Demand for service tax based on a non-existing provision is not sustainable: CESTAT Allahabad

Indus Valley Partners (India) Pvt Ltd Vs Principal Commissioner of Central Tax (CESTAT Allahabad)

In this case between Indus Valley Partners (India) Pvt Ltd and the Principal Commissioner of Central Tax, the issue revolves around the classification of services provided by Indus Valley Partners (IVP) US and Bijesh Amin Consulting Corporation (BACS). The tax authorities treated these services as “Business Auxiliary Services” and demanded service tax under the reverse charge mechanism. However, the appellant argued that these services should be classified as “intermediary services” and thus not taxable in India.

The appellate tribunal analyzed the agreements between the parties and concluded that the services provided by IVP US and BACS fell under the category of “intermediary services.” They noted that intermediary services involve three or more parties and include arranging or facilitating the provision of services or goods between these parties. In this case, IVP US and BACS were acting on behalf of the appellant to promote their products and services in the US and other parts of the world, making their services intermediaries.

Moreover, the tribunal observed that the demand for service tax was made based on the classification of services under the “Business Auxiliary Service” category, which was omitted from the Finance Act from July 1, 2012. Therefore, relying on a non-existing provision for classification was deemed legally incorrect.

Furthermore, the tribunal highlighted the principle of revenue neutrality, stating that since the appellant was a Special Economic Zone (SEZ) unit and was availing CENVAT credit for taxes paid on input services, there was no net gain to the government exchequer from the service tax demand. Several precedents were cited to support the argument that in cases of revenue neutrality, no penalty or interest should be imposed.

Ultimately, the tribunal set aside the demand for service tax, interest, and penalties, ruling in favor of the appellant.

FULL TEXT OF THE CESTAT ALLAHABAD ORDER

This appeal has been directed against Order-in-Original No.10/PR. Commr./ST/Noida/ 2019-20 Dated 13.01.2020 passed by the Ld. Pr. Commissioner, Central Tax, Noida whereby demand of Service Tax amounting to Rs.6,66,50,976/- was confirmed along with interest and penalty amounting to Rs.6,66,50,976/- was also imposed under Section 78 of the Finance Act, 1994¹.

2. Briefly stated, the facts of the case are that M/s Indus Valley Partners (India), i.e., the Appellant is a registered SEZ unit under the Special Economic Zone Act, 2005 vide Letter of Approval dated 10/12/2009 for carrying out authorized operations namely ^„Software Development‟. The Appellant was working at three different places namely, (i) SDF B-13, 14 & 15, 3rd Floor, Noida Special Economic Zone, Dadri Road, Phase-II, Noida, (ii) Unit No.153 & 154, 1^st Floor, SDF-V, Santacruz Electronics Export Processing Zone, SEZ Andheri (E), Mumbai and (iii) 702, 7^th Floor Skylark Building, 60, Nehru Place, New Delhi and was holding Centralized Service Tax registration No. AAACI7597RSD002 dated 12/05/2016. The Appellant was engaged in software development activities and was availing CENVAT credit under CENVAT Credit Rules, 2004 in respect of service tax paid on input services received.

3. The Officers of Central Tax, Audit Commissionerate, Noida had conducted audit of the records of the Appellant for the period from April, 2013 to June, 2017 during June,18, July,18 & September,18 and observed that in Balance Sheets for 2013-14 to 2016-17, income on two points was shown, (i) from sale of licence and (ii) from sale of services. It was further observed that in the said Balance sheets, under the head of “other expenses and “expenditure in foreign currency”, expenses incurred were shown to be Rs.10,18,89,711/-, Rs.8,93,82,836/-, Rs.9,50,98,590/- and Rs.20,12,62,814/- respectively. It was also observed that the said expenses were made towards procurement of “Marketing Support Services” from Indus Valley Partners² having office at 1350 Broadway, Suite-601, New York and M/s Bijesh Amin Consulting Corporation³ having office at 9203, Hidden Creek Drive, Great Falls VA 22066 USA. The Appellant entered into Agreements with IVP-US and BACS for above said services. From the Agreement dated 21.03.2016 with IVP-US which was the same for earlier period also, it was found that IVP-US had provided services for identification and prediction of market trends in US, analysis of customer needs on regular basis etc against payment equal to IVP-US’s cost plus appropriate margin as per global transfer pricing. It was further found that IVP-US was working solely for the Appellant on principal to principal basis at arm’s length.

