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OIO No. 12/STC-AHD/ADC(MKR)/11-12 of 21

BRIEF FACTS OF THE CASE

It appeared from the Balance Sheet for the year 2004-05 of the Arvind Mills Ltd. situated at Naroda Road, Ahmedabad (hereinafter referred to as the “service recipient”) that they have paid huge amount of commission in foreign currency, but details were not available. So, a letter bearing F.No. STC/4-32/Prev/05-06 dated 26.10.2005 was issued to the service recipient and in its Para 2 it was requested to provide details of such commission paid, as such activity was chargeable to service tax. In reply of the same, the service recipient had submitted a letter No. Nil dated 28.11.2005 and in its Para 2 it had been, interalia, mentioned that for export market they were paying commission to foreign commission agents on sale made through them in abroad; that Commission agents work abroad and collecting export orders for their finished goods; that also in some cases, commission was paid to foreign agent against service provided for procurement of input from abroad; that the services rendered abroad do not attract service tax, as the levy covers only services provided within India.

2. A further letter bearing File Number STC/4-57/Prev/05-06-Gr.I dated 31.01.2006 was issued to the service recipient and in its Para 2 it was, interalia, mentioned that such activities attract Service Tax under the category of Business Auxiliary Services; that in cases the services providers were residing outside India, the Service receiver was within India, as per Rule 2(d)(iv) of the Service Tax (Amendment) Rules, 2002 w.e.f. 16.08.2002 and as per the amended Rule 2(d)(iv) substituted by Service Tax (fifth amendment) Rules, 2005 w.e.f. 16.06.2005, the person receiving taxable service in India was liable to pay up Service Tax and as per sub Section (2) of Section 68, all the provisions shall apply to such person as if he was the person liable for paying the service tax in relation to such service. In reply of the same, the service recipient has submitted a letter No. Nil dated 13.02.2006 and in its Para 2 it was, interalia, mentioned that no service tax was leviable on export commission paid to foreign commission agent for services rendered in abroad prior to 16.06.2005; that Service Tax Rule 2(1)(d)(iv) was amended w.e.f. 16.06.2005; that as per the new provision, taxable services received from abroad by a person belonging to India were taxed in the hands of Indian recipient receiving taxable service in India; that accordingly they have obtained service tax registration and paid Service Tax on overseas commission, in case service rendered after 16.06.2005.

3.1 A Summons bearing File Number STC/4-57/Prev/05-06/Gr.I dated 10.07.2006 was issued and Statement of Shri. Himatram Jairam Bhatt, Chief


Manager (Excise) of The Arvind Mills Ltd. was recorded on 10.07.2006 under the provisions of Section 14 of the Central Excise Act, 1944 read with Section 83 of the Finance Act, 1994 wherein he, interalia, stated that he is working in The Arvind Mills Ltd. Since last 35 years; that he is B.Com., L.L.B. passed and knowing well about the legal provisions contained in various Acts, Rules and Notifications related to Service Tax; that he is overall in charge of Central Excise and Service Tax matters of the company. He further stated that The Arvind Mills Ltd. is mainly engaged in manufacture of yarn, fabrics and garments; however, as a recipient of some taxable services and as a person liable for payment of service tax under rules 2(1)(d)(iv) & (v) of the Service Tax Rules, 1994, the Arvind Mills Ltd. is registered with Central Excise / Service Tax Department and having Service Tax Registration Certificate No. AABCA2398DST001 for receiving various taxable services and as a person liable for payment of service tax under the said rules 2(1)(d)(iv) & (v). 3.2 On being asked about payment of commission to foreign commission agents, he further stated that they were paying commission to foreign commission agents on the amount of sales made through them; that such foreign commission agents work abroad, collect export orders and deliver particulars to them and subsequently, they execute exports of finished products from India; that in some cases commission was paid to foreign agents for the service provided by them for procurement of inputs from abroad. On being asked about the service tax liability on the amount of Commission paid by them to the foreign commission agents, who are non-residents or from outside India or does not have any office in India, he further stated that they were paying service tax on such services rendered from abroad from 16.06.2005 onwards; and on being asked about the past period, he stated that during the F.Y. 2004-05 their company paid total commission Rs.6.59 crore in foreign currency, as per Balance Sheet; the break-up of the said expenses has been furnished in their letter dated 28.11.2005; on being further asked about commission paid to such foreign Commission Agents for the services rendered by them during the period from 09.07.2004 to 15.06.2005, he further stated that their company has paid total commission of Rs.4,28,56,464/- (Rupees Four Crore Twenty Eight Lakhs Fifty Six Thousand Four Hundred Sixty Four only), as mentioned in Annexure-B of their letter dated 13.02.2006; that in the said Annexure-B, month wise amounts of commission paid to foreign commission agents working abroad, has been shown for the months of July-04 to Dec-05; that he further clarified that the amounts shown against the months represent amount paid during that month for the services rendered between the period 09.07.2004 to 15.06.2005; that in respect of the services rendered by them on


or after 16.06.2005, they have regularly paid self-assessed service tax on the amounts of commission paid to such foreign commission agents.

3.3 On being asked about service tax registration under category of ‘Business Auxiliary Service’ and payment of service tax on the commission amount paid to the foreign commission agents (who were non-residents or from outside India or does not have any office in India), he further stated that their company had neither obtained registration for Business Auxiliary Services (during the period from 09.07.2004 to 15.06.2005) nor paid any service tax in this category on the amount of commission paid to such foreign commission agents for the services rendered by them during the period from 09.07.2004 to 15.06.2005. On being asked about the reasons for not obtaining registration and non-payment of service tax, he further stated that they were liable to pay service tax consequent to amendment to Section 65(105) by insertion of Explanation w.e.f. 16.06.2005 read with amended Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 w.e.f. 16.6.2005; that as per the new provisions w.e.f. 16.06.2005, taxable services received from abroad by a person belonging to India were taxed in the hands of Indian recipient from 16.06.2005.

