Custom, Excise & Service Tax Tribunal
Croda India Company Pvt Ltd vs Commr.Service Tax- Vii Mumbai on 17 May, 2019Bench: S. K. Mohanty, Sanjiv Srivastava CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL, MUMBAI WEST ZONAL BENCH COURT No. Appeal No. ST/86398/2015 (Arising out of Order-in-Original No. 48/ST-VII/RS/2014 dated
23.03.2015 passed by Commissioner of Service Tax, Mumbai-VII) Croda India Company Pvt. Ltd. Appellant
Plot No.1/1 Part,
TTC Industrial Area, MIDC,
Thane-Belapur Road,
Koparkhairne,
Thane 400 709 Vs.
Commissioner of Service Tax-VII Respondent
Mumbai
115, New Central Excise Bldg.,
M.K. Road, Churchgate,
Mumbai 400 020.

Appearance:
Shri Gagan Kumar with Shri Lokesh Jain, Advocates for the
Appellant
Shri M.K. Sarangi, Authorised Representative for the
Respondent CORAM:
Hon’ble Mr. S.K. Mohanty, Member (Judicial)
Hon’ble Mr. Sanjiv Srivastava, Member (Technical) FINAL ORDER NO. A/85916/2019 Date of Hearing: 11.02.2019 Date of Decision: 17.05.2019 PER: SANJIV SRIVASTAVA This appeal is directed against order in original No
46/ST-VII/RS/2014 dated 23.03.2015 of Commissioner
Service Tax -VII Mumbai. By the said order Commissioner
has held as follows:

“4.1 I confirm the demand of Service Tax of Rs
1,32,57,559/- (Rupees One Crore Thirty Two Lakhs Fifty 2 ST/86398/2015 Seven Thousand Five Hundred and Fifty Nine only) and
order its recovery from M/s Croda Chemicals (India)
Private Limited under the provisions of Section 73(2) of
the Finance Act, 1994 for the reasons discussed above.

4.2 I order recovery of interest at appropriate rate from
the due date till the date of payment, on the amount of
demand confirmed at Para 4.1 above, from M/s Croda
Chemicals (India) Private Limited under the provisions of
Section 75 of the Finance Act, 1994.

4.3 I impose a penalty of Rs 1,32,57,559/- (Rupees One
Crore Thirty Two Lakhs Fifty Seven Thousand Five Hundred
and Fifty Nine only) on M/s Croda Chemicals (India)
Private Limited under the provisions of Section 78 of the
Finance Act, 1994.

4.4 I impose a penalty of Rs 10,000/- (Rupees Ten
Thousand only) under Section 77 of the Finance Act, 1994
on M/s Croda Chemicals (India) Private Limited.”

2.1 Appellant are registered with the department for
providing various taxable services viz Technical Inspection
and Certification Agency Services, Maintenance and Repair
Services, Business Auxiliary Services, Transport of Goods
by Road Transport Agency Service, Business Support
Service and Information Technology Software Services.

2.2 During the course of CERA audit it was noticed that
Appellants had during the period 2008-09 to 2012-13
received from their associated enterprises (M/s Croda
International) located abroad a sum of Rs 12,02,62,275/-
for sale of their goods (falling under chapter 29, 34 & 38)
in India as detailed in the table below:

S Particulars Amount (Rs)
No 1 Commission from Overseas Group 9,40,89,745 Companies 2 Expenses Reimbursed by Overseas 80,51,169 3 ST/86398/2015 Group Companies 3 Foreign Exchange remittance made 1,81,21,361 Total 12,02,62,275 2.3 On this amount received they did not paid the
Service Tax amounting to Rs 1,32,57,59/-.

2.4 A show cause notice was thus issued to the
appellants asking them to show cause as to why this
amount of Rs 1,32,57,559/- should not be demanded from
them in terms proviso to Section 73(1) of Finance Act,
1994 along with interest under Section 75. Penalties under
Section 76, 77 & 78 ibid were also proposed.

2.5 After considering the submissions made by the
appellants Commissioner adjudicated the matter as per his
order referred in para 1, supra. Aggrieved by the order of
Commissioner, Appellants filed this appeal.

3.1 We have heard Shri Gagan Kumar, Advocate for the
Appellants and Shri M K Sarangi, Additional Commissioner,
Authorized representative for the revenue.

3.2 Arguing for the Appellants learned counsel
submitted-

i. They are not liable to pay service tax amounting to Rs 1,04,96,144/- on the indent commission received by them for the sale of goods in domestic market. These services have been provided by them to their group companies abroad and are to be treated as export of services for the reason as follows:
a. Period 01.04.2008 to 27.02.2010 Rule 3(1)(iii)/ Definition 3(2)(a)(b) Export of Service Rules, 2005 during this period for the Business Auxiliary Service to qualify as export of service, the service should have been provided to a person outside India and should have been used outside India. Also the payments should have been received in 4 ST/86398/2015 convertible foreign exchange. Since the services provided by them are admittedly Business Auxiliary Services against which the payments have been received in convertible foreign exchange, these services will qualify as export of services as has been held in following cases;
GAP International [2015 (37) STR 757 (T- Del)] Microsoft Corporation (I) (P) Ltd [2014 (36) STR 766 (T-Del)] Paul Merchants Ltd [2013 (29) STR 257 (T- Del)] Samsung India Electronics P Ltd [2016 (42) STR 831 (T-Del)] IBM India (P) Ltd [2016 (55) GST 161 (T- Bang)] ABS India Ltd [2009 (13) STR 65 (T-Bang)] Blue Star Ltd [2008 (11) STR 23 (T-Bang)] SGS India (P) Ltd [2014 (34) STR 354 (Bom)] Simpra Agencies [2014 (36) STR 430 (T-Del)]
b. Period 28.02.2010 to 30.06.2012:

The clause (a) of Rule 3(2) of Export of Services Rule, 2005 which prescribed condition for use of outside India was deleted. Thus the only condition that was required to be satisfied was that the services specified should have been provided to person located outside India and the payment for the same should have been received in convertible foreign exchange. Since in the present case the service recipient was located outside India and the payments were received in convertible foreign exchange, the services provided were squarely covered by the said provisions as export of service.
5 ST/86398/2015 c. Period 01.07.2012 to 31.03.2013:
During this period the service tax has been demanded from them treating them as providing intermediary services and thus according to rule 9 of Place of Provision of Services Rules, the place of provision of services is the location of service provider. This approach cannot be sustained because prior to amendments made in the definition of intermediary by Notification No 14/20014-ST dated 11.07.2014 (w.e.f 1.10.2014), the definition did not included intermediary in relation to sale of goods. This exclusion of intermediary in relation to sale of goods is further evident from Education Guide, Para 5.9.6. Thus Rule 9 will not be applicable and the as per Rule 3 the place of provision will be the location of service recipient. The service provided thus will continue to be export of services in terms of Rule 6A of Service Tax Rule, 1994.
ii. They have recovered expenses under various heads from their overseas associate group companies on actual basis. Since these reimbursement is in relation to the services that are considered as export of services, these charges will form the part of full value of service rendered and exported. Hence not leviable to service tax. Further in case of Intercontinental Consultants & Technocrats (P) Ltd [2018 (66) GST 450 (SC)], Hon’ble Apex Court has held Rule 5(1) of The Service Tax 9determination of Value) Rules, 2006 is ultra vires and hence these reimbursements made cannot be subjected to service tax. Supreme Court has further held that amendments made to Section 67 by Finance Act, 2015, by adding explanation top the effect that 6 ST/86398/2015 “consideration includes reimbursement” is effective prospectively from 14.05.2015. Since entire period of demand is prior to that date, the demand made in respect of these reimbursements cannot be sustained.
iii. Appellants are not liable to discharge service tax on the reimbursement of expenses made to overseas associate group companies as these services were rendered to them completely outside India and hence are non taxable in terms of Section 66A of the Finance Act, 1994. Since these amounts are nothing but reimbursements then even in case of reverse charge the taxable value is to be determined under Section 67 of Finance Act, 1994 and as per decision of Apex Court in case of Intercontinental Consultants, these charges which are in nature of reimbursements cannot be part of the taxable value. Further whatsoever charges Service Tax is paid by the appellants under the reverse charge mechanism is also available to them as CENVAT Credit and hence the situation is totally revenue neutral.
iv. Extended period of limitation is not invokable in the present case in view of the decisions in following cases:
a. Continental Foundation Joint Venture [2007 (216) ELT 177 (SC)] b. Kingfisher Airlines Ltd. [2015 (40) STR 1159 (T-Mum)] c. Reliance Industries Ltd. [2016 (57) GST 84 (T-
Mum)]
v. Since they are not liable to pay service tax no penalty could have been imposed on them in view of following decisions:
a. Sarup Tanneries Limited [2005 (184) ELT 217 (T)] b. Explicit Trading [2004 (169) ELT 205 (T)] 7 ST/86398/2015 c. Gamma Consultancy (P) Ltd [2006 (4) STR 591 (T)]
vi. Interest is also not payable as there is no service tax payable beyond the due date.