4. The Appellant also entered into an Agreement dated 01.04.2013 with BACS for Marketing Consultancy. As per the Agreement, BACS would provide the marketing consultancy services. It is found from the Agreement that BACS was to provide services for development of prospective buyers, extending help in closing and executing projects etc against fee of USD 3,00,000/- per annum. In addition to above, the Appellant was also required to pay travelling and transportation expenses.

5. In view of the above, it appeared that activity carried out by IVP-US and BACS for the Appellant were of the category of ^„service‟ in terms of provisions of Section 65B(44) of the Act, and was chargeable to service tax under Section 66B of the Finance Act, 1994. The above services were classifiable under ^„Business Auxiliary Service‟ and the Appellant was required to pay service tax accordingly under reverse charge mechanism but the same was not paid by him. The Appellant claimed that services received by them from IVP US and BACS were under the category of ^„intermediary services‟ and as per Rule 9 of the Place of Provisions of Services Rules, 2012, in the case of intermediary services, the place of provision of services would be location of service providers. As the location of service providers was outside of India, the place of provision would also be treated as outside of India and no service tax was chargeable.

6. It is further observed that exemption provided under Section 26 of the SEZ Act, 2005 read with notification No.40/2012-ST dated 20.06.12, would be available as ^„Business Auxiliary Services‟ rendered by the Appellant were not Authorised Operation as per Approval letter issued by the SEZ.

7. On the basis of above audit observation, Show Cause Notice dated 23.10.18 was issued to the Appellant for demand of service tax of Rs.6,66,50,976/- on the services carried out by IVP-US and BACS in US and other parts of the world on behalf of the Appellant during the period April, 2013 to June, 17 along with interest and penalty under reverse charge mechanism, treating such services under the category of ^„Business Auxiliary Service‟. The case was adjudicated and demand was confirmed along with interest and penalties imposed. Hence the present appeal before this Tribunal.

8. Shri Abhinav Kalra C.A. represented the case on behalf the Appellant and contended that IVP US and BACS had been working as intermediaries and they had been providing intermediary services. They were engaged in Marketing Support Services on account of the Appellant to overseas customers. Citing the definition of ^„Intermediary Service‟ as provided under Rule 2(f) of the Place of Provision of Services Rules, 2012 (in short “the POP Rules”), he contended that an “intermediary” arranges provision of service for his principal which would mean to plan, organize, and carry out (an event)‟, ^„put (things) in a neat, attractive, or required order”. The main job of intermediary is to get the entrusted work done as per requirement. He further contended that IVP US and BACS were providing services like identification and predict market trends in US, to analyse customer needs on regular basis, full time marketing services provided by IVP globally, generate leads for potential sales and help in closing and executing projects for IVP etc. As per the definition of ^„intermediary‟, the provision of service has to be arranged between two or more persons. In the instant case IVP US and BACS arranged the provision of different services between IVP India and its clients located in USA and other parts of the globe. “Intermediary” excludes a person who provides the main service on his account. The main service provided by the Appellant is ^„Software Development‟. Marketing Support Services are also the part of software development but they are after sale services. He went on to say that in terms of Rule 9 of the Place of Provision of Services Rules, 2012, the place of provision of service in respect of ^„intermediary service‟ was the location of the intermediary service provider. Since the intermediary services of Marketing Support were carried out by IVP US and BACS in the United States of America and other parts of the globe, the place of provision of service in both the cases would be the foreign territory. As the place of provision of service is itself outside the taxable territory of India, demanding service tax on the said services was not legally correct.