3.4 On being asked, he further stated that the figures of commission paid to foreign agents were not shown / included / reflected in the half yearly ST-3 returns filed by them; that before initiation of this inquiry, their company had not intimated to the Central Excise / Service tax department about non-payment of service tax on such commission paid to foreign agents for the relevant period i.e. from 09.07.2004 to 15.06.2005.

4.1 As per the rule 2(1)(d)(iv) of the Service Tax Rules, 1994 (prevailing during the period covered under this notice i.e. from 09.07.2004 to 15.06.2005), the “person liable for paying service tax” means – in relation to any taxable service provided by a person who is a non-resident or is from outside India, does not have any office in India, the person receiving taxable service in India.

4.2 The definition of “business auxiliary services”, as defined under clause (19) of section 65 of the Finance Act, 1994 specifically includes services as a commission agent in this category.

4.3 The definition of “taxable service” given in Section 65 (105) (zzb) of the Finance Act, 1994 (prevailing during the period covered under this notice i.e. from 09.07.2004 to 15.06.2005) covers any service provided to a client, by a commercial concern in relation to business auxiliary service.


4.4 The services of ‘Commission Agents’ covered under the category of “Business Auxiliary Services” were exempted till 08.07.2004 under Notification No. 13/2003-ST dated 20.06.2003. The said exemption to the services of ‘Commission Agents’ (except Commission Agents of ‘Agriculture Produce’) was withdrawn w.e.f. 09.07.2004 due to amendment in the said Notification No. 13/2003-ST vide Notification No. 8/2004-ST dated 09.07.2004.

4.5 In view of the above, it appeared that in case of services rendered by foreign commission agents, the person receiving service in India was liable for paying service tax w.e.f. 09.07.2004.

4.6 It appeared that the service recipient had received taxable services of foreign Commission Agents in India, in as much as the service recipient was situated and working in India. As the foreign Commission Agents were non-resident or from outside India and did not having any office in India, the service recipient was liable to pay service tax on the gross amount of Commission paid by them as per the provisions of the Rule 2(1)(d)(iv) of the Service Tax Rules, 1994.

4.7 It further appeared that for the services of foreign commission agents rendered during period from 09.07.2004 to 15.06.2005, the service recipient has paid total commission of Rs.4,28,56,464/- as mentioned in Annexure-B(A) of their letter dated 13.02.2006, which was reproduced below:

Details of payment made to foreign commission agent working in abroad on service rendered during 09.07.2004 to 15.06.2005

Month of payment Commission paid (Rs.)

Jul-04 0Aug-04 0Sep-04 4,42,513/-Oct-04 9,12,783/-Nov-04 60,40,044/-Dec-04 12,65,011/-Jan-05 31,17,581/-Feb-05 36,08,073/-Mar-05 63,76,204/-Apr-05 12,40,935/-May-05 52,65,665/-Jun-05 12,76,096/-Jul-05 37,81,207/-

Aug-05 17,78,437/-


Sep-05 24,65,626/-Oct-05 34,04,941/-Nov-05 18,32,647/-Dec-05 48,701/-Total 4,28,56,464/-

4.8 The above figures were also confirmed by Shri. Himatram J. Bhatt, Chief Manager (Excise) in his Statement dated 10.07.2006. On the basis of the above, it further appeared that on this amount Service Tax was required to be paid @10% adv. amounting to Rs.42,85,646/- and Education Cess was required to be paid, @2% adv. on Service Tax, amounting to Rs.85,713/-, which were not paid by them.

5. It appeared that the service recipient has contravened the provisions of Section 69 of the Finance Act, 1994 read with Rule 4 of the Service Tax Rules, 1994 in as much as they have failed to apply for service tax registration within stipulated time as a “person liable for paying the service tax” on receipt the “taxable services” of foreign commission agents in India under the category of “Business Auxiliary Services” during the period from 09.07.2004 to 15.06.2005; Section 68 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994 in as much as they have failed to determine and pay the Service Tax totally amounting to Rs.42,85,646/- + Education Cess of Rs.85,713/- for the period from the 09.07.2004 to 15.06.2005; Section 70 of the Finance Act, 1994 read with Rule 7 of the Service Tax Rules, 1994 in as much as they have failed to file half yearly ST-3 returns for the said services received during the period from 09.07.2004 to 15.06.2005.

6. All the above acts of contravention as discussed in above paras on the part of the service recipient, appeared to have committed by suppression of the facts in as much as the service recipient has not applied for Service Tax Registration during the aforesaid period; not filed any ST-3 return for this service for the aforesaid period and also not disclosed to the Central Excise / Service tax department about non-payment of service tax on such amounts of commission paid to foreign commission agents for the period from 09.07.2004 to 15.06.2005.

7. Therefore, the said service tax not paid by them was required to be demanded and recovered from them with interest under the proviso to Section 73(1) read with Section 75 of the Finance Act, 1994 by invoking extended period of five years in as much as the said service recipient have suppressed the facts to the department. All these acts of contravention of the provisions of Section 68, 69 and 70 of the Finance Act, 1994 read with Rules


2(1)(d)(iv), 4, 6 and 7 of the Service Tax Rules, 1994 appeared to be punishable under the provisions of Section 76, 77 and 78 of the Finance Act, 1994.