3.3 Arguing for the revenue learned Authorized
Representative while reiterating the findings in impugned
order submitted that-

i. In respect of the demand which appellants claim to have been made in respect of the services exported by them i.e. commission towards sale of good in India from associated overseas companies the fact which is most relevant is whether these services have been utilized outside India. In case it is held that these services were utilized provided and utilized outside India then they can be treated as export of services. However adjudicating authority has relying on the Circular dated 13.10.2011 concluded that these services have been not been used outside India and hence cannot be treated as export of services. The decisions of the Tribunal in case of GAP International referred to by the Appellants is clearly distinguishable. ii. The pleadings of the Appellant are self contradictory is as much as they are relying on CBEC guidelines (w.e.f 01.07.2012) to say that they are not providing intermediary service of Commission Agent, while on the other hand they are disputing the applicability of Circular dated 13.05.2011.
iii. The decision in case of Star India Pvt Ltd [2015 (8) STR 884 (T-Mum)] squarely covers the issue in favour of revenue.
iv. The other decisions relied upon by the appellants in case of Crompton Greaves Ltd 2015-TIOL-2724- CECT-Mum, Roha Dyechem Ltd 2017-TIOL-3448- CEST-Mum, SGS India [2014 (34) STR 354 (Bom)] & 8 ST/86398/2015 Tech Mahindra [2014 (36) STR 241 (Bom)] are also distinguishable.
v. On the issue of revenue neutrality, it should be noted that in terms of CENVAT Credit scheme all the tax payments made under the Act are made Cenvatable to avoid the cascading effect. The general preposition that only because they are eligible to CENVAT Credit they are not required to pay tax is against the basic framework of law.
vi. Extended period of Limitation is rightly invokable in the present case in view of the decisions in case of Reliant Advertising [2013 (31) STR 166 (T)], Vodafone Digilink [2011 (24) STR 562 (T-Del)] and Bharat Sanchar Nigam Ltd [2011-TIOL-552-CEST- Mum] 4.1 We have considered the impugned order,
submissions made in the appeal and during the course of
arguments.

4.2 Demand of Service tax in the present case has been
made on three counts, i.e. i. The charges received by the appellants from their associated group of companies abroad for sale of their goods in India as Commission are leviable to service tax. (Service Tax demand Rs 1,04,96,144/-) ii. The charges received by the appellant for recovery of expenses from associate group companies (Service Tax Demand Rs 8,67,926/-)
iii. The foreign exchange remittances made by the appellant for recovery of expenses to the associate group companies (Service Tax Demand Rs 18,93,490/-) 4.3 The issues for our consideration in the present case
are framed as under:-

I. Whether the charges recovered by the Appellants as Commission for sale of goods of associated group of 9 ST/86398/2015 companies abroad are leviable to service Tax under category of Business Auxiliary Service provided in India or the same are in respect of Export of Services as defined from time to time and thus exempt from payment of Service Tax.
II. Whether Service Tax is leviable in respect of reimbursements made by the associated group companies to the appellants towards expenses actually incurred by them.
III. Whether in respect of Foreign Exchange remittances made by the appellants to their associated group companies abroad for reimbursement of various expenses incurred by them could be levied to service tax on reverse charge basis treating the services provided as import of services.
IV. Whether the demand is hit by limitation as extended period of limitation as per Section 73 of The Finance Act, 1994 is not invokable in the present case. V. Whether demand for interest under Section 75 and penalties imposed under Section 77 and Section of Finance Act, 1994 can be sustained.

4.4 Whether the charges recovered by the
Appellants as Commission for sale of goods of
associated group of companies abroad are leviable
to service Tax under category of Business Auxiliary
Service provided in India or the same are in respect
of Export of Services as defined from time to time
and thus exempt from payment of Service Tax.

4.4.1 Admittedly the services provided by the appellant in
respect of the sale of goods for the associated group of
companies abroad in India are classifiable under the
taxable category of Business Auxiliary Services as defined
by the Section 65(105)(zzb) of the Finance Act, 1994.
While the contention of revenue is that commission
received by the appellants towards provision of these 10 ST/86398/2015 services is taxable in India, appellant claim exemption
treating these services as export of services during the
relevant periods. Thus we are concerned with the question
whether these services are services provided in India or
are export of services.

4.4.2 In the present case we are concerned with the period
from 2008-09 to 2012-13. During the period under
consideration, whether services provided are export of
services or not needs to determined in terms of Export of
Services Rules, 2005 as amended from time to time for
period upto 30.06.2012 and for period thereafter in terms
of Place of Provision of Services Rules, 2012. The relevant
provisions of the Rule as they existed from time to time
during the period of dispute are reproduced below:

Export of Service Rules, 2005 (1) Export of taxable services shall, in relation to taxable services.-
(i) ………; (ii) ………: Provided …….;.
(iii) specified in clause (105) of section 65 of the Act, but excluding.-
a. sub-clauses (zzzo) and (zzzv);
b. those specified in clause (i) of this rule except when the provision of taxable services specified in sub-clauses
(d),(zzzc),(zzzr) and (zzzzm) does not relate to immovable property; and c. those specified in clause (ii) of this rule, when provided in relation to business or commerce, be provision of such services to a recipient located outside India and when provided otherwise, be provision of such services to a recipient located outside India at the time of provision of such service:
11 ST/86398/2015 Provided that where such recipient has commercial establishment or any office relating thereto, in India, such taxable
services provided shall be treated as export of service only when order for provision of such service is made from any of his commercial establishment or office located outside India. Provided further that where the taxable service referred to in sub-clause (zzzzj) of clause (105) of section 65 of the Act …..

(2) The provision of any taxable service specified in sub-
rule (1) shall be treated as export of service when the
following conditions are satisfied, namely:-

a. such service is provided from India and used outside India; and b. payment for such service provided outside India is received by the service provider in convertible foreign exchange.

Explanation.- ……..

(In sub-rule (2), clause (a) – omitted & Explanation at
clause (b) – substituted vide NTF. NO. 06/2010-ST, DT.
27/02/2010) Place of Provision of Services Rules, 2012.

2. Definitions (f) “intermediary” means a broker, an agent or any
other person, by whatever name called, who arranges or
facilitates a provision of a service (hereinafter called the ‘main’ service) between two or more persons, but does not
include a person who provides the main service on his
account.;

3. Place of provision generally –

The place of provision of a service shall be the location of
the recipient of service:
12 ST/86398/2015 Provided that in case the location of the service receiver is
not available in the ordinary course of business, the place
of provision shall be the location of the provider of service.

9. Place of provision of specified services.-

The place of provision of following services shall be the
location of the service provider:-

(a) ……;

(b) …….;

(c) Intermediary services;

(d) ……..

4.4.3 Admittedly in the present case, the commission
received by the appellant is in respect of the sale of goods
of associated group companies in India. It is not the case
wherein the commission was paid in respect of the goods
sold by the associated group companies elsewhere. It is
the submission of the appellants that the services provided
by them to their associated group companies for which
they have received this commission is a performance
based service. In para 3.2 of his order Commissioner has
recorded as follows:

“3.2 The Noticee have admitted that they are providing
services of commission agent to their associated group
companies which are located outside India. They have also
admitted that the associated group companies do not have
any business operations in India. They only have
customers located in India. Therefore the marketing and
promotion services provided by the Noticee are used by
the sales of the product to the customers in India.
Admittedly, Noticee have earned commission of Rs
9,40,66,745/- from its associate group companies, located
abroad for selling of goods manufactured by them, in
Indian market during the period 2008-09 to 2012-13. The
services of commission agent were used in India.” 4.4.4 CBEC has vide 13 ST/86398/2015 i. Circular No 111/05/2009 dated 24.02.2009 clarified as follows: “2. The matter has been examined. Sub-rule (1) of
rule 3 of the Export of Services Rule, 2005 categorizes the
services into three categories:

(i) Category (I) [Rule 3(1)(i)] : For services (such as
Architect service, General Insurance service, Construction
service, Site Preparation service) that have some nexus
with immovable property, it is provided that the provision
of such service would be ‘export’ if they are provided in
relation to an immovable property situated outside India.

(ii) Category (II) [Rule 3(1)(ii)] : For services (such
as Rent-a-Cab operator, Market Research Agency service,
Survey and Exploration of Minerals service, Convention
service, Security Agency service, Storage and Warehousing
service) where the place of performance of service can be
established, it is provided that provision of such services
would be ‘export’ if they are performed (or even partly
performed) outside India.

