Service Tax on wet cleaning under Business Auxiliary Service

CASE STUDY

Introduction:-

Business Auxiliary Services –The term “Business Auxiliary Service” has been defined taxable in Sub-clause (zzb) of clause (105) of Section 65 of the Finance Act, 1994 which means service as to a client by any commercial concern/person in relation to business auxiliary service. Further the value of taxable service shall be the gross amount charged by the service provider for providing such service and the money value of any other consideration (if any) received for such services. Appellants here are engaged to providing the services of Mechanized washing and ironing of linen such as bed sheets, face towels, pillow covers, curtains, blankets etc., for AC Coaches of Railway’s including retiring rooms of customer namely North Western Railway, Jodhpur as per the contract awarded to the appellant by the service receiver. As the services provided by the appellant are not covered under the category of Business auxiliary services and the same correctly falls under the category of wet cleaning which is exempted vide Board Circular F. No. B11/1/2002-TRU dated 1-9-2002.

M/s Mohd. Rafique v/s , Additional Commissioner Central Excise, Jaipur-II
[Order-In-Original no. 89/ST/JP-II/2012 dated: 25.07.2012]

Relevant Legal Provisions:

Section 65 (19) of Finance Act, 1944

“Business auxiliary service” means any service in relation to-

(i) promotion or marketing or sale of goods produced by or belonging to the client; or
(ii) promotion or marketing of services provided by the client; or
(iii) any customer care service provided on behalf of the client; or
(iv) ----------------
(v) provisions of services on behalf of the client.

Brief Facts:-

Appellant, M/s. Mohd. Rafique, Moti Chowk, Dubgaron ka Kuwa, Jodhpur (Rajasthan) are engaged in providing taxable service namely “Business Auxiliary Service” classifiable under Section 65 (19) (ii) of Finance Act, 1994. The appellant suppressed the material facts and taxable value received under the category of “Business Auxiliary Services” rendered by them and have evaded service tax amounting to Rs. 525772/- (Rs. 510458/- ST + Rs. 10209/- Ed. Cess+ Rs. 515/- H. Ed. Cess) on Business Auxiliary Services during the period from 12.5.2009 from 11.5.2010 by contravening the provisions of Section 66, 67, 68(1), 69 & 70 of Chapter V of Finance Act, 1994 read with the provisions of Rule 4, 6 & 7 of Service Tax Rules, 1994. Therefore it appears that an amount of Rs. 525472/- is recoverable from the appellant under proviso to Section 73(1) of the Act along with interest under section 75 of the Act at the specified rate on the amount of service tax not paid. They have also failed to obtain Service tax registration for providing service of “Business Auxiliary Service” as required under section 69 of the Act and they have failed to file prescribed ST-3 returns as required under section 70 of the Act with the jurisdictional Central Excise/Service tax authorities. Thus, M/s. Mohd. Rafique, Moti Chowk, Dubgaron ka Kuwa, Jodhpur (Rajasthan) have contravened the provisions of Section 69 and 70 of the Act read with Rule 4 & 7 of the Rules respectively and since the appellant has willfully suppressed the facts from the department with intent to evade payment of service tax therefore liable to panel action under section 76, 77 & 78 of the Finance Act, 1994.

- In view of these facts, the appellant was called upon to show cause to the Additional Commissioner, N.C.R. Building, statute Circle, C-Scheme, Jaipur vide show cause Notice No. V(ST) Adj.-II/10/150 dated 07.04.2011 alleging therein as to why:-

(i) Service Tax amounting to Rs. 525772/- (Rs. 510458/- ST + Rs. 10209/- Ed. Cess+ Rs. 515/- H. Ed. Cess) not paid by them should not be demanded and recovered from them under Proviso to Section 73(1) of the Finance Act, 1994 along with interest thereon in terms of the provisions of Section 75 of the said Act.

(ii) Penalty should not be imposed upon them under Section 76, 77 and 78 of the Finance Act, 1994.