8. Therefore, The Arvind Mills Ltd., Naroda Road, Ahmedabad were issued a show cause notice bearing F.No. STC/4-47/O&A/07 dated 04.03.2009 asking them as to why ;

i) services of foreign commission agents received by them should not be considered as taxable services under the category of “Business Auxiliary Services” as defined under clause 105(zzb) read with clause (19) of Section 65 of the Finance Act 1994, as amended and why they should not be held as the “person liable for paying the service tax”, as a person receiving taxable service in India, as defined under Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 as amended and prevailing during the period from 9.7.2004 to 15.6.2005;

ii) the total / gross amount of Rs.4,28,56,464/- paid by them to such foreign commission agents should not be considered as taxable value of the said taxable services for the period from 09.07.2004 to 15.06.2005 (particulars thereof were shown and calculated in the Annexure-B(A) of the service recipient’s letter dated 13/02/2006 and confirmed during the Statement dated 10/07/2006);

iii) service tax amounting to Rs.42,85,646/- (Rupees Forty Two Lakhs Eighty Five Thousand Six Hundred and Forty Six Only - calculated @10% adv on the aforesaid gross amount of Rs.4,28,56,464/-) should not be charged and recovered from them under the proviso to Section 73(1) of the Finance Act, 1994, as amended;

iv) education cess amounting to Rs.85,713/- (Rupees Eighty Five Thousand Seven Hundred and Thirteen Only - calculated @2% adv on the aforesaid amount of Service Tax of Rs.42,85,646/-), should not be charged and recovered from them under the provisions of Section 73(1) of the Finance Act, 1994 read with Section 95 of the Finance Act (No.2) 2004;

v) interest at the prescribed rate chargeable under the provisions of Section 75 of the Finance Act, 1994, as amended, should not be recovered from them;

vi) penalty under the provisions of Section 76 of the Finance Act, 1994, as amended, should not be imposed on them for failure to pay Service Tax and Education Cess as mentioned hereinabove;

vii) penalty under Section 77 of the Finance Act, 1994, as amended, should not be imposed on them in as much as they failed to make an application


for registration for this service as required under the provisions of the provisions of aforesaid Section 69 read with Rule 4 and also failed to file the prescribed ST-3 returns as required under the provisions of aforesaid Section 70 read with Rule 7 as amended;

viii) penalty under Section 78 of the Finance Act, 1994, as amended, should not be imposed on them for suppressing and not disclosing the aforesaid value of the said taxable service before the department with intent to evade payment of Service tax and Education Cess.

DEFENSE REPLY

9.1 The assessee filed their reply vide their letter dated 03.09.2009. They at the outset denied all the charges and allegations made in the notice; that they denied that they were liable to tax or penalties as proposed in the show cause notice; that they also denied that extended period was available to the Department for issuing notice; that they denied that there was any malafied on their part or there was any suppression of information with intend to evade tax.

9.2 They further submitted that in order to create a liability to tax, there must be a charging section covering the transaction; that unless and until the transaction was within the four corners of the charging section, the question of payment of tax does not arise; that under the Finance Act, 1994, under Section 66, the charge to pay service tax is enacted; that Section 66 is the charging section creating liability to pay service tax; that Section 68 was a machinery section for collection of the tax so payable; that it was important to note that Section 66 does not provide for charging service tax on taxable services as defined under Section 65 (105) but enumerates, specifically and individually, each sub-clauses of clause 105 of Section 65; that the explanation to taxable services would not apply to Section 66, as Section 66 does not create charge on taxable services but creates charge on specific entries referred in the sub-clauses mentioned in Section 66; that the Legislators have a specific purpose and have intentionally not used the word “taxable services” in the charging section, and have taken extra pain to enumerate each and every sub-clause of clause 105; that this clearly shows the intention that the explanation of definition of taxable services by the explanation in clause 105 is specifically not applicable to Section 66, the charging section.

9.3 They further submitted that it is a matter of well recognized principle that unless the Act creates a charge to pay tax, there cannot be a liability to pay tax; that since the charging section does not provide for such


liability to pay tax, the machinery provisions cannot do so; that it is well recognized principle that the machinery provisions cannot extend beyond the charging section.

9.4 They relied on the decision of Hon'ble Supreme Court in the case of Laghu Udyog Bharati, reported in 1999 (112) ELT, 365, wherein, the Hon'ble Supreme Court has, after examining the provisions of Sections 66 and 68, rejected the Department's contention that recipient of the service be liable to tax, in the absence of charging section, ;that the provisions of Section 68 (2) read with Notification No. 36/04 ST dated 31.12.2004 and Rule 2 (d) (iv) of the Service Tax Rules 1994, provide for the machinery for payment of tax by the recipient; that however, as mentioned above, the entire machinery provisions cannot create a charge which is otherwise not created by Section 66; that this position has been changed by inserting Section 66A w.e.f. 18.04.2006; that Section 66 A is a charging section creating a specific charge on recipient of the service in specified circumstances; that only when Section 66A is enacted, i.e. from 18.04.2006, the charging section is provided, and, therefore, it is only from this date that liability to pay tax on the recipient can be legally made; that the period impugned in this notice is prior to 18.04.2006 and therefore they are not liable to pay tax and therefore demand must fail.

9.5 They relied upon the judgment of the Tribunal in the case of Foster Wheeler Energy Ltd; that in Para 6.8, the Hon'ble Tribunal has clearly noted that the insertion of Section 66A has created a charge and therefore a liability, but not for the period prior thereto; that when the charge was created for the first time on 18.04.2006, then the earlier machinery provisions need not be referred so as to reject the same; that the Tribunal deciding a matter need not refer to all the provisions in its order; that it was the basis of the decision which would forma ratio and which would bind the parties.