(iii) Category (III) [Rule 3(1)(iii)] : For the remaining
services (that would not fall under category I or II), which
would generally include knowledge or technique based
services, which are not linked to an identifiable immovable
property or whose location of performance cannot be
readily identifiable (such as, Banking and Other Financial
services, Business Auxiliary services and Telecom
services), it has been specified that they would be ‘export’,-

(a) If they are provided in relation to business or
commerce to a recipient located outside India; and (b) If they are provided in relation to activities other than
business or commerce to a recipient located outside India
at the time when such services are provided.
14 ST/86398/2015 3. It is an accepted legal principle that the law has to
be read harmoniously so as to avoid contradictions within
a legislation. Keeping this principle in view, the meaning
of the term ‘used outside India’ has to be understood in
the context of the characteristics of a particular category of
service as mentioned in sub-rule (1) of rule 3. For
example, under Architect service (a Category I service
[Rule 3(1)(i)]), even if an Indian architect prepares a
design sitting in India for a property located in U.K. and
hands it over to the owner of such property having his
business and residence in India, it would have to be
presumed that service has been used outside India.
Similarly, if an Indian event manager (a Category II
service [Rule 3(1)(ii)]) arranges a seminar for an Indian
company in U.K. the service has to be treated to have
been used outside India because the place of performance
is U.K. even though the benefit of such a seminar may flow
back to the employees serving the company in India. For
the services that fall under Category III [Rule 3(1)(iii)],
the relevant factor is the location of the service receiver
and not the place of performance. In this context, the
phrase ‘used outside India’ is to be interpreted to mean
that the benefit of the service should accrue outside India.
Thus, for Category III services [Rule 3(1)(iii)], it is
possible that export of service may take place even when
all the relevant activities take place in India so long as
the benefits of these services accrue outside India.
In all the illustrations mentioned in the opening paragraph,
what is accruing outside India is the benefit in terms of
promotion of business of a foreign company. Similar
would be the treatment for other Category III [Rule
3(1)(iii)] services as well.”

ii. Circular No 141/10/2011 dated 13.05.2011 clarified as follows:
15 ST/86398/2015 Circular No.111/05/2009-ST was issued on 24th February
2009 on the applicability of the provisions of the Export of
Services Rules, 2005 in certain situations. It had clarified
on the expression “used outside India” in Rule 3(2)(a) of
the Export of Service Rules 2005 as prevalent at that time.
The condition specified in Rule 3(2)(a) has since been
omitted vide Notification 06/2010-ST dated 27 Feb 2010.
In the context of the stated Circular an issue has been
raised, whether for the period prior to 28.2.2010 the
requirement that the service should be “used outside
India” invariably means the location of the recipient?

2. In the stated Circular it was inter-alia, clarified that the
words, “used outside India” should be interpreted to mean
that “the benefit of the service should accrue outside
India”. It is well known that services, being largely
intangibles, are capable of being paid from one place and
actually used at another place. Such arrangements
commonly exist where the services are procured centrally
eg audit, advertisement, consultancy, Business Auxiliary
Services. For example, it is possible to obtain a
consultancy report from a service provider in India, which
may be used either at the location of the customer or in
any other place outside India or even in India. In a
situation where the consultancy, though paid by a client
located outside India, is actually used in respect of a
project or an activity in India the service cannot be said to
be used outside India.

3. It may be noted that the words “accrual of benefit” are
not restricted to mere impact on the bottom-line of the
person who pays for the service. If that were the intention
it would render the requirement of services being used
outside India during the period prior to 28.2.2010
infructuous. These words should be given a harmonious
interpretation keeping in view that during the period upto
27.2.2010 the explicit condition was provided in the rule 16 ST/86398/2015 that the service should be used outside India. In other
words these words may be interpreted in the context
where the effective use and enjoyment of the service has
been obtained. The effective use and enjoyment of the
service will of course depend on the nature of the service.
For example effective use of advertising services shall be
the place where the advertising material is disseminated to
the audience though actually the benefit may finally accrue
to the buyer who is located at another place.

4. This, however should not apply to services which are
merely performed from India and where the accrual of
benefit and their use outside India are not in conflict with
each other. The relation between the parties may also be
relevant in certain circumstances, for example in case of
passive holding/ subsidiary companies or associated
enterprises. In order to establish that the services have
not been used outside India the facts available should
inter-alia, clearly indicate that only the payment has been
received from abroad and the service has been used in
India. It has already been clarified that in case of call
centers and similar businesses which serve the customers
located outside India for their clients who are also located
outside India, the service is used outside India.

5. Besides above, to attain the status of export, a number
of conditions need to be satisfied which are specified in
Rule 3(1) and Rule 3(2) of Export of Services Rules 2005.
The Circular No.111/05/2009-ST explained the expression “used outside India” only and the other conjunct
conditions, as applicable from time to time, also need to be
independently satisfied for availing the benefit of an
export.”

4.4.5 Thus there is no dispute about the facts that the
services provided by the appellant to their associated
group companies abroad are in relation to marketing and
promotion of the sale of the goods of those associated 17 ST/86398/2015 companies in India. Though the receiver of the service is
located outside India he uses these services for promoting
the sale of goods in India. In our view the services
rendered in relation to marketing and sales promotion of
goods in India have been used by the associated group
companies in India. It is only as result of such usage of
services in India that the sales of the these associated
group company goes up in India.

4.4.6 In terms of Export of Service Rules, 2005 as they
existed prior to their amendment by Notification NO.
06/2010-ST, dated 27/02/2010, Rule 3(2)(a), specifically
prescribed the condition of “use outside India” as
determining factor to treat the services as export of
services. The phrase used in the said rule is “used outside
India” and not “beneficiary of service outside India”. In the
present case though the beneficiary of service is located
outside India, but the use of service is in India for sales
promotion of the goods of the beneficiary. The sales
promotion of the goods needs to be looked qua the market
in which the goods are sold or intended to be sold and not
qua the location of manufacturer/ beneficiary of service.
The same is the crux of the two circulars issued by CBEC.

4.4.7 Appellants have relied on series of decisions in
support of their contention that these services have been
issued by the recipient of services located abroad/ outside,
hence should be treated as export of service. These
decisions are considered in table below:

GAP International The facts of the case are
[2015 (37) STR 757 completely distinguishable. The
(T-Del)] services in case of GAP International were in relation to the procurement of goods and not for the sale of goods in Indian market. The goods by the foreign entity by availing the services of service provider were to be consumed by the foreign entity in foreign land. Since these services were in relation to the 18 ST/86398/2015 procurement of goods and not in relation to marketing and sales promotion of the goods in India the case is clearly distinguishable.

Microsoft Corporation As per the para 3.2 of the order
(I) (P) Ltd [2014 (36) the consideration for the services
STR 766 (T-Del)] provided is linked to the expenses incurred and is not linked to the invoice value as in the present case. Para 3.2 of the decision is reproduced below: “3.2 Consideration payable to appellant for providing aforesaid services was prescribed by clauses 6.1, 6.2, 6.3 and 6.4 of the agreement which reads as under :

“6.1 Product Support Services and Consulting Services. For product support services and consulting services rendered pursuant to Article 2, MO shall pay Subsidiary an amount equal to one hundred and ten percent (110%) of Subsidiary’s actual expenses, less revenues, incurred in connection with its duties, provided such expenses comply with Subsidiary’s budget, as adjusted from time to time, and provided, further, such expenses are not already covered by another Section of this Agreement or covered in another agreement between Subsidiary and MO or any MO affiliate. The reimbursement and additional compensation shall be exclusive of any applicable consumption tax such as a Value Added Tax or a Goods and Services Tax, which consumption tax shall be the responsibility of MO.

6.2 Marketing of Microsoft Products. For assistance in the marketing of Microsoft Products under Article 3, MO shall pay Subsidiary one hundred and fifteen percent (115%) of Subsidiary’s actual expenses, less 19 ST/86398/2015 revenues, incurred in connection
with its duties as defined in
Article 3, provided such expenses
comply with Subsidiary’s budget,
as adjusted from time to time,
and provided, further, such
expenses are not already covered
by another Section of this
Agreement or covered in another
agreement between Subsidiary
and MSFT or any MSFT affiliate.
Taxes, insurance, duties, freight
and other charges not
attributable to the Microsoft
Product itself paid by the
customer shall not be considered
in calculating the amount of
commission. The commission
payments shall be exclusive of
any applicable consumption tax
such as a Goods and Services Tax
or a Value Added Tax which
consumption tax shall be the
responsibility of MO.

6.3 RGE Services. For RGE
Services rendered pursuant to
Article 4, MO shall pay subsidiary
an amount equal to one hundred
and ten percent (110%) of
Subsidiary’s actual expenses, less
revenues, incurred in connection
with its duties, provided such
expenses comply with
Subsidiary’s budget, as adjusted
from time to time, and provided,
further, such expenses are not
already covered by another
Section of this Agreement or
covered in another agreement
between Subsidiary and MO or
any other MSFT affiliate. The
reimbursement and additional
compensation shall be exclusive
of any applicable consumption tax
such as a Value Added Tax or a
Goods and Services Tax, which
consumption tax shall be the
responsibility of MO.

6.4 Other Inter-company
Services. For other services
and/or sales provided pursuant to
Article 5, MO or Subsidiary shall 20 ST/86398/2015 invoice the recipient of the sales and/or services for such sales and/or services at a price as may be agreed between the parties from time to time, provided, however, that any amount so invoiced shall be consistent with the arm’s length standard (as defined in the OECD transfer pricing guidelines and relevant national legislation). The invoice shall contain a general description of the sales or services and the cost of the sales and/or services to be paid.””

From the reading of the said paras in the contract, the bench had observed in para 51 stating “Even otherwise also, I find that the disputed service is the service being provided by the appellant to his principal located in Singapore. The marketing operations done by the appellant in India cannot be said to be at the behest of any Indian customer. The service being provided may or may not result in any sales of the product in Indian soil.”

