Case Law Details
Principal Commissioner of Central Excise & S. Tax Vs Ganga Carrier Private Limited (CESTAT Kolkata)
CESTAT Kolkata held that reimbursement for miscellaneous activities by Clearing and Forwarding Agents from their clients being reimbursed on actual basis is not includible in value of taxable service and hence service tax not leviable.
Facts- The Respondent M/s Ganga Carriers Pvt. Ltd was appointed as Clearing and Forwarding Agents by M/s Everest Industries Ltd and some other clients. An investigation was initiated against them by the Officers of DGCEI and as a result of which two Show Cause Notices dated 19.10.2005 and 21.12.2006 were issued to the Respondent demanding Service Tax of Rs. 1,57,68,416/-in total, including Education Cess. It has been alleged that the Respondent has paid Service Tax only on the remuneration/ commission received by them and not paid service tax on the reimbursements received from various clients.
The notices were adjudicated and the Adjudicating Authority has confirmed the total demand of Service Tax amounting to Rs.1,57,68,416/- along with interest and penalty. On Denovo adjudication, the Adjudicating Authority dropped the proceedings. Being aggrieved, revenue has preferred the present appeal.
Conclusion- Held that the Respondent has recovered precisely the same amount from the recipient that has been paid on their behalf by producing the documentary evidence in regard to such expenditure. Thus, it is clearly established that the Respondent has acted as ‘Pure Agent’ while incurring such expenditure.
Held that the adjudicating Authority has dropped the demand made in the Notice on the ground that the remuneration for C&F work and reimbursement for miscellaneous activities have been separately mentioned against specific items and they got reimbursement on actual basis. The decisions cited above clearly supports the view taken by the adjudicating authority in the impugned order. Accordingly, we hold that there is no infirmity in the impugned order and uphold the same.
FULL TEXT OF THE CESTAT KOLKATA ORDER
The present appeal has been filed by the against the impugned order dated 11.08.2015, passed by the Commissioner, Central Excise and Service Tax, Patna, wherein he dropped the proceedings initiated vide Show Cause Notice dated 19.10.2005. Aggrieved against the impugned order, the Department has filed this appeal.
2. Briefly stated facts of the case are that the Respondent M/s Ganga Carriers Pvt. Ltd was appointed as Clearing and Forwarding Agents by M/s Everest Industries Ltd and some other clients. An investigation was initiated against them by the Officers of DGCEI Jamshedpur and as a result of which two Show Cause Notices dated 19.10.2005 and 21.12.2006 were issued to the Respondent demanding Service Tax of Rs. 1,57,68,416/-in total, including Education Cess. In the Notices, it has been alleged that the Respondent has paid Service Tax only on the remuneration/ commission received by them and not paid service tax on the reimbursements received from various clients. The Notices were adjudicated and the Adjudicating Authority has confirmed the total demand of Service Tax amounting to Rs.1,57,68,416/- along with interest and penalty vide OIO dated 30/11/2007. The Respondent preferred appeal before the CESTAT, Kolkata which vide its orders dated 26/03/2012 and 17/07/2014 remanded the case back to the Adjudicating Authority to decide the matter afresh taking into consideration the guidelines prescribed in respect of reimbursement by the Tribunal in the case of M/s Sri Bhagavathy Traders Vs CCE, Cochin, reported in 2011-24-STR 290. On Denovo adjudication, the Adjudicating Authority dropped the proceedings vide Orderin-Original dated 11.08. 2015. The present appeal has been filed by the department against dropping of the proceedings in the impugned order.
3. In their grounds of appeal, the Appellant submitted that C&F Agent is not a piecemeal service, rather it is a composite activity undertaken on behalf of Principal and therefore it cannot be further divided to segregate each of the steps of service from the other steps. The Appellant cited the decision of the Tribunal in the case of Naresh Kumar & Co Pvt. Ltd. Vs Commissioner of Service Tax, Kolkata, wherein it has been held that “if expenditure is indispensable and inevitable incurred to provide a service such cost should essentially form part of cost of service itself and shall contribute to value of taxable service. Thus, expenditure incurred being incidental or ancillary to perform an act shall essentially make value addition to the service”.
