Whether service tax is leviable under BAS when transactions are on principal to principal basis and the contract is of revenue sharing?

PJ/Case Law/2013-14/1654

Case:-SHRI NEERAJ PRASAD Vs COMMISSIONER OF CENTRAL EXCISE, KANPUR

Citation:-2013-TIOL-973-CESTAT-DEL

Brief Facts:-The appellant (CLIL) is a company engaged in providing the services of commercial training and coaching services attracting service tax. The CLIL provide the services of commercial training and coaching through their centers across the country, out of which except for eight centres, which are wholly owned by CLIL, the rest are operated through three parties under franchise agreements. The appellant in this case have entered into a license agreement/franchise agreement with CLIL in 2001, which is reviewed after 3 years. Under this agreement, the appellant operates the commercial training and coaching centres of CLIL using its trade mark, logo and the proprietary system developed by CLIL. The fee collected from the students is deposited by the appellant in the account of CLIL and the receipt is also issued by CLIL. The CLIL retained 75% of the fee and gave 25% to the appellant for operating the coaching and commercial training centres. There is no dispute that CLIL have taken the centralized registration and paid service tax on the tuition fee collected from the students through the appellant. The department was of the view that the appellant are providing the business auxiliary services to CLIL which is taxable under Rule 65(105)(zzb) of the Finance Act, 1994. Since the appellant had neither taken service tax registration nor were paying any service tax, the department issued a show cause notice dated 17.3.2011 to the appellant for demand of service tax along with education cess along with interest thereon and also for imposition of penalty on them under Sections 76, 77 and 78 of the Finance Act. The service tax was sought to be charged on 25% of the amount being received by the appellant from CLIL. The show cause notice was adjudicated by the Commissioner vide order-in-original dated 28.8.2012 by which the Commissioner confirmed the above mentioned service tax demand along with interest and imposed penalties on the appellant under Section 76, 77 and 78 of the Finance Act, 1994. The Commissioner in this order held that the appellant have provided business auxiliary services to CLIL and, therefore, the service tax is chargeable on the amount received by them from CLIL, as they have imparted training to the students on behalf of the CLIL using their brand and technical know-how. Against this order of the Commissioner, this appeal has been filed along with stay application.

Appellant’s Contention:-The Appellant pleaded that they had entered into a franchise agreement with CLIL and using the brand name of CLIL and methodology adopted by CLIL, were operating the commercial and training centres of CLIL, that the appellant were collecting the fee for the various courses on behalf of the CLIL and were deposing the same in CLIL's account, that the receipt for the course were being issued by CLIL and it is CLIL who were paying service tax on the fee for the courses being received from the students, that the appellant for operating the coaching and training centres were only getting an amount of 25% of the fee, that the appellant are a sort of sub-contractor for CLIL and since CLIL were paying service tax on the full value of the fee received for the courses being organized, the appellant would not be liable to pay any service tax, that in this regard he relies upon the Board's Circular No.109/3/09/ST dated 23.02.2009 wherein the Board has clarified that the revenue sharing arrangement is not liable to service tax, that the appellant are not operating the professional coaching centres on behalf of CLIL, as the transaction between the appellant and the CLIL are on principal to principal basis and hence the appellant cannot be said to have provided a services on behalf of CLIL, that for charging service tax in terms of Section 65 (19) (vi) read with Section 65 (105) (zzb) of the Finance Act, 1994, it has to be proved that the services has been provided on behalf of the client, that the term "on behalf of connotes an agency arrangement, that from the appellant's agreement with CLIL it is clear that the appellant are not an agent of CLIL, that, even if it is held that the services provided by the appellant to CLIL is business auxiliary services, the same would be exempted from service tax under Notification no.14/04-ST dated 10.09.2004. as amended from time to time, that in any case when CLIL have paid service tax under Section 65(105)(zzc) on the amount received by them from the students through the appellant from the students attending the courses, the service tax cannot be charged once again on a part of that amount which is being received by the appellant from CLIL, that in this regard, reliance is placed on the Newton Engg. & Chemicals reported in 2008 (12) STR 378 (T) and Semac Pvt. Ltd. Vs.CST, Bangalore reported in 2006 (4) STR 475 = (2006-TIOL-1546-CESTAT-BANG), that the entire exercise is revenue neutral, as even if the service tax is paid by the appellant, its cenvat credit would be available to the CLIL, that the bulk of the tax demand is time barred, as the longer limitation period is not available to the department for the reason that the appellant have not suppressed any relevant facts from the department, that the appellant have a strong prima facie case and, hence, the requirement of pre-deposit of service tax demand, interest thereon and penalty may be waived for hearing of the appeal and recovery thereof may be stayed during the pendency of the appeal.

Respondent’s Contention:-The Respondent opposed the stay application by reiterating the findings of the Commissioner in the impugned order and pleaded that the appellant by operating the coaching centres for CLIL have provided the services of business auxiliary services taxable under Section 65 (105) (zzb) with Section 65 (19)(vi) of the Finance Act, 1994, that the appellant cannot be called a sub-contractor, that just because CLIL would be eligible for cenvat credit of the service tax paid by the appellant, this cannot be the reason for non-payment of service tax by the appellant, that by not obtaining service tax registration and not filing any return, the appellant have suppressed the relevant facts from the department and hence, longer limitation period has been correctly invoked and penalty under Section 76, 77, and 78 has been correctly imposed and that as such the appellant cannot be said to have prima facie case in their favour and hence, this is not the case for waiver from the requirement of pre-deposit.

Reasoning of Judgment:-After considering the submissions from both the sides and perused the records, the undisputed facts are that the appellant are operating the commercial coaching and training centres for CLIL under franchise agreement under which they collected the fee from the students on behalf of the CLIL and deposited the same in the CLIL's account and also operated the coaching and training centres and organized the courses for which a part of the tuition fee is paid by CLIL to them. There is also no dispute that the CLIL have paid service tax on the entire amount of tuition fee received from the students. The point of dispute is as to whether in these circumstances the appellant's activity would attract service tax and whether in these circumstances, the appellant would be liable to pay service tax on the amount of 25% of the tuition fee being received by them from the CLIL. Prima facie, we find that the appellant's contract with CLIL is like a revenue sharing arrangements under which the appellant operate commercial coaching and training centres for CLIL and get a portion of the fee collected from the students. The Board in its circular dated 23.2.2009 has clarified that in the revenue sharing arrangements where two contracting parties act on principal to principal basis one does not provide service for another and such activities are not covered under service tax. From the appellant's contract with CLIL, it appears that the appellant cannot be said to be an agent of CLIL and the transaction between them are on principal to principal basis. We are, therefore, of the view that the above circular of the Board is applicable to the facts of the case. Moreover, even if the service tax is charged from the appellant by treating their activity as business auxiliary service, CLIL would be liable for its cenvat credit. There is also no dispute that the service tax is sought to be charged on 25% of the amount of tuition fee being received by CLIL from the students through the appellant and CLIL have already paid service tax on that amount i.e. the full amount of tuition fees received from the students. We are, therefore, of the view that the appellant have prima facie case in their favour and pre-deposit of service tax demand, interest thereon and penalty is, therefore, waived for hearing of their appeal and recovery thereof is stayed till the disposal of the appeal. Stay application is allowed.

Decision:-Stay granted.

Comment:- The crux of this case is that when the transactions are on principal to principal basis and the contract is basically revenue sharing arrangement, it cannot be brought within the ambit of service tax under the category of BAS. Moreover, when service tax has been already paid on the entire amount of tuition fees, levying service tax again on 25% of the fees is primarily not tenable.

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PJ/Case Law/2013-14/1654

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