By TIOL News Service

MUMBAI, DEC 27, 2016: THE issue involved is - Whether service tax is payable under "Business Auxiliary Service" on the advertisements of computers (the Appellants final products), carrying a foot note "Intel Inside" and "Microsoft Windows" logos, belonging to their respective owners, in a case where reimbursement of the said advertisement expenses is received from Intel and Microsoft.

The DGCEI was of the view that the services provided by the appellants are taxable under 'Business Auxiliary Service' as per Finance Act, 1994 effective from 01.07.2003.

However, since the appellants were not discharging their service tax liability on the commercial considerations received, SCNs were issued.

The demands of service tax were confirmed along with interest and penalties. The period involved is 01.07.2003 to 28.02.2007.

In the matter of the stay application filed, the Member (J) writing for the Division Bench while waiving the pre-deposit of the ST confirmed observed thus -  2011-TIOL-1112-CESTAT-Mum -

5. From perusal of the show-cause notice, it is clear that the allegation against the applicants is promotion of brand name and not the promotion of branded goods. Therefore, the said activity has come into taxable net w.e.f 01.07.2010 and the same has been considered by this Tribunal in the case of Jetlite (India) Ltd. (supra), wherein this Tribunal has held that promoting the brand name does not fall under the category of 'Business Auxiliary Services'. Therefore, we find that the appellant have made out a strong prima facie case for complete waiver of pre-deposit of Service Tax, interest and penalty. Accordingly, the same is waived and recovery thereof is stayed during pendency of the appeal."

When the appeal was heard, there was a difference of opinion and, therefore, the matter came to be referred to the third Member for a majority decision.

The following difference of opinion was placed before the third Member -

Whether the Member (Judicial) is correct in holding that the appellants are engaged in the  activity of promoting the brand of Intel/Microsoft  consequently, the activity of 'promotion or marketing of logo or brand' does not cover under the category of Business Auxiliary Service by relying on the judgment of Jetlite (India) Ltd. (supra).

Or

Whether the Member (Technical) is correct in holding that the appellants are engaged in the  activity of promoting the branded goods of Intel/Microsoft, therefore, the judgment of Jetlite (India) Ltd., (supra) is not applicable to the facts of this case and the demands are rightly confirmed under the category of Business Auxiliary Service and the extended period of limitation has rightly been invoked.

We reported this order as - 2012-TIOL-1349-CESTAT-MUM.

Incidentally, against this decision, the appellant had filed a ROM application before the Tribunal but the same was dismissed thus -

We reported this order as 2012-TIOL-1814-CESTAT-MUM .

Unhappy with this decision of the CESTAT, the appellant filed an appeal before the Bombay High Court but the same was dismissed on the ground that it did not raise any substantial question of law. Nonetheless, the High Court made the following scathing observations -

This order was reported as - 2014-TIOL-623-HC-MUM-ST .

The Third Member on reference, Member (Technical) heard the matter in July and an order was passed recently.

The Member (T) observed thus -

++ I must confess to being confronted with a predicament in resolving this difference of opinion as the order of Hon'ble Member (J) concludes with his finding that the said contributions of M/s Intel Corporation and M/s Microsoft Corporation are not liable to tax under section 65(105)(zzb) of Finance Act, 1994 but Hon'ble Member (T) has, besides confirming liability to tax under this head, gone on to render findings against appellants on the claim that the said consideration is exempted from tax being an export and on the claim that the demands are barred by limitation prescribed in section 73(1) of Finance Act, 1994.

++ I notice that the difference of opinion concurred with by both Hon'ble Members does include the issue of limitation as decided upon by Hon'ble Member (T) and must, therefore, be addressed by me in the event that the primary issue is against appellants with the potential of the legality of that determination being questioned.

++ On the issue of limitation, Learned Counsel for appellants have drawn my attention to the finding in the order of Hon'ble Member (T) that the circumstances do not warrant imposition of penalty under section 78 of Finance Act, 1994…

++ Proviso to section 73(1) of Finance Act, 1994 and section 78 are predicated on the same ingredients and recourse to the proviso, while acknowledging that circumstances do not justify penalty under section 78, does not appear to bear the hallmark of consistency. I am, therefore, unable to concur with the finding of Hon'ble Member (T) that the extended period has been correctly invoked.

