Liability to pay service tax on Outward GTA

PJ/CASE STUDY/2010-11/32

04 December 2010

PJ/Case Study/2010-11/32

Case Study

Prepared By:

CA. Rajani Thanvi

Sukhvinder Kaur LLB [FYIC]

And Megha Jain

Introduction:

As per Rule 2 (1) (d) (v) of the Service Tax Rules, 1994 the liability to pay the service tax in certain categories of persons is on the service recipient. However, in case the manufacturer who is dispatching the goods and is paying the amount towards outward freight to the transporter on behalf of the purchaser of goods or the consignee, whether such a manufacturer will have to pay the service tax on the said amount paid to the transporter? This is the subject matter of the case under study hereunder.

Relevant Legal Provisions:

Rule 2 (1) (d) (iv) of the Service Tax Rules, 1994:

(a) "person liable for paying the service tax" means-

(iv) in relation to taxable service provided by a goods transport agency, where the consignor or consignee of goods is, -

(a) any factory registered under or governed by the Factories Act, 1948 (63 of 1948);

(b) any company formed or registered under the Companies Act, 1956 (1 of 1956);

(c) any corporation established by or under any law;

(d) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India;

(e) any co-operative society established by or under any law;

(f) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made thereunder; or

(g) any body corporate established, or a partnership firm registered, by or under any law,

any person who pays or is liable to pay freight either himself or through his agent for the transportation of such goods by road in a goods carriage;

Section 68 of the Finance Act, 1994

Section 68: Payment of service tax

(2) Notwithstanding anything contained in sub-section (1), in respect of any taxable service notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.]

In the case of M/s Shree Pet, Ajmer

[Order-in-Original No. 85(ST)/2010, dated 24.11.2010]

Brief Facts:

- During the Audit of the Noticee, it was observed that during the period from 2005-06 to 2007-08, the Noticee had collected an amount on account of outward transportation on which service tax was liable to be paid.

- The Noticee explained that the amount paid by them was the advance which was paid to the transporter at the time of dispatching the goods, on behalf of the buyers. They had paid this advance amount as “agent” of buyers and it was reimbursed to them by the buyers and rest the payment of freight was paid by the buyer.

- Department contended that in terms of provisions of Notification No. 36/2004– ST, the liability of payment of service tax in the case of GTA services lies on the consignee or consignor who pays the freight. Accordingly, it was contended that since the Noticee had paid an amount on account of outward transportation, therefore they were liable to pay the Service tax on the same.

- It was also alleged that the Noticee had never informed the Department in respect of having been paid outward freight and this fact had come before the Department only during the audit of the records of the Noticee. This act of the Noticee had resulted in non-payment of service tax leviable on the outward freight paid by them. It therefore, appears that the Noticee had suppressed the facts from the Department and intentionally not paid service tax.

- Accordingly, show cause notice was issued wherein it was alleged that the Noticee had not paid service tax, which is recoverable from them along with interest and they were also liable for penal action.

Noticee’s Contentions:

¨ Noticee submitted that they were not liable to pay the service tax on the payment made for outward transportation as they were acting as agents of the buyers of their finished goods in terms of Rule 2 (1) (d) (iv) of the Service Tax Rules, 1994.

¨ Relying upon Rule 2 (1) (d) (iv) of the Service Tax Rules, 1994, it was submitted that it is clear that any person who pays or is liable to pay freight either himself or through his agent for the transportation of such goods by road will be the person liable to pay the service tax. In their case, they were not paying the freight to the transporter. But they were only acting as agents of the buyer and paying advance of token amount to the transporter. The remaining amount of freight was paid by the buyer to the transporter. Thus, it was submitted that as per Rule 2 (1) (d) (iv) of the said Rules, the buyer of their goods was liable to pay the service tax and no liability can be affixed on the Noticee for payment of service tax.

¨ It was further submitted that the Noticee had not contravened any provisions of the Notification No. 36/2004-ST issued under Section 68 (2) of the Finance Act, 1994 as they had only acted as an agency of the principal i.e. the buyer of their final products and the buyer was liable to pay the service tax on the freight.

¨ The Noticee further submitted that penalty under Section 76 of the Finance Act, 1994 was not imposable on them because they were only acting as agent to the buyer of their goods and therefore, they were not liable to pay the service tax on outward freight and there is no failure on their part to pay the service tax.

¨ The Noticee further submitted that penalty under Section 78 of the Finance Act, 1994 could not be imposed on them as they had not suppressed any facts with an intention to evade payment of service tax. It was submitted that when the audit was conducted they have produced all the records before the Audit party without hiding any records or documents. Therefore, it cannot be said that they have deliberately suppressed any facts. Moreover, it is submitted that they bona fidely believed that they were not required to pay any service tax. Therefore, where the assessee has acted under bona fide belief penalty cannot be imposed on him. In Noticee’s case also they have acted under bona fide belief that they were not liable to pay the service tax and it is the buyer of their goods who is liable to pay the service tax. Reliance was placed on judgment given in the case of Commissioner of C. Ex., Kolkata-I v/s D. K. Parmananda & Co. [2006 (4) STR 191 (Tri-Kolkata)] in support of their contention.

¨ Alternatively, it was also submitted that penalty cannot be simultaneously imposed under Section 76 and under Section 78 on them as both the sections are mutually exclusive. This has been held in the judgment given in the case of M/s Anand Agencies v/s CCE (Service Tax), Coimbatore [2010-TIOL-364-CESTAT-MAD]. Reliance was also placed on judgment given in the case of M/s Safe Test Enterprises v/s CCE, Salem [2010-TIOL-355-CESTAT-MAD]

Issue Involved:

The issue involved in this case was that

Whether the Noticee who had paid the amount for outward transportation in the role of an agent of the Consignee of Goods and who was recovering the amount so paid from consignee was liable to pay service tax on the said amount?

Decision of the Assistant Commissioner:

Ø The Assistant Commissioner found that the Noticee being consignor of the goods paying some amount to the transport agency and charging the same to the consignee of the goods in the invoices raised by them. Here, Noticee was acting as an agent of the consignee and paid some advance amount of freight to the transporter agency/ truck driver which were not covered under service tax and the accounts of both the heads i.e. value of the goods charged and advance paid to the transport agency/truck driver was being maintained separately.

Ø The Assistant Commissioner held that on perusal of the same it is clear that the advances paid to the truck driver as an agent did not fall under the purview of service tax.

Ø The Assistant Commissioner agreed with the contention of the Noticee that for recoverable advance payment of freight given by the Noticee on behalf of their clients, they can not be held responsible for payment of service tax being specified person in terms of Rule 2 (1) (d) (iv).

Ø It was held that as per Section 68(2) of the Finance Act read with Rule 2 (1) (d) (iv), the liability of payment of service tax in respect of services provided by the “Transport Agency”, in relation to transport of goods by road in a goods carriage will be on the consignor or consignee if he pays the freight or liable to pay freight either himself or through his agent. It was held that in the present case, the Noticee were not liable to pay freight but paying some advance payment for fuel and other expenses etc. acting as agent of the consignee of the goods, therefore they were not liable to pay service tax.

Order of the Assistant Commissioner:

The proceedings initiated vide impugned show cause notice were dropped.

Conclusion:

The Assistant Commissioner rightly held that when the consignor of goods was acting as an agent of the consignee and in that role had paid the token freight amount which was recovered from the consignee then service tax liability could not be imposed on the consignor of goods. In this case, the liability was on the consignee of goods and he was the person liable to pay the service tax.

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PJ/CASE STUDY/2010-11/32
04 December 2010

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