Scope of inclusion within the meaning of 'gross amount charged'

Case:- BHAVEN DESAI Vs COMMISSIONER OF SERVICE TAX, MUMBAI

Citation:- 2016-TIOL-508-CESTAT-MUM

Issue:- Scope of inclusion within the meaning of 'gross amount charged'

Brief Facts:- M/s Bhaven Desai, who style themselves as 'channel associate' of M/s ABN Amro Bank, are in appeal against orderinappeal no. RBT/163/2011 dated 19th April 2011 of Commissioner of Central Excise (AppealsIV), Mumbai ZoneI which, though extending the benefit of 'cumtax' valuation and dropping of penalty under section 76 of Finance Act, 1994, held them liable to service tax of Rs.18,20,271/as provider of 'business auxiliary service' for the period between April 2004 and October 2004 and interest thereon besides upholding penalty under section 78 of Finance Act, 1994. The original authority, Additional Commissioner of Service Tax, Mumbai, by order no. 29/STC/AC/0809 dated 25th February 2009, confirmed demand of tax of Rs.18,46,791/and interest thereon besides imposing penalties; they had paid Rs.13,61,914/towards tax and Rs.1,41,356/towards interest during the pendency of investigation and adjudication. M/s Baven Desai contracted with M/s ABN Amro Bank to carry out activities relating to credit/debit cards and other products offered by the bank. As the 'direct sales team' of the bank operating in many cities, they were entrusted with the task of telecalling, identifying of potential customers, sourcing applications and forwarding the same to the bank for which it is claimed that Rs.40,000/per month was paid as remuneration besides being reimbursed for certain expenses incurred by them. According to Revenue, M/s Baven Desai renders 'business auxiliary service' to M/s ABN Amro Bank and the 'reimbursable expenses' cannot be excluded from computation of taxable value. During investigation of the designated bank account in which M/s ABN Amro Bank had been depositing payments in accordance with the contract, M/s Baven Desai was found to be in receipt of Rs.2,12,79,930/. Admittedly, they could furnish expense vouchers amounting to Rs.1,49,47,365.58 and service tax liability on the remaining Rs.52,96,730/, being Rs.5,46,266/, was paid on 27th June 2006 along with interest of Rs.1,40,470/. They claimed to have discharged service tax on the fixed monthly remuneration which, according to them, is the consideration for service rendered.

Appellant’s Contention:-Learned Counsel for M/s Baven Desai places reliance on the decisions of this Tribunal in Wings Group of Companies v Commissioner of Service Tax [2008 (12) STR 287 (TBang)] = 2008TIOL2166CESTATBANGand SR Kalyanakrishnan Commissioner of Central Excise [2008 (9) STR 255(TBang)]2007TIOL1914CESTATBANGto contend that the activities contracted are taxable under section 65(105)(zzzq). Learned Authorized Representative drew attention to the agreement of the assessee with the bank as falling squarely within the definition in section 65(19)(ii) as held in the impugned order and to the terms of the agreement regarding reimbursement which could by no stretch be called 'out of pocket' expense. On the matter of appeal of Revenue, the grant of 'cumtax' benefit and dropping of penalty under section 76 of Finance Act, 1994 was contended to be beyond the scope of permissible discretion.The contentions regarding jurisdiction and wrongful disposal of adjudication order have been discussed at length in the impugned order. The very same contentions, as well as grounds thereof, were made before the first appellate authority; no fresh material has been furnished before us and we find ourselves to be in concurrence with the evaluation by, and conclusion of the first appellate authority that there is no lapse of jurisdiction or lapse of authority in the rendering of adjudication by Additional Commissioner of Service Tax, Mumbai.

