By TIOL News Service

NEW DELHI, MAY 30, 2017: THE appellant is in the business of running multiplex cinema houses and are registered for the payment of service tax under various taxable categories.

The appellant entered into an agreement with Pepsi Foods Limited on 02/04/2002 for promotion of products of the client in the multiplex run by the appellant.

The appellants were discharging service tax on the income received from Pepsi which are attributable to marketing/promotion of their products.

The dispute in the present appeal relates to appellant's tax liability on "pouring fees" paid by Pepsi to the appellant in terms of Clause 12 of the agreement readwith Schedule 5. The said schedule stipulated that for a period of six years Pepsi shall pay ‘pouring fees' starting from Rs.52 lakhs for the first year and after progressive increase to pay Rs.129 lakhs for the 6th year.

The Revenue viewed that the said "pouring fees" income is taxable under the category of Business Auxiliary Service.

Accordingly, proceedings initiated were concluded in the form of demand of service tax of Rs.40,14,042/- for the period 01/07/2003 to 31/03/2007. Penalties were also imposed.

In appeal before the CESTAT, the appellant submitted that the agreement is basically for buying products of Pepsi for sale in their premises and the pouring fees received is an additional discount in such sale transaction. Inasmuch as the pouring fee is to be considered as an amount received for not allowing other competing products to be displayed and sold in their premises viz.as non-compete fees and not liable to service tax. The appellant has also taken the ground of limitation.

The AR justified the demand and negated the submissions of the appellant.

The Bench observed -

On merits:

+ The nature of such (pouring) fee and the reason for such payment is not elaborated in the agreement... In fact Clause 5 of the agreement clearly stipulates the price consideration and the discounts entitled, very clearly. There is no reason to consider pouring fees as additional discount.

+ Regarding the argument that it should be considered as a non-compete fee pursuant to an exclusive arrangement between Pepsi and the appellant, we note that there is no stipulation regarding non-compete obligation on the part of the appellant in the agreement itself. There is no linkage of a particular act of the appellant to receive the pouring fees.

+ In the letter dated 23/01/2012, Pepsico clarified to the appellant that the said fee is paid to dissuade PVR from entering into similar contract with other competitors of Pepsi. We note that if pouring fee is to be considered as non-compete fee, first of all there should have been indication in the agreement to that effect and second such non-compete arrangement should be enforceable by law . Payment of an amount to dissuade an appellant from displaying competitor's products, by itself, cannot be equated to a non-compete agreement.

+ We find that pouring fees as received by the appellant cannot be considered as a discount for sale transaction or as a payment for non-compete reason as given by the appellant. The indication is that it is more in the nature of fee received for promotion of Pepsi products. As such, we find no merit in the appellant's plea regarding non-taxability of the said consideration received by them.

Limitation:

"…we find that the appellants were registered with the Department under taxable categories of BAS and other tax entries and the appellants did not disclose the receipt of consideration as ‘pouring fees' in any of their returns. The facts remains that even on enquiry the appellants did not take any effort to get the issue clarified except seeking advice from Pepsi. When the appellants were showing and discharging service tax on receipts for various promotional activities it is apparent that significant portion of receipt under the category of ‘pouring fees' received for such activities should have been included in the tax returns during the material time.The tax, if any, paid could have been reimbursed from Pepsi, by itself, does not establish the bonafide of the appellant."

Concluding that the demand invoking the extended period has been correctly raised and confirmed and penalties were justified, the appeal was dismissed.

(See 2017-TIOL-1813-CESTAT-DEL)