From the facts as stated above it is quite evident that services provided by Microsoft India, were generalized service for sales promotion of the products of Microsoft Singapore in the territory assigned to them, whereas in the present case the commission is linked not to expenditure but the actual invoice value of sale. Thus this decision to is distinguishable.
Paul Merchants Ltd As per para 4, the demand was
[2013 (29) STR 257 made on the reimbursement
(T-Del)] made by foreign entity towards the expense incurred by the Paul Merchants towards advertisement and other promotional activities undertaken for promoting the business of foreign entity. Hence this case too is distinguishable as 21 ST/86398/2015 the tax demand is in respect of the expenses reimbursed by the foreign entity and not in relation to actual sale of goods.

Samsung India This decision has been passed
Electronics P Ltd [2016 heavily relying on the decision in
(42) STR 831 (T-Del)] case of Blue Star Ltd, which is clearly distinguishable. Hence we find this decision also distinguishable.

IBM India (P) Ltd The period of dispute in the
[2018 (17) GSTL 268 present case was 16-8-2002 to
(T-Bang)] 30-11-2005, hence the matter should have been considered as per the law existing at that time but relying upon various decisions, rendered in terms of Export of Services Rules, 2005 the Bench passed the decision.
Since the matter needed to be considered and decided as per the law existing at the material time we do not find that this decision would be applicable in the present case.

ABS India Ltd [2009 Since the judgment is in respect
(13) STR 65 (T-Bang)] of the un-amended Export of Service Rules, 2005 it has not considered the scope of phrase “used in India” and hence is distinguishable.

Blue Star Ltd [2008 Since the judgment is in respect
(11) STR 23 (T-Bang)] of the un-amended Export of Service Rules, 2005 it has not considered the scope of phrase “used in India” and hence is distinguishable.

SGS India (P) Ltd In para 24, Hon’ble Bombay High
[2014 (34) STR 554 Court summarizes the fact stating
(Bom)] “24. In the present case, the Tribunal has found that the assessee like the respondent rendered services, but they were consumed abroad. The clients of the respondents used the services of the respondent in inspection/test analysis of the goods which the clients located abroad intended to import from 22 ST/86398/2015 India. In other words, the clients abroad were desirous of confirming the fact as to whether the goods imported complied with requisite specifications and standards. Thus, client of the respondent located abroad engaged the services of the respondent for inspection and testing the goods. The goods were tested by the respondents in India. The goods were available or their samples were drawn for such testing and analysis in India.
However, the report of such tests and analysis was sent abroad.
The clients of the respondent were foreign clients, paid the respondent for such services rendered, in foreign convertible currency. It is in that sense that the Tribunal holds that the benefit of the services accrued to the foreign clients outside India.”
Since in this decision the service under consideration was in relation to goods under consideration for import by a foreign entity, the same is distinguishable.

Simpra Agencies [2014 The issue under consideration in
(36) STR 430 (T-Del)] the case was with respect to classification of services. After holding that services are classifiable as “Business Auxiliary Services”. Tribunal followed its decision in case of GAP International and Paul Merchant since there is no discussion in respect of export of service vis a vis the facts of that case we do not find thus case applicable to the present set of facts.

4.4.8 In case of Tech Mahindra [2014 (36) STR 241
(Bom)], Hon’ble Bombay High Court has analyzed the
provisions of Export of Service Rules, 2005 and has held as
follows:

“57. The other submission of Mr. Sridharan pertains to
the Export of Services Rules, 2005. The argument 23 ST/86398/2015 proceeds on the footing that it is difficult to determine the
situs or locale of the service. Rule 3(1)(i), (ii) and (iii) of
the Export of Services Rules, 2005 have been enacted so
as to overcome the difficulty of determining the situs or
locale of service.

58. In that context, a closer look at these Rules would be
necessary. The Export of Services Rules, 2005 were
notified by Notification No. 9/2005 S.T., dated 3-3-2005.
Rule 3 defines what is export of taxable service. The
definition was substituted with effect from 19-4-2006. The
export of taxable service in relation to taxable services
which have been referred to in clause (i) of sub-rule (1) of
Rule 3 is in relation to an immovable property situated
outside India.

59. Then comes Rule 3(1)(ii) and which relates to taxable
service specified in sub-clauses of clause (105) of Section
65 of the Finance Act, 1994. However, the services
referred therein are those which are performed outside
India. The first proviso below this was stating that if such
taxable service is partly performed outside India it shall be
considered to be performed outside India. Then, there is a
further proviso of this sub-rule wherein it was stated that
any taxable service provided shall be treated as export of
service only if such service is delivered outside India and
used in the business or any other purposes outside India
and payment for such service provided is received by the
service provider in convertible foreign exchange. [see Rule
3(2)].

60. Rule 3(1)(iii) refers to all such taxable services
specified in clause (105) of Section 65 of the Finance Act,
1994, but excluding those in sub-clauses (zzzo) and (zzzv)
and those specified in clause (i) of this Rule except when
the provision of taxable services specified in sub-clauses
(d), (zzzc), (zzzr) and (zzzzm) does not relate to
immovable property. Thus, the classification appears to be 24 ST/86398/2015 of taxable service in relation to immovable property which
is situated outside India and if it satisfies the conditions in
the proviso below sub-rule (1) of Rule 3, then, there is
stipulation in relation to taxable services referred to in
several sub-clauses of clause (105) of Section 65 of the
Finance Act, 1994 and specified in Rule 3(1)(ii). That is in
relation to taxable services, specified in these sub-clauses
of clause (105) of Section 65 of the Finance Act, 1994
which sub-clauses have been specified in Rule 3(1)(ii), as
are performed outside India. However, in relation to that
also if such taxable service is performed partly outside
India it shall be considered to have been performed
outside India. The further proviso below sub-rule (2) as it
then stood stated that for the purpose of sub-rule (2) of
Rule 3 of the Export of Services Rules, 2005 any taxable
service provided shall be treated as export of service only
if such service is delivered outside India and used in the
business or any other purpose outside India and payment
for such service provided is received by the service
provider in convertible foreign exchange. Rule 3(1)(iii)
takes within its fold the services other than those part of
Rule 3(1)(i) and (ii) and stipulates that such taxable
services which are provided and used in and in relation to
commerce or industry and the recipient of such services is
located outside India provided that such recipient has
commercial or industrial establishment or any office
relating thereto in India, then, such taxable services shall
be treated as export of service only if the order for
provision of such service is made from any of its
commercial or industrial establishment or any office
located outside India. The service so ordered is delivered
outside India and used in the business outside India and
payment of such service provided is received by the
service provider in convertible foreign exchange. Then,
there is broad category referring to such taxable services
which are provided and used other than in or in relation to 25 ST/86398/2015 commerce or industry, if the recipient of taxable services is
located outside India at the time when such services are
received.

61. There is substitution as we have said above and what
we find is that below Rule 3(1) and it’s clauses, Rule 3(2)
has been substituted with effect from 1-3-2007 by
Notification No. 2/2007ST, dated 1-3-2007. Rule 3(2)(a)
has been omitted with effect from 27-2-2010. The words “such service is provided from India and used outside
India; and” were omitted with effect from 27-2-2010 by
Notification No. 6/2010ST, dated 27-2-2010. Thereafter,
the only condition remained to be satisfied and for the
purpose of being qualified or termed as export of taxable
service is that any taxable service specified in sub-rule (1)
of Rule 3 shall be treated as such when the payment for
such service is received by the service provider in
convertible foreign exchange. We are concerned with the
situation prior to this omission. We are of the view that if
Mr. Sridharan’s submissions have to be accepted, then, we
must ignore this omission.”

4.4.9 In light of discussions and the Bombay High Court
decision in case of Tech Mahindra as above we are of the
view that services provided by the appellants were
provided for the sale of goods of the associated group
companies in India and were thus used in India. According
for the period prior to 27.02.2010 the benefit of export of
services as claimed by the appellant in respect of
commission received by them for sale of goods in India
from associated group companies cannot be extended to
them.

4.4.10 From 27.02.2010, the condition of “use outside
India” has been removed by way of omission of clause “a”
of sub-rule (2) of Rule 3 of Export Of Service Rules, 2005.
When the said condition has been omitted the only
conditions to be satisfied for considering the service to 26 ST/86398/2015 qualify as export of service are in respect of the location of “service recipient” and “the receipt of consideration in
convertible foreign exchange”. Admittedly in the present
case the service recipient is located outside India and the
payments toward considerations for providing the service
are received in convertible foreign exchange. In our view
the benefit of export of services cannot be denied to the
Appellant from 27.02.2010 onwards till 30.06.2012.

4.4.11 From 01.07.2012 onwards the Place of
Provision of Service Rules, 2012 were introduced. Rule 2
(f) of the said Rules define “intermediary”. Commissioner
has in his order held that appellant was providing the “intermediary services” in relation to sale of goods by the
associated group companies and hence by application of
the rule 9 ibid, the place of provision of service is the
location of service provider. In para 3.3 to 3.5,
Commissioner has held as follows:

“3.3 This is a case where the intermediary services are
provided by a person located in India relating to sale of
goods in India, for which the consideration has been
received as commission by the service provider in India.
Intermediary services provided by the noticee is
appropriately classifiable as “Business Auxiliary Services”
under Section 65(105)(zzb) of Finance Act, 1994. Noticee
also applied for and has taken service tax registration for
provision of Business Auxiliary Service.

