation on finding that the entire exercise alleged was revenue neutral. In CCEx Vs Reclamation Welding Ltd. , it was held by the Tribunal that when recipient of same group company is eligible to avail the CENVAT Credit of the duty paid by the assessee, the assessee could not be alleged to have mala fide intent to evade payment of duty and accordingly extended period of limitation cannot be invoked. Therefore, even on this ground the entire demand and any contrary finding recorded for invoking extended period, are liable to be set aside.

The impugned order was set aside & the appeal was allowed with consequential relief.

In passing: Also see 2015-TIOL-2273-CESTAT-MUM.

(See 2016-TIOL-603-CESTAT-MUM)