1. Introduction :-In the that article I gave case laws and reasoning for dodging the applicability of service tax, in this article I give you the most important aspect of the tax planning i.e. structuring of the agreement. Part -I of this Article can be accessed at the following Link- Service Tax Planning – Limits of Management Consultancy Services
2. Analysis of various agreements
2.1 Nirulas Corner House (P.) Ltd vs. CST (See Note- 1)
Relevant extracts of the underling agreement were:
Ø That the First Party has appointed the Second Party to manage, sale and supervise preparation of items in accordance with the policies of Second Party through their agents, supervisors, employees and representatives.
Ø Further, it is unequivocally agreed to by the First Party that a Restaurant Advisor/Manager and some other skilled staff, if thought fit by the Second Party trained and appointed by the Second Party, shall be placed from supervising and operating the Restaurant. The said Restaurant Advisor / Manager and the other skilled staff will be employees of the Second Party in that all emoluments and conditions of service applicable to like Advisor / Manager and other employees on the pay roll of the Second Party shall be applicable to them. That in the event of the First Party having any complaint regarding the performance or modus operandi of the said Restaurant Advisor/Manager or other staff the First Party shall report any deficiency or complaint to the Second Party, in writing and on receipt of which the Second Party may take any action which it deems appropriate. Further, the First party shall both verbally and in writing inform all the employees of the First Party working in the restaurant that all orders given by the said Restaurant Advisor / Manager etc. in the course of their work whether given is to be referred to the First Party who may countermand such instructions provided they feel it is in the interest of the functioning of the restaurant, but the First Party shall at the earliest opportunity, but not later than forty eight hours, inform the Second Party in writing the details and their reasons for countermanding the instructions of the said Restaurant Advisor/ Manger. The second Party on receipt of such information and representation from the Restaurant Advisor / Manager or First Party, if any, shall decide whether such instructions issued by the restaurant Advisor/ Manager are in the interest of better functioning of the restaurant or not, and which decision shall be binding on both the First party and restaurant Advisor / Manager. The Second Party shall not be responsible for any act of omission or commission of the staff working at the First Party’s restaurant. The First Party shall reimburse the expenses of the Second Party for the Restaurant Advisor / Manager / skilled staff.
Ø As compensation for the services rendered by the Second Party as set forth in this agreement, except to the extent provided therein, the First Party agrees to pay the Second Party.
(a) A Technical Assistant fee of Rs.3 ,00,000 /- for advice on putting the restaurant in a benefiting running condition, which will include the following:
(b) A monthly fee consisting of eight and a half percent of the ‘Gross Sales per month”, excluding sales tax and any other taxes, as defined in the agreement, and which sum shall be payable in advance by the last day of the previous month for the current month. However, for the first six months of the operation this sum shall be payable by 10th of the preceding month to Second Party for the purpose of sales promotion and specialized facilities incurred to further the interests and sales of the restaurants.
2.2 Basti Sugar Mills Company Limited (See Note 2)
Relevant extracts of the underling agreement were:
Ø The party of the First Part hereby entrusts the operation of the Factory to Party of Second Part for its functioning at optimum efficiency under the overall supervision of Dr. K.R. Narang and Dr. S.K. Garg who will constitute for the purpose of day-to-day operation of the Factory, a management committee to achieve the desired results.
Ø To run the Factory continuously and to achieve optimum efficiency for the full sugar season, the Party of the Second Party will identify, recruit and appoint capable and efficient, technical, administrative and financial staff, wherever required, in consultation with the Party of the First Part. [Try not to include the words underlined in the agreement]
Ø That both Parties have agreed that nothing contained in this agreement shall create employer – employee relationship between Party of the Second Part and any officer or workmen employed in the Factory at Maizapur.
Ø That the Party of the Second Part has agreed to identify all the administrative and technical bottlenecks in the Factory and shall remedy them before the start of the crushing season.
Ø That the Party of the Second Part has agreed to make thorough study about technical, financial and administrative aspects of the Factory and if required take up the restructuring wherever necessary, in consultation with the Party of the First Part. [Try not to include the words underlined in the agreement]
Ø In consideration of technical and financial services the Party of the First Part has agreed to compensate the Party of the Second Part minimum charges of Rs.42.5 Lacs per annum every year subject to the ceiling of 20% of the net profit of the sugar division whichever is higher.
2.3 Sterlite Optical Technologies Ltd. (see Note- 3)
Relevant extracts of the underling agreement were:
Ø Appellant to depute technical manpower to STL to run/manage the cable manufacturing unit.
Ø Appellant to charge a management fee of 2% on the turnover of ARM for managerial services in the area of general management marketing, technical and commercial.
3. CONCLUSION
Important points learnt from the above analysis:
(a) Title of the agreement – “Management agreement”.
(b) Opening part of the agreement – “The party of the First Part entrusts the operation of the Factory to Party of Second Part ………………………..”
(c) Freedom of Manager to operate and recruit persons – “To run the Factory continuously and to achieve optimum efficiency, the Party of the Second Party will identify, recruit and appoint capable and efficient, technical, administrative and financial staff, wherever required.”
(d) No employer – employee relationship – “Both Parties have agreed that nothing contained in this agreement shall create employer – employee relationship between the parties to agreement.”
(e) Second party is given all administrative responsibilities – “That the Party of the Second Part has agreed to identify all the administrative and technical bottlenecks in the Factory and shall remedy them before the start of the crushing season.
That the Party of the Second Part has agreed to make thorough study about technical, financial and administrative aspects of the Factory and if required take up the restructuring as and when it deems fit.”
(f) Payment of fees – “In consideration of technical and financial services the Party of the First Part has agreed to compensate the Party of the Second Part minimum charges of Rs. ____________ Lacs per annum every year subject to the ceiling of ____% of the net profit.”
I close this article with few precautions that must be taken care of while drafting the agreement:
(a) Try not to use the following words in the agreement:
i. Advice;
ii. Consultancy;
(b) Calculation of the fee shall not be made on the basis of per visit or per advice. Fee shall be paid on a lump sum basis and or on % of gross profit or both.
(c) Impose penalty on manager for not carrying out the work according to optimum efficiency.
Note
1.[2009] 19 STT 373 (New Delhi -CESTAT)
2.2007 (7) STR 431
3.[Final Order Nos. A/2634-2635 / 2008, dated 11-12-2008]
RAJAT MOHAN
B. Com(H), A.C.A., D.I.S.A.
