Pradeep Jain - Chartered Accountant

PJ/CASE STUDY/2009-10/030

08 February 2010

Case Study

Prepared By:

CA Pradeep Jain

And Megha Jain

Introduction: -

It is a very tedious task to decide under which category of taxable service, the service rendered by an assessee would fall. To decide the same there are various factors which are required to be considered like what is the nature of the service rendered, etc. In the case under study it was required to be decided that whether the respondent-assessee was a consignment agent or was a clearing and forwarding agent.

Commissioner of C. Ex., Bangalore-I v/s Mahaveer Generics

[2010 (17) STR 225 (Kar)]

Brief Facts of the Case: -

- Respondent-assessee was registered under the category of clearing and forwarding agent (C & F Agent) under Service Tax. They intended to surrender their registration certificate under the Service tax on the ground that their activities did not fall within the purview of the category of C & F Agent. Accordingly, they sought for surrender of the Certificate and issuance of a fresh registration.

- The Original Adjudicating Authority held that the respondent-assessee was a C & F Agent and their activities came within the taxable service as C & F Agent. Respondent was ordered to continue with the registration under the category of C & F Agent.

- Respondent filed appeal before the Commissioner (Appeal) who dismissed the appeal and confirmed the order passed by the Original Authority.

- Being aggrieved by the said order, respondent filed appeal before the Tribunal. Respondent contended before the Tribunal that its activity came within the purview of Commission Agent and as such the rejection of their prayer for surrendering the registration certificate issued under the said C & F Agent category by the Authorities was erroneous. The Tribunal allowed the appeal by holding that activity carried on by respondent would not come within the purview of the category of C & F Agent.

- Revenue has come up in appeal before the High Court challenging the judgment passed by the Tribunal.

Question for Consideration: -

The question for consideration was: -

When the respondent-assessee were rendering the service of receiving, storing and distributing the goods manufactured by M/s Cipla Ltd, whether the Hon’ble Tribunal was right in holding that the party was not acting as clearing and forwarding Agents and was not providing taxable service?

Appellant’s Contention: -

¨ Revenue contended that the Lower Authorities were fully justified in rejecting the claim of the respondent. The lower authorities had taken a holistic view in interpreting the Section 65 (25) of the Finance Act which defines the activity of C & F Agent and as reversal of the said orders by the Tribunal, by interpreting the definition “C & F Agent” on the basis of dictionary meaning is erroneous and liable to be set aside.

¨ It was further contended that the Tribunal ought not to have traversed beyond interpreting the Section as per the language employed in the Statute itself and further submitted that while interpreting the taxing Statutes the authorities cannot import which is not expressed in the provision itself. In this regard reliance was placed on the decision given in Commissioner of Sales Tax U.P. v/s Modi Sugar Mills Pvt Ltd [AIR 1961 SC 1047].

¨ It was further contended that the Tribunal was in error in relying upon the dictionary meaning. They relied upon the decision of the Apex Court in Ponds India ltd v/s Commr. of Trade Tax, Lucknow [2008 (227) ELT 497 (SC)]. It was contended that definition of dictionary meaning as found in Wikipedia should not be used in aid of construction of a Fiscal Statute. Section itself being explicitly clear wherein the word consignment agent has also been included in the section itself and hence it comes within inclusive definition of “C & F Agent”. Reliance was also placed on the decision given in Karnataka Power Transmission Corporation Ltd & Anr v/s Ashok Iron Works Pvt Ltd [2009 AIR SCW 1502].

Respondent’s Contention: -

¨ Respondent-assessee contended that the Authorities had relied upon the decision given in Prabhat Zarda Factory (India) Ltd v/s CCEE, Patna [2006 (2) STR 584 (Tribunal)] and contended that said decision having been overruled by the Larger Bench in the case of Larsen and Tourbo v/s Commissioner of Central Excise, Chennai [2006 (3) STR 321 (Tri-LB)] and affirmed by the Punjab and Haryana High Court in the case of Commissioner of Central Excise, Jalandhar v/s United Plastomers [2008 (10) STR 229 (P&H)], the Tribunal was fully justified in allowing their appeal.

