Sustainability of Order

PJ/Case Study/2010-11/40

CASE STUDY

Prepared By:
CA Pradeep Jain,
Sukhvinder Kaur, LLB [FYIC]

Introduction: -

In the case under study, the show cause notice was issued to the appellant-assessee alleging that they were providing service falling under the category of Business Auxiliary service. The order-in-original was passed holding that the appellant was liable to pay service tax as it was providing the service of Banking and Financial service. Whether such an order which is traveling beyond the four corners of the show cause notice sustainable? This is the issued involved in the case under study.

M/s. Taj Hari Mahal v/s Deputy Commissioner, Jodhpur
[Order-In-Appeal No. 517(CB)ST/JPR-II/2010, Dated: 10/01/2011]

Brief Facts: -

-           Appellant is a five star Hotel in the city of Jodhpur. They were accepting foreign exchange from their customers for settlement of bills. The foreign currency collected so was surrendered to M/s Thomas Cook (India) Ltd and were getting an incentive of 2.3% on all the Indian Rupee Business Volume.

-           Department alleged that the said service will fall under the category of Banking and Financial services and raised the demand of service tax on incentive earned by the appellant during the period from 01.04.2005 to 31.10.2006.

-           The Adjudicating Authority confirmed the demand of service tax with interest under Section 73 and 75 of the Finance Act, 1994 and also imposed penalty of Rs. 10, 000/- under Section 76 of the Finance Act, 1994.

-           Being aggrieved by the same, appellant filed appeal before the Commissioner (Appeal).

Appellant’s Contentions: -

Appellant submitted that the demand pertained to the period from 1.4.2005 to 31.10.2006. Earlier, the Board has clarified that service provider by money changers are liable to service tax under “Banking and Financial services” by Circular No. 341/44/2005-TRU dt 06.10.2005. This Circular was superseded by Circular no. 92/3/2007 dated 12.03.2007. But later on, it was clarified vide Circular no. 96/7/2007-St dated 23.08.2007 that money changers are buying and selling foreign exchange and as such they are not covered in service tax. But the Finance Act, 2008 has included the money changers and service tax levied on the same from 15.05.2008 under the category of “Banking and Financial services”.

So from the above legal position, it is clear from the Circular dated 23.08.2007 that the providing services of money changers were never covered under service tax net. This is sale and purchase of foreign currency and hence is not liable to service tax at all.

Appellant further submitted that even the Board Circular no. 341/44/2005-TRU dt 06.10.2005 said that the impugned activity will be covered under “Banking and Financial services” but the show cause notice has been issued to us under category of “Business auxiliary service”. Thus, the Department is not following its own Circular and has issued us show cause notice and order under wrong category and hence the demand is not sustainable. It is settled law that when the demand is issued under wrong category of service then the demand is not sustainable.

Appellant further submitted that the impugned service has been specifically included in the service tax with effect from 15.05.2008 in “Banking and Financial services”. This clearly underlines that the impugned activity was not covered under the service tax prior to this amendment. Reliance is placed on following cases to support their contention:-

FEDERAL BANK LTD. Versus COMMR. OF C. EX., CUS. & S.T. (APPEALS), COCHIN [2009 (15) S.T.R. 279 (Tri. - Bang.)]
IBM INDIA PVT. LTD. Versus COMMISSIONER OF SERVICE TAX, BANGALORE [2010 (17) S.T.R. 317 (Tri. - Bang.)]
GANDHI & GANDHI CHARTERED ACCOUNTANTS Versus C.C.E., HYDERABAD [2010 (17) S.T.R. 25 (Tri. - Bang.)]

From the ratio of aforesaid decisions, it is clear that the service tax is not leviable on these services prior to 16.05.2008. Even the Board Circular 96/7/2007-ST dated 23.08.2007 also provided that prior to this amendment said service was not taxable.

