Whether service tax demand is justifiable where the service tax is already paid on the entire amount received from the customers and the commission is retained from the said amount only?

PJ/Case Study/2012-13/39

CASE STUDY

Prepared By: CA Neetu Sukhwani &

Kavita Thanvi

Introduction:-

The department filed this appeal in pursuant to Order-in Review No. 15/2011 dated 3.6.2011 passed by the Commissioner of Central Excise. The assessee is engaged in providing GTA services and paying the service tax on the gross amount received from client after claiming 75% abatement under notification no. 32/2004-ST. The assessee arranges trucks for transport of goods of their customers at a lower price than the amount of freight received from their customers and earns commission. The department is of the view that the commission so received is leviable for service tax under the category of Business Auxiliary Services. However, the assessee is alleging that they have paid service tax on the gross amount of freight which was inclusive of commission. Thus, when the service tax is paid on the entire amount received from the clients/customers, then no service tax will be chargeable on the commission retained by them from the said amount. This will amount to taxing the same amount twice. There will be double taxation which is not justifiable. The adjudicating authority accepted the submissions of the assessee and dropped the proceedings initiated against them vide show cause notice but the department has filed an appeal against the said order.

Deputy Commissioner vs M/s Rathore Freight Carriers
[Order-In-Appeal no. 110 (RDN) ST/JPR-II/2012 dated: 01.10.2012]

Relevant Legal Provisions:-

·         Section 65 (19) of the Finance Act, 1994:-

(19) “business auxiliary service” means any service in relation to, —

(i)            promotion or marketing or sale of goods produced or provided by or belonging to the client; or
(ii)           promotion or marketing of service provided by the client; or
(iii)       any customer care service provided on behalf of the client; or
(iv)       procurement of goods or services, which are inputs for the client; or
Explanation. — For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, “inputs” means all goods or services intended for use by the client;
(v) production or processing of goods for, or on behalf of the client; or
(vi) provision of service on behalf of the client; or
(vii) a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision,
and includes services as a commission agent, but does not include any activity that amounts to “manufacture” of excisable goods.
[Explanation. — For the removal of doubts, it is hereby declared that for the purposes of this clause, —
(a) ”commission agent” means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person —
(i)    deals with goods or services or documents of title to such goods or services; or
(ii)   collects payment of sale price of such goods or services; or
(iii) guarantees for collection or payment for such goods or services; or
(iv) undertakes any activities relating to such sale or purchase of such goods or services;
(b) excisable goods” has the meaning assigned to it in clause (d) of section 2 of the Central Excise Act, 1944(1 of 1944);
(c) “manufacture” has the meaning assigned to it in clause (f) of section 2 of the Central Excise Act, 1944(1 of 1944).

·         Notification No.1/2009 – Service Tax
In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), and in supercession of the notification of the Government of India in the Ministry of Finance (Department of Revenue), No.29/2008- Service Tax, dated the 29thJune, 2008, published in the Gazette of India Extraordinary, vide G.S.R.482 (E), dated the 29th June, 2008, except as things done or omitted to be done before such supercession, the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable services specified in sub-clauses (j), (k), (zr), (zza), (zzb), (zzzf), (zzzq) and (zzzzj) of clause (105) of section 65 of the Finance Act, provided by any person to a goods transport agency for use by the said goods transport agency to provide any service, referred to in sub-clause (zzp) of clause (105) of section 65 of the Finance Act, to a customer in relation to transport of goods by road, from the whole of the service tax leviable thereon under section 66 of the Finance Act subject to the condition that the invoice issued by such service provider, providing services should mention the name and address of the goods transport agency and also the name and date of the consignment note, by whatever name called, issued in his behalf.

Issue: - Following issue was made before the Commissioner Appeals:-

Whether service tax demand is justifiable where the service tax is already paid on the entire amount received from the customers and the commission is retained from the said amount only?