3.4 To determine whether transaction amounts to export
of service or not depends upon the place of provision
under consideration or place of consumption of service
under consideration.

3.5 Section 94 of Finance Act, 1994 gives power to the
Central Government to make Rules for carrying out the
provisions of the Acts, including the power to make Rules
to determine the place of provision of taxable service.
Notification No 28/2012-ST dated 20.06.2012 has been 27 ST/86398/2015 issued in exercise of the powers conferred under clause
(hhh) of Sub Section (2) of Section 94 of the Finance Act,
1994. Rule 9 of the said Rules states that place of
provision of the intermediary service shall be location of
service provider. The services provided by the Noticee
admittedly an intermediary service, the place of provision
of the service provided by the Noticee and consequently
the place of consumption is the location of the Noticee i.e.
India. Hence the question of treating said service as export
of service w.e.f 20.06.2012 does not arise.”

4.4.12 We cannot agree with the conclusion of the
Commissioner, holding the services provided by the
Noticee as “intermediary service”. From the Rule 2(f) of
Place of Provision of Service Rules, 2012, it is quite evident
that service provided in relation to sale of goods by a
commission agent cannot be classified as intermediary
service. We are further supported in our view because para
5.9.6 of The Education Guide issued by the CBEC clearly
states:-

“5.9.6 What are “Intermediary Services”?

Generally, an “intermediary” is a person who arranges or
facilitates a supply of goods, or a provision of service, or
both, between two persons, without material alteration or
further processing. Thus, an intermediary is involved with
two supplies at any one time:

i) The supply between the principal and the third party; and
ii) The supply of his own service (agency service) to his principal, for which a fee or commission is usually charged.

For the purpose of this rule, an intermediary in
respect of goods (such as a commission agent i.e. a
buying or selling agent, or a stockbroker) is
excluded by definition.”
28 ST/86398/2015 Thus while it is true that intermediary includes
intermediary in respect of sale of goods, but legislature
has while framing these rules deemed it fit to exclude the
intermediaries in respect of sale of goods from the
definition of intermediary. Hence we cannot sustain the
view expressed by the Commissioner, contrary to the
express definition of intermediary provided by the Place of
Provision of Service Rules, 2012. Hence in our view the
services provided by the appellant in respect of the sale of
goods of associated group companies cannot be said to be
services provided by intermediary as defined by said Rules
ibid. Since Rule 9 is applicable to specified services and the
services provided in this case being not the intermediary
services, this Rule will not be applicable for determination
of place of provision of service.

4.4.13 We are in agreement with the appellants that
by application of Rule 3, the place of provision in this case
will be the location of Service Recipient. Rule 6A of the
Service Tax Rules, 1994 introduced with effect from
01.07.2012, by Notification No 36/2012-ST dated
20.06.212 reads as follows:

“6A. Export of services.-

(1) The provision of any service provided or agreed to be
provided shall be treated as export of service when,-

(a) the provider of service is located in the taxable territory,
(b) the recipient of service is located outside India,
(c) the service is not a service specified in the section 66D of the Act,
(d) the place of provision of the service is outside India,
(e) the payment for such service has been received by the provider of service in convertible foreign exchange, and
(f) the provider of service and recipient of service are not merely establishments of a distinct person in 29 ST/86398/2015 accordance with item (b) of Explanation 3 of clause (44) of section 65B of the Act”

Since tin respect of the services provided by the appellant
for sale of goods of the associated group companies satisfy
the all the conditions as laid down by the said Rule 6A to
treat it as export of service are satisfied we are bound to
hold that the commission received towards sale of goods of
associated group companies abroad are in relation to
export of services.

4.4.14 Summarizing our findings as per
discussions above we hold that benefit of export of
services in respect of commission received towards
sale of goods of the associated group companies in
India post 27.02.2010 shall be admissible to the
appellants.

4.5 Whether Service Tax is leviable in respect of
reimbursements made by the associated group
companies to the appellants towards expenses
actually incurred by them.

4.6.1 Admittedly appellants have received certain amounts
as reimbursements from their associated group abroad on
actual basis for various activities undertaken by them and
as detailed in table below:

Nature of reimbursement Amount ‘Rs Travel Expenses of the employees of overseas 9,61,505
associate companies Trade exhibition, ICMBA Conference, 9,95,690 Training expenses of the employee of 3,00,067
overseas company AMC Charges paid to M/s Ramco Systems Ltd 7,89,374
on behalf of M/s PT Croda Indonesia Salary cost of their seconded employees from 38,17,754
respective overseas group companies to which
they were seconded on quarterly basis 30 ST/86398/2015 Detention and Demurrage Cost 1,48,173 Management Consultancy and Testing 6,01,833
Services Repacking Charges on purchase of goods, 4,36,770
procurement of designed cartons, price
variation on goods purchased.

Total 80,51,166 4.5.2 Appellants have claimed that these reimbursements
were made by their associated group companies on actual
basis in respect of various expenses incurred by them
under various heads. These expenses have been sought to
be added in the value of taxable services in view of Rule 5
of the Service Tax (Determination of Value) Rules, 2006.

4.5.3 In case of Intercontinental Consultants &
Technocrats (P) Ltd [2018 (66) GST 450 (SC)], Hon’ble
Apex Court while holding the said Rule 5 ultra vires the
statue held as follows:

“21.Undoubtedly, Rule 5 of the Rules, 2006 brings within
its sweep the expenses which are incurred while rendering
the service and are reimbursed, that is, for which the
service receiver has made the payments to the assessees.
As per these Rules, these reimbursable expenses also form
part of ‘gross amount charged’. Therefore, the core issue is
as to whether Section 67 of the Act permits the
subordinate legislation to be enacted in the said manner,
as done by Rule 5. As noted above, prior to April 19, 2006,
i.e., in the absence of any such Rule, the valuation was to
be done as per the provisions of Section 67 of the Act.

22.Section 66 of the Act is the charging Section which
reads as under:

“there shall be levy of tax (hereinafter referred to as the
service tax) @ 12% of the value of taxable services
referred to in sub-clauses of Section 65 and collected in
such manner as may be prescribed.”
31 ST/86398/2015 23.Obviously, this Section refers to service tax, i.e., in
respect of those services which are taxable and specifically
referred to in various sub-clauses of Section 65. Further, it
also specifically mentions that the service tax will be @
12% of the ‘value of taxable services’. Thus, service tax is
reference to the value of service. As a necessary corollary,
it is the value of the services which are actually rendered,
the value whereof is to be ascertained for the purpose of
calculating the service tax payable thereupon.

24.In this hue, the expression ‘such’ occurring in Section
67 of the Act assumes importance. In other words,
valuation of taxable services for charging service tax, the
authorities are to find what is the gross amount charged
for providing ‘such’ taxable services. As a fortiori, any
other amount which is calculated not for providing such
taxable service cannot a part of that valuation as that
amount is not calculated for providing such ‘taxable
service’. That according to us is the plain meaning which is
to be attached to Section 67 (unamended, i.e., prior to
May 1, 2006) or after its amendment, with effect from,
May 1, 2006. Once this interpretation is to be given to
Section 67, it hardly needs to be emphasized that Rule 5 of
the Rules went much beyond the mandate of Section 67.
We, therefore, find that High Court was right in
interpreting Sections 66 and 67 to say that in the valuation
of taxable service, the value of taxable service shall be the
gross amount charged by the service provider ‘for such
service’ and the valuation of tax service cannot be
anything more or less than the consideration paid as quid
pro qua for rendering such a service.

25.This position did not change even in the amended
Section 67 which was inserted on May 1, 2006. Sub-
section (4) of Section 67 empowers the rule making
authority to lay down the manner in which value of taxable
service is to be determined. However, Section 67(4) is 32 ST/86398/2015 expressly made subject to the provisions of sub-section
(1). Mandate of sub-section (1) of Section 67 is manifest,
as noted above, viz., the service tax is to be paid only on
the services actually provided by the service provider.

26.It is trite that rules cannot go beyond the statute. In
Babaji Kondaji Garad, this rule was enunciated in the
following manner :

“Now if there is any conflict between a statute and the
subordinate legislation, it does not require elaborate
reasoning to firmly state that the statute prevails over
subordinate legislation and the byelaw, if not in conformity
with the statute in order to give effect to the statutory
provision the Rule or bye-law has to be ignored. The
statutory provision has precedence and must be complied
with.”

27.The aforesaid principle is reiterated in Chenniappa
Mudaliar holding that a rule which comes in conflict with
the main enactment has to give way to the provisions of
the Act.

28.It is also well established principle that Rules are
framed for achieving the purpose behind the provisions of
the Act, as held in Taj Mahal Hotel :

“the Rules were meant only for the purpose of carrying out
the provisions of the Act and they could not take away
what was conferred by the Act or whittle down its effect.”