++ From the (definition of BAS), it is clear that the recipient of any of the specified activities has to be a client for the tax to crystallize. …We need to not concern ourselves with all the specific activities enumerated in section 65(19) and may restrict ourselves to that of 'promotion or marketing or sale of goods produced or provided by or belonging to the client'.

++ A key element in the definition of 'business auxiliary service' are the goods in relation to which service is rendered. The goods are to be produced or provided by or belonging to the client. There is no dispute that the goods supplied by M/s Intel Corporation and M/s Microsoft Corporation are bought by appellants thus ruling out any allegation that service is rendered by appellants in relation to these goods. Neither do the facts hold that goods are provided by M/s Intel Corporation or M/s Microsoft Corporation to the appellant for rendering of services.

++ Appellants use the products of M/s Intel Corporation and M/s Mi crosoft Corporation not to sell them as such but to manufacture personal computer; the portion of the definition supra relating to sale of goods referred to in section 65(19)(i) [promotion or marketing or sale of goods produced or provided by or belonging to the client]will not, therefore, apply to the present dispute.

++ Appellants are manufacturers of branded products and, by no stretch of imagination, can it be inferred that, in the process of promoting their own products, the components in the personal computers were also marketed for a consideration paid by M/s Intel Corporation and M/s Microsoft Corporation. Obviously, the allegation of having promoted the products of these two entities can only be with reference to future releases from the two entities. Suffice it to say that appellants are reimbursed some portion of the cost of advertising and publicity conducted upon inclusion of the logos of the two entities in the advertising and publicity material of the appellants. The reimbursements are drawn from a fund created out of a contribution of the two entities that is directly linked to purchases effected in the past by appellant. There is no connect between the source of contribution for the publicity campaign and the outcome of the publicity campaign.

++ A question that arises is whether the two suppliers benefit in any manner from the inclusion of their logos in the advertisement and publicity material deployed by the appellants. In scale and reputation, appellants are incomparable with the two global giants. It is difficult to conceive that the products of these two entities will find additional acceptability in the market owing to the inclusion of their respective logos. The products themselves are amenable to utilization only by computer manufacturers and the publicity, if any, among the potential customers of the two appellants is unlikely to derive any economic benefits to the supplier.

++ On the contrary, the products of the appellants are likely to find greater acceptance among potential customers owing to the acknowledged incorporation of the products of M/s Intel Corporation and M/s Microsoft Corporation in the computers manufactured by the appellants. Such a reversal of roles would alter the relationship in a manner that was not contemplated in the show cause notice. That the reimbursements are circumscribed by funds added in proportion to the procurements effected by the appellants from the two suppliers and not from enhanced sales attributed to the alleged promotion of product would reinforce the conclusion that the objective of the schemes is not the enhancement of the customer-base of M/s Intel Corporation and M/s Microsoft Corporation and, thus, not in consonance with the definition of taxable activity in section 65(19)(i) of Finance Act, 1994.

++ At best, it may be surmised that the scheme incentivizes the appellants to procure more products from the two suppliers and to enhance the sales of the computers manufactured by the two appellants. Such a benefit to the appellants would not qualify as promotion of product of client. Indeed, the impugned order should have ascertained the existence of a client-provider relationship between the appellants and the two suppliers along the nature of the fiscal flow accruing to the appellants as a prelude to determining the taxability. Owing to this lack in the impugned order and in view of the above, I find myself unable to concur with Hon'ble Member (T) that the activity of the appellants is promotion of the branded goods of M/s Intel Computers and M/s Microsoft Computers taxable as 'business auxiliary service'. I, therefore, concur with Hon'ble Member (J) to find in favour of the appellants.

And so, the Majority decision is that the impugned order was set aside and the appeals were allowed with consequential relief.

(See 2016-TIOL-3334-CESTAT-MUM)