4. In this case the CESTAT remanded the matter back to the Adjudicating Authority with a specific direction to decide the case by taking into the guidelines prescribed by the Tribunal in the case of Sri Bhagavathy Traders Vs CCE, Cochin. But, the Adjudicating Authority failed to appreciate the spirit of the guidelines prescribed by the Tribunal in the aforesaid decision and dropped the demand on the ground that the remuneration for C&F work and reimbursement for miscellaneous activities have been separately mentioned against specific items and they got reimbursement on actual basis. In the case of Bhagavathy Traders Vs CCE, Cochin, the Tribunal has held that “the concept of reimbursement will arise only when the person actually paying was under no obligation to pay the amount and he pays the amount on behalf of the buyer of the goods and recover the said amount from the buyers of the goods”.
4. Regarding dropping the demand on the ground of limitation, the Appellant stated that the Respondent never disclosed before the department about the receipt of amounts in the form of reimbursements from the clients. Accordingly, they contended that extended period has been rightly invoked in the Notices dated 19.10.2005 and 21.12.2006. In view of the facts of the case and the decisions cited by them, they prayed for setting aside the impugned order and allow the appeal filed by the department.
5. The Respondent stated that they had paid Service tax from on the amount of remuneration/ commission received, handling charges, transportation charges, salvaging charges, documentation charges, etc. They did not pay service tax on the amount of reimbursement of expenses such as salaries of client’s staff, other expenses like rent, telephone expenses, printing, postage, They were under the bona-fide belief that reimbursement of expenses was never under the scope of levy of service tax.
6. They relied on the Board Circular F. No. B.43/7/97-TRU dated 11th July, 1997 wherein it was clarified that the value of taxable service rendered by a C&F Agent has been defined as the gross amount charged by such agents from the client for the services of clearing and forwarding operations in any manner. However, under service Tax rules it has been provided that the value of taxable service in relation to services rendered by clearing and forwarding agents to a client shall deemed to be the gross amount of remuneration or commission , by whatever name called, paid to such agent by the client engaging such agent. They stated that the C&F Agent receives commission or remuneration which usually consists of two components:
i. Minimum commission on a flat rate or turnover basis depending on the packages/consignments handled;
ii. A variable commission based on performance which is computed on the performance indicators agreed upon between the agent and the principal. This is usually given as a percentage of the turnover.
The above two constitute the remuneration or commission paid to the C&F agent by the principal and is thus liable to service tax levy. It is innate nature of C&F Agency service that number of expenditures is being incurred by the service provider and re-imbursement is being asserted in the bills. The nature and list of these expenses may vary from case-to-case basis and dependent on the nature of contract. Reimbursement of expenses in case of clearing and forwarding agents are not forming part of gross value and not exposed to service tax.
7. The Respondent submits that they have been paying Service tax regularly as required under Rule 6 on the remuneration/service charges they had been receiving from their principals. The SCN alleged that charges towards rent, postage, courier, stationery, telephone and so on collected by the respondent from their principals to meet the actual expenses incurred in connection with clearing and forwarding of goods were to be added to the taxable value of the service. In this regard, they placed their reliance on the judgment of the Hon’ble Madras High Court in the case of M/s SANGAMITRA SERVICES AGENCY Versus COMMISSIONER OF S.T., CHENNAI [2014 (33) S.T.R. 137 (Mad.)] wherein the Hon’ble High Court has held as under:
“7. In the absence of any material to show the understanding between the Principal and the Client that the Commission payable by the principal was all inclusive, it is difficult to hold that the gross amount of remuneration/commission would nevertheless include expenditure incurred by the assessee providing the services; that all incidental charges for running of the business would also form part of the remuneration or Commission (by whatever name called). The phrase “by whatever name called” must necessarily have some link or reference or nature to the receipt of remuneration or commission. Thus, if a receipt is for reimbursing the expenditure incurred for the purpose, the mere act of reimbursement, per se, would not justify the contention of the Revenue that the same, having the character of the remuneration or commission, deserves to be included in the sum amount of remuneration/commission.”
8. The Respondent submitted that Section 67 of the Finance Act, 1994 defines the valuation of taxable services for charging Service Tax and according to which, the value shall be the gross amount charged by the service provider for such service provided. The Explanation which was inserted to aforementioned Section 67 defines ‘Consideration’ as below:
“Consideration” includes any amount that is payable for the taxable services provided or to be provided;
In the Union Budget 2015, all the reimbursement expenses have been included in the consideration with effect from 14/05/2015. Hence while calculating service tax, the service provider has to include all the expenses whatever he incurred for rendering service, w.e.f.14.04.2015 0nly and not before that period. The dispute in the present appeal pertains to the period from 2000-01 (October) to 2004-05 (September) and hence, the substitution brought in the definition of Consideration vide Finance Act, 2015 would not be applicable for the period in the present appeal.