29.In the present case, the aforesaid view gets
strengthened from the manner in which the Legislature
itself acted. Realising that Section 67, dealing with
valuation of taxable services, does not include
reimbursable expenses for providing such service, the
Legislature amended by Finance Act, 2015 with effect from
May 14, 2015, whereby Clause (a) which deals with ‘consideration’ is suitably amended to include reimbursable
expenditure or cost incurred by the service provider and 33 ST/86398/2015 charged, in the course of providing or agreeing to provide
a taxable service. Thus, only with effect from May 14,
2015, by virtue of provisions of Section 67 itself, such
reimbursable expenditure or cost would also form part of
valuation of taxable services for charging service tax.
Though, it was not argued by the Learned Counsel for the
Department that Section 67 is a declaratory provision, nor
could it be argued so, as we find that this is a substantive
change brought about with the amendment to Section 67
and, therefore, has to be prospective in nature. …….”

4.5.4 In view of the decision of Apex Court holding that
Rule 5 is ultra vires the Section 67 of The Finance Act,
1994 during the material period and noting that
Commissioner has not given any other reason for including
these charges in value of taxable service, we hold that
these charges cannot be added to the value of taxable
services provided by the appellants. However we make it
clear that since these charges cannot be added to value of
taxable services provided, appellants could not have
claimed any CENVAT Credit in respect of the input services
received for providing these reimbursable services to their
associate group companies. Subject to verification of the
fact of non availment of CENVAT Credit in respect of these
input services we agree with the contentions of the
appellants in this respect.

4.6 Whether in respect of Foreign Exchange
remittances made by the appellants to their
associated group companies abroad for
reimbursement of various expenses incurred by
them could be levied to service tax on reverse
charge basis treating the services provided as import
of services.

4.6.1 Appellants had made certain payments towards
various services received by them from their overseas
associate group companies or others. Appellants have 34 ST/86398/2015 claimed that these payments are also in nature of
reimbursements for specific activity and not in nature of
payment towards the service received from abroad. Since
these are reimbursements, they too cannot be added in
the value of taxable service, even if the demand of Service
Tax in this case is on reverse charge basis. In their view
decision of Apex Court in case of Intercontinental
Consultant will apply to these charges.

4.6.2 We find that the payments made in the Foreign
Currency are for provision of various services to the
appellant or its employees by the overseas group associate
companies. These charges are not reimbursement but
payments towards the specific service provided by the
overseas group associate company and are not
reimbursements. If the arguments made by the appellant
were to be accepted then every payment made by the
service recipient to the service provider will be nothing but
reimbursement made. That is not even the scope of
decision of the Apex Court in case of Intercontinental
Consultants. For claiming some payments made to be
reimbursable expenses, the claimant has to from the
contract identify the main service provided and then the
expense reimbursed. In this case if the payments are
made for provision of specific service, which is taxable
service, then the service tax is payable.

4.6.2 Admittedly in present case the service provider the
associated group companies are not having any office or
presence in India. Thus the recipient of service has to pay
the service tax on reverse charge basis. We do not find
any merits in the submissions made by the appellant in
this respect.

4.7 Whether the demand is hit by limitation as
extended period of limitation as per Section 73 of
The Finance Act, 1994 is not invokable in the present
case.
35 ST/86398/2015 4.7.1 Commissioner has in para 3.14 to 3.16 on
issue of limitation held as follows: “3.14 Assessee has also contended that the demand for
the period 01-04-2008 to 30-09-2011 is barred by
limitation period. The undisputed fact is that the issue was
raised during the course of CERA audit conducted by the
CAG on their records. Thus it is evident that the
department was not aware till the date of audit the fact
that the Noticee was earning commission but not
assessing/paying the service tax on it. Statutory returns
filed by the Noticee do not contain the details of
commission earned by them. Therefore, the fact of
misdeclaration and contravention of the provisions of law
with intent to evade service tax is clearly established. The
recovery mechanism provided in proviso clause to Section
73(1) of the Finance Act, 1994, as it existed at the
material time, provides for demanding Service Tax short
paid or not paid during the period up to five years, by
reason of –
(a) fraud, or
(b) collusion, or
(c) wilful mis-statement, or
(d) suppression of facts, or
(e) contravention of any of the provisions of this Chapter
or of the rules made thereunder with intent to evade
payment of Service Tax.
Thus, each of the sub-clauses getting covered by (a) to (e)
of Section 73(1) are independent of each other and
existence of any / each one of the individual situation is
good enough to attract demand of Service Tax for
extended period under the proviso clause to Section 73(1).
In the present case, the Noticee has suppressed the
material facts as discussed above. In the ST-3 returns
filed by the Noticee, they did not declare about the
impugned commission earned by them which resulted in
non payment of service tax. But for audit, non furnishing 36 ST/86398/2015 of commission earned by the Noticee could have gone
unnoticed. Under self assessment, onus to declare the
information correctly in the statutory ST-3 returns is on
the taxable person.
3.15 From the foregoing, it is evident that non declaration
of commission earned in the statutory ST-3 returns was
deliberate act on the part of the Noticee with intent to
evade payment of appropriate Service Tax. Thus, in the
instant case, as already discussed above, the Noticee had
deliberately suppressed the material facts from the
department with intent to evade payment of Service Tax.
Hence, the department is justified in demanding the
Service Tax with interest by invoking proviso to Section
73(1) of Finance Act, 1994.

3.16 Thus, it is a clear case of suppression of facts and
contravention of provisions of law leading to evasion of
Service Tax leviable on the services provided by the
assessee. I, therefore, hold that the assessee is liable for
penalty in terms of Section 78 ibid. As the penalty under
Section 78 is sufficient to meet the justice, I do not impose
any penalty under Section 76 ibid.”

4.7.2 The facts about the commission being received by
the appellants from their overseas associate group
companies for sale of their goods in India was never
brought to the knowledge of department. Neither the
commission received were reflected in the ST-3 return filed
by the appellants. Though appellant had taken registration
for providing business auxiliary services, and they do not
dispute the fact that the services provided by them to the
overseas associated group companies are appropriately
classifiable under the said category they should have
reflected the commission received from the overseas
associated group companies in the ST-3 return. Having not
done so they have clearly suppressed the relevant
information with the intention to evade payment of service 37 ST/86398/2015 tax. We find that in similar circumstances in following
decisions invocation of extended period has been upheld:

i. Tamilnadu Coop Textiles Processing Mills Ltd [2007
(207) ELT 593 (T)] “9.We have considered the decisions cited before us. In
the case of Padmini Products (supra), it was held that,
where there was scope for doubt as to whether the goods
were dutiable or not, the extended period of limitation
under the proviso to Section 11A(1) would not get
attracted. In the present case, there was no scope for the
Mills to doubt whether grey fabrics processed by them
were handloom fabrics or powerloom fabrics. In TNHB’s
case, it was held that the assessee must be aware that
duty was leviable and must be found to have deliberately
avoided paying duty so that the extended period of
limitation could be invoked for demanding the duty from
them. This condition, in our view, stands satisfied in the
present case. In the case of Chemphar Drugs & Liniments
(supra), it was held that conscious or deliberate
withholding of information by manufacturer was necessary
to invoke the larger period of limitation. The facts and
circumstances of the present case, which have already
spelt out, indicate that the Mills deliberately suppressed
material facts before the Department. In the relevant
invoices, they declared the goods as handloom fabrics,
even though they were aware of the fact that the goods
were dutiable powerloom fabrics. In the case of G.T.C.
Industries (supra), the Tribunal did not find any evidence
of the job worker having suppressed any fact with intent to
evade payment of duty on the goods manufactured by
them and removed under the brand name of G.T.C.
Industries Ltd. and, accordingly, it was held that the longer
period of limitation was not invocable against the job
worker. This decision of the Tribunal is not applicable to
the present case of the Mills for reasons already noted by 38 ST/86398/2015 us. In the case of Karmayogi Dyeing Pvt. Ltd. (supra), it
was found by the Tribunal that the wrong declaration of
fabric by the processor (job worker) was based on the
declaration given to them by the supplier of grey fabric,
and, in the absence of anything to indicate that the
processor had colluded with the other party for wrong
declaration, it was held that the extended period of
limitation would not be available. This decision is also not
applicable to the facts of the present case inasmuch as the
grey fabric supplier (Co-optex) has not been shown to
have misdeclared the fabrics in their delivery documents to
the Mills. They were using different product code numbers
for grey handloom fabrics and grey powerloom fabrics in
the delivery documents and the scope of this practice was
known to the processor (the Mills). Hence there was no
question of collusion between the Mills and Co-optex. In
their appeal, the Mills have raised a feeble plea that the
relevant facts were known to the Department and hence
the allegation of suppression against them is not
sustainable. However, they have not established that the
relevant facts were known to the Department prior to the
investigating officers’ visit to their premises. Even if it be
assumed that the Department had knowledge of the
relevant facts, the Mills can still be found to have
suppressed such facts as held by the Tribunal in the case
of Bajaj Tempo Ltd. (supra).