9.6 They further submitted that the transaction in question would not create a tax liability on two accounts, viz. (1) that the appellant being the “recipient” of the service, and (2) that the services were rendered abroad; that any taxation taw in India cannot tax a service which was rendered outside India; that the impugned transactions were not liable to service tax; that the service provider, viz. the foreign agent, was situated abroad and has performed the service abroad; that when both, i.e. provider of the service and performance of the service was outside India, the question of demanding service tax in India does not arise; that the decision of the Tribunal is particularly applicable on this argument and is binding.


9.7 They further submitted that by enacting Section 66A, such transactions are made taxable by creating a charge, and, therefore, prospectively such transactions may be taxable, however, the said charging section can never have retrospective implication and, therefore, the impugned period being prior thereto, no tax liability arises.

They also relied on the following decisions ;

Delhi High Court decision in the case of Unitech Limited reported in 2009-TIOL-293-HC-DEL-ST.

Mumbai High Court decision in the case of Indian National Ship owners Association Vs Union of India - 2008-TIOL-633-HC-MUM-ST

;that when the matter is covered by two decisions of high courts and there is no contrary decision available, the same are binding and must be followed; that the demand must therefore be withdrawn.

9.8 They further submitted that even otherwise the demand is barred by limitation; that they are registered assessee and have consciously decided that for the prior period they were not liable to tax; that their belief is upheld by two high court decisions cited above; that they have also explained their stand in correspondence as well in the statement relied upon in the notice; that therefore the demand is barred by limitation; that the demand would also be revenue neutral in as much as they would be entitled to credit of the very tax paid and also refund thereof since the service was in connection with export of goods.

9.9 They further submitted that when the demand does not survive, the penalty would also not survive; that the longer period is also not available to the Department and hence the penalty under Section 78 will not survive; that there was also no assessed tax liability not paid and hence no question of penalty under Section 76 arises; that they requested for discharging the notice with consequential relief.

PERSONAL HEARING

10. Vide this office letter dated 05.05.2011, the assessee was requested to appear for personal hearing on 11.05.2011. Shri Rahul Bhatt, Senior Manager (Excise) appeared for personal hearing and reiterated the argument communicated vide their letter dated 04.03.2009.


DISCUSSION & FINDINGS

11. I have gone through the records of the case including the submissions made by the assessee in their written reply dated 03.09.2009 as well as in their submissions made during the course of personal hearing held on 11.05.2011.

12. I observe that the assessee have obtained Service Tax Registration and paid Service Tax on overseas commission in case services rendered after 16.06.2005. I find that the assessee has nowhere disputed the receipt of service from the foreign based dealers / agents who were helping them to market their products in order to boost their sales. They have even not disputed the making of payment of commission / incentive to those dealers/agents.

13.1 As per the provisions of Section 65(19) of the Finance Act, 1994, the term ‘Business Auxiliary Service’ means any service in relation to:

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

(ii) promoting or marketing of service provided by the client; or(iii) any customer care service provided on behalf of the client;

or…………………………….

13.2 I also find that in view of the difficulties faced by the Government in collecting the service tax where the service provider leave the country amendment was made in the Service Tax Rules, 1994 by inserting a sub-clause (iv) in the clause (d) of sub-rule (1) of Rule 2 by the Notification No. 12/2002 dated 01.08.2002 effective from 16.08.2002. As per the amendment, in relation to taxable service provided by a person who was a non resident or a person from outside India, who does not have any office in India, the person receiving the taxable service in India shall be the person liable for paying the service tax. The assessee has contended that there was no charging Section available in Section 66 and no provision for levy of Service Tax on import of service prior to introduction of Section 66A w.e.f. 18.04.2006 is not tenable and therefore not acceptable as I find that in the case of Laghu Udyog Bharti Vs Union of India reported in 1999 (112) ELT, 365, the Hon’ble Supreme Court had quashed the levy of service tax on goods transport operators service and clearing & forwarding agents on the ground that the levy of service tax not on the person rendering the service, but the person to whom or for whom, the


service was rendered was clearly illegal and unsustainable in Law. But The Hon’ble Supreme Court however, did not held that the levy of service tax was illegal on the aforesaid services, the Hon’ble Court only struck down those provisions in which the burden of tax was shifted from service provider to the service recipient. Also, after the above judgment, Section 66 was amended from 16.10.1998 to the effect that “there shall be levied a tax…………………………………and collected in such manner as may be prescribed” in place of “there shall be charged a tax……………………………..which are provided to any person by the persons responsible for collected the service tax.” Thereby, through the above amendment provisions were made even to levy service tax on the person receiving the service tax. In view of the above amendment w.e.f. 16.08.2002 as per Rule 2(1)(d)(iv) provision related to the registration, payment of service tax, filing of returns etc were made applicable to the person who was the receiver of the services. Also, the foreign companies rendering the services in India who does not have office in India, service tax was to be paid by the recipient of the services.

13.3 Further, I find that service has been rendered in connection with export of goods by identifying customers, procurement of export orders etc. On the basis of service received, the respondent has exported goods. The commission has been paid for services received by them in India. Thus it is clear that the services are provided from abroad and received in India. Further, I find that a recent clarification issued by CBEC from F.No. 275/7/2010-CX.8A dated 30.06.2010. The relevant portion of the clarification is reproduced below ;

“However, it may be noted that the aforementioned judgment in the case of M/s INSA Vs Union of India does not apply to the cases where taxable service, provided by a non resident, not having any office / establishment in India, is received in India. The levy of service tax on such services has been examined in the cases of (i) M/s Hindustan Zinc Ltd Vs Commissioner of Central Excise, Jaipur by the larger Bench of CESTAT [2008 (11) STR 338 (T-LB)], and (ii) UOI Vs M/s Aditya Cement by the Hon’ble High Court of Rajasthan [2008 (10) STR (Raj)], wherein it has been held that service tax liability on services received in India from a non resident arises w.e.f 01.01.2005………..”