¨ It was contended that the very same principal namely, M/s Cipla Ltd, had engaged a similar agent in Punjab which activity carried on by the said assessee was identical to the activity carried on by the respondent and the Punjab and Haryana High Court [2009 (14) STR 608 P&H] having taken a view that the activity carried out by the assessee therein was of commission agent and submits that while examine the said issue the order of the Tribunal in Mahavir Generics also came up for consideration and came to be approved. It is prayed that the High Court should consider the said judgment and answer in favour of the respondent.

¨ Respondent also referred the definition of “Commission Agent” as defined under Section 2 (19) (a) and contended that they would fall within the purview of the said definition. Circular No. 59/8/2003-ST wherein the definition of Commission Agent with reference to clearing and forwarding agent has been clearly spell out and the nature of the activity carried on by the respondent is in consonance with the meaning assigned in the said Circular and thus the activity carried on by the respondent falls outside the purview of clearing and forwarding agent.

¨ It was further contended that the Tribunal was fully justified in holding that the decision in Prabhat Zarda Factory case relied upon by the authorities was erroneous.

Reasoning of the Judgement: -

The Hon’ble High Court held that

v The High Court examined the Agreement between Respondent and M/s Cipla Ltd and held that reading of the clauses of the agreement conjunctively it can be seen that clearing and forwarding operations was a compendious expression of nature of services rendered by Principal to the Agent and respondent’s case the respondent did not stop at rendering only the services of Commission Agency, but also extended beyond the same and thus would fall within the category of “clearing and forwarding agents” as the operations are in the said nature.

v The High Court further held that the contentions of respondent are not acceptable for many reasons. From the agreement it is clear that agreement itself terms the respondent as a consignment agent. Thus, the parties were at ad-idem when the contract was entered into between them as to what their status would be. It was held that both principal and respondent-agent understood their duties and responsibilities which included only not only having effective control of the goods by the Principal but also that price determination was in the hands of both the principal as well as with respondent. Hence by no stretch of imagination it can be concluded that in the event of respondent being a commission agent the price determination would also be left within the domain of a commission agent. The said reasoning was not logical and therefore not acceptable.

v The High Court further held that the aspect that respondent having been given the authority and power to appoint dealers, stockists and distributors clearly proves that it is not a mere case of consignment agent but it is the responsibility fixed on the assessee to carry out the activity of getting the goods stored by clearing it and then forwarding it to the stockists and dealers if any appointed by the respondent itself or as directed by the Principal. If it were to be commission agency only these clauses would not have found a place in the contract.

v The High Court further held that apart from procuring the orders the assessee is also engaged in the activities mentioned in the agreement which are independent of commission agency. In certain situations, only commission agency work may be carried on by clearing and forwarding agent. Activities of the consignment agent and commission agent may overlap but such overlap does not means that the person concerned will not be covered under clearing and forwarding agent service.

v The High Court further held that the decision given by the Punjab and Haryana High Court in the case of Kulcip Medicines Pvt Ltd was factually in error. In that decision it was held that appeal was not filed by the Department against the decision given in Mahaveer Generics case [2006 (3) STR 276 (Tribunal)] and therefore, the decision given therein was accepted. However, an appeal was filed by the Department in the Karnataka High Court and was pending on the date of disposal of the appeal in Kulcip’s Case.

v This High Court further held that the activity carried on by the assessee with reference to the text of the enactment would depend on the nature and activity as held by the Apex Court in KPTCL case both in text and context the word ‘includes’ as mentioned in the definition clause of clearing and forwarding agent. It was held that Legislature in its wisdom have desired to give extended and enlarged meaning to such expression.

v In the end it was held that the activity carried out by the respondent would fall within the category of “clearing and forwarding agent’ and thus amenable to the definition of taxable service.

Decision of the High Court: -

The substantial question of law is answered in favour of the Appellant-revenue and against the Respondent-assessee. Impugned order passed by the Tribunal is set aside. Order passed by the Original Authority confirmed.

Comments & Conclusion: -

The issue of “Consignment agent” will be covered under definition of “clearing and forwarding agent” has been in dispute for over a long period of time. But this was settled by Punjab and Haryana High Court in favour of assessee. It seemed that the issue is settled now. But again the matter came up before Karnataka High court and it has gone against the consignment agents and it is held that they are covered under definition of C & F agent. Thus, current position is that the matter is favour of assessee by one High Court and against by other High Court. Let us wait for the Apex Court to decide the issue finally. Till then the litigation will go on………………

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PJ/CASE STUDY/2009-10/030
08 February 2010

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