Brief Facts:-

The appellant M/s Rathore Freight Carriers are registered for GTA services. They are providing Goods Transport Agency Services and are paying Service tax on gross amount received from client for transporting the goods after getting necessary abatement under Notification No. 32/2005-ST and 34/2005-ST both dated 03.12.04. The present appeal has been filed by the Department in terms of Order-in-Review No. 15/2011 dated 03.06.2011 which was passed by the Commissioner of Central Excise Jaipur-II against OIO No. 52/ST/2011 dated 09.03.2011 which was passed by the Deputy Commissioner, Central Excise Division, Jodhpur. Out of the freight so received from the client the respondent gained certain amount as booking of the trucks was made of lower amount and showed such gain as commission income in its profit and loss account. The assessee has received a sum of Rs. 1636705/- during the period 2006-07 to 2009-10. Therefore a show cause notice for recovery of service tax of Rs. 196554/- chargeable thereon, was served under Section 73 of the Finance Act, 1994.
The notice was adjudicated by the impugned order, and demand was dropped on the ground that the noticee paid service tax on gross amount of freight, which was inclusive of commission after getting necessary abatement/concession under Notification No. 32/2005-ST and 34/2005-ST both dated 3.12.2004 under GTA services, hence charging service tax again on commission, which being part of the freight, under ‘Business Auxiliary Services’ would equivalent to double taxation. On being not satisfied with the impugned order, the department reviewed the same and filed this appeal before the Commissioner (Appeals).

Department’s grounds for appeal:-

It was held by the appellant department that the adjudicating authority while passing the order, have not examined factual position of the issue involved in the case. To drop the demand and non imposition of penalty under Section 76, 77 and 78 of the Finance Act, 1994 do not appear to be legal and correct. Further they stated that the assessee was registered for providing Goods Transport Agency Services and was paying service tax on the gross amount of the freight received from the client for transporting goods after getting abatement/concession under Notification No. 32/2005-ST and 34/2005-ST both dated 3.12.2004. Out of the freight received from the client, the respondent got certain amount from the truck owners as commission for truck booking and received an amount of Rs. 1636705/- during the period from 2006-07 to 2009-10 which was leviable to service tax under the category of ‘Business Auxiliary services’.
Thus, it was alleged that the demand of Rs. 196554/- was liable to be confirmed alongwith interest, and the respondent was liable for penalty under Section 76, 77 and 78 of the Finance Act, 1994.

Assessee’s Contentions:-

Assessee made the following cross objections before the Commissioner (Appeals):

·         The Respondent - assessee submit that the order in original passed by the Deputy Commissioner is very correct in dropping the demand of service tax with interest and refraining from imposing penalty under the Finance Act, 1994. The impugned appeal filed by the department is therefore totally erroneous and is liable to be set aside.

·         They submitted that in their reply to the impugned show cause notice they had clearly contended that they were not providing any marketing services to any truck owner. The customers who wanted to send their cargo would contact them and book the cargo. They were issuing consignment note after receiving cargo and were charging freight from clients. Subsequently arrange the self-truck/truck on hire or transporting the cargo and pays him for transporting the said cargo from the freight amount charged which is lesser amount. The differential amount is kept by them as his cut/commission. It is submitted that they are paying service tax on the entire freight amount received from the customer after taking abatement @ 75% under Notification No. 32/2004-ST under GTA service.

·         It is submitted that when the service tax is paid on the entire amount received from the clients/customers, then no service tax will be chargeable on the commission retained by them from the said amount. This will amount to taxing the same amount twice. There will be double taxation which is not tenable.

·         It is further submitted that they did not provide any marketing services to any truck owner as it was not binding on them to send the cargo from a particular truck. Moreover, the client sending the cargo did not advise them to send the cargo from a particular truck. Therefore, there was no marketing or sales promotion being done for the particular or specific truck owners. Therefore, they cannot be said to be providing Business Auxiliary Services (BAS) to the truck owners.

·         Further it is evident from the Consignment notes also that they are paying the service tax on the amount that they are charging from the service recipient. Also they have not charged any extra amount from the truck owners or the service recipient then what is mentioned in the Consignment notes. The truck owners are paid the freight from the amount that has been already charged from the recipient of the service. That means the service tax has been paid on the whole of the amount received which includes the so called commission.

·         They further submit that the learned Adjudicating Authority in the order under challenge rightly held that the cut/commission i.e. the difference between freight received and freight paid was an income to them and on this income they are paying income tax. The said fact of payment of service tax was verified by the learned Adjudicating Authority from the Income tax returns filed by them. Therefore, it was rightly held that there cannot be double tax on the same consideration/commission. Otherwise double tax will be payable by the GTA service providers.

