Case Law Details
Madhya Gujarat Vij Company Limited Vs Commissioner of C.E. & S.T.-Vadodara (CESTAT Ahmedabad)
The CESTAT Ahmedabad ruled that cost-sharing arrangements among group companies of Madhya Gujarat Vij Company Limited (MGVCL) are not subject to service tax under Business Support Services (BSS) as defined in Section 65(104c) of the Finance Act, 1994. The case stemmed from reimbursements made by group companies for shared expenses like maintenance and administrative costs, which were borne by MGVCL for assets it owned. These reimbursements were on an actual basis without any profit margin. The tax authorities argued these payments qualified as consideration for BSS, but the tribunal disagreed, citing precedents where cost-sharing arrangements were not treated as taxable services.
The tribunal emphasized that MGVCL merely acted as an agent, procuring services from third parties for common use and recovering costs from group companies. No additional consideration or markup was charged, ruling out the possibility of a service provision. It referred to similar cases, such as Gujarat State Fertilizers & Chemicals Ltd. vs. CCE, where the Supreme Court held that cost-sharing does not imply service provision. The tribunal further observed that since these costs were incurred on a shared basis without service provision, the demand for service tax was unjustified. Accordingly, the tax claim was set aside.
FULL TEXT OF THE CESTAT AHMEDABAD ORDER
The issue involved in the present appeal pertains to whether reimbursement of expenses recovered by the appellant from its group companies M/s Gujarat State Electricity Corporation Limited, M/s Gujarat UrjaVikas Nigam Limited & M/s Gujarat Energy Transmission Corporation Limited, pursuant to common cost sharing can be considered as consideration towards the provision of Business Support Services under Section 65(104c)of the Finance Act,1994 for the purpose of charging service tax.
1.1 The appellant is a power distribution Company which came in to existence pursuant to the Gujarat Electricity Industry Reorganization & Regulation Act 2003. Under this Act, the erstwhile Gujarat Electricity Board (GEB) was split in to separate companies as follows:
i) Gujarat Urja Vikas Nigam Limited (GUVNL), the holding
ii) Gujarat State Electricity Corporation Limited (GSECL), a generation company & wholly owned subsidiary of the holding
iii) Gujarat Energy Transmission Corporation Limited (GETCO), a transmission company & wholly owned subsidiary of the holding
iv) Madhya Gujarat Vij Company Limited (MGVCL), a distribution company & wholly owned subsidiary of the holding company.
v) Uttar Gujarat Vij Company Limited (UGVCL), a distribution company & wholly owned subsidiary of the holding company.
vi) Paschim Gujarat Vij Company Limited (PGVCL), a distribution company & wholly owned subsidiary of the holding company.
vii) Dakshin Gujarat Vij Company Limited (DGVCL), a distribution company & wholly owned subsidiary of the holding company.
1.2 Out of the above seven companies, four companies e. GUVNL, GETCO, GSECL & MGVCL have registered & corporate offices at Vadodara within one compound. Upon the implementation of the Financial Restructuring Plan (FRP) notified in Government of Gujarat Notification No. GHU-2006-91-Guv-1106- 590-A dated 3/10/2006, the activities of the various companies shown above stood transferred from the erst-while GEB. However, the assets & liabilities available in each company’s locations were neither transferred to any other companies nor was distributed.
1.3 MGVCL, the appellant owned majority of the assets such as the multi- storeyed building, the VIP Guest house, the Vidyut Nagar Staff colony in Vadodara and the same continued to be owned by MGVCL even after splitting up of GEB in to holding company & various wholly owned subsidiary companies. The expenses in respect of these assets such as maintenance, alteration, administration & general expenses including the electricity bills, taxes as well as other statutory deductions & allowances came to be paid by MGVCL after issuing work orders. These expenses were allocated to the holding & subsidiary companies on actual basis and the same were re- imbursed by them on actual basis. No additional consideration other than actual expenses was received by the appellant from holding & subsidiary companies.
1.4 Therefore, a disclosure is also being made in the accounts of MGVCL as under:
“Consequent upon unbundling of business of GEB-erst, various assets including lands and buildings belonging to the Companies are used by Holding Company / other fellow subsidiary Companies. Common expenses for maintenance/usage of such assets have been apportioned and debited to Holding Company / other fellow subsidiary Companies based on reasonable basis. However, for such other un-identifiable expenses or income, no provision has been made for any such charges receivable or payable to or by the Company.”
1.5 The case of the department is that the reimbursement of actual expenses shared by the group companies belonging to government of Gujarat is falling under the category of business support service. Hence, the same is liable to service tax.