Appellant submitted that the impugned order relates to demand for the period from 1.4.2005 to 31.1.2006. The Circular no. 341/44/2005-TRU was issued on 6.10.2005. But there was no Circular for the period from 1.4.2005 to 5.10.2005. Hence, the demand for this period is not sustainable. Further, the above Circular was also withdrawn and new Circular no. 96/7/2007-St dt. 23.08.2007 was issued which says that the activity of purchase and sale of foreign exchange is not chargeable to service tax. The appellant’s contention was that the service tax is not payable for any period as the circular clearly says that it is not chargeable to service tax. But the Department has tried to make out the proposition that earlier Circular is applicable during that period and new Circular is applicable from the date of issue of Circular. If this analogy is accepted that the Circular is effective from the date of issuance than the earlier Circular is also applicable only from 5.10.2005. But the impugned order has confirmed the demand from 1.04.2005. Thus, the order itself is taking contradictory stands.

Appellant further submitted that the order-in-original has itself accepted that the aforesaid service was covered under “Banking and Financial service” in view of Circular no. 341/44/2005-TRU. Even it seems that the order confirms the service tax under that category only. But the SCN had been issued to appellant under the category of Business Auxiliary Services. Thus, the order-in-original is going beyond the show cause notice and impugned order-in-original is completely erroneous and deserves to be quashed. Reliance is placed on following case law in this regard:-

IN RE: JANKALYAN NAGARI SAHAKARI PATSANSTHA LTD. [2009 (15) S.T.R. 603 (Commr. Appl.)]

On the analysis of the above judgment, it is clear that the adjudication order has been passed without considering the fact that the show cause notice was issued under “Business Auxiliary service”. The order in original has just treated the services of Business Auxiliary service and Banking and Financial Service as synonyms. The order in original saying that the services are covered in Banking and Financial Service which is nowhere said in the show cause notice issued to the appellant. Hence the order is going beyond the show cause notice. Such an order which itself is contradictory should be set aside.

Appellant submitted that their main business was to run Hotels and not that of promoting the Foreign Exchange Money Changer business. Thus, they are not providing any service as a foreign exchange broker. The services provided by them to their customers regarding the same are absolutely free of charge i.e. no charges like that of brokerage etc. is levied by them. They simply received the foreign exchange converted into Indian Rupees and pass on to Banks/ Full Fledged Money Changers (FFMC). The Department itself by way of Circular has clarified that the services such as transfer of money through money orders, operation of savings accounts, issue of postal orders provided by the Department of Posts are not liable to service tax as their main business is not related to “banking and other financial services” but it is only an extra service which they provide to their customers. Similarly they are engaged in hotel business and not banking and other financial services. The Circular No. 83/1/2006-ST dt. 4th July, 2006 was referred wherein it was clarified that services such as transfer of money through money orders, operation of savings accounts, issue of postal orders provided by the Department of Posts are not liable to service tax under section 65(105)(zm) read with section 65(12) of the Finance Act, 1994.

Thus, they are not liable to pay Service tax for the aforesaid services provided by them. This submission of the appellant was not discussed and distinguished by the learned adjudication officer. Thus, the impugned order-in-original is totally against the principle of natural justice. This renders the impugned order-in-original as null and void.

Further without prejudice to the above, the appellant further submitted that the income earned under the process is not liable to service tax under BAS as they are getting exchange difference earned by the hotel on reaching a particular target / volume of foreign currency and therefore the same cannot be regarded as broking since the appellant procure the foreign currency from his customers i.e. hotel guests and surrender it to FFMC. The point to be noted here is that there is no trading i.e. purchase or sale of foreign currencies. It is only a statutory obligation to surrender the foreign currencies to FFMC. For clear analysis the definition of Business Auxiliary Service was referred.

It was submitted that a plain reading of the definition it is crystal clear that the appellant are not in the business of promoting or marketing the services rendered by the FFMC. The services contemplated under the definition of BAS are essentially those of Business Process Outsourcing (BPO), which is not the activity that they are engaged in. As such, the whole Show Cause Notice is not tenable. Moreover, the reference to the services as a commission agent in the aforesaid definition must be confined to mean services of commission agent in relation to only those services listed down under clause (i) to (vii). As they do not render any of the services contemplated in clause (i) to (vii) of the aforementioned definition and thus they are not covered, even if it is deemed as the appellant’s receipt of incentive as commission. As already explained, the receipts are not in the nature of commission. So, the order-in-original passed without considering such contentions of the appellant is liable to be set aside.

Appellant further submitted that even these Banks/ FFMC are not their customers within the meaning of Sec 95 (105)(zzk) of the Finance Act. They are only receiving incentives from the Banks/FFMC and in no case it can be termed as commission Therefore they are not liable to pay service tax as no brokerage is collected. Further, the Central Board of Excise and customs has clarified vide its Circular no. 62/2003 dated 21.08.03 that trading in foreign exchange will not be taxable.

