No tax liability can be confirmed against any person unless the same is specifically alleged in the show cause notice

The impugned order confirms the demand against the appellant under the category Business Auxiliary Services without specifying which specific sub-clause covered the activities rendered by UTL. We find that no tax liability can be confirmed against a person without putting him/it on notice as to its liability. It is essential that the liability is indicated in the notice with reference to the specific statutory provision. In the instant case, the impugned proceedings did not allege at the show cause notice stage or find at the adjudication stage the specific provision under which the services rendered by UTL are classifiable.

IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
SOUTH ZONAL BENCH, BANGALORE

Appeal No. ST/723/2008

Arising out of the Order-in-Original No.22/2008-ST Dated: 25.11.2008
Passed by the Commissioner of Customs Central Excise & Service Tax, Hyderabad

Date of Decision: 20.10.2010

M/s UNITED TELECOM LTD.

Vs

CCE, HYDERABAD

Appellant Rep by: Mr B N Gururaj, Adv.
Respondent Rep by: Mr M M Ravi Rajendran, JDR

CORAM: M V Ravindran, Member (J)
P Karthikeyan, Member (T)

FINAL ORDER NO.1312/2010

Per: P Karthikeyan:

This is an appeal filed by M/s United Telecom Ltd., (UTL) Hyderabad challenging the order of the Commissioner of Customs, Central Excise and Service Tax. Hyderabad-II Commissionerate. Vide the impugned order, the Commissioner confirmed demand of an amount of Rs.1,06,23,697/- being the service tax found due from the appellant on services falling under ‘Business Auxiliary Services’ rendered by it during the period 2003-04 to October 2007. The Commissioner demanded applicable interest on the above amount and imposed penalties under Sections 76,77 & 78 of the Finance Act 1994 (the Act). A penalty of 1,10,00,000/-was imposed under Section 78 of the Act.

2. The facts of the case are that UTL had established e-Seva technology application system on “Built Own, Operate and Transfer” basis providing online transaction access or facility in respect of utility bills/tax payments, issue of certificates etc besides generation of various types of MIS reports. These services were provided under an agreement dated 19.5.2003 between UTL and Director e-Seva, Hyderabad. E-Seva Project is implemented by the Govt of Andhra Pradesh. Under a letter dated 20.12.2005 addressed to the jurisdictional officers of the department, UTL had explained the scope of the e-Seva project as follows:-

(i) Procurement and installation of hardware, like servers for setting up 51 Integrated Citizens Service Centers (ICSC) in three districts spanning 23 Municipalities.

(ii) Networking the different ICSCs and connecting the backend services of the associated departments and agencies

(iii) Implementation of the solution and training of the project personnel in running the application.

(iv) Owning and maintaining of the system on a turn key basis including supply of consumables stationary and media, and other material essentially to provide the services and meeting the cost of electricity, telecommunication, water, house keeping, security and connectivity charges at the e-Seva center for entire contract period of five years.

(v) At the end of five years, all the hardware and software to be handed over to the Government in working condition.

(vi) The electricity connection and leased lines required for connectivity have to be obtained in the name of the Government.

(vii) Servers of the participating departments like Transco, Municipalities etc have been procured and installed and managed by the concerned departments themselves.

The e-Seva project, in the implementation of which UTL was involved, covered East Godavari, West Godavari and Krishna Districts in Andhra Pradesh.

2.1 The authorities found that the services offered under e-Seva projects were the following:

(a) Utility bills/Tax payments: Electricity bills, water & sewerage bills Telephone bills, property taxes etc.

(b) Certificates: registration of births and deaths, issue of birth certificate, death certificate, encumbrance certificates etc.,

(c) Permits/Licenses: MCH trade licenses, driving licenses, learning driving license, registration of Motor vehicles etc.

The consideration as per the contract would be calculated and paid to UTL on the basis of transactions carried out. Transactions involved issue of driving license, birth/death certificate, payment of property tax, payment of telephone bills, issue of cinema tickets etc. In the show cause notice issued, the authorities had tentatively found that UTL provided services to e-Seva. e-Seva ran cash counters at which the citizens paid utility bills, purchased bus and cinema tickets etc. Parties involved were departments of State Govt and Central Govt as well as private parties such as cinema theatres. UTL received service charges on a monthly basis from the Director e-Seva based on the number of transactions. These were tentatively held to be classifiable under ‘Business Auxiliary Services’ by the authorities.