9. The Ld. Counsel for the Appellant vehemently refuted the classification of impugned services under ^„Business Auxiliary Service‟. He pleaded that “intermediary” means, as per rule 2(f) of the POP Rules, 2012, 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) or a supply of goods between two or more persons but does not include a person who provides the main service or supplies the goods on his account and services provided by IVP US and BACS were intermediary services. In support of his contention, he also placed reliance on the clarification issued on intermediary in ^„An Education Guide (“Guidance Note”)” on June 20, 2012 issued by the Central Board of Excise and Customs. He emphasized that where a service was capable of being classified under two or more categories, the more specific classification would prevail. It was argued that the definition of “Intermediary” specifically excluded a person who provided the main service or supplies the goods on his account. IVP US and BACS were not having any control over the provision of the main service nor can alter any terms between IVP India and their clients. Reliance was placed on the decision of Excel Point Systems (India) Private Limited Vs Commissioner of ST Bangalore, 2018 (10) G.S.T.L. 254 (Tri. – Bang.). He also referred to the decision of the Tribunal in the matter of Samarth Sevabhavi Trust vs. Commissioner of Central Excise, Aurangabad. In Royal Western India Turf Club Ltd. Vs Commissioner of Service Tax, Mumbai-I, the Tribunal set aside the Order in Original which confirmed the demand on the basis of wrong classification of service”

10. On the issue of non-inclusion of services like identification and prediction of market trends in US, to analyse customer needs on regular basis, full time marketing services provided by IVP globally, generate leads for potential sales and help in closing and executing projects for IVP etc, he contended that the Appellant was granted permission by SEZ for carrying out software development services and the said activities include above operations also. He referred to the definition of software development given in wikipedia. The ultimate aim of the process of Software Development is to bring into existence an operational software and to achieve that ultimate objective, the above activities become an integral part. Therefore, all the process undertaken by the Appellant for development of software including Marketing Support Services is duly covered under the term ^„Software Development‟ as authorized by the LOP dated 10/12/2009 under the SEZ Act, 2005.

11. The Ld. Counsel for the Appellant argued that no penalty was imposable under Sections 78 & 77 of the Finance Act, 94 as the Appellant was apprising everything to the department by way of filing of ST-3 returns. He also argued that the
proceedings are barred by limitation. Principle of revenue neutrality was also cited. It was contended that the impugned order is not proper and not sustainable.

12. Departmental Representative submitted that services rendered by IVP US/ IVP UK were classifiable under the category of Business Auxiliary Services and were chargeable to service tax under reverse charge mechanism. He reiterated that impugned OIO was proper, legal and maintainable.

13. Heard both sides and perused the appeal records.

14. With a view to understand nature of services rendered by IVP US and BACS, we examine the Agreements executed between the Appellant and said overseas companies. The Agreement was termed as ^„Marketing Support Services Agreement‟. As per the Agreement dated 21.03.16 executed between the Appellant and IVP-US, which was same for the past period also. The relevant clauses of the Agreement are as below :-

(a) The IVP US has been established to explore new business opportunities to provide marketing support to IVP product services and products, to generate leads for potential sales, follow up with customers for pending payments, represent IVP business interests in the US and to promote awareness and sales to IVP products and services in the US and such additional services as may be mutually agreed in writing (here in after in consolidation referred to as ^„Marketing Support Services‘).

(b) The IVP US has the requisite skilled employees who are capable of providing Marketing Support Services.

(c) Subject to terms and conditions set forth herein, the parties hereto agree that IVP US will allocate specific personnel /employees as listed in the Appendis-1 and as may be modified in writing from time to time to provide Marketing Support Services in US. The IVP US shall use its best efforts to support the IVP India to identify and predict market trends in US, analyse customer needs on regular basis and pass on suggestion to incorporate updated modules of software, improve customer relations, facilitate the information flow between the IVP India and its customers and facilitate closure and execution of assignments / project for IVP for filling gap between customer and the IVP India.

(d) The price which IVP India shall pay to the IVP US for Marketing Support Services shall be equal to the IVP US‘s cost plus appropriate mark up at arm‘s length as per the bench marking provided by global transfer pricing consultants.

(e) Cost in para 2.1.1 means all direct and indirect costs attributable to the performance of the Marketing Support Services by identified personnel/employees including their salaries, bonus communications, travelling and other administrative overheads allocable to them on head counts basis which the IVP US incurs in order to provide such services.

(f) The IVP US shall issue a debit note/invoices at the end of each month on the IVP India including detailed statement of the cost incurred along with supporting documents. The IVP India shall pay to the IVP US within thirty working days of receipt of invoice from the IVP-US.