Assessee’s Contentions:-

Assessee made following submissions before the Commissioner (Appeal):

v The appellant submit that the contention of the show cause notice that they are engaged in supply of bed rolls to North Western Railways is not sustainable on the ground that their contract with the North Western Railways is only limited to the washing, dry cleaning and ironing of the bed sheets, towels, pillow covers, curtains and blankets. No other activity is being undertaken by them. After washing, the bed rolls are returned to the Railway authorities, who further arrange to provide the same to the passengers. As such the activities undertaken by them is not falling under the category of taxable services as provided in Section 65(105) of the Finance Act, 1994 whereas the show cause notice is issued to them contended that the same is falling under the category of Business Auxiliary Services as defined in Section 65(105) (zzb) of the Finance Act, 1994, it is not sustainable from any angle and is liable to be quashed.

v It was submitted that it is clear from the rates of the activities as determined in the agreement that they are undertaking only the washing and ironing of the bed sheets, towels, pillow covers, curtains and blankets. They are only providing the washing (wet cleaning) services to the Railway Authorities. The services provided to the Western Railway, i.e., washing activities do not fall under the category of Taxable services. They submitted that they are engated primarily in the washing/wet cleaning of the bed rolls supplied by the western Railway. No other service like distribution etc. is provided by them. This fact is proved from the contract agreement no. CG-509T/Bedroll Washing/08/Vpl-II of North Western Railway with M/s. Rishi Enterprises in which the contractor will provide personnel for distribution of Bedroll to onboard passenger of AC Coaches. They do not provide any further services and even the distribution is done by railway authorities only. As such, these services cannot be alleged to fall in the category of Business Auxiliary Services.

v Further they submit that the services provided by them are primarily washing services which are exempt from payment of service tax as clarified by Circular F. No. B11/1/2002-TRU dated 1-9-2002 that wet cleaning is exempt from service tax. It makes clear that washing services provided by a dry cleaner are not chargeable to service tax. Since they are providing the washing services hence these cannot be treated as taxable services as these are not falling under the category of taxable services. Hence the show cause Notice is not sustainable and is liable to be quashed.

v They further submitted that show cause notice is issued by invoking the extended period of limitation by alleging that they have suppressed the material facts from the department with an intent to evade payment of service tax. In this respect it is submitted that suppression means that something one is liable to disclose and it is not disclosed. However, as per discussion it is crystal clear that the services rendered by them are not liable to service tax under the provisions of Finance Act, 1994. As such, they were neither liable to get themselves registered with the Department nor they were required to pay the service tax or file the return. The law requires the disclosure only from the providers of taxable services. Nothing contained therein calls any provider of non-taxable services to disclose anything. Hence, they have not contravened any provision of the Finance Act, 1994 or rules made there under. Therefore there was no fraud, collusion, misstatement or suppression of fact, They relied upon following cases for the sake of clarification:-

(i) KHURANA ENGINEERING LTD. V/S COMM. OF C.EX. AHMEDABAD [2011(21) STR 115(Tri.-Ahmd.)]

(ii) SONAL VYAPAR LTD. V/S COMM. OF CENTRAL EXCISE, SALEM [2010(19) STR 247(Tri.-Chennai)]

(iii) GRAND ASHOK V/S COMM. OF SERVICE TAX, BANGALORE [2009(15) STR 344(Tri.-Bang.)]