Appellant have submitted in reply to show cause that the Commission agents were totally exempt by Notification No. 13/2003 and as amended by Notification no. 8/2004 till 16.06.05. It is only after this date, the Commission agent was included in the explanation to definition of “Business Auxiliary Services”. Thus, the services of commission agent were exempt till June 16, 2005. But the learned Assistant Commissioner has not considered this submission of the appellant. Such a non speaking order is liable to be set aside.

Further it was submitted that the demand has been confirmed on the appellant saying that the appellant has suppressed material facts from the Department. The show cause notice was issued to the appellant invoking the extended period under Section73 of the Finance Act. It is submitted that the information was collected by the audit wing of the department from Balance sheet. Balance Sheet is a publicly document and nobody can suppress the same. Reliance was placed on the following judgments:

ROLEX LOGISTICS PVT. LTD. Versus COMMISSIONER OF SERVICE TAX, BANGALORE 2009 (13) S.T.R. 147 (Tri. - Bang.)
KIRLOSKAR OIL ENGINES LTD. Versus COMMISSIONER OF CENTRAL EXCISE, NASIK 2004 (178) E.L.T. 998 (Tri. - Mumbai)
JINDAL VIJAYANAGAR STEEL LTD. Versus COMMISSIONER OF C. EX., BELGAUM 2005 (192) E.L.T. 415 (Tri. - Bang.)
HINDALCO INDUSTRIES LTD. Versus COMMISSIONER OF C. EX., ALLAHABAD [2003 (161) E.L.T. 346 (Tri. - Del.)]
MARTIN & HARRIS LABORATORIES LTD. Versus COMMISSIONER OF C. EX., GURGAON [2005 (185) E.L.T. 421 (Tri. - Del.)]

In the light of this decision, it is ample clear that the show cause notice issued by invoking the extended period of limitation is not legally tenable and is liable to be quashed.

With regard to imposition of penalty under Section 76 of the Service tax wherein it is said where there is failure to pay service tax then the assessee will be liable for this penalty. The said section was referred and it was submitted that the analysis of the section makes it clear that if the assessee is liable to pay the service tax and has not paid it then the penalty can be imposed on him. But the appellant is not liable to pay the service tax on the basis of our aforesaid submissions. So the penalty imposed on the appellant is totally bad and the order in original should be set aside.

Issue Involved: -

The issue before the Adjudicating Authority was that

Whether the appellant was liable to pay service tax for providing the service of Business Auxiliary service for receiving commission on foreign exchange surrendered to the Money exchanger firm?

Whether the impugned order was maintainable as it held that the appellant had provided the service under Banking and Financial service when the show cause notice was alleging that the appellant had provided Business Auxiliary service?

Discussions & Findings:-

The Commissioner (Appeal) found force in the contention of the appellant that the show cause notice has been issued under the category of “Business auxiliary service” and the demand was confirmed under the category of “Banking and financial services” and hence order-in-original travelled beyond the show cause notice.

Reliance was placed on the judgment of the Supreme Court in the case of Toyo Engineering India Ltd [2006 (201) ELT 513 (SC)] wherein it was held that

“Show cause notice – Scope of – Grounds did not find mention in show cause notice – Department cannot travel beyond show cause notice – Section 28 of Customs Act, 1962.”

In the end, it was held that the Adjudicating Authority cannot travel beyond the Show cause notice. Accordingly without going into merit, the Commissioner (Appeal) set aside the impugned order.

Decision of the Appellant Authority: -

Appeal allowed.

Conclusion: -

The Commissioner (Appeal) rightly set aside the impugned order-in-original which was not passed on the ground raised in the show cause notice. The Adjudicating Authority cannot travel beyond the four walls of the show cause notice otherwise it will amount to passing an order on the grounds which were not answered by the assessee and would amount to violation of principles of natural justice. No person can be condemned unheard. This unwritten and ever-present law is to be followed by any authority acting in a judicial capacity otherwise injustice will be caused to the assessee.

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PJ/CASE STUDY/2010-11/40
02 February 2011

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PJ/CASE STUDY/2010-11/40
02 February 2011