It appears from the above that all specified services which were provided by IVP US were in connection with products and services of the Appellant. The services were provided in US to clients or prospective clients of the Appellant on behalf of the Appellant. All specified services were provided to facilitate sale of the product of the Appellant. IVP US also persuades clients to make payment to the Appellant promptly. The payment towards rendering said services was made by the Appellant.

15. The Agreement dated 01.04.2013 executed between the Appellant and BACS was termed as ^„Marketing Consultancy Agreement. The relevant clauses of the Agreement are as follows:-

(a) IVP hereby appoints BACS its full time marketing consulting to provide the services. (para 1.5)

(b) BACS commits to provide services on an exclusive full time basis for this assignment. (Para 1.6)

(c) BACS agreed to not take on any assignment those conflicts with the current set of offered services provided by IVP.( Para 1.7)

(d) IVP will permit Mr Bijesh Amin to utilise the title of ^„Managing Director‟ for marketing purposes as such a title will be beneficial to him to help secure business for IVP. This title does not confer any right / responsibility that a managing director has under the Indian Companies Act in India. (Para 1.8)

(e) BACS shall provide IVP the following services-

a. Full time for services provided by IVP globally,

b. Generates leads for potential sales and help in closing and executing projects for IVP,

c. Ensure that assigned consultant plays the role in full time manner as desired by IVP on projects being executed by IVP. (Para-2.1)

(f) All out of pocket expenses incurred by BACS related to performance of services under this Agreement such as all travels expenses, transportation, business etc shall be reimbursed by IVP.

From the above it appears that the BACS was hired to facilitate the Appellant to enhance its sale of products globally by providing above specified services.

16. We find that the demand of service tax was raised treating the said specified services as Business Auxiliary Service. With effect from 01.07.12, under ^„negative list‟ era when all services were made taxable except those which were enumerated in negative list, there was no definition of ^„Business Auxiliary Service‟. However, there was definition of ^„Business Auxiliary Service‟ in the Finance Act, 1994 during pre-negative list era, under section 65(105)(zzb) of the Finance Act, 1994. It was defined as:-

“Business Auxiliary Service” means any service in relation to, –

(i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or

(ii) promotion or marketing of service provided by the client; or Explanation – For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, “service in relation to promotion or marketing of service provided by the client” includes any service provided in relation to promotion or marketing of games of change, organised, conducted or promoted by the client, in whatever form or by whatever name called, whether or not conducted online, including lottery, lotto, bingo;

(iii) any customer care service provided on behalf of the client; or

(iv) procurement of goods or services, which are inputs for the client; or

Explanation – For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, “inputs” means all goods or services intended for use by the client;

(v) production or processing of goods for, or on behalf of the client; or

(vi) provision of service on behalf of the client; or

(vii) a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision, and includes services as a commission agent, but does not include any activity that amounts to “manufacture” of excisable goods.”

In the present case services were treated as in relation to provision of service on behalf of the client and on the basis of said definition, services were proposed to classify under Business Auxiliary Service. It is trite that in interpretation of statute, the omitted provision cannot be considered. The Hon‟ble Supreme Court in the case of Shiv Shakti Cooperative Society Vs Swaraj Developers & others, held as under :-

“Section 6 of the General Clauses Act has no application because there is no substantive vested right available to a party seeking revision under Section 115 of the Code. In Kolhapur Canesugar Works Ltd. and another vs. Union of India and others (AIR 2000 SC 811), it was observed that if a provision of statute is unconditionally omitted without a saving clause in favour of pending proceedings, all actions must stop where the omission finds them, and if final relief has not been granted before the omission goes into effect, there is no scope for granting it afterwards.”

In view of the above decision, it is not proper to take assistance of the omitted definition of Business Auxiliary Service for classification of services rendered by IVP US and BACS on behalf of IVP India.

17. It was contended by the Appellant that the said services were intermediary services. It is found that ^„Intermediary‟ was defined under rule 2(f) of the Place of Provisions of Services Rules, 2012 as 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) or a supply of goods, between two or more persons, but does not include a person who provides the main service on his account. Above definition reveals that intermediary involves three or more persons –

i. Provider of service,

ii. Principal on whose behalf service is rendered or supply of goods is made and

iii. Persons (customers of principal) who actually received services.