13.4 In the present case taxable service has been provided by a non resident, not having any office / establishment in India, and has been received in India and thus the Service Tax liability of the service provider arises w.e.f 01.01.2005 onwards and not from July 2004’ as demanded in show cause notice. The issue involved in the present case and that of INSA are different. In


the case of INSA, the service were received outside India and thus not applicable to the present case. The clarification issued by CBEC from F.No. 275/7/2010-CX.8A dated 30.06.2010 specifically states that “………in view of these judgments, levy of service tax on taxable services received in India which are provided by a non resident, not having office / establishment in India arises on reverse

charge basis w.e.f 01.01.2005”. The clarification further affirms that in case of taxable service provided by a non resident, not having any establishment in India and received in India, the Service tax liability arises w.e.f 01.01.2005 and in case of taxable service received outside India by a person, who is resident of India or has place of business / establishment in India, the Service Tax liability arises w.e.f 18.04.2006, as in the case of INSA.

14.1 In view of the above discussion, I hold that the service provider is liable to pay

service tax w.e.f 01.01.2005 and not from July 2004 as demanded in show cause notice and

accordingly the revised calculation will be as under ;

Month Commission PaidS.Tax Payable including Edu. Cess as per

SCN

S.Tax liable to be dropped

S.Tax liable to be confirmed

Jul-04 0 0 0Aug-04 0 0 0Sep-04 4,42,513/- 45,136/- 0Oct-04 9,12,783/- 93,104/- 0Nov-04 60,40,044/- 6,16,084/- 0Dec-04 12,65,011/- 1,29,031/- 0Jan-05 31,17,581/- 0 3,17,993/-Feb-05 36,08,073/- 0 3,68,023/-Mar-05 63,76,204/- 0 6,50,372/-Apr-05 12,40,935/- 0 1,26,576/-May-05 52,65,665/- 0 5,37,099/-Jun-05 12,76,096/- 0 1,30,162/-Jul-05 37,81,207/- 0 3,85,683/-

Aug-05 17,78,437/- 0 1,81,401/-Sep-05 24,65,626/- 0 2,51,494/-Oct-05 34,04,941/- 0 3,47,304/-Nov-05 18,32,647/- 0 1,86,930/-Dec-05 48,701/- 0 4,967/-TOTAL 4,28,56,464/- 43,71,359/- 8,83,355/- 34,88,004/-

14.2 From the above discussion & findings, it is ample clear that the services provided by the assessee falls under the category of “Business Auxiliary Services” and the Service Tax amounting to Rs.34,88,004/- (including Edu. Cess) needs to be confirmed and service tax amounting to Rs.8,83,355/- demanded for the period prior to 01.01.2005 is liable to be dropped.

15.1 Further, the assessee has relied on the following judgments ;

Laghu Udyog Bharati Vs Union of India reported in 1999 (112) ELT, 365. Foster Wheeler Energy Ltd., Unitech Ltd., Vs Commissioner of Service Tax, Delhi reported in 2009

(15) STR 385 (Del.)


Indian National Ship Owners Association Vs Union of India reported in 2009 (13) STR. 235 (Bom).

15.2 In this connection, I would like to quote the honorable Supreme Court, who in the case of Commissioner of Central Excise Bangalore versus Shri Kumar Agencies has held in 2009 (13) STR 3 that reliance should not be placed on decisions without discussing as to how the factual situation fitted in with the factual situation of the decision on which reliance is placed. Observations of the quotes are neither to be read as Euclid theorems nor as provisions of the statute and that too, taken out of the context. These observations must be read in the context in which they appear to have been stated. Judgments of quotes are not to be construed as statutes. To interpret words, phrases and provisions of a statute, it may become necessary for judges to embark into lengthy discussions. But the discussions are meant to explain and not to define. Judges interpret statutes, they do not interpret judgments. They interpret words statutes, their words are not to be interpreted as statutes. The honorable Supreme Court further adds at Para five of the same judgment that circumstantial flexibility, one additional or different fact, may make a world of difference between conclusions in two cases. Disposal of cases by blindly placing reliance on a decision is not proper. Secondly, both the judgment quoted are a remand order and interim decision respectively. Accordingly, I am not bound to follow the judgments / case laws, quoted by the party in their defense reply.

15.3 Secondly, the assessee has submitted that the demand would also be revenue neutral in as much as they would be entitled to credit of the very tax paid and also refund thereof, since the service is in connection with export of goods. But here I am not going into the matter of admissibility of the CENVAT Credit as first of all this issue is out of the purview of the SCN and I do not find myself obliged to discuss any issue out of the purview of the SCN.

16.1 Further, I find that the assessee has submitted that the demand is time barred. Before proceeding further, the provisions contained in Section 73 of the Finance Act, 1994, is reproduced hereunder ;

"Section 73 - Recovery of Service Tax not levied or paid or short levied or short paid or erroneously refunded - (1) where any service has not been levied or paid or has been short levied or short paid or erroneously refunded, Central Excise Officer may, within one year from the relevant date, serve notice on the person chargeable with the service tax which has not been levied or paid or which has been short levied or short paid or the person to whom such tax refunded has erroneously been made, requiring him to show cause why he should not pay the amount specified in the


notice. Provided that where any service tax has not been levied or paid or has been short levied or short paid or erroneously refunded by reasons of - (a) fraud; or (b) Collusion; or (c) willful mis-statement; or (d) suppression of facts; or (e) contravention of any of the provisions of this Chapter or of rules made there under with intent to evade payment of service tax, by the person chargeable with service tax or his agent, the provision of this sub-section shall have effect, as

if, for the words "One Year", the words "Five Years" had been substituted."