10.For the reasons already recorded by us, it is held that
the extended period of limitation was rightly invoked in
this case for demanding duty from the Mills in respect of
the processed powerloom fabrics supplied to Co-optex
during the period of dispute.”
ii. Rail Tel Corporation of India [2015 (40) S.T.R.
1131 (Tri. – Del.)] 39 ST/86398/2015 6. We find that the appellant had registered itself under
leased circuit service and as has been analysed above the
impugned service rendered clearly and unambiguously fell
under the scope of leased circuit service. Thus for the
appellant who operates in this field and was even
registered for leased circuit service, and therefore was not
unaware thereof. Bona fide belief is not some sort of
hallucinatory belief. It is a genuine belief of a reasonable
person operating in an appropriate environment. Thus for
such as assessee as the appellant, it could not have been a
bona fide belief on its part that the service rendered did
not fall under leased circuit service because there was no
scope of any confusion or ambiguity in that regard.
Further, the appellant did not timely provide the
information sought and had to be issued repeated
reminders. Therefore we are of the view that the appellant
is guilty of suppression of fact and therefore the extended
period has rightly been invoked and mandatory penalty is
clearly imposable.”

iii. In case of Pasupati Spinning and Weaving Mills
[2015 (318) ELT 623 (SC)]Hon’ble Apex Court held “4.
…….Equally, we do not think that there is any ground for
interference on the extended period of limitation being
applicable inasmuch as CESTAT is again correct in saying
that as the declaration and RT-12 returns being vital
documents submitted by the respondent (appellant herein)
did not mention the vital word “hanks”, they suppressed a
material fact which, to their knowledge, would not bring
their sewing thread within the exemption Notification. ……”

iv. Reliant Advertising [2013 (31) STR 166 (T)-

“17. Ld. Counsel for the respondent/assessee has
contended that since no penalty as proposed in the Show
Cause Notice was imposed in the adjudication order,
invoking the provisions of Section 80, invocation of the
extended period of limitation is also unsustainable. This 40 ST/86398/2015 contention does not commend acceptance by this Tribunal.
The adjudicating authority clearly recorded a finding that
failure of the assessee to disclose the position in
conformity with the position in its balance sheet, in the ST-
3 returns filed amounts to suppression of the correct
taxable value from the department; that this position is
fortified by the figures in the balance sheet of the assessee
admitted by Ms. Shaifali Singh, in her statement recorded
on 23-8-2006. Since there is a suppression by the
assessee, rationally concluded by the adjudicating
authority, invocation of the extended period of limitation is
legitimate. The adjudication order is thus impeccable and
warrants no interference. The appellate authority erred in
reversing the adjudication order.”

4.7.3 Appellants have relied upon the certain decisions to
claim that extended period of limitation cannot be invoked
in the present case. However we find that these decisions
are not applicable in the present case for the reasons as
stated below:

a. Continental Foundation Joint Venture [2007 (216) ELT 177 (SC)]-

While discussing the issue on suppression the Apex Court
stated “Suppression means failure to disclose full
information with the intent to evade payment of duty.
When the facts are known to both the parties,
omission by one party to do what he might have
done would not render it suppression. When the
Revenue invokes the extended period of limitation under
Section 11A the burden is cast upon it to prove
suppression of fact. An incorrect statement cannot be
equated with a willful misstatement. The latter implies
making of an incorrect statement with the knowledge that
the statement was not correct.” Since the facts in that
case were known to both the parties Hon’ble Apex Court
held charge of suppression cannot be invoked. That is not 41 ST/86398/2015 the case here. In this case certain information which was
available with the appellants was never disclosed to
revenue, with the intention to evade payment of tax. This
decision of Apex Court is clearly distinguishable.

b. In case of Kingfisher Airlines Ltd. [2015 (40) STR
1159 (T-Mum)] Tribunal stated “26.1 So far the question
of invocation of extended period is concerned, I find that
there is no case of any suppression on the part of the
appellant Airlines. The appellant Airlines have duly
disclosed the receipts from passengers towards excess
baggage in their books of account, maintained in the
ordinary course of business. I find that the issue is one of
interpretation of the taxing statute and as such being
debatable, there is no element of any fraud or suppression.
Accordingly, the extended period of limitation is held not
invocable.” This decision is also distinguishable. It is not
the case that the book of accounts maintained by the
appellant were completely declared to the revenue and
were made available to the authorities from time to time.
As per Rule 6(3) of The Service Tax Rules, 1994, it is not
that every book of account maintained by the Appellant is
known to the revenue, but the appellant is required to
make a declaration to the jurisdictional officers in respect
of the book of accounts maintained by it. Same provision
exists in Rule 22 of Central Excise Rules, 2002. Thus
without making a enquiry into this aspect that the said
book of account were declared to the revenue or not the
decision of Tribunal holding that information was made in
book of accounts in normal course of business is nothing
but per-incuariam to this extent and cannot be binding
precedent. In this decision also one member has who has
differed with the majority held on limitation aspect stating “20. Being well aware of the requirement of law, the
appellants collected excess baggage charges over a long
period of time without declaring the same to the
department. This shows suppression of facts and intention 42 ST/86398/2015 of the appellant to evade duty. Hence, the extended period
under Section 73(1) of the Finance Act has been rightly
invoked. Reliance is placed on Bharat Roll Industry (Pvt.)
Ltd. v. CCE, Haldia – 2008 (229) E.L.T. 107 (Tri.-Cal.). The
appellants have not been able to show any judgment of
the Courts to support a view that the issue of classification
of excess baggage and the liability of Service Tax on such
excess baggage was a debatable issue. In the case of
Jetlite India v. CCE – 2011 (21) S.T.R. 80 (Tri.-Delhi), it
was held that excess baggage charges are leviable to
Service Tax. The issue is very clear and the failure to pay
Service Tax cannot be condoned.”

c. Similarly we find decision in case of Reliance
Industries Ltd. [2016 (57) GST 84 (T-Mum)] to not
applicable in the present set of facts.

4.7.4 In light of discussions as above we uphold the
charges of suppression with intent to evade payment of
duty for invoking extended period of limitation as provided
by Section 73 of Finance Act, 1994.

4.8 Whether demand for interest under Section 75
and penalties imposed under Section 77 and Section
of Finance Act, 1994 can be sustained.

4.8.1 While adjudicating Commissioner has imposed
penalties as under Section 77 and 78 of Finance Act, 1994.

4.8.2 Since we have held that extended period of limitation
has been rightly invoked in the present case, the
provisions of section 78 will get attracted automatically. In
case of Rajasthan spinning and Weaving Mills Hon’ble APEX
Court has held as follows:

“16. The other provision with which we are concerned in
this case is Section 11AC relating to penalty. It is as
follows :

11AC. Penalty for short-levy or non-levy of duty in
certain cases.-
43 ST/86398/2015 ………… 17. The main body of Section 11AC lays down the
conditions and circumstances that would attract penalty
and the various provisos enumerate the conditions, subject
to which and the extent to which the penalty may be
reduced.

18. One cannot fail to notice that both the proviso to sub-
section 1 of Section 11A and Section 11AC use the same
expressions : “….by reasons of fraud, collusion or any
wilful mis-statement or suppression of facts, or
contravention of any of the provisions of this Act or of the
rules made thereunder with intent to evade payment of
duty,…”. In other words the conditions that would extend
the normal period of one year to five years would also
attract the imposition of penalty. It, therefore, follows that
if the notice under Section 11A(1) states that the escaped
duty was the result of any conscious and deliberate wrong
doing and in the order passed under Section 11A(2) there
is a legally tenable finding to that effect then the provision
of Section 11AC would also get attracted. The converse of
this, equally true, is that in the absence of such an
allegation in the notice the period for which the escaped
duty may be reclaimed would be confined to one year and
in the absence of such a finding in the order passed under
Section 11A(2) there would be no application of the
penalty provision in Section 11AC of the Act. On behalf of
the assessees it was also submitted that Sections 11A and
11AC not only operate in different fields but the two
provisions are also separated by time. The penalty
provision of Section 11AC would come into play only after
an order is passed under Section 11A(2) with the finding
that the escaped duty was the result of deception by the
assessee by adopting a means as indicated in Section
11AC.
44 ST/86398/2015 19. From the aforesaid discussion it is clear that penalty
under Section 11AC, as the word suggests, is punishment
for an act of deliberate deception by the assessee with the
intent to evade duty by adopting any of the means
mentioned in the section.