It is also important to note that in case provision of service was made by a person is in his own account to his customers, it cannot be termed as an intermediary. The words “arranges or facilitates‟ the provision of services or supply of goods, between two or more persons, is the crux of the definition of intermediary. Legal meaning of ^„facilitate‟, as per Merriam Webster Dictionary, is i) to make something easier, ii) to help something run more smoothly and effectively. Here in the present case, IVP US and BACS help IVP India to make sale of software developed by the Appellant easier. In ^„Taxation of Services: An Education Guide‟ issued by the CBEC, the ^„Intermediary services‟ were clarified as under:-

“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. Also excluded from this sub-rule is a person who arranges or facilitates a provision of a service (referred to in the rules as “the main service”), but provides the main service on his own account. In order to determine whether a person is acting as an intermediary or not, the following factors need to be considered: Nature and value:

An intermediary cannot alter the nature or value of the service, the supply of which he facilitates on behalf of his principal, although the principal may authorize the intermediary to negotiate a different price. Also, the principal must know the exact value at which the service is supplied (or obtained) on his behalf, and any discounts that the intermediary obtains must be passed back to the principal.

Separation of value:

The value of an intermediary‘s service is invariably identifiable from the main supply of service that he is arranging. It can be based on an agreed percentage of the sale or purchase price. Generally, the amount charged by an agent from his principal is referred to as “commission”. Identity and title:

The service provided by the intermediary on behalf of the principal is clearly identifiable. In accordance with the above guiding principles, services provided by the following persons will qualify as ^„intermediary services‘:-

i) Travel Agent (any mode of travel)

ii) Tour Operator

iii) Commission agent for a service [an agent for buying or selling of goods is excluded]

iv) Recovery Agent Even in other cases, wherever a provider of any service acts as an intermediary for another person, as identified by the guiding principles outlined above, this rule will apply.

v) Normally, it is expected that the intermediary or agent would have documentary evidence authorizing him to act on behalf of the provider of the ^„main service‘

The above discussion makes it clear as to what kind of services would fall in the category of ‟Intermediary Services‟. The scope of intermediary services can be summarized as under:-

1. Minimum of Three Parties: Intermediary does not carry out the main supply himself but arranges or facilitates the main supply of goods and services between two or more persons. The arrangement requires a minimum of three parties, two of them transacting in the main supply of goods and services and one arranging or facilitating the main supply. An activity between only two parties can, therefore, NOT be considered as an intermediary service.

2. Two distinct supplies: There are two set of supplies-

a. Main supply, of goods or services, between two principals, which can be a supply of goods or services or securities;

b. Ancillary supply, is the service of facilitating or arranging the main supply of goods or services between the two principals. This supply is identifiable and distinguished from the main supply and is supply of intermediary service.

3. Intermediary service provider to have the character of an agent, broker or any other similar person: The Act itself defines intermediary as a broker, agent or any other person facilitating or arranging the services. The word ^„means‟ in the definition is not inclusive and does not expand the definition to include any other person. The phrase “arranges or facilitates” indicates that intermediary services are only supportive services.

4. Does not include a person who supplies such goods and services or both or securities on his own account: The definition of intermediary services specifically excludes a person who supplies such goods or services, or both or securities on his own account. The person supplying services, fully or partly, on principal-to-principal basis, cannot be covered under the scope of “intermediary”.

5. Sub-contracting for a service is not an intermediary service: The main supplier of goods or services or both can outsource the main service, fully or partly, to sub-contractor. Such sub-contractors are carrying out the main supply of goods or services and provides the main service on his own account to the buyer on behalf of main supplier. Such services are not intermediary and part of main supply only. In the instant case we find that –

i. The Appellant was engaged in software development services. He authorised his clients to use software on certain consideration.

ii. The main service of the Appellant was, therefore, authorisation of use of software developed by him.

iii. For selling authorisation of use of software, the Appellant hired services of IVP US and BACS to promote his products. The aforesaid services were to be undertaken before sale of the main service i.e., sale of authorisation of use of software.

iv. The Appellant entered into the said agreement with IVP US and BACS to provide pre- sale service to the clients of the Appellant in USA and other parts of the globe.

v. IVP US and BACS do not have to change title of main service or alter the main character of such service.

vi. IVPUS AND BACS were required to work under the control of the Appellant.

vii. Billing was done by IVP US AND BACS in the name of the Appellant.