16.2 Further, I find that extended period can only be invoked when ingredients of Section 73(1) and the intent to evade payment of service tax is found. I observe that the department cannot of its own come to know about any taxable service being provided by any person / firm and for this it has to depend on the voluntarily disclosure by the service provider. In the instant case, I find that had the department not found out regarding the taxable service, the same would have been escaped assessment and resulted into non payment / short payment of the service tax. Hence, the extended period is rightly invoked in the instant case. So far relying on data available in the records of the company i.e. the balance sheet / General ledger produced during investigation is concerned, it does not absolve the service provider of any intent to evade. It is well known that balance sheet for any financial year is prepared and finalized about six months after completion of the particular financial year. If the disclosure in balance sheet is taken as proof of the bonafide, then the first half of any financial year gets time barred on the date the balance sheet is issued. In that case any unscrupulous service provider will commit a deliberate evasion in the first half of the financial year and by the time the balance sheet is published the said evasion will be barred by limitation. So, in my view, putting details in the balance sheet ipso facto does not prove their bonafide. The service provider in the instant case is an old registered firm with the service tax department having a knowledge about the statute. Hence, I find that the contention of the service provider cannot be accepted. The ingredients for invoking extended period demand service tax are existing and extended period is rightly invoked in the instant case. Further, how the extended period is to be computed has been clarified by various judgments. I rely on the following judgments of Hon’ble Supreme Court & Tribunals ;

Mathania Fabrics Vs CCE, Jaipur reported in 2008 (221) ELT 481 (SC) CCE, Ahmedabad I Vs M Square Chemicals reported in 2008 (231)

ELT 194 (SC) Salasar Dyg & Ptg. Mills (P) Ltd., Vs CCE, Surat reported in 2009

(235) ELT 93 (Tri-Ahmd.)


Associated Cement Companies Ltd., Vs CC reported in 2001 (128) ELT 21 (SC)

16.3 Hon’ble High Court of Gujarat in the case of CCE, Surat – I Vs Neminath Fabrics Pvt. Ltd., reported at 2010 (256) ELT 369 (Guj), while deciding the similar issue in Central Excise, has held that proviso can not be read to mean that because there is knowledge, suppression which stands established disappears – concept of knowledge, by no stretch of imagination, can be read into provisions – suppression not obliterated, merely because department acquired knowledge of irregularities. The relevant para is reproduced below ;

“20. Thus, what has been prescribed under the statute is that upon the reasons stipulated under the proviso being satisfied, the period of limitation for service of show cause notice under sub-section (1) of Section 11A, stands extended to five years from the relevant date. The period cannot by reason of any decision of a Court or even by subordinate legislation be either curtailed or enhanced. In the present case as well as in the decisions on which reliance has been placed by the learned advocate for the respondent, the Tribunal has introduced a novel concept of date of knowledge and has imported into the proviso a new period of limitation of six months from the date of knowledge. The reasoning appears to be that once knowledge has been acquired by the department there is no suppression and as such the ordinary statutory period of limitation prescribed under sub-section (1) of Section 11A would be applicable. However such reasoning appears to be fallacious inasmuch as once the suppression is admitted, merely because the department acquires knowledge of the irregularities the suppression would not be obliterated.”

17. The assessee further submitted that no penalty was imposable when the demand does not survive. I find that the assessee has not paid the service tax. Had the department not found out regarding the taxable service, the same would have been escaped assessment and resulted into non payment of the service tax. Hence, I find the assessee has suppressed the facts, taxable value and the nature of taxable service from the department with an intent to evade payment of service tax and, therefore, the said service tax not paid is required to be demanded and recovered from them under the proviso to Section 73 (1) of the Finance Act, 1994 as amended, by invoking extended period of five years. I also find that the above contraventions of the provisions of Section 68, Section 69 and Section 70 of the Finance Act, 1994 read with Rule 4, Rule 6 and Rule 7 of Service Tax Rules, 1994 on the part of the assessee has rendered themselves liable for penalty Under Section 76, Section 77, Section 78 of the Finance Act, 1994.


17.2 I find that the assessee have contravened the provisions of Section 67 and Section 68 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994, in as much as they have suppressed the taxable value and also failed to make payment of service tax of Rs.34,88,004/- [including Education Cess] on such suppressed value under the category Business Auxiliary Service, such amount of service tax is required to be paid by them alongwith interest as per Section 73 & 75 of the Finance Act, 1994.

Penalty under Section 76:

18.1 I further observe that during the relevant period M/s The Arvind Mills Ltd., have defaulted in payment of service tax which has been established as not paid, in accordance with the provisions of Section 68 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994, and thereby rendered liable to pay mandatory penalty under the provisions of Section 76 of the Finance Act, 1994 for default in payment of service tax on time till the final payment. It has come to my notice that till date M/s The Arvind Mills Ltd., have not paid the service tax, hence imposition of mandatory penalty under Section 76 is once again justified.

18.2 Accordingly, I hold that M/s The Arvind Mills Ltd., are liable to imposition of penalty under Section 76 of the Finance Act, 1944. My conclusion is also based on various decisions of Hon’ble High Courts & Tribunals as mentioned below ;

CCE & ST Vs First Flight Couriers Ltd reported at 2007(8) STR 225 (Kar.)

