Whether activity of importing goods and selling them on high sea sales basis leviable to service tax under BAS?

PJ/Case Law/2013-14/2012

Case:-STATE TRADING CORPORATION OF INDIA LTD. VERSUS COMMR. OF S.T., MUMBAI

Citation:-2013(32) S.T.R. 702 (Tri.-Mumbai)

Brief Facts:-There is a miscellaneous application, a COD application and three stay applications directed against Order-in-Original No. 7-9/ST/SB/2012-13, dated 23-8-2012 passed by the Commissioner of Sales Tax, Mumbai.

The miscellaneous application is for filing the additional grounds and production of certain documents relating to the sales transaction undertaken by the appellant. This can be considered only at the time of final hearing of the appeal. The COD application is for condoning the delay of 26 days. The delay occurred due to fact that the appellant was directed to file separate appeals instead of a composite appeal which was filed in time. Considering the reason stated as satisfactory, the COD application is allowed.

The appellant herein is M/s. State Trading Corporation of India Ltd. and they are engaged in trading of various commodities such as edible oils, petroleum products, gold, silver, groceries etc. The appellant undertakes import as well as export of these items on behalf of various traders/merchants. In the case of an import transaction, they undertake the imports by placing order on the foreign suppliers, opening LC and the goods are purchased on their own account and when the goods arrive in India, they sell these goods to the customers on High Seas Sale basis and they charge a mark-up ranging from 1% to 1.5% of the value of the goods. The documents for import of the items are filed by the respective customers, who declare the value inclusive of the mark-up for the purposes of customs duty assessment. The Revenue was of the view that the applicants are rendering services of import and export to the customers and therefore, they are liable to Service Tax under the category of "Business Auxiliary Services". Accordingly, the notices were issued which were adjudicated upon and Service Tax demands amounting to Rs. 16.54 crores (approx.) were confirmed along with interest and penal consequences. Hence, the appellant is before Tribunal.

Appellant Contentions:-The ld. Counsel for the appellant makes the following submissions:-

The transaction undertaken by them in one of simple trading. They purchase the goods from the foreign suppliers based on the orders placed on them by their customers and they sell these goods to their customers. They are purchasing the goods from the overseas suppliers on their own account and thereafter they sell these goods to their customers by adding a mark-up.

The transaction is on principal to principal basis and is a simple trading transaction. Further, the mark-ups added by them on their purchase price is already subject to customs duty and hence, Service Tax is not to be leviable on transaction of trading as the transaction is one of sale and not of service.

The Ld. Counsel for the appellant relies on the circular issued by C.B.E. & C. vide Circular No. 32/2004, dated 11-5-2004 wherein the Board has clarified as follows :-

Subject : Customs Valuation Rules, 1988 - Determination of assessable value for goods sold on high seas - Regarding.

Representations have been received on the Ministry to clarify the manner of determining the value of imported goods imported on high-sea-sales basis. As per the existing practice in Mumbai Custom House, the "high-seas-sales-charges" are added to the declared CIF value in terms of Public Notice No. 145/2002, dated 3-12-2002. Such "high-seas-sales-charges" are taken to be 2% of the CIF value as a general practice. In case the actual high-sea-sale contract price is more than "the CIF value plus 2%", then the "actual contract price" paid by the last buyer is being taken as the value for the purpose of assessment. In some of the custom houses, however, audit has raised objection stating that if, in a particular transaction, there were about three/four high-sea-sales, then high-sea-sales service charges @2% has to be added to the CIF value, for each such transaction.

2. The matter has been examined taking into account the Advisory Opinion 14.1 of the GATT. Valuation Code, which stipulates that if the importer can demonstrate that the immediate sale under consideration took place with a view to export the goods to the country of importation, then such transaction would constitute an international transfer of goods. The later transaction which led to the import would be the relevant transaction for assessment and Rule 4 of Customs Valuation Rules, 1988 would apply. Hon'ble Supreme Court, in the case of M/s. Hyderabad Industries Limited [2000 (115) E.L.T. 593 (S.C.)] have also upheld that the service charges/high-seas-sales-commission (actuals) are includable in the CIF value of imported goods. Therefore, it is clarified that the actual high-seas-sale-contract price paid by the last buyer would constitute the transaction value under Rule 4 of Customs Valuation Rules, 1988 and inclusion of commission on notional basis may not be appropriate. However, the responsibility to prove that the high-seas-sales-transaction constituted an international transfer of goods lies with the importer. The importer would be required to furnish the entire chain of documents, such as Original Invoice, high-seas-sales-contract, details of service charges/commission paid etc., to establish a link between the first international transfer of goods to the last transaction. In case of doubt regarding the truth or accuracy of the declared value, the Department may reject the declared transaction value and follow the sequential methods of valuation under Customs Valuation Rules, 1988.

From the above circular, it can be seen that the transaction is one of import and their trade margin is included in the taxable value for the purposes of assessment of customs duty.
The Ld. Counsel also relies on the decision of the Tribunal in the case of Indian Oil Co. Ltd. vide Order No. S/108/2012/CSTB/C-I, dated 6-1-2012 [2012 (27) S.T.R. 23 (Tri.-Mum.)] where in a similar situation, it was held that transaction is one of the sale and Service Tax liability is not attracted and accordingly waiver from pre-deposit of the dues adjudged was granted. Therefore, he pleads for grant of stay.

Respondent Contentions:-The Ld. Commissioner (AR) appearing for the Revenue, on the other hand, contends that the transaction of "sale" by the appellant to their customers includes the service element also. The appellant did not place the orders on the foreign supplier on their own, but on receipt of the orders from their customers and thereafter they place the orders on the foreign supplier. For this purpose, they are charging 1 to 1.5% margin to cover expenses. This activity of the appellant would constitute procurement of goods on behalf of the client. Accordingly he prays for putting the appellant to terms.

Reasoning of Judgment:-We have carefully considered the submissions made by both sides. From perusal of the import documents as well as invoices, it is evident that the transaction is one of trading or sale. The mark-up/trade margin charged by the appellant is also subject to customs duty as part of the transaction value. If that be so, there is no reason why the same part of the transaction value should be taken out of the customs transaction and subjected to Service Tax under the guise of Business Auxiliary Services. The Board's circular dated 11-5-2004 also clarifies that the customs duty liability is to be discharged on the value inclusive of trade margin in the case of High Seas Sales transaction.

Therefore, following the precedent decision in the case of M/s. Indian Oil Corporation Limited (supra), in the present case also, we grant waiver from pre-deposit of the dues adjudged against the appellant and stay recovery thereof during the pendency of the appeal.

Decision:-Stay application allowed.

Comment:-The essence of this case is that the activity of importing goods and selling them on high sea would primarily not be leviable to service tax under the category of “BAS” as customs duty is paid on the transaction value of the goods. Moreover, this kind of arrangement is more in the nature of “trading” in light of the decision given in the case of M/s. Indian Oil Corporation Limited.

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