·         Further they rely upon the Ministry’s Circular F. No. 341/18/2004-TRU (PT.). Dated 17-12-2004 wherein it is clarified that liability of payment of service tax on a particular amount occurs only once and if the same has been deposited by a person, then it cannot be taxed twice. This circular clarifies that if service tax is paid by any person, other person cannot be made liable to pay the service tax on the same amount in order to avoid double taxation. Though, this was intended to clarify the cases where the service tax has been paid by the transporter; it cannot be demanded from the consignor/consignee as it would tantamount to double taxation. However, the analogy drawn by this circular is clear that service tax cannot be levied twice on the same amount. If the example taken above is recalled – the amount charged on LR and recovered from customers is Rs. 15000/- on which service tax is duly paid. The amount given to truck owners is Rs. 10000/-. The impugned order is demanding the service tax on amount of Rs. 5000/- (being 15000-10000). And whereas, the service tax has been paid on the value inclusive of this Rs. 5000/-. Thus, if the service tax is demanded on this amount it would lead to double taxation as this value has already been taxed with the amount of Rs. 15000/-. Therefore, the appeal filed by the Department is required to be set aside.

·         It is submitted that in the appeal the only ground for appeal against the order-in-original given is in the form of a statement that they were providing the service under the category of Business Auxiliary Service (BAS) however no further contentions have been raised to establish as to how they were providing service falling under BAS. It has not been established as to whether they were acting as an agent of the truck owners carrying the cargo. It has not been established that they were canvassing orders on behalf of the truck owners or were doing marketing for them. Therefore, the appeal filed by the appellant-department is not sustainable.

·         They further submit that the learned Adjudicating Authority in the Order-in-Original had rightly held that they cannot be Principal and Agent of the same GTA service providing services to the hundred of principal. They were booking the cargo from clients and then getting the said cargo transported from Truck owners which were available. But they were not hiring only specific truck owners. Even the clients were not asking for the particular truck owner to be booked for transferring their cargo. Moreover, they were paying the consideration to the truck owners for transporting the cargo and not the other way around. They held that learned Adjudicating Authority rightly held that the truck owners were not paying the consideration to them for booking of the cargo but they were paying the freight amount to the truck owners. Therefore, it is clear that they were not providing any BAS service to the truck owners.

·         They submit that the Learned Adjudicating Authority rightly held that the basic tenet of service tax i.e., ‘the service provider be given consideration/money by the service receiver’ is not present in this case. The truck owner was not giving any consideration to them. It was rightly held that no service tax can be charged on the service received without consideration. Therefore, the appeal filed by the Department should be set aside.

·         Further it was submitted that the learned Adjudicating Authority rightly held that service tax is an indirect tax so it should be shifted and recovered from the service receiver whereas in the present case, if they are paying service tax on commission then from whom will they recover service tax paid on commission, whereas it recover service tax paid on GTA from person who books the cargo for transport. It was held that levying service tax on commission earned (difference between freight charged from customers and freight paid to truck owner) is baseless and unfounded. It was held that the commission was their income and shown in Profit & Loss Account Bilty Charges on which they pays income tax. It is submitted that when the basic tenet for levying service tax is not present, then how service tax can be demanded from commission received is not understandable.

·         Even otherwise, no service tax will be payable on the commission received by them as they will get the benefit of the Notification No. 1/2009-ST dated 5.1.09 regarding exemption in respect of certain specified taxable services when provided to a Goods transport agency (GTA). So if for the argument sake also this is accepted that there is any goods transport agency involved in the transaction and they are earning some commission it will be exempt in the purview of the above notification. As the Notification says that the services provided to a Goods transport Agency will be exempt from the levy of service tax and therefore they has to pay no service tax on this transactions. Therefore this Notification exempts the service tax leviable on the services provided to the GTA under the head Business auxiliary service. Therefore if this ratio is also applied they are not liable to service tax under the head Business Auxiliary service and therefore the appeal filed by the Department is not tenable and thus is liable to be set aside.