UOI Vs Aakar Advertising, reported at 2008 (11) STR.5 (Raj.) UOI Vs Shiv Ratan Advertisers reported at 2008 (12) STR 690

(Raj.) Shiv Network Vs CCE, Daman reported at 2009 (14) STR 680

(Tri-Ahmd) CCE, Vapi Vs Ajay Sales Agencies reported at 2009 (13) STR 40

(Tri–Ahmd) Siddhi Motors Vs CCE, Rajkot reported at 2009 (15) STR 422

(Tri-Ahmd)

18.3 I further observe that the Hon’ble CESTAT in a recent judgment in the case of M/s Gujarat Industrial Security Force Society Vs CST, Ahmedabad, vide order No. A/1110/WZB/AHD/2010 dated 05.08.2010, has held that no


lenient view can be taken under Section 76 of the Finance Act, 1994. The relevant paras are reproduced below ;

“2. After hearing both the sides, I find that in this case, the assessee was registered more than 6 years back and no explanation has been given by them for delayed filing of return and delayed payment of service tax. Under these circumstances, I am not finding fault in stand taken by the lower authority that penalty is imposable under section 76 and once it is held that penalty is imposable under section 76, the amount fixed as per the provision of section 76 is required to be imposed. Under these circumstances, even though the Ld. Advocate submitted that the appellant is a non profit organization, no lenient view can be taken in view of the provisions of law.3. Accordingly, the appeal is rejected.”

18.4 Hon’ble High Court of Gujarat in the case of CCE & Cus. Vs Port Officer, reported at 2010 (19) STR 641 (Guj) has now settled the issue of penalty under Section 76. The relevant para is reproduced below ;

“10. A plain reading of Section 76 of the Act indicates that a person who is liable to pay service tax and who has failed to pay such tax is under an obligation to pay, in addition to the tax so payable and interest on such tax, a penalty for such failure. The quantum of penalty has been specified in the provision by laying down the minimum and the maximum limits with a further cap in so far as the maximum limit is concerned. The provision stipulates that the person, who has failed to pay service tax, shall pay, in addition to the tax and interest, a penalty which shall not be less than one hundred rupees per day but which may extend to two hundred rupees for everyday during which the failure continues, subject to the maximum penalty not exceeding the amount of service tax which was not paid. So far as Section 76 of the Act is concerned, it is not possible to read any further discretion, further than the discretion provided by the legislature when legislature has prescribed the minimum and the maximum limits. The discretion vested in the authority is to levy minimum penalty commencing from one hundred rupees per day on default, which is extendable to two hundred rupees per day, subject to a cap of not exceeding the amount of service tax payable. From this discretion it is not possible to read a further discretion being vested in the authority so as to entitle the authority to levy a penalty below the stipulated limit of one hundred rupees per day. The moment one reads such further discretion in the provision it would amount to re-writing the provision which, as per settled canon of interpretation, is


not permissible. It is not as if the provision is couched in a manner so as to lead to absurdity if it is read in a plain manner. Nor is it possible to state that the provision does not further the object of the Statute or violates the legislative intent when read as it stands. Hence, Section 76 of the Act as it stands does not give any discretion to the authority to reduce the penalty below the minimum prescribed.”

18.5 The Hon’ble High Court of Gujarat has further confirmed the above view in the case of CCE Vs S J Mehta & Co., reported at 2011 (21) STR 105 (Guj.) and CCE Vs Bhavani Enterprises reported at 2011 (21) STR 107 (Guj.).

Penalty under Section 77 :

19. I further find that the service provider has failed to take registration and failed to file returns & hence they are liable for penalty under Section 77 for not taking service tax registration and not filing service tax returns.

Penalty under Section 78 :

20.1 I further observe that the show cause notice also proposes imposition of penalty under Section 78 of the Finance Act, 1994. I find that fraud, suppression of facts and wilful mis-statement on the part of M/s The Arvind Mills Ltd., has been established beyond doubt as discussed and concluded in the earlier part of this order. Accordingly, I hold that M/s The Arvind Mills Ltd are also liable to penalty under the provisions of Section 78 of the Finance Act, 1994.

20.2 As it is already proved that the service provider had suppressed the facts, the consequences shall automatically follow. Hon’ble Supreme Court has settled this issue in the case of U.O.I Vs Dharmendra Textile Processors reported in 2008 (231) ELT 3 (S.C) and further clarified in the case of U.O.I Vs R S W M reported in 2009 (238) ELT 3 (S.C). Hon’ble Supreme Court has said that the presence of malafide intention is not relevant for imposing penalty and mens rea is not an essential ingredient for penalty for tax delinquency which is a civil obligation.

20.3 I, therefore, hold that they have rendered themselves liable to penalty under Section 78 of the Finance Act, 1994. My above view gets support from below mentioned case laws ;


Shiv Network Vs CCE, Daman reported in 2009 (14) STR 680 (Tri.Ahmd.)

CCE, Vapi Vs Ajay Sales Agencies reported in 2009 (13) STR 40 (Tri. Ahmd.)

Order No. A/754/WZB/AHD/2010 dt. 09.06.2010 / 23.06.2010 in the case of M/s Bajrang Security Services Vs CST, Ahmedabad.

Order No. A/1937/WZB/AHD/2010 dated 08.10.2010 / 20.12.2010 in the case of M/s Dhaval Corporation Vs CST, Ahmedabad.

20.4 I further observe that recently hon’ble High Court of Punjab & Haryana, in the case of CCE Vs Haryana Industrial Security Services reported at 2011 (21) STR 210 (P&H), has also upheld the penalty equal to service tax imposed under Section 78 of the Finance Act, 1994. Hon’ble Karnataka High Court has also taken similar view in the case of CCE, Mangalore Vs K Vijaya C Rai reported at 2011 (21) STR 224 (Kar.)