20. At this stage, we need to examine the recent decision
of this Court in Dharamendra Textile (supra). In almost
every case relating to penalty, the decision is referred to
on behalf of the Revenue as if it laid down that in every
case of non-payment or short payment of duty the penalty
clause would automatically get attracted and the authority
had no discretion in the matter. One of us (Aftab Alam, J.)
was a party to the decision in Dharamendra Textile and we
see no reason to understand or read that decision in that
manner. In Dharamendra Textile the court framed the
issues before it, in paragraph 2 of the decision, as follows :

“2. A Division Bench of this Court has referred the
controversy involved in these appeals to a larger Bench
doubting the correctness of the view expressed in Dilip N.
Shroff v. Joint Commissioner of Income Tax, Mumbai &
Anr. [2007 (8) SCALE 304]. The question which arises for
determination in all these appeals is whether Section 11AC
of the Central Excise Act, 1944 (in short the “Act’) inserted
by Finance Act, 1996 with the intention of imposing
mandatory penalty on persons who evaded payment of tax
should be read to contain mens rea as an essential
ingredient and whether there is a scope for levying penalty
below the prescribed minimum. Before the Division Bench,
stand of the revenue was that said section should be read
as penalty for statutory offence and the authority imposing
penalty has no discretion in the matter of imposition of
penalty and the adjudicating authority in such cases was
duty bound to impose penalty equal to the duties so
determined. The assessee on the other hand referred to
Section 271(1)(c) of the Income Tax Act, 1961 (in short 45 ST/86398/2015 the IT Act’) taking the stand that Section 11AC of the Act
is identically worded and in a given case it was open to the
assessing officer not to impose any penalty. The Division
Bench made reference to Rule 96ZQ and Rule 96ZO of the
Central Excise Rules, 1944 (in short the “Rules’) and a
decision of this Court in Chairman, SEBI v. Shriram Mutual
Fund & Anr. [2006 (5) SCC 361] and was of the view that
the basic scheme for imposition of penalty under section
271(1)(c) of IT Act, Section 11AC of the Act and Rule
96ZQ(5) of the Rules is common. According to the Division
Bench the correct position in law was laid down in
Chairman, SEBI’s case (supra) and not in Dilip Shroff’s
case (supra). Therefore, the matter was referred to a
larger Bench.”

After referring to a number of decisions on interpretation
and construction of statutory provisions, in paragraphs 26
and 27 of the decision, the court observed and held as
follows :

“26. In Union Budget of 1996-97, Section 11AC of the Act
was introduced. It has made the position clear that there is
no scope for any discretion. In para 136 of the Union
Budget reference has been made to the provision stating
that the levy of penalty is a mandatory penalty. In the
Notes on Clauses also the similar indication has been
given.

“27. Above being the position, the plea that the Rules
96ZQ and 96ZO have a concept of discretion inbuilt cannot
be sustained. Dilip Shroff’s case (supra) was not correctly
decided but Chairman, SEBI’s case (supra) has analysed
the legal position in the correct perspectives. The reference
is answered………”.

21. From the above, we fail to see how the decision in
Dharamendra Textile can be said to hold that Section 11AC
would apply to every case of non-payment or short 46 ST/86398/2015 payment of duty regardless of the conditions expressly
mentioned in the section for its application.

22. There is another very strong reason for holding that
Dharamendra Textile could not have interpreted Section
11AC in the manner as suggested because in that case
that was not even the stand of the revenue. In paragraph
5 of the decision the court noted the submission made on
behalf of the revenue as follows :

“5. Mr. Chandrashekharan, Additional Solicitor General
submitted that in Rules 96ZQ and 96ZO there is no
reference to any mens rea as in section 11AC where mens
rea is prescribed statutorily. This is clear from the
extended period of limitation permissible under Section
11A of the Act. It is in essence submitted that the penalty
is for statutory offence. It is pointed out that the proviso to
Section 11A deals with the time for initiation of action.
Section 11AC is only a mechanism for computation and the
quantum of penalty. It is stated that the consequences of
fraud etc. relate to the extended period of limitation and
the onus is on the revenue to establish that the extended
period of limitation is applicable. Once that hurdle is
crossed by the revenue, the assessee is exposed to
penalty and the quantum of penalty is fixed. It is pointed
out that even if in some statues mens rea is specifically
provided for, so is the limit or imposition of penalty, that is
the maximum fixed or the quantum has to be between two
limits fixed. In the cases at hand, there is no variable and,
therefore, no discretion. It is pointed out that prior to
insertion of Section 11AC, Rule 173Q was in vogue in
which no mens rea was provided for. It only stated “which
he knows or has reason to believe”. The said clause
referred to wilful action. According to learned counsel what
was inferentially provided in some respects in Rule 173Q,
now stands explicitly provided in Section 11AC. Where the
outer limit of penalty is fixed and the statute provides that 47 ST/86398/2015 it should not exceed a particular limit, that itself indicates
scope for discretion but that is not the case here.”

23. The decision in Dharamendra Textile must, therefore,
be understood to mean that though the application of
Section 11AC would depend upon the existence or
otherwise of the conditions expressly stated in the section,
once the section is applicable in a case the concerned
authority would have no discretion in quantifying the
amount and penalty must be imposed equal to the duty
determined under sub-section (2) of Section 11A. That is
what Dharamendra Textile decides.”

4.8.3 Hence we uphold imposition of penalty under
Section 78, however the same needs to be re-quantified as
indicated earlier in the order.

4.8.4 Penalties under Section 77, is for the reason of
contraventions of various provisions and acts of omission
to perform the task as required to be performed under the
provisions of the act. Such penalties are in nature of Civil
Liabilities and do not require any contumacious conduct on
the behalf of the defaulter. Hon’ble Supreme Court has in
case of Gujarat Travancore Agency held as follows:

“4.Learned Counsel for the assessee has addressed an
exhaustive argument before us on the question whether a
penalty imposed under Section 271(1)(a) of the Act
involves the element of mens rea and in support of his
submission that it does he has placed before us several
cases decided by this Court and the High Courts in order to
demonstrate that the proceedings by way of penalty under
Section 271(1)(a) of the Act are quasi criminal in nature
and that, therefore, the element of mens rea is a
mandatory requirement before a penalty can be imposed
under Section 271(1)(a). We are relieved of the necessity
of referring to all those decisions. Indeed, many of them
were considered by the High Court and are referred to in
the judgment under appeal. It is sufficient for us to refer to 48 ST/86398/2015 Section 271(1)(a), which provides that a penalty may be
imposed if the Income Tax Officer is satisfied that any
person has without reasonable cause failed to furnish the
return of total income, and to Section 276C which provides
that if a person willfully fails to furnish in due time the
return of income required under Section 139(1), he shall
be punishable with rigorous imprisonment for a term which
may extend to one year or with fine. It is clear that in the
former case what it intended is a civil obligation while in
the latter what is imposed is a criminal sentence. There
can be no dispute that having regard to the provisions of
Section 276C, which speaks of wilful failure on the part of
the defaulter and taking into consideration the nature of
the penalty, which is punitive, no sentence can be imposed
under that provision unless the element of mens rea is
established. In most cases of criminal liability, the
intention of the Legislature is that the penalty should serve
as a deterrent. The creation of an offence by Statute
proceeds on the assumption that society suffers injury by
and the act or omission of the defaulter and that a
deterrent must be imposed to discourage the repetition of
the offence. In the case of a proceeding under Section
271(1)(a), however, it seems that the intention of the
legislature is to emphasise the fact of loss of Revenue and
to provide a remedy for such loss, although no doubt an
element of coercion is present in the penalty. In this
connection the terms in which the penalty falls to be
measured is significant. Unless there is something in the
language of the statute indicating the need to establish the
element of mens rea it is generally sufficient to prove that
a default in complying with the statute has occurred. In
our opinion, there is nothing in Section 271(1)(a) which
requires that mens rea must be proved before penalty can
be levied under that provision. We are supported by the
statement in Corpus Juris Secundum Volume 85, page
580, Paragraph 1023 :
49 ST/86398/2015 “A penalty imposed for a tax delinquency is a civil
obligation, remedial and coercive in its nature, and is far
different from the penalty for a crime or a fine or forfeiture
provided as punishment for the violation of criminal or
penal laws.””

Hence we uphold the penalties imposed under the
provisions of Section 77 of the Finance Act, 1994.

4.8.4 Since the demand of tax has been upheld the
demand for interest will follow. It is now settled law that
interest under Section 75, is for delay in the payment of
tax from the date when it was due. Since appellants have
failed to pay the said Service Tax by the due date interest
demanded cannot be faulted.

4.9 Thus in view of discussions as above we respond to
questions framed by us in para 4.3 as follows:

I. The demand in relation to the commission received
by appellants in respect of sale of goods of associated
group companies can be sustained upto 26.02.2010. For
period post 26.02.2010, the benefit of export of service
will be admissible to them. Matter remanded for re-
quantification of demand upto 27.02.2010.

II. Demand in respect of reimbursements made by the
overseas group associate companies in relation to
expenses incurred by the appellant cannot be sustained.
The demand is set aside subject to verification of the fact
that appellants have not availed any CENVAT credit in
respect of such reimbursable expenses.

III. Demand in respect of the reimbursements made to
the overseas group associate companies in relation to
expenses incurred by them is sustained. However since the
appellants have disputed the computation of demand the
matter is remanded back to original authority for re-
computation of demand.
50 ST/86398/2015 IV. Extended period of limitation is invokable in the
present case.

V. DEMAND for interest under Section 75 and penalties
under section 77 and 78 of Finance Act, 1994, to upheld.
However the quantum of interest and penalties need to be
redetermined in terms of recomputed demand.

5.0 Thus we dispose of the appeal by setting aside the
impugned order and remand the matter back to
adjudicating authority for re-computation of demand,
interest and penalties as indicated in para 4.9 above.
(Order pronounced in the open court on 17.05.2019) (S.K. Mohanty) Member (Judicial) (Sanjiv Srivastava) Member (Technical) tvu

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