9. The Respondent also placed their reliance on the Judgement of PHARMALINKS AGENCY (I) PVT. LTD. Versus COMMISSIONER OF C. , PUNE-III [2015 (37) S.T.R. 305 (Tri. – Mumbai)] wherein the CESTAT, Mumbai has held as under:
“5 .1 As regards the demand of Service Tax on freight charges, we notice that the service recipient had entered into a separate agreement with the transporter for transporting of goods from Pune to various destinations and in terms of the agreement it was the service recipient’s obligation to discharge the freight expenses. The appellant only paid these expenses and got them reimbursed from M/s. Abbot India Ltd. Thus, they were acting as a pure agent as the transportation was undertaken not as part of C&F agency functions but independently of the said function and, therefore, the question of including the expenditure incurred on freight in the consideration received is clearly unsustainable in law.”
10. with the introduction of Service tax (Determination of Value) Rules, 2006, concept of ‘Pure Agent’ was brought in to address the taxability issues of Expenditure incurred as a ‘Pure Agent’ were excluded from the taxability and conditions were laid down under Explanation (1) to rule 5(2) to determine as to who will be considered as ‘Pure Agent’. In the present matter under dispute, a perusal of the agreements entered with the different principals clearly revels that there were specific amounts for remuneration to be charged as a C&F Agent. The Respondent states that they were not under any obligation be it legal or contractual to incur any expenditure against miscellaneous heads as all such expenses were to be borne by the service recipient only. They recovered precisely the same amount from the recipient that has been paid on their behalf by producing the documentary evidence in regard to such expenditure. The clients, while making such payment, were well aware that such amounts were to be paid to the third party. Law nowhere provides for levying service tax on amounts that was never in relation to the taxable services agreed to be provided.
11. The Respondent relied on the judgement in the case of INTERCONTINENTAL CONSULTANTS & TECHNOCRATS PVT. LTD. Versus UNION OF INDIA [2013 (29) S.T.R. 9 (Del.)] as affirmed by the Hon’ble Supreme Court of India also in 2018 (10) G.S.T.L. 401 (S.C.), wherein Hon’ble High Court of Delhi held that “18. There is thus inbuilt mechanism to ensure that only the taxable service shall be evaluated under the provisions of 67. Clause (i) of sub-section (1) of Section 67 provides that the value of the taxable service shall be the gross amount charged by the service provider ~for such service”. Reading Section 66 and Section 67(1)(i) together and harmoniously, it seems clear to us that in the valuation of the taxable service, nothing more and nothing less than the consideration paid as quid pro quo for the service can be brought to charge. Sub-section (4) of Section 67 which enables the determination of the value of the taxable service ~in such manner as may be prescribed” is expressly made subject to the provisions of sub-section (1). The thread which runs through Sections 66, 67 and Section 94, which empowers the Central Government to make rules for carrying out the provisions of Chapter V of the Act is manifest, in the sense that only the service actually provided by the service provider can be valued and assessed to service tax. We are, therefore, undoubtedly of the opinion that Rule 5(1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. It purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider ~in the course of providing taxable service”. What is brought to charge under the relevant Sections is only the consideration for the taxable service.”
12. In view of the decisions cited above , they argued that the reimbursement of expenses received by them were not meant for services rendered but for the expenditure incurred on behalf of client by the service provider. Accordingly, they prayed for upholding the impugned order and reject the appeal filed by the Department
13. Heard both sides and perused the appeal records.
14. The issue to be decide in the present appeal is whether the reimbursement of expenses received by the Respondent are includable in the assessable value for the purpose of payment of service tax. The Respondent stated that they have paid Service tax on the amount of remuneration/ commission received, which include handling charges, transportation charges, salvaging charges, documentation charges, etc. They did not pay service tax on the amount of reimbursement of expenses such as salaries of client’s staff, other expenses like rent, telephone expenses, printing, postage, etc. They were under the bona-fide belief that reimbursement of expenses was never under the scope of levy of service tax. They cited Board Circular F. No. B.43/7/97-TRU dated 11th July, 1997 and contended that the reimbursement of expenses in case of clearing and forwarding agents are not forming part of gross value as per this Circular and hence not includable in the assessable value for the purpose of computation of service tax.
