Paradeep Phosphates Ltd Vs Commissioner of Central Excise (CESTAT Kolkata)
Held that work of mediator/ arbitrator in resolving the dispute between the parties is not management consultancy service. Accordingly, not liable to service tax under management consultancy service u/s 65(65) of the Finance Act, 1994
Facts-
The appellant paid mediation fees of USD 10,00,000/- to M/s. Cotunace. The appellants deposited the service tax under the Head “Management Consultant‟s Service” on reverse charge basis under protest. The appellant felt that the fees paid to M/s Cotunace did not qualify under any category of taxable service and therefore, filed a refund claim for Rs.45,78,857/- on 16.03.2011.
The Department issued a show-cause notice proposing to reject the refund claim and the claim was rejected by the Order-in-Original and such rejection was upheld by the impugned order dated 20.02.2012. Hence, this appeal.
Conclusion-
Held that M/s Cotunace have not rendered any advice for running the organisation of the appellants in an effective manner. Their role was mediation /arbitration in resolving the dispute. They have only performed the work of mediator/arbitrator in resolving the dispute between the appellant and M/s GCT. Actual work performed cannot be equated with advice. Therefore, M/s Cotunace did not render any management consultancy service to the appellant. The services rendered by M/s Cotunace do not fall under management consultancy service in terms of Section 65 (65) of Finance Act, 1994.
FULL TEXT OF THE CESTAT KOLKATA ORDER
The appellants were admitted to the Board for Industrial and Financial Reconstruction (BIFR) and a Scheme for Financial Reconstruction was sanctioned. In terms of the Scheme, dues of current unsecured creditors including OCP-MP Morocco to the extent of 11% of the over dues were proposed to be waived off ; in respect of non-current unsecured creditors including M/s Group Chimique Tunisien (GCT), a waiver of 70% were granted. An appeal was filed against the same before the Appellate Authority for industrial and financial reconstruction, which remanded back the matter to BIFR with a direction to the Bank to grant similar dispensation to M/s Group Chimique Tunisien (GCT). The said order was challenged by the appellant company before the Hon‟ble High Court and the Hon‟ble Supreme Court. In subsequent proceedings, the BIFR directed the appellants to resolve the settlement of outstanding dues with GCT and submit completion report to the Board and MA (SBI). Accordingly, the appellant entered into an agreement and appointed M/s Cotunace to mediate and get the matter settled with GCT for a mediation fee of USD 10,00,000/-, which was paid by the appellants to M/s Cotunace. The appellants deposited the service tax under the Head “Management Consultant‟s Service” on reverse charge basis under protest. The appellant felt that the fees paid to M/s Cotunace did not qualify under any category of taxable service and therefore, filed a refund claim for Rs.45,78,857/- on 16.03.2011.
2. The Department issued a show-cause notice proposing to reject the refund claim and the claim was rejected by the Order-in-Original and such rejection was upheld by the impugned order dated 20.02.2012. Hence, this appeal.
3.1 The Learned Chartered Accountant appearing on behalf of the appellants, submits, it is evident that the sine qua non for taxability of a service provided by a management or business consultant is that it should be in connection with the management of any The term “management” was examined by the Hon‟ble Apex Court in the case of R. Dalmia Vs CIT 1977 (106) IT (SC) to include the “act of managing by direction, or regulation, or administration or control or superintendence”. In the aforesaid judgment, it has also been observed that in the context of business, “Manage” means “to control, to guide, to administer, to conduct or direct affairs”, carry on “business”.
3.2 Further, the scope of „management consultancy services‟ was examined by the Central Board of Excise and Customs (CBEC) in consultation with the Indian Institute of Management, Ahmadabad and the opinion obtained was communicated vide Board‟s Circular No. 1/1/2001-S.T., dated June 27, 2001 which reads as follows :
“7. In this regard, the Board had consulted the Indian Institute of Management, Ahmadabad for obtaining an expert opinion on the subject matter. They have opined that the term “management” is generally understood to mean running the affair of an organisation in an organised and systematic manner. To be able to do this efficiently and effectively, management typically involves carrying out a host of activities, functions and tasks and at different levels. Thus management encompasses both strategic and operational level functioning and would include tasks such as planning, organising, staffing, directing, controlling and coordinating. Management also invariably involves designing organisational structure around functions such as marketing, manufacturing, research and development and finance and/or business area such as product groups or geographical markets. Thus management of any organisation involves carrying out a wide variety of clearly defined activities across a number of organisational sub-units in a coherent and coordinated manner. Since the expression “Management” is an inclusive term, „management consultant‟ would also be equally encompassing expression and would include any adviser who renders services on any aspect of management.”