2.2. As per the show cause notice, services involved were originally classified under the category “Online information and database access or retrieval service” and demand of service tax for the period April 2003 to November 2005 confirmed vide order-in-original No 4/2007-ST dated 26.2.2007. On appeal, the Commissioner (Appeals) Hyderabad decided that the impugned activities were not covered under the category “Online information and database Access or Retrieval” and allowed the appeal filed by UTL under order-in-appeal No 29/2007(H)(ii)-ST dated 31.7.2007. A similar demand for the subsequent period up to June 2006 was also set aside by the Commissioner (Appeals) vide order-in-appeal No 45/2007(H)(ii)-ST dated 16.12.2007 on same grounds. Commissioner (Appeals) observed that the appellants could be providing taxable services but the classification was not “Online information and database access or retrieval”. The show cause notice basic to the subject proceedings was issued on the basis that the orders of the Commissioner (Appeals) were no bar for initiating fresh proceedings for demand of service tax under the category “Business Auxiliary Services”.

3. In the impugned order, the Commissioner rejected the plea of the appellants that the impugned proceedings could not have validly invoked extended period for demanding service tax on the reasoning that the present show cause notice had not invoked extended period for a ‘subsequent period.’ He also rejected the claim of the assessee that the proceedings were fundamentally flawed as the show cause notice had not attempted to classify the services under any of the six clauses under Section 65(19) of the Act wherein ‘Business Auxiliary Services’ were listed. The Commissioner held that in terms of sub-clause (zzb) of Section 65(105), ‘Business Auxiliary Services’ were “any service provided or to be provided to a client by any person in relation to business auxiliary service.” He found that clause (iii) of Section 65(19) appeared to be the most appropriate and there was no impropriety if the assessment was done under the broad heading “Business Auxiliary Services.”. The Commissioner also held that UTL was a commission agent and that it updated the data bases of participating entities by establishing necessary computer network. By updating the database of the participating entities, UTL maintained the accounts of these entities. It was following this reasoning that the Commissioner confirmed the demands and imposed penalties on UTL.

4. In the appeal filed before the Tribunal, UTL has raised several grounds assailing the impugned order.

i) It is submitted that the department had not made any attempt to adduce any evidence that operating of e-Seva counters amounted to provisioning of taxable service in any manner. The subject activity was not classifiable under any of the taxable services envisaged under clause 105 of Section 65 of the Act. After having failed to successfully adjudicate and recover the liability on the very same services, initiated under three show cause notices, the impugned proceedings were in violation of principles of res-judicata. The Committee of Commissioners had accepted the orders passed in the earlier proceedings. The impugned proceeding was therefore contrary to judicial discipline. The appellants cited several case laws in support of this plea.

ii) No new fact had emerged after the conclusion of earlier proceedings. The instant proceedings were on the same set of facts based on which the department had originally alleged that the subject services were classifiable under “Online information and database access or retrieval services”. The only change was that the period of demand had been extended from July 2003-March 2007 to July 2003-October 2007. In the absence of any new material, the impugned proceedings were hit by res judicata.

iii) On merits, the appellants submitted that in the impugned order, the adjudicating authority had not decided as to under which of the sub-clauses (i) to (vi) of entry under Section 65(19), the impugned services could be classified. There was no classification of the service under any of the sub-clauses (i) to (vi) of Section 65(19). Therefore, the same could not be classified under sub-clause (vii) of Section 65(19) as well.

iv) UTL did not recover any amount from the citizens towards the services it rendered. There was no contract between UTL and the citizens. There was no privity of contract as principal and agent between the participating entities and the UTL.

v) It is submitted that the findings of the Commissioner that the appellant rendered customer care services on behalf of the client, of sub-clause (iii), clause 19 of Section 65 was not justified. The Director e-Seva, a public authority, merely provided certain facilitation services to the citizens. The Govt itself did not earn any revenue from e-Seva service. Moreover, the show cause notice had not alleged that the demand of tax was on treating the alleged activity as customer care provided by the appellant. The demand was made treating UTL as a commission agent. This observation traversed beyond the show cause notice.

vi) The appellant did not provide any service to the Director e-Seva. He paid the appellants based on the number of transactions put through as per the agreement. The participating entities also did not pay any consideration to the appellants. The appellant’s right was limited to accessing the data base of these entities and updating them on receipt of cash and issue of receipts. The appellants were not an agency of either the citizens or the entities that participated in the e-Seva or of the e-Seva Director. In the impugned order there was no finding as to whose agency the appellant was for treating the receipts as commission. The impugned order acknowledged that there was no contract between the participating entities and UTL and that the scheme e-Seva did not envisage such arrangement. In the absence of any contract it could not be assumed that the appellants were acting as agents of either Director e-Seva or of the participating entities.

vii) As the revenue had initiated proceedings in respect of the same activity earlier, and lost the cases, Revenue could not allege that UTL had kept it in darkness and invoke extended period of limitation. Knowledge of facts and suppression of facts were antithetical.

viii) There was ambiguity faced by the department in interpreting the statutes. Therefore, there was no deliberate defiance of law or contumacious conduct on the part of the appellant. The demand of service tax and penalties imposed were therefore not sustainable.