2. Neeta Ladha, Ld. Chartered Accountant appearing on behalf of the appellant submits that there is no provision of service among the group companies, its only common expenditure which has been shared by all the group companies, therefore in absence of any service, there is no question of any levy of service tax. It is her submission that the expenditure for which the sharing was done is towards the services which are actually provided by the third parties to the appellant and appellant merely recovers share of the other group companies from them on actual basis without any markup. Thus, appellant company is acting as pure agent or other group companies, the applicable service tax has already been charged by the service provider in their invoices which was paid by the appellant. She submits that this issue is no longer res-integra as the same is covered by the Hon’ble Supreme Court judjment in the case of M/s. Gujarat State Fertilisers & Chemicals Limited & Anr vs. Commissioner of Central Excise, Civil Appeal Nos.4066-4067/2015. She also placed reliance on the CESTAT-Ahmedabad decision in the case of Hazira Lng Pvt. Ltd. vs. CST-Service Tax-Ahmedabad, Service Tax Appeal No.596 of 2011. She further submits that if at all the service tax is payable, the same is available as Cenvat credit to their own group companies. Hence, the entire situation is revenue neutral. In support she placed reliance on the decision of Hon’ble Gujarat High Court in the case of CCE vs. Ineos ABS Ltd 2010 (254) E.L.T. 628. The said judgment was upheld by the Hon’ble Supreme Court reported in Comm. Vs. Indeos ABS Ltd. Ltd. 2011 (267) E.L.T. A155 (S.C.). She submits that due to revenue neutrality since there is no charge of suppression of fact on the appellant. The demand is also not sustainable on the ground of time bar as under this fact the extended period could not have been invoked. She also placed reliance on the CESTAT Mumbai decision in the Appeal No.ST/86341/15 in the case of Reliance ADA Group Pvt Ltd. vs. Commissioner of Service Tax, Mumbai IV. She also placed reliance on the judgment in the case of J.M.Financial Services Pvt. Ltd vs. Commissioner of Service Tax, 2014 (36) STR 151.
3. Shri Anoop Kumar Mudvel, learned Superintendent (AR) appearing on behalf of the revenue, reiterates the findings of the impugned order.
4. On the careful consideration of the submissions made by both the sides and perusal of the records, we find that the undisputed facts of the present case is that against the common administrative expenditure, the appellant have collected the reimbursement against the sharing of the common facilities from their group companies. The department has demanded service tax on the business support Firstly, the sharing of actual expenditure among the group companies does not amount to service. Hence, the same is not taxable. Secondly, by stretch of imagination such activity is not classifiable as business auxiliary service. The issue of sharing of common expenditure among the group company has been considered in the following decision:-
“M/s Gujarat State Fertilizers & Chemicals Limited & Anr vs. Commissioner of Central Excise:-
We have considered the aforesaid submissions in the light of the material placed on record. We shall advert to the second aspect namely, as to whether the arrangement between GSFC and GACL amounts to providing any services by GSFC to GACL and 50% incineration expenses incurred would constitute charges for providing such services. There is no dispute about the manner in which HCN is received through pipeline from M/s. Reliance Industries Ltd. by GSFC and GACL and then shared in the ratio of 60:40 respectively. GSFC and GACL are public sector undertakings, as already mentioned above. Since HCN is to be received through pipeline, it is abundantly clear that in order to save the expenditure, both the parties agreed that there should be a common pipeline. Once HCN is received through the said common pipeline, it comes first to GSFC’s premises and from there it is diverted in the ratio of 60:40, meaning thereby that GSFC receives 60% of the HCN whereas GACL receives 40% of the supply in accordance with their respective requirement. To enable GACL to receive this HCN through common pipeline, arrangement/agreement was entered into between these two parties. For this purpose, handling facilities were installed in the premises of GSFC. However, fact remains, for which there is no dispute, that for installation of these facilities both the parties had contributed towards the investment. Since the said handling facilities are in the premises of GSFC, incineration also takes place at the said premises. Handling facilities expenditure thereof is shared equally by both the parties. That is clearly provided in the agreement/arrangement that was agreed to between the parties and is reflected in the Minutes dated 06.07.1980. Once these facts are accepted, we find that handling portion and maintenance including incineration facilities is in the nature of joint venture between two of them and the parties have simply agreed to share the expenditure. The payment which is made by GACL to GSFC is the share of GACL which is payable to GSFC. By no stretch of imagination, it can be treated as common ‘service’ provided by GSFC to GACL for which it is charging GACL.
We are, thus, of the opinion that the second ingredient has not been established in the present case and the question of service tax does not arise. In view thereof, it is not necessary to go into the question as to whether receiving of HCN through the said common pipeline in the tank which is setup by the GFSC and GACL amounts to ‘storage’ or not and we leave the said question open.