Respondent’s Contention:-The activities of M/s Baven Desai are covered by section 65(19)(ii) of Finance Act, 1994 and that 'gross amount charged' in section 67 of Finance Act, 1994 precluded acceptance of claim for abatement of reimbursements in computation of the total costs involved in providing the taxable service. The plea for non-inclusion of expenses of personnel and administration as well as infrastructure costs from taxable value was not found to be acceptable. For this, reliance was placed by the first appellate authority on Atlanta v Commissioner of Central Excise [2005 (179) ELT 455 (TriChennai) = 2004TIOL1040CESTATMAD and re Amit Sales [2009 (13) STR 165 (TriDel)]. The further claim to be taxable as provider of 'support services of business or commerce' from 1st May 2006, for exclusion of Rs.25,07,600/representing personal loans and for extension of benefit of exemption notification no. 13/2003-ST dated 20th June 2003 and notification no. 14/2004-ST dated 10th September 2004 were not accepted in the impugned order.

Reasoning Of Judgment:Perusal of the respective descriptions of the two services in section 65(19) of Finance Act 1994, liable to tax under section 65(105)(zzb), and section 65 (104c) of Finance Act, 1994 liable to tax under section 65(105)(zzzq), makes it abundantly clear that legislation has deliberately acknowledged the dichotomy in the practices of outsourcing by business entities. From the viewpoint of the recipient, 'business auxiliary service' is the outsourcing in relation to externality of the business entity while 'support services of business or commerce' is the outsourcing of the internal activities of the business entity. We do not need to concern ourselves with 'support services of business or commerce' as that was rendered taxable only from 1st May 2006 long after the period in dispute in the present appeal. The activities that are rendered liable to tax under section 65 (105) (zzb) of Finance Act, 1994are described in section 65(19) of Finance Act, 1994 as:
(19) "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) any incidental or auxiliary support service such as billing, collection or recovery of cheques, accounts and remittance, evaluation of prospective customer and public relation services, and includes services as a commission agent…..'
With effect from 10th September 2004, the following were also incorporated in that definition
(iv) procurement of goods or services, which are inputs for the client; or
(v) production on behalf of, the client;
7/12/2016 BHAVEN DESAI Vs CSTTIOL
(vi) provision of service on behalf of the client;
and the existing (iv) was renumbered as (vii) and expanded.
Though the assessee has admitted to rendering service to M/s ABN Amro Bank, its contention is that the service rendered was not taxable on that date. It is moot whether the entire range of activities that composed the service rendered by M/s Baven Desai was liable to be taxed under a single category. They have, themselves, drawn attention to two categories of receipts indicating that more than one service is rendered. The decision of this Tribunal in re SR Kalyanakrishnan referred supra was in the context of a specific set of activities relating to applications for loan and was followed in re wings Group of Companies owing, presumably, to identical transactions by that service provider. We notice that the assessee in this appeal was in the business of making potential customers of M/s ABN Amro aware of the various financial products offered by the bank. This included calling up individuals, obtaining application forms and furnishing them to the bank. M/s Baven Desai, admittedly, goes beyond a restricted range of activities and is in effect a front office' of M/s ABN Amro Bank. Hence, the decisions cited on behalf of the assessee do no support its claim of exclusion from taxability as provider of 'business auxiliary service' for which a consideration is received.
M/s Baven Desai has claimed that the remuneration received by them for rendering taxable service, in accordance with the agreement, is a per mensem amount of Rs 40,000 and that tax has been discharged on this amount. It is also noticed that the other inflows into the designated bank account maintained with the client has been claimed to be reimbursement of expenses incurred by M/s Baven Desai on behalf of the client. Revenue went to the extent of calling for vouchers to examine this claim but, having gone through this process, as admitted in the show cause notice, chose to ignore this claim while confirming demand of tax on the entire amount received in the bank; and, that too, despite the assessee paying tax on an amount of Rs.52,96,730/after accepting inability to produce evidence that these were expended on behalf of client.