·         Further going with the above analogy the TRU letter 334/13/2009 dated 6.7.2009 it is clarified that the above Notification No. 1/2009 dated 5.1.2009 is given retrospective effect from 1.1.05. The relevant extract of the Notification is reproduced below:-
Goods Transport Agents (GTAs) receive several services from other service providers (such as warehouse keeper, cargo handlers, C&F agents) during the movement of goods, en-route. While these individual services are taxable at the hands the service providers, the GTA cannot take credit of tax paid on such services, as the abatement allowed to them is subject to condition that no credit should be availed. This matter was agitated by the GTAs, and the government agreed to exempt such services. Consequently, notification No. 1/2009-S.T., dated 5-1-2009 was issued. It was, however, pointed out by GTAs that litigation is pending for the past period. In this regard Board's letter F. No. 137/175/2007-CX.4 (Vol. II) dated 22-4-2009 was sent to the field formations to identify such cases, as the Government has promised to drop all past demands/litigation on this matter, latest by the end of August, 2009. In order to enable the field formations to dispose of the pending demands and discharge the notices issued for the past period, the said notification No. 1/2009-S.T. is being given retrospective effect (with effect from 1-1-2005) through changes made in the Finance (No. 2) Bill, 2009. Upon the enactment of the Bill, field formations must be directed to take up these cases on priority and ensure that all such cases are disposed of latest by 31st August, 2009.
Therefore from an analysis of the extract of the above circular it is clarified that the benefit of the Notification 1/2009 dated 5.1.2009 is applicable retrospectively from 1.1.05. Therefore if for the argument sake also it is accepted and they according to this Notification are not liable to service tax on the claim raised in appeal.

·         Further the appeal is proposing to impose interest on the demand under Section 75 of the Service Tax Act, 1944. To this they contend that if the demand is not sustainable in the law then there arises no question of imposing interest. Therefore, the appeal is liable to be set aside.
·         Further the appeal is proposing to impose penalty under the Section 76, 77 and 78 under the Finance Act, 1994. The Section 76 levies penalty for failure to pay service tax. But they have not contravened any of the provisions of the service tax Act. Further, they have not willfully suppressed the facts from the department. They have not paid the service tax on the commission received under the Business Auxiliary services because they were under bona fide belief that they are not providing BAS service to the truck owners and there is no willful suppression on their part.In continuation to above, it is submitted that even the Hon’ble Supreme Court has decided that penalty should not be ordinarily imposed unless there is deliberate disobedience of law. This has been held in the case ofHindustan Steel v. State of Orissa [1978 2 ELT J 159 (Supreme Court)].In this case it was held that an order imposing penalty for failure to meet statutory obligation is result of proceedings which are quasi judicial in nature and penalty should not ordinarily be imposed unless the person acted deliberately in defiance of law or was guilty of misconduct or dishonest or acted in conscious disregard of his obligation. It is further held in the case of Orient Ceramics and Industries [1987 (32) ELT 218 (I)] that words ‘with intent to evade payment of duty’ are very significant and unless and until the intention to evade payment is proved on part of assessee, no penalty can be imposed.
·         Further they submit that the same issue has been decided in their favour vide order in appeal no. 278-279 (CB)/ST/JPR-II/2011 dated 31.05.2011. This order in appeal has been passed to drop the demand of service tax under Business Auxiliary Services in respect of the same receipts for the years 2004-05 and 2005-06. This is exactly the same issue and proceedings were initiated exactly on the same grounds as raised in the impugned appeal filed by the department in this case pertaining to the year 2006-07 to 2009-10. The analysis of the said order in appeal no. 278-279 (CB)/ST/JPR-II/2011 dated 31.05.2011 makes it ample clear that the issue in impugned appeal filed by the department has already been settled in favour of the respondents. Since the department has not gone in appeal against this decision, it has become final and binding on the departmental authorities. It has been held in the case of Union of India v/s Kamalakshi Finance Corporation Ltd [1991 (55) ELT 433 (SC)] that the decision of higher authorities is always binding on the departmental authorities and they cannot take stand contrary to the decision of higher authority. Therefore, in the light of this decision, the rule set by higher formations is always binding on the lower formations irrespective of their personal views. Thus, the lower authorities are always bound by the orders of higher authorities, may it be Commissioner Appeals or Tribunal. In the instant case, the order of Commissioner (Appeals) has not further appealed, as such, it has become final and lower formations are bound to follow the same under similar facts and circumstances. Therefore, the ratio of above decision is applicable in the instant case and the department was supposed to drop the proceedings initiated against the respondents on the exactly same ground. But this has not been done and impugned appeal is filed by it. Such an appeal filed by ignoring the decisions of higher authority is not justified and is liable to be set aside.