(iv) LARSEN & TURBO LTD. V/S COMM. OF C.EX.,PUNE-II [2007(211) ELT 513(SC)]

Hence, the department cannot raise the demand under proviso od Section 73(1) in subsequent period. As such, the show cause notice issued by invoking the extended period of limitation is not tenable and is liable to be quashed.

v Further they submit that this is second show cause notice which has been given to them and extended period cannot be invoked in second show cause notice. The earlier show cause notice no. V(ST)SCN/47/JDR/08/5622 dated 03.10.2008 was decided in favour vide OIO no. 438/ST/2009-10 dt. 14.06.2010. However, the Apex Court of India has clearly held in case of ECE Industries Ltd. Versus Commissioner of Central Excise, New Delhi[2004(164) ELT 236].

v They further relied upon the case of Mohd. Dress Laundry & Washers in the OIO no. 443/ST/2009-10 dt. 14.06.2010wherein the proceedings initiated vide show cause notice were dropped by the Deputy commissioner holding that Railways awarded contract to the assessee for washing, dry cleaning, ironing of Bed Sheet, Towel, pillow covers, curtains & Blankets. This service deserves to be classified under cleaning services and not under Business Auxiliary services Category. Since the gross receipt from dry cleaning is below the threshold limit prescribed under Notification No. 6/2005-ST dated 1.03.2005. From this it is clear that the washing activities cannot be considered as Business Auxiliary services. As the facts of the above case is similar to their case and the demand of service tax is not viable. Furthermore, the department has not gone in appeal against this order, hence the impugned order has attained finality. Thus, the above decision is binding on the department. In view of above case the impugned show caused notice is liable to be set aside.

v They have submitted that even if the allegation raised in show cause notice is proved, then also no penalty is imposable on them as they have acted under bona fide belief that their activity is not taxable service. Further, for imposing the penalty the intention to evade payment of service tax is the condition precedent which is not proved here. The allegation of suppression is not sustainable where the service providers are providing non taxable services. Without proving the suppression or intention to evade payment of tax, penalty is not sustainable.

Issue: -

1. Whether the appellant is liable to pay service tax on account of services alleged to be provided under the categories of Business Auxiliary Services or not?

2. Whether the appellant contravened the provisions of Rule 4, 6 and 7 of the Service Tax Rules, 1994 read with the provisions of Section 66, 67, 68, 69 and 70 of the Finance Act, 1994 or not?

Reasoning of the Commissioner (Deputy):-

The Additional Commissioner found that as per the provisions of Clause 19(III) of Section 65 of the Finance Act, 1994, the Business Auxiliary Services also mean any customer care service provided on behalf of the client, which means any services provided by any service provider directly to the customer on behalf of the client covered under the said provisions. But in this case the appellant is providing services directly to the service receiver and not to the customer of service receiver i.e. passengers. Therefore, the contention of the made by the appellant that the services provided by him is not covered by the provisions of clause 19 (III) of Section 65 of the Finance Act, 1994 is sustainable. On the basis of which the impugned show cause notice we served upon to the noticee. He further held that as the services provided by the noticee is not covered under the category of Business Auxiliary services and the same is correctly falling under the category of wet cleaning which is exempted from the preview of service tax vide Board Circular F. No. B11/1/2002-TRU dated 1-9-2002.
Further the demand raised in the show cause notice is not sustainable in the view of definition of Business Auxiliary Service because the appellant is doing wet cleaning as per the contract between the appellant and the Railway therefore other provisions as alleged in the show cause notice for contravening various Section are also not sustainable. Thus, the SCN is not maintainable on merit and deserve to be dropped. Since, the demand is not maintainable, therefore, penal provisions are not attracted for imposing penalty.

Decision of the Adjudicating Authority:-

Demand of service tax has been dropped. Accordingly penalty is also not imposed.

Conclusion:-
This is very good decision wherein the service tax on wet cleaning was exempt from service tax. But the department issued show cause notice under the category of “Business Auxiliary service” . This was done because they knew that the service tax under “dry cleaning” will not be sustainable. But it was clear cut case and Hon’ble adjudication authority dropped the proceedings.

But by the time the service tax law changed and new regime of service tax under negative list has come. The Negative list does not exempt the service tax on wet cleaning. Hence the service tax on the same will be payable on the same. The service provider was facing litigation from the department and by the time, the demand was dropped, service tax levy came on his services. Hence, nobody can escape from service tax.

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08 June 2013

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PJ/CASE STUDY/2012-13/19
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