Though section 67 of Finance Act, 1994 mandates tax payment on 'gross amount charged by service provider', tax cannot be determined on the total receipts owing to the qualification 'for such service rendered by him' therein. Therefore, the routine application of tax rate on the entire payment received from a recipient of service is not envisaged or authorized by law. Tax collection is sanctified only to the extent of identifying the value of the service rendered. The claim of an assessee that a specific amount is the value of the service rendered is questionable only when Revenue can establish that there are elements in the receipts which require inclusion in the charge for the service rendered. Such an exercise is not perceptible in the proceedings before the lower authorities. M/s Baven Desai entered into agreement with their client which, inter alia, provides for reimbursement of certain expenses. No effort appears to have been taken to ascertain if these expenses are attributable to services rendered and if the services to which these can be attributed are taxable. The chargeability of certain amounts received being attributable to a particular taxable service cannot be presumed to confer authority to tax other amounts received from the same entity for services unknown. That would not be a tax on services but a tax on receipts which is not the legislative intent or objective of taxing services.
To ascertain the quid pro quo for the consideration, facts and circumstances of the transaction must be comprehended. The client M/s ABN Amro Bank, offers financial products for a customer base spread across the country. The provenance of such products should visibly be linked to the financial institution; that is, and has been, the peculiarity of the banking sector since it first came into being. M/s Baven Desai, notwithstanding its credibility within its circle, cannot pretend to provide institutional credibility to its client in relation to the financial products of the latter. While M/s Baven Desai may undertake to popularize the products amongst the populace, the potential customer will look for the symbols of the client as the sole reassurance in relation to the offerings. Further, the industry in which the client, M/s ABN Amro Bank, operates is subject to rigorous regulation in the number of branches that it can operate. An existing service provider may, additionally, be required to operate a 'front office' of the client to reinforce the credibility of the financial products. These may be mandates of the client for which the client may have to make a separate payment whether these are for actual or on lumpsum is a matter of commercial agreement. To the extent that compliance with these mandates are liable to classified only within services that are 'as yet' not taxable, it would be contrary to legislative sanction to determine tax liability on such receipts. The confirmation of demand, and approval thereof, by the lower authorities, thus, exceed limits envisaged by the legislature. We notice that the bulk of the expenses have been incurred on salaries, telephones, office space and advertisements, all of which may be considered to be essential to bringing the banking institution to the doorstep of the customer and is, thereby, inextricably enmeshed with the financial product offered by the bank. The costs claimed to be reimbursibles are, therefore, not attributable to the 'business auxiliary service' rendered by the assessee but to the cost of the product itself. Not surprisingly, the bank reimburses these expenses. Therefore, these fall outside the scope of inclusion within the meaning of 'gross amount charged' in section 67 of Finance Act, 1994 in the context of the identified taxable service. The assessee's claim of reimbursable expenses having been evidenced except for Rs.52,96,730/and the tax having been paid on the unevidenced portion of receipts, further demand of tax envisaged in the show cause notice fails to survive. It would appear that the adjudicating authority was itself not unambiguously certain about the taxability and its scope; the assessee cannot be placed on a higher pedestal of more exacting standards of comprehension and compliance. Invoking of section 73(4) of Finance Act, 1994 is, therefore, not warranted. The first appellate authority has dropped the penalty under section 76 of Finance Act, 1994.There is no justification for having continued with, the adjudication after the tax liability had been discharged.

Decision:-Appeal allowed.

Comment:- The gist of the case is that in order to levy service tax on any expense, the amount received whether as reimbursement or otherwise, should be attributable to particular service. It has been held that if any amount is being received from any person to whom other services are provided, that amount should be directly attributable to provision of a taxable service, otherwise service tax cannot be levied. If the entire amount received from service recipient (without determining the nature of taxable service provided or correlating with the service provided) is subject to levy of service tax then it would not be a tax on services but a tax on receipts which is not the legislative intent or objective of taxing services.

Prepared By: - Alakh Bhandari

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PJ/CASE LAW/2016-17/3168

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