For the aforesaid reasons, the demand of ‘service tax’ made by the respondent is unwarranted and is hereby set aside. We, thus, allow these appeals thereby quashing the Adjudicating Authority’s order as well as the order of the CESTAT.
There shall be no order as to costs.”
In the case of Hazira Lng Ltd. vs. CST-Service Tax-Ahmedabad, Service Tax (supra), this Tribunal vide order No.A/11349/2022 dated 02.11.2022 considering the same issue and passed the following order:-
4. We have gone through the rival submissions. We find that the appellant had entered into arrangement with their associates company namely M/s. Hazira Port Ltd, by which they have claimed, they were sharing certain cost. Shri Sujal Shah Manager Taxation of Hazira Port Pvt Ltd in his statement dated 04.10.2010 stated that the object of the cost sharing agreement was to identify the requirement for a joint or a common function that may be required by any of the associated enterprises namely Hazira Lng Pvt Ltd, Hazira Ports Pvt Ltd and Hazira Gas Pvt Ltd., respectively and to jointly procure and use the said services. The said agreement also required the associated enterprises to contribute towards their allocated share in cost of common function. The appellants had raised debit notes on associated enterprises and in the said debit notes they have treated the said cost sharing as supply of business support services. In the ST-3 returns for the period October, 2007 to March, 2008, the appellant had made the following remark in their ST-3 returns:
“The amount shown as taxable service charged represents the value to be contributed by our associated enterprise which in our view is not subject to Service Tax”. Though the said transaction did not result into rendition of any taxable service, taking a conservative view to avoid litigation, they treated it as business support service.”
4.1 It was claimed by Shri Sujal Shah that the Company neither received the payment till 31.03.2008, nor there was any possibility of receive it in Consequently they wrote off the said amount in their books of accounts on 31.03.2008.
4.2 Prior to 05.2008, the explanation C to Section 67 read as under: “gross amount charged’ includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debits notes and book adjustment.”
With effect from 10.05.2008, the said explanation C was substituted with the following explanation:
“gross amount charged’ includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debits notes and book adjustment, and any amount credited, as the case may be, to any account, whether called “suspense account” or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise”.
4.3 The appellants have contended that they have not provided any services to their associated company. The arrangement between them and the associated company was in the nature of cost sharing they relied on the decision of Hon’ble Apex Court in case of Gujarat State Fertilizers & Chemicals Ltd Vs CCE 2016 (45) STR 489 (SC), wherein para 15, 16 & 17 following has been observed:
“15. We have considered the aforesaid submissions in the light of the material placed on record. We shall advert to the second aspect namely, as to whether the arrangement between GSFC and GACL amounts to providing any services by GSFC to GACL and 50% incineration expenses incurred would constitute charges for providing such services. There is no dispute about the manner in which HCN is received through pipeline from M/s. Reliance Industries Ltd. by GSFC and GACL and then shared in the ratio of 60: 40 respectively. GSFC and GACL are public sector undertakings, as already mentioned above. Since HCN is to be received through pipeline, it is abundantly clear that in order to save the expenditure, both the parties agreed that there should be a common pipeline. Once HCN is received through the said common pipeline it comes first to GSFC’s premises and from there it is diverted in the ratio of 60 40, meaning thereby that GSFC receives 60% of the HCN whereas GACL receives 40% of the supply in accordance with their respective requirement To enable GACL to receive this HCN through common pipeline, arrangement/agreement was entered into between these two parties. For this purpose, handling facilities were installed in the premises of GSFC However, fact remains, for which there is no dispute, that for installation of these facilities both the parties had contributed towards the investment Since the said handling facilities are in the premises of GSFC, incineration also takes place at the said premises. Handling facilities expenditure thereof is shared equally by both the parties. That is clearly provided in the agreement/arrangement that was agreed to between the parties and is reflected in the Minutes dated 6-7-1980 Once these facts are accepted, we find that handling portion and maintenance including incineration facilities is in the nature of joint venture between two of them and the parties have simply agreed to share the expenditure. The payment which is made by GACL to GSFC is the share of GACL which is payable to GSFC By no stretch of imagination, it can be treated as common service provided by GSFC to GACL for which it is charging GACL.
16. We are, thus, of the opinion that the second ingredient has not been established in the present case and the question of service tax does not arise. In view thereof, it is not necessary to go into the question as to whether receiving of HCN through the said common pipeline in the tank which is setup by the GFSC and GACL amounts to ‘storage’ or not and we leave the said question open.
17. For the aforesaid reasons, the demand of ‘service tax made by the respondent is unwarranted and is hereby set aside. We, thus, allow these appeals thereby quashing the Adjudicating Authority’s order as well as the order of the CESTAT.”