Both Penalty under Section 76 & 78 – Justified:

21.1 I also find that penalty under Section 76 ibid is provided for failure to pay service tax whereas penalty under Section 78 ibid is for suppressing value of taxable service. In the instant case, service tax liable to be paid in terms of Section 68 read with Rule 6 of the Service tax Rules, 1994, have not been found paid as well as service tax has not been paid / short paid by suppressing value of taxable service by reason of wilful mis-statement and suppression of facts. Of course these two offences may arise in the course of same transaction, or from the same action of the person concerned. But the incidents of imposition of penalty are distinct and separate and even if the offences are committed in the course of same transaction or arises out of the same act the penalty is imposable for ingredients of both offences, this aspect was also considered by the Hon’ble High Court of Kerala in the case of Assistant Commissioner, C.Ex. Vs Krishna Poduval – 2006 (1) STR 185 (Ker). I also find that the Hon’ble Mumbai Tribunal in the case of Golden Horn Container Services Pvt. Ltd. v/s Commr. of C. Ex., Raipur reported at 2009 (16) S.T.R. 422 (Tri.-Mumbai), has held that Section 76 provides for a penalty who commits default simpliciter in payment of the tax whereas section 78 is a more stringent penal provision, which provides harsher penalty who commits default with mens rea. Since in this case also, M/s The Arvind Mills Ltd has committed default with mens rea, the decision of the tribunal is squarely applicable.


21.2 Therefore, I am of the view that in the facts and circumstances of the case, it is justifiable, if the penalty is imposed under the provisions of Section 76 and 78 of the Finance Act, 1994, separately, following the decisions of Hon’ble Kerala High Court and Mumbai tribunal (supra). My views are also further supported by various decisions of tribunals in the cases of ;

a) Shiv Network v/s Commissioner of Central Excise & Customs, Daman reported at 2009 (14) S.T.R. 680 (Tri.-Ahmd.)

b) Commissioner of Central Excise, Vapi v/s Ajay Sales Agencies reported at 2009 (13) S.T.R. 40 (Tri.-Ahmd.), and

c) Mett Macdonald Ltd. v/s Commissioner of Central Excise, Jaipur reported at 2001 (134) E.L.T. 799 (Tri.-Del.).

d) M S Shah & Co., Vs CST, Ahmedabad – Order No. A/1328/ WZB/ Ahd/ 2010 dated 30.06.2010 / 26.08.2010.

e) Bajarang Security Services Vs CST, Ahmedabad – Order No. A/745/ WZB/Ahd/2010 dated 09.06.2010 / 23.06.2010.

f) CESTAT, Principal Bench, New Delhi in the case of Bajaj Travels Ltd., Vs CCE, Chandigarh – 2009 (16) STR 183 (Tri.Del.)

22. In view of the above discussions and findings, I pass the following order:

-: O R D E R :-

(i) I consider the total / gross amount of Rs.3,41,96,113/- paid by them to such foreign commission agents as taxable value under “Business Auxiliary Services” for the period from January 05’ to December 05’ & confirm the total amount of Service Tax amounting to Rs.34,88,004/- (including Education Cess) [Rupees Thirty Four Lakhs Eighty Eight Thousand & Four Only] for the period 01.01.2005 to December 05 short paid / not paid by them under Section 73 (2) of the Finance Act, 1994;

(ii) I drop the demand of Rs.8,83,355/- (including Education Cess) (Rupees Eight Lakhs Eighty Three Thousand Three Hundred Fifty Five Only) for the reasons as discussed above;

(iii) I direct M/s Arvind Mills Ltd., to pay the interest as applicable on the amount of their service tax liability for the delay in making the payment under Section 75 of the Finance Act, 1994;

(iv) I impose a penalty of Rs.200/- (Rupees Two Hundreds Only) upon them per day or at the rate of 2% of the service tax amount per month, whichever is higher, under the provisions of Section 76 of the Finance Act, 1994, as amended, for failure to pay Service Tax and


Education Cess within the stipulated period as required under the provisions of Section 68(1) of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1944, as amended. As the actual amount of penalty could be depending on actual date of payment of service tax, however, as per Section 76 of the Finance Act, 1994, penalty will be restricted to the above confirmed amount of service tax liability;

(v) I impose penalty of Rs.3,000/- under Section 77 of the Finance Act, 1994 for failure to take registration & to file prescribed Service Tax Returns within the stipulated time;

(vi) I also impose a penalty of Rs.34,88,004/- (including Education Cess) [Rupees Thirty Four Lakhs Eighty Eight Thousand & Four Only] upon them under Section 78 of the Finance Act, 1994 for suppressing the value of taxable services provided by them before the Department with intent to evade payment of service tax under the category Business Auxiliary Service. If the service tax amount is paid alongwith appropriate interest as applicable, within 30 days from the date of receipt of this order, then the amount of penalty under Section 78 shall be reduced to 25% of the service tax amount, provided if such penalty is also paid within such period of 30 days.

-Sd-

( Dr. Manoj Kumar Rajak)Additional Commissioner,

Service Tax :Ahmedabad.

F.No. STC/4-47/O&A/07 Date: 06/06/2011 By R.P.A.D ToThe Arvind Mills Ltd.,Naroda Road,Ahmedabad – 380025.

Copy to:-

1. The Commissioner, Service Tax, Ahmedabad. (Attention Review Cell). 2. The Assistant Commissioner (Preventive), Service Tax, Ahmedabad.

(Attn.: Superintendent (Prev.), Group-I)3. The Assistant Commissioner, Service Tax, Division III, Ahmedabad4. The Superintendent Range- XIII, Divn.-III, Service Tax, Ahmedabad with a

extra copy of OIO to be served to the assessee & obtain the dated acknowledgement & submit the same to this office.

5. Guard File

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