Service Tax not payable on consideration received due to termination of arrangement

FULL TEXT OF THE CESTAT ORDER IS AS FOLLOWS:-

These two appeals are against the common impugned order dated 26.12.2008 of Commissioner, LTU, Chennai. The dispute in the present appeals relate to service tax liability of the appellant for certain considerations received from RICO Industries Ltd.

2. The brief facts of the case are that the appellant along with Ford, USA and the affiliates entered into an agreement with RICO, India. The said agreement titled as Value Participation Agreement explained the role of each of the parties with reference to promotion and sales of auto components manufactured by RICO India. Essentially there are three parties in the agreement, constituting Ford India and Ford, USA and RICO, India. The auto components of RICO India are sold to Ford, USA, its affiliates and to non-ford companies like Volvo, Land Rover etc. The agreement states that there will be an Annual Incremental Purchase Payment in US dollars terms which will be fully remitted to the appellant as a percentage of incremental sale of auto components of RICO, India. The appellant did not buy any components from RICO. The components are sold to Ford, USA and affiliates and also non-Ford companies. The full consideration at the rate of 5% of incremental sale value is paid to appellant in India. The dispute in the present case is on the said amount received by the appellant is to be considered as a taxable income under the category of Business Auxiliary Service indicating the promotion and sale of goods on behalf of the client RICO, India. Based on the particulars of income available in the balance sheet of the appellant, proceedings were initiated against the appellant resulting in the impugned order. The impugned order confirmed service tax liability of such income called Annual Incremental Purchase Payment as well as consideration received due to termination of the arrangement as per Termination Agreement dated 6.5.2005.

3. The ld. counsel for the appellant submits that first of all, the show cause notice and the impugned order have proceeded based on the income particulars of the balance sheet of the appellant. It is only in the adjudication proceedings certain examination of the agreements and further elaboration of the tax liability was made. He submitted that the appellant along with Ford, USA and affiliates were party to the agreement. However, for the goods sold by RICO and Ford, USA and affiliates, there can be no question of any promotion of business of the client. The agreement identified the appellant and the Ford, USA as one party. The ld. counsel strongly contested the demand proceedings on limitation. He submitted that the show cause notice is very cryptic and relied only on certain income shown in the balance sheet. The case was rather examined during the adjudication proceedings only. Further, the ld. counsel strongly contested the taxation of consideration received for terminating the arrangement with RICO. The value participation agreement dated 1.4.2003 was terminated on 6.5.2005. After terminating, the appellant received certain termination payment. There is no service attributable to such This is more like a compensation for lost business opportunity. Such payments are never considered as services at least till 2012. On these two basic grounds, the ld. counsel contested the appeal proceedings.

4. The ld. AR supported the findings recorded in the impugned order. He submitted that the appellant did not disclose the full income in the statutory return. The appellant being one of the party, who is to promote the products of RICO, India and having received full consideration for such payment, is rightly taxed under Business Auxiliary Service of such income. He supported the findings in the impugned order both on merits as well as on limitation.

5. We have heard both sides and gone through the case records.

6. Since the appellants are contesting the whole demand on limitation, we are considering the issue on limitation first. Admittedly, proceedings were initiated based on particulars gathered from the balance sheet of the appellant. The consideration accruing to the appellant in pursuance of value participation agreement was sought to be taxed after examination only during adjudication proceedings. No detail allegation or data was made or alleged in the show cause notice proceedings. We have perused the details of the agreement and the reasoning followed by the adjudicating authority. Prima facie, it is clear that the whole of the consideration received cannot be subject to tax under the heading Business Auxiliary Service. This is for the simple reason that the appellant is part of a party to the agreement. They received full consideration as assigned by Ford, USA who have purchased to components made and sold by RICO. The amount attributable to such purchase cannot be considered as promotion of RICO product to third party. Here, Ford is the single party of agreement consisting of appellant as well as Ford, USA. Apparently, the service of business promotion could have been attributed to both appellant as well as Ford, USA and affiliates. Only because the full amount is assigned to the appellant, tax liability on all the activities cannot be fastened on the appellant. However, we are not going into the full details for a finding on the case on merits. As the appellant contested the demand on limitation considering the intricacies of the provisions of the agreement and the appellant being not the sole service provider and the full details were captured in the balance sheet and other documents of the appellant, we hold that the case for extended period for demand for the consideration received pursuant to the value of participation agreement cannot be sustained. The whole issue is subject matter of detailed analysis of the promotion agreement and prima facie, our findings also indicate that this is a matter of examination and interpretation with no justification to invoke the ingredients of section 73(1) proviso can be sustained. In this connection, we also refer to the decision of the Tribunal in Hindalco Industries Ltd. Vs. Commissioner of Central Excise, Allahabad reported in 2003 (161) ELT 346 (Tri. Del) and Blackstone Polymers Vs. Commissioner of Central Excise, Jaipur reported in 2014 (301) ELT 657 (Tri. Del.). In these decisions, Tribunal held that if the demands are made based on balance sheet and other publicly made details of the company, the same cannot be sustained for extended period.

7. Regarding the tax liability on the consideration received due to termination of the arrangement, we note that no identifiable service can be attributed for such consideration. It is rather a termination of arrangement which itself the original authority held as a service. We note that by terminating the arrangement, the appellants are adversely put to certain business The consideration has been paid for such loss. No identifiable service could be attributed for such payment during the material time. Accordingly, the tax liability on such consideration could not be sustained.

8. In view of the above discussion and analysis, the impugned order is set aside and the appeals are allowed with consequential relief, if any.

(Dictated and pronounced in open court)