·         They reiterate that the decision of higher authority is binding on the lower formations. This is the rule of binding precedent which is to be followed in the hierarchy of judicial forums. It has been held in the case of Government of Andhra Pradesh & Othrs v/s A. P. Jaiswal & Ors [2001 AIR SCW 101] that the rule of precedent should be followed in order to maintain the consistency in judicial pronouncements. In this case it was observed that “Consistency is the cornerstone of the administration of justice. It is consistency which creates confidence in the system and this consistency can never be achieved without respect to the rule of finality. It is with a view to achieve consistency in judicial pronouncements, the Courts have evolved the rule of precedents, principle of stare decisis etc. These rules and principles are based on public policy and if these are not followed by Courts then there will be chaos in the administration of justice…”. It was further held by the Larger Bench in the case of Commissioner of C. Ex., Vadodara v/s Adarsh Re-rolling Mills [2002 (143) ELT 533 (Tri. - LB)] that “Certainty about law and uniformity in its implementation are central in ensuring rule of law. Therein lies the necessity to follow precedent and subordination of adjudicating authorities to their appellant authorities. Uniformity in tax administration is even more important than legal correctness.”

Thus it is clear that the rule of precedent should be accepted and followed by the judicial forums. Since in the instant case, the issue has been decided by Commissioner (Appeals) vide order in appeal no. 278-279 (CB)/ST/JPR-II/2011 dated 31.05.2011; the impugned appeal filed by the department should also be rejected and proceedings initiated against them should be set aside.

Reasoning of the Commissioner (Appeals):-

It was observed that the adjudicating authority in this case, dropped the demand on the so called commission received from truck owners for booking their trucks by the respondent under the category of Business auxiliary service on various grounds and concluded that the respondent, as a matter of facts, did not provide any business auxiliary service but was providing only GTA services to service receivers and its earning out of the this services was shown as commission as is known in trade parlance. Further they held that the respondent also contended that the activities undertaken by them would be squarely covered under the definition of Goods Transport Agency, and that the so called consideration i.e., commission received by the respondent from the truck owners for transporting/carrying business to the truck owners is not true. The fact is that the clients i.e., the service receiver of the GTA services, who wanted to dispatch their cargo would contact the respondent and booked the cargo, and the respondent were issuing consignment notes after receiving cargo and charging freight from their clients. The respondents then arranged self trucks or trucks on hire for transporting the cargo and payment made for transporting the said cargo was lesser than the amount received from the service receivers of GTA services. Thus the differential amount so earned was booked as commission as was the practice in the trade parlance, which in nothing but the share of freight amount received by the truck owner from the service recipient on which service tax was already paid while booking the goods through the bilties.
Therefore there should not be any double taxation on the same amount on which the service tax has already been paid by the respondent. Further they also find that the issue has already been decided in OIO no. 278-279 (CB)/ST/JPR-II/2011 dated 16.06.2011, in which the appeal of the department was rejected. It was observed in said decision that the appellant, Rathore Freight Carriers has paid service tax on the entire amount of freight and kept the difference of freight received from client and freight paid to truck owners, since once service tax has been paid on the whole amount then it again cannot be demanded on some part of it which is retained by the GTA to avoid the double taxation, hence the demand is not sustainable. As the demand is not sustainable therefore the question of interest does not arise and penalty under Section 76, 77 and 78 of the Finance Act, 1994 is not impossible in view of the Hon’ble Supreme Court’s decision in case of HMM Ltd. [1995 (76) ELT 497].

Decision:- Department’s appeal rejected.

Conclusion:- This is yet another case that depicts that the demand has been raised by the department by merely observing income titled as ‘commission’ booked in the accounts of the assessee without taking the pain to look into the facts thoroughly. This is a common practice seen wherein mere reference of the term is made the sole basis for levy of service tax without even analysing the provisions framed in this regard. If the situation of commission earned would have been analysed by the department at the time of issuance of show cause notice stage itself, there would not have been need to waste time and energy. Moreover, it is worth mentioning that the issue was already decided in favour of the same assessee earlier.

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PJ/CASE STUDY/ 2012-13/39
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