In the light of the above observation of Hon’ble Apex Court, it is seen that the arrangement of the appellant with it is associate companies is in the nature of cost sharing and it would not be correct to say that the appellants are providing any services to their associate companies. In this regard the observations of Tribunal in the case of Reliance Ada Group Pvt Ltd Vs CST2016 (43) STR 372 (T) also became relevant:
“5.5 It is therefore clear that common services are not ‘provided’ by the appellant but, only these are only ‘procured’ by the appellant from the Service Providers. Costs thereof are shared by the recipient Participating Group Companies by making reimbursements to the Appellant. The Appellant merely carries out the agency function of procurement of services for the Participating Group Companies which share the costs and expenses thereon.
5.6 We find that the reimbursements of the cost/expenses incurred by the Appellant cannot be regarded as consideration flowing to the Appellant towards the taxable service provided by the Appellant rather the receipts are towards the reimbursements of the cost/expenses incurred by the Appellant in terms of the cost sharing agreement with the Participating Group Companies.
5.7 Section 64(3) of the Act which states the “Extent, commencement and application” of Chapter V of the Act, reads as under:
“(3) It shall apply to taxable services provided on or after the commencement of this Chapter.”
Service tax is a levy on rendition of taxable service. We find that in the peculiar facts of the instant case, the Appellant is merely acting as a manager/trustee to incur expenses on behalf of the Participating Group Companies. The object of entering into such cost sharing arrangement is to reduce the cost of operation of the Participating Group Companies. The activities carried out by the Appellant enables the Participating Group Companies to share the common services, the best available talent and resources required for carrying out their business activities. No taxable service is provided by the Appellant and therefore in absence of rendition of such service by the Appellant to the Participating Group Companies, the demand of Service tax cannot sustain.
5.8 It is seen that in the impugned Order contrary to the above findings recorded in Para 4.3 regarding procuring of services which are reproduced hereinabove, the adjudicating authority in Para 4.5 onwards of the impugned Order erroneously proceeds on the basis that those services were provided by the appellant. This self-contradictory finding is not supported by any documentary evidence. On the basis of such erroneous self contradictory findings, the adjudicating authority holds that the activities do fall under the definition of ‘Business Support Services under Section 65(104c) read With Section 65(105)(zzzq). We find that these observations and findings of the adjudicating authority emanate from the confusion that the Appellant provides the services in question, whereas the Appellant at best acts as an agency to procure services and allocate cost to various Participating Group Companies for which it can claim an amount of Rs One Crore jointly from all participating group companies as its fees in addition to the reimbursement of the total costs incurred Towards such common services.
5.9 No direct statutory provision or any binding precedent could be shown to us by the Revenue, which for the relevant time, covers the activity of incurring costs and seeking reimbursements as Pure Agent under the purview of the “Business Support Services” under Clause (105) of Section 65 of the Finance Act, 1994 as amended by Finance Act, 2006 There is no dispute on the fact that no additional fees or profits or consideration for Pure Agent services is received by the appellant, who has merely recovered actual costs incurred from the Participating Group Companies.
5.10 We find that the definition of ‘Business Support Services’ covers only specific activities in its inclusive part of the definition. Only if such specific activities are carried out, it would be classifiable as Business Support Services The Appellant per se in its own capacity has not provided any of the specified services to the Participating Group Companies The attempt of the adjudicating authority to link all the activities of the Appellant with the marketing policies, customer evaluation procurement policies, distribution policies, customer relation policies, taxation policies, etc, and also considering the appellant as a Service Provider, appears to be for anyhow bringing the same in the definition of ‘taxable serves’, which exercise is only on assumptions, without any documentary evidence, and contrary to the findings recorded in earlier part of the same impugned Order (in Para 4.3 thereof).”
4.4 We find that revenue has not been able to identify any specific service, which the appellant has provided to its associate In these circumstances, we do not find that the activities in the nature of sharing cost between associate companies amount to provision of any service by one company in the agreement with to any other companies in the said cost sharing agreement.
4.5 However, since the activities under taken under the cost sharing agreement do not amount to provision of Service in terms of the decision of Hon’ble Apex Court in case of Gujarat State Fertilizers & Chemicals Ltd.(supra), the demand of Service Tax on the activities under taken under the cost sharing agreement cannot be sustained.
5. The demand is therefore set aside, appeal is consequently ”
From the above judgments, it is settled that sharing of the common expenditure among the group companies does not amount to business support services. Even the said activity does not amount to service. Therefore, following the aforesaid decisions which are on the identical facts of the present case service tax demand is not sustainable. Accordingly, the impugned orders are set aside, appeals are allowed.
(Pronounced in the open court on 22.11.2024)
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