15. We observe that Service tax (Determination of Value) Rules, 2006, has brought in the concept of ‘Pure Agent’ to address the taxability issues of reimbursements. As per the said Rules, expenditure incurred as a ‘Pure Agent’ were excluded from the assessable value. In the present matter under dispute, a perusal of the agreements entered with the different principals clearly revels that there were specific amounts for remuneration to be charged as a C&F Agent. We also observe that the Respondent has recovered precisely the same amount from the recipient that has been paid on their behalf by producing the documentary evidence in regard to such expenditure. Thus, it is clearly established that the Respondent has acted as ‘Pure Agent’ while incurring such expenditure.
16. We observe that all the ‘reimbursement expenses’ have been included in the consideration with effect from 14/05/2015. Hence while calculating service tax, the service provider has to include all the expenses whatever he incurred for rendering service, w.e.f.14.04.2015 only and not before that period. The dispute in the present appeal pertains to the period from 2000-01 (October) to 2004-05 (September) and hence, the substitution brought in the definition of ‘Consideration’ vide Finance Act, 2015 would not be applicable for the period in the present appeal.
17. We observe that the issue has been decided by the Hon’ble Delhi High Court in the case of INTERCONTINENTAL CONSULTANTS & TECHNOCRATS LTD. Versus UNION OF INDIA [2013 (29) S.T.R. 9 (Del.)] which has been affirmed by the Hon’ble Supreme Court of India also in 2018 (10) G.S.T.L. 401 (S.C.). The gist of the decision is reproduced below:
“Section 66 levies service tax at a particular rate on the value of taxable services. Section 67(1) makes the provisions of the section subject to the provisions of Chapter V, which includes Section 66. This is a clear mandate that the value of taxable services for charging service tax has to be in consonance with Section 66 which levies a tax only on the taxable service and nothing else. There is thus inbuilt mechanism to ensure that only the taxable service shall be evaluated under the provisions of 67. Clause (i) of sub-section (1) of Section 67 provides that the value of the taxable service shall be the gross amount charged by the service provider “for such service”. Reading Section 66 and Section 67(1)(i) together and harmoniously, it seems clear to us that in the valuation of the taxable service, nothing more and nothing less than the consideration paid as quid pro quo for the service can be brought to charge. Sub-section (4) of Section 67 which enables the determination of the value of the taxable service “in such manner as may be prescribed” is expressly made subject to the provisions of sub-section (1). The thread which runs through Sections 66, 67 and Section 94, which empowers the Central Government to make rules for carrying out the provisions of Chapter V of the Act is manifest, in the sense that only the service actually provided by the service provider can be valued and assessed to service tax. We are, therefore, undoubtedly of the opinion that Rule 5(1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. It purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider “in the course of providing taxable service”. What is brought to charge under the relevant Sections is only the consideration for the taxable service. By including the expenditure and costs, Rule 5(1) goes far beyond the charging provisions and cannot be upheld. It is no answer to say that under sub-section (4) of Section 94 of the Act, every rule framed by the Central Government shall be laid before each House of Parliament and that the House has the power to modify the rule. As pointed out by the Supreme Court in Hukam Chand v. Union of India, AIR 1972 SC 2427 :-
“The fact that the rules framed under the Act have to be laid before each House of Parliament would not confer validity on a rule if it is made not in conformity with Section 40 of the Act.”
Thus Section 94(4) does not add any greater force to the Rules than what they ordinarily have as species of subordinate legislation.
18. We observe that the ratio of the decision in the case INTERCONTINENTAL CONSULTANTS & TECHNOCRATS PVT. LTD. Versus UNION OF INDIA [2013 (29) S.T.R. 9 (Del.), squarely applicable in this case. We observe that the adjudicating Authority has dropped the demand made in the Notice on the ground that the remuneration for C&F work and reimbursement for miscellaneous activities have been separately mentioned against specific items and they got reimbursement on actual basis. The decisions cited above clearly supports the view taken by the adjudicating authority in the impugned order. Accordingly, we hold that there is no infirmity in the impugned order and uphold the same.
19. In view of the above discussion, we uphold the impugned order and reject the appeal filed by the department.
(Dictated and pronounced in the open Court)
Author Bio