5. During hearing learned counsel for the appellants submitted that the impugned order confirmed demand of service tax against the appellant without requisite proposal made in the show cause notice. The show cause notice did not indicate the precise and specific liability of the appellant in respect of activities it carried out during the material period in implementing e-Seva project. Show cause notice being the foundation of levy of demand, the impugned demand was not sustainable as the same was ordered based on allegations that did not define clearly the liability of the appellant. The impugned demand and penalties were therefore not sustainable. We have also heard learned DR. who reiterates the findings contained in the impugned order.

6. We have carefully perused the records and studied the rival submissions. The appellant is engaged in operating what is called ‘glorified cash counters’ by the Revenue, in facilitating the payment of utility bills such as electricity bills, telephone bills etc., issuance of certificates/licenses such as birth/death certificates, driving licenses, and issue of cinema tickets, bus tickets etc., at e-Seva counters. The transactions entered into by UTL are recorded in the database of the respective participating entities such as BSNL, APTRANSCO, etc. These activities are carried out under an agreement with Director e-Seva, functioning under the AP State Govt. The appellants are paid on a monthly basis depending on the number of transactions put through. We have no doubt that UTL renders a service to Director e-Seva and receives consideration for the same. This could be a taxable service as found by the lower appellate authority. We note that the demand is confirmed against the assessee under the category “Business Auxiliary Services”. The statutory provisions relating to “Business auxiliary Services” are reproduced below:

“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

(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

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

(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 impugned order, the Commissioner rejected the plea of the appellant that the show cause notice did not contain proposal to classify the services under a specific clause of Section 65(19) of the Act. It was also argued that the show cause notice did not mention the sub-clause to which the impugned activity was relatable if it fell under sub-clause(vii). The Commissioner had rejected these challenges on the reasoning that the show cause notice had proposed to classify the impugned activities under “Business Auxiliary Services” under sub-clause (zzb) of Section 65(105) which defined the taxable service as any service provided to a client by any person in relation to business auxiliary services. As the impugned services fell under the broad definition of business auxiliary services, not pointing out the relevant sub-clause of the six clauses of Section 65(19) did not affect the demand. However, he observed that the entry stated at clause (iii) of the Section 65(19) appeared to be the most appropriate. He also rejected the claim of the appellant that they were not liable to pay service tax on the consideration received as a ‘commission agent’ since the statute did not require an assessee to be an agent (of a principal). As per the definition of ‘commission agent’, rendering of service on behalf of another person was sufficient for paying consideration as commission agent. The Commissioner held that the appellant updating the database of BSNL or Airtel or APTRANSCO amounted to maintaining their accounts.

7. We find that service tax under the head “Business Auxiliary Services” can be collected on the following activities.

(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

(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

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

(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].”

If the activity is held to be service incidental or auxiliary to any activity specified in sub- clause (i) to (vi), the same is classifiable as business auxiliary services under sub-clause (vii).

7.1 The impugned order confirms the demand against the appellant under the category Business Auxiliary Services without specifying which specific sub-clause covered the activities rendered by UTL. We find that no tax liability can be confirmed against a person without putting him/it on notice as to its liability. It is essential that the liability is indicated in the notice with reference to the specific statutory provision. In the instant case, the impugned proceedings did not allege at the show cause notice stage or find at the adjudication stage the specific provision under which the services rendered by UTL are classifiable.

8. We find that the same services were proposed to be subjected to tax under three earlier proceedings and that in case of two orders of demand, the first appellate authority had vacated the same and in respect of the third notice, the original authority itself had dropped the demand. The Committee of Commissioners had accepted the orders of the first appellate authority. We also find that the activities engaged in by the appellants were intimated to the department on 20.12.2005. The show cause notice basic to these proceedings was issued on 8.1.2008. The period of dispute is from July 2003 to October 2007. The plea of limitation raised by the appellant is valid and demand for most part of the period of dispute is time barred. The appellants have rightly relied on the judgment of the apex Court in the case of Nizam Sugar Factory Ltd., Vs CCE  [2006(197)ELT 465(SC) in this connection.

8.1 In the impugned order, the Commissioner suggests that the activity of the appellant could be classified variously under clause (iii) of Section 65(19) as service rendered on behalf of a client, as of a commission agent or, under clause (vii), as maintenance of accounts. The Commissioner does not give a finding as to the sub-clause (i) to (vi) of 65(19) to which maintenance of accounts related if the services fell under clause (vii). Moreover, there were no such proposals in the show cause notice. We find that no tax liability can be confirmed against any person unless the same is specifically alleged in the show cause notice. We hold that the impugned demand, therefore is not legally sustainable. Consequently, the demand of interest and penalty is also not sustainable.

9. In the result, the appeal filed by UTL is allowed.

(pronounced in open Court on 20.10.2010.)

NF