The terms and conditions of agreement indicate that IVP US AND BACS were working as an Agent of the Appellant. All the elements required for qualifying ^„intermediary‟ were present in the above agreement. IVP US AND BACS could not alter the nature or value of main service, value of intermediary services was clearly identifiable and the services provided by intermediary were clearly identifiable. There were three persons involved in the above deal, i.e., the Appellant, Clients of the Appellant and IVP US OR BACS. In view of the above discussion we are of the considered view that services provided by IVP US and BACS were of the category of ^„intermediary services‟. Reference is made to the decision of the CESTAT in the case Excel Point Systems (India) Pvt. Ltd. [2018 (10) G.S.T.L. 254 (T) where the party was engaged providing project support services, consulting services, marketing on product, technical support services, providing advice, clarification and technical assistance to customers on behalf of the group company located outside India and payment received in convertible foreign exchange. The party in the said matter contested that he was providing services in nature of Business Auxiliary. The Ld. First appellate authority however, held that the services rendered by the appellant fall under the definition of intermediary under Rule 2(f) of the Place of Provisions of Services Rules, 2012 and in terms of Rule 9 of the Place of Provision of Services Rules, 2012 specified vide Notification No.28/2012, dated 20-6-2012 which is effective from 1-7-2012 in the case of intermediary service, place of provision of services shall be the location of the service provider. The findings of the Ld. Commissioner were subsequently upheld by the Hon‟ble CESTAT. The said decision is squarely applicable to the present case also.

18. It is seen that demand was raised and subsequently confirmed under reverse charge mechanism treating the place of provision of services within taxable territory. Under the Place of Provisions of Services Rules, 2012 (POP Rules), place of provisions of services were specified for different services. Rule 3 of the POP Rules specifies general rule that the place of provision of a service would be place of service recipient. Rule 4 provides place of provision of performance based services. Rule 5 hypothecates place of provisions in relation to an immovable property, including services provided in this regard by experts and estate agents, provision of hotel accommodation by a hotel, inn, guest house, club or campsite, by whatever, name called, grant of rights to use immovable property, services for carrying out or co-ordination of construction work, including architects or interior decorators, shall be the place where the immovable property is located or intended to be located. Rule 6 is in regard to place of provision relating to events. Rule 7 fixes place of provision of services provided at more than one location. Rule 8 provides place of provision of services where provider and recipient are located in taxable territory. Rule 9 provides place of provision of the following services as the location of service provider:-

(a) Services provided by a banking company, or a financial institution, or a non-banking financial company, to account holders;

(b) omitted vide Notification 46/2016-Service Tax

(c) Intermediary services;

(d) Service consisting of hiring of means of transport other than, – (i) aircrafts, and (ii) vessels except yachts upto a period of one months.

Rule 10 provides place of provision of goods transportation services. Rule 11 defines place of provision of passenger transportation service. Rule 12 defines place of provision of services provided on board a conveyance.

In the present case services for which demand was raised were intermediary services. In accordance with Rule 9 of the POP Rules, place of provision of service of intermediary service was location of service provider. Service providers in the instant case were located in USA. Hence, place of provision of service was USA. As both the service provider and service recipient were located in non-taxable area, service tax demanded in this case is not sustainable.

19. The Ld. Pr. Commissioner while confirming demand had given his findings as under:-

“ In the present case, IVP US and BACS had not arranged or facilitated services rendered by IVP India rather they had provided marketing support services such as to identify and predict market trends in US, analyse customer needs on regular basis and pass on suggestion to incorporate updated modules of software, improve customer relations, facilitate the information flow between the IVP India and its customers and facilitate closure and execution of assignments / project for IVP for filling gap between customer and the IVP India. From the fee structure involved in both the cases i.e., IVP and BACS, it is evident that both the service providers namely IVP US and BACS have provided services on principal to principal basis. In case of IVP US the fee payable is cost plus margin and BACs was engaged by IVP India on full time basis on payment of USD 3,00,000/ per annum which shows that they were not simply broker or agent.”