3.3 In view of the aforesaid, it can be inferred that the levy of Service tax is on the activity involving advise or consultancy in connection with the management of any organisation, which involves controlling guiding or administering or conducting or directing affairs of such organisation and does not cover mere provision of a service in connection with the business of the organisation. The activity of management would encompass decision making activities required to run the business in an efficient manner.
3.4 In the present case, the contract between the Appellant and M/s. Cotunace for mediation services to settle outstanding dues payable by the Appellant to its supplier, GCT, was in pursuance to the Order of the BIFR. In terms of such Order, M/s Cotunace was to arrive at a settlement such that the pending disputes between the Appellant and GCT are resolved and arbitration between the parties is precluded.
3.5 At this juncture, a reference is made to the meaning of the term „ mediation‟ as defined under the Black‟s Law Dictionary (8th Edition), which states that mediation is “a method of non-binding dispute resolution involving a neutral third party who tries to help the disputing parties reach a mutually agreeable solution”.
3.6 The concept of mediation has also been clarified in the Mediation Training Manual of India. Issued by the Mediation and conciliation Project Committee, Supreme Court of India, Delhi as:
“1.4 Mediation in essence is an assisted negotiation process. Mediation addresses both the factual/ legal issues and the underlying causes of a dispute. Thus, mediation is broadly focused on the facts, law, and underlying interests of the parties, such as personal, business/ commercial, family, social and community interests. The goal of mediation is to find a mutually acceptable solution that adequately and legitimately satisfies the needs, desires and interests of the parties.
1.8 the mediator employs certain specialized communication skills and negotiation techniques to facilitate a productive interaction between the parties so that they are able to overcome negotiation impasses and find mutually acceptable solutions.”
3.7 In line with the process of mediation summarized herein-above, M/s cotuance enabled the parties, viz. the Appellant and GCT to find a solution to the dispute relating to the outstanding dues. M/s cotuance has not in any circumstance provided any advice or consultancy or assistance with respect to management of the financial aspects of the Appellant Company. This factual scenario is evident from the agreement between the Appellant and the M/s Cotunace as well as from the Order of the BIFR intending to settle the outstanding dues between the parties.
3.8 The Appellant submits that in the absence of any form of guidance or advice or assistance with respect to management of the finances of the Appellant, the activity by the Mediator, which is executionary in nature, cannot be said to fall under the category of management or Business Consultant service. Reliance in this regard is placed on M/s Basti Sugar Mills Company , Vs. CCE-2007 (7) S.T.R. 431 (Tribunal), which has been affirmed by the Hon‟ble Supreme Court in 2012 (25) S.T.R. J154 (S.C.).
3.9 The Appellant further submits that while undertaking the mediation activity, the Mediator is expected to possess a skill of negotiation and communication to resolve the disputes relating to outstanding dues between the parties and not in any area of management of the Appellant Company. In the absence of any such expertise or performance of an activity relating to such expertise provided by the Mediator, the present activity can by no stretch be taxed under the above-mentioned entry. Reliance in this regard is placed on the judgment of Swaraj Mazda Ltd. Vs. CCE, Chandigarh 2013 (31) STR 205 (Tri.-Del).
3.10. It is further submitted that the Respondent has grossly erred in as much it has considered the activity of mediation to be similar to that of financial management of the Appellant, which is concerned with the planning and controlling of the firm‟s financial resources. In the present case, while the activity of mediation by M/s Cotunace no doubt leads to resolving a contractual dispute between the parties in relation to the outstanding dues, which ultimately has an impact on the finances of the Appellant, the aforesaid entry cannot be said to include each any every activity which has a financial implication on the business. Hence, the finding of the Respondent is grossly unsustainable and liable to be set aside.
3.11 Consequently, there is no basis for levy of Service Tax under the head “Management or Business Consultant Service” and the entire refund claim of the tax paid inadvertently is admissible to the Appellant along with interest thereon. The impugned order is liable to be set aside for this reason itself.
4. The learned Chartered Accountant for the appellants relies on the following case laws:
