Taxability of marketing services rendered by appellant to its group companies.

PJ/CASE LAW/2016-17/3212

Case:-FRANCO INDIAN PHARMACEUTICAL (P) LTD. Versus COMMR. OF S.T., MUMBAI

Citation:- 2016 (42) S.T.R. 1057 (Tri. - Mumbai)

Brief Facts:-This appeal is directed against Order-in-Original No. 62/STC-I/SKS/11-12, dated 29-2-2012.The issue in brief is appellant is manufacturer of pharmaceutical products and having their own marketing network. They have three related companies which are group companies, which were also manufacturers of pharmaceutical products but they do not have any marketing network, hence for selling the product they used the network of the appellant. Appellant for use of such marketing network, recovers the expenses incurred by them from these three group companies in form of percentage of the value of sale made by these three companies and the same is recorded in writing by an agreement dated 8 November, 1982. It is the case of the revenue that the recovery of such expenses is in the nature of services rendered under the category of Business Auxiliary Services (promotion or marketing or sale of goods produced are belonging to the client). A show cause notice was issued for demand of the service tax liability, interest thereof and for imposition of penalties. Appellant contested the issue on merits as well as on limitation. After following the due process of law, the adjudicating authority confirmed the demand rose with interest and also imposed penalties. He also appropriated an amount paid by the appellant during the material period.

Appellant’s Contention:-Learned Advocate appearing on behalf of the appellant draws our attention to the facts of the case. He takes us through the show cause notice, reply made and the impugned order. It is his submission that the agreement entered by the appellant with their group companies has to be seen to come to an appropriate conclusion. He takes us through the various clauses of the agreement dated 8 November, 1982; he would submit that the infrastructure facility of Marketing Pharmaceutical being available with the appellant, they shared the same with their group companies and recovered the cost attributable to salary, wages, bonus, demand and incidental expenses of the employees who were deputed to the work of marketing of the group companies. He would submit that the issue is now squarely covered by the decision of the Tribunal in the case of K. Raheja Real Estate Services Pvt. Ltd. vide Final Order No. A/1048/2013, dated 10-4-2013. He would also submit that the issue of sharing the employees and recovering a cost was considered by this Bench in the case of Mahindra & Mahindra Contech Ltd. - 2014 (35)S.T.R. 634 (Tri.-Mumbai), has held that such services cannot be taxed even under “Management Consultancy Services”.

Respondent’s Contention:-Learned departmental representativereiterated the findings of the first appellate authority.

Reasoning Of Judgement:-On perusal of records it was found that the agreement entered by the appellant and other three companies talks about lending of services of the employees as required from time to time for the marketing of the goods. It is also seen from the agreement that the employees who are deputed to the group companies are governed by the rules, terms and conditions applicable to that group company; that the goods which are manufactured by the group companies and sold by the deputed employees has to be considered as the sale of that group companies and any complaint regarding the said product has to be addressed and solved by that group companies and not by appellant. The reading of the contract indicates that appellant is only deputing the employees to the group companies and said employees are called back after the job is completed and utilized in the activity of the appellant or deputed to any other group company. It was found that revenue’s claim that such activity would fall under the “Business Auxiliary Services”, has no lows-standing as agreement does not indicate that the appellant is rendering services of promotion or marketing of the goods manufactured by the group companies. Similar issue cropped up before the Bench in the case of K. Raheja Real Estate Services Pvt. Ltd. (supra). Same view was expressed by this Bench in the case of Mahindra & Mahindra Contech Ltd. (supra) wherein the Bench relying upon the judgment of Glaxo- Smithkline Pharmaceuticals Ltd. - 2006 (3)S.T.R. 711 = 2005 (188)E.L.T. 171 (Tribunal), allowed the appeal filed by the assessee. It is specifically recorded that in the case of GlaxoSmithkline Pharmaceuticals Ltd. the revenue sought to put the services under “Management Consultancy Services” or “Business Auxiliary Services”.
Same conclusion can be reached by viewing this matter from a different perspective. By legislative design, services rendered in the course of employment have been kept outside the purview of service tax levy. This is true not only for the period under consideration but even at present under the new Negative List Regime of taxation post-2002. Whether such services are rendered by an employee to one employer or to many, as in the case of joint employment, cannot make any difference to the tax treatment of the emoluments earned by the employee. Support for this conclusion could be found from a Draft Circular of the Board dated 27-7-2012 which deals with the cases of “joint employment”.
Even otherwise, by its very nature, a situation where employer-companies have a pre-existing agreement to hire employees on joint basis and agree to share the cost of employment on actual by dividing it amongst themselves in such a manner that each employer bears only his part of the cost indicates that there was no intention amongst the employer-companies to render any service to each other. It indeed the intention of the parties would have been otherwise, the employer-company which takes the trouble of hiring an employee in its own rolls would have insisted on some mark-up or margin being given to it, over and above the actual cost. In the absence of such a mark-up/margin, the payments received against debit notes by one employer-company upon the other employer-companies, will not partake the character of consideration for any service, but will merely represent reimbursement of shared costs.

Decision:-Appeals allowed.

Comment:- The crux of the case is that assessee only deputed employees to group companies, who were called back after job was completed - Such activity is not ‘Business Auxiliary Services’. Also, services rendered in course of employment are kept outside the purview of service tax levy. It is true even under new Negative List Regime of taxation post-2002. Thus, the services rendered by appellant are not covered under service tax regime.

Prepared By-Ritika Mehta

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PJ/CASE LAW/2016-17/3212

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