There is no statutory definition of ^„agent‟ in the Finance Act, 1994 but the term ^„agent‟ has been defined in the Contract Act as-

“An “agent” is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal”.”

We find that fee structure has no link with agency system once agreement shows that a person is working under the direction of and on behalf of another person, the agency system obviously exists in such deal. In the present case, from the Agreements executed between the Appellant and IVPUS and BACS clearly reveal that they were working for and on behalf of and under the direction of the Appellant. Thus, we do not find any reason to deny the claim of the Appellant that the said services were of the category of intermediary service.

20. It is noticed that for classification of impugned services definition of Business Auxiliary Service given in section 65 of the Finance Act, 1994 was taken into consideration. Section 65 of the Finance Act, 1994 was omitted with effect from 01.07.2012. It shows that the definition was not in existence with effect from 01.07.12. The demand in the instant case pertains to April,13 to June,17 when the definition provided under section 65 was not in existence. The classification of service on the basis of a non­existing provision is bad in law. With effect from 01.07.12, all services except services mentioned in negative list were made taxable. Contrary to that, definition of ^„intermediary‟ was available even after 01.07.12 and nature of impugned services were within four corners of intermediary services. We therefore find that observation of the Pr. Commissioner is not sustainable and liable to be set aside.

21. It is also important to note that the Appellant was a SEZ unit and was availing Cenvat credit of taxes paid on its input services. Services which were provided by IVP US/UK were input services for the Appellant. In this case service tax was payable under reverse charge mechanism under notification No.30/12-ST dated 20.06.12 by the service recipient and the same was available for taking back in the form of Cenvat Credit. Thus, there was no gain to the government exchequer in that case. It is a case of revenue neutrality. We find that the issue of the applicability of revenue neutrality in the circumstances of charging service tax under reverse charge mechanism has been settled in catena of judgments. In the case of Jet Airways India Ltd. [2016-TIOL-2072-CESTAT-MUM], the Tribunal considered the issue of revenue neutrality where service tax was required to pay under reverse charge mechanism as service provider was foreign based firm. The Tribunal held that as the appellant could have availed CENVAT credit of the service tax paid on reverse charge mechanism, hence, a revenue neutral situation arises wherein appellant pays the tax and takes the credit and accordingly set aside the tax demand interest thereon and penalties. In the case of Jain Irrigation System Ltd. [2015 (40) S.T.R. 572 (T)] the Tribunal holds that revenue neutral situation comes about when credit is available to assessee himself. In the case of Coca-Cola India Pvt. Ltd. [2007 (213) E.L.T. 490 (S.C.)] the Apex Court accepted the stand that the duty payable in respect of beverage basis/concentrates is modvatable. Since the duty payable is modvatable, there is no revenue implication. We find that the facts of the present case are squarely covered by the abovementioned decisions and as such no demand is sustainable.

22. As regards interest and penalty we find that the issue is no more res integra. Once demand is not sustainable, interest and penalty under Section 78 would not be imposable. In support of above, reference is made to the following decisions:-

(1) CCE, Pune Vs. Coca-Cola India Pvt. Ltd., 2007 (213) E.L.T. 490 (S.C.);

(2) CCE & C. Vadodara-II Vs. Indeos Abs Ltd. 2010 (254) E.L.T. 628 (Guj.), affirmed by the Hon‟ble Supreme Court in [2011 (267) E.L.T. A155 (S.C).

(3) Hindalco Industries Ltd. v. Commissioner of Central Excise, Bhubaneswar-II – 2023-TIOL-403-CESTAT-KOL.

(4) M/S. Jai Balaji Industries Ltd. v. Commissioner of Central Excise, Bolpur – 2023 (6) TMI 1102 – CESTAT KOLKATA.

In the case of CCL Products (India) Ltd [2012 (927) S.T.R. 342 (T), the Tribunal has consistently held that in the case of revenue neutrality, no penalty is imposable under Section 78 of the Finance Act, 1994.

23. In view of the foregoing discussions, we set aside the impugned order and allow the appeal with consequential relief as per law.

(Order pronounced in open court on – 02^nd April, 2024)

Notes:

¹ The Act,

² IVP-US

³ BACS