Sugar buffer stock subsidy is not warehousing charges. Not liable to service tax- unnecessary litigation by revenue fit cases for allowing cost of appeal and damages in favor of tax payers.

[C.A. DEV KUMAR KOTHARI]

Sugar Mills:

Sugar mills produce sugar which is an essential commodity and is very sensitive item for the public and politics. To maintain stock and price of sugar the Government has powers to regulate and control sugar production, release of sugar and price. Government also purchases sugar as levy sugar from mills at much less price and use the same for distribution through public distribution system. The GOI also regulate release of sugar according to production, demand, festive demand etc. GOI exercises such powers under general laws like the Essential Commodities Act, Industrial Regulations Act, The Sugar Development Fund Act, The Sugar Development Fund Rules etc.

Buffer stock is stock of sugar mill:

To maintain stock many times GOI issues directives to sugar mills to hold some stock of sugar as buffer stock and do not allow to sell the same during restricted period. The sugar mills incur costs on account of inventory carrying- that is storage, insurance, loss during storage, interest costs, safe keeping cost etc. To compensate the sugar mills for the same (usually partly) a part of cost is reimbursed or a subsidy is given to sugar mills.  In this process the sugar mills hold stock as their own stock which they can release or sell only when the government issues directions. Even if the stock is sold to the GOI or its agencies, the sugar mill hold stock as its own stock to be sold to the GOI or its agencies according to the off take by GOI or its agencies according to release orders for levy stock. Therefore, there is no activity of storage or warehousing done by sugar mills on behalf of any other party or GOI. The stock held, even as buffer stock is held as own goods of sugar mills. It is not a case that ownership of sugar is transferred and then stock is held on behalf of the transferee.

Buffer stock subsidy is not warehousing charges:

It is clear that buffer stock subsidy allowed by GOI is not for warehousing of sugar on behalf of GOI  but it is allowed as an incentive for holding stock to maintain supply and price of sugar in overall public interest.

No service provider and service receiver:

 In such situation GOI cannot be considered as a service receiver in capacity of a client, customer or any person availing services. The sugar mill cannot be considered as a service provider. Therefore, there is no relationship of service provider and service receiver between the sugar mill and the GOI or its agencies.

No service, no service provider and service receiver:

Thus we find that the basic essentials for attracting service tax liability are not at all attracted in relation to buffer stock subsidy received by sugar mills. When there is no service, no service provider no service receiver, then there is no question of levy of service tax. But unfortunately, the service tax department is indulging into unnecessary litigation by issuing SCN, raising demands and disputing orders of appellate authorities on such clear issues as appears from reported judgments some of which are discussed and analyzed below:

M/s Nawanshahr Co-operative Versus CCE, Jallandhar, [2008 -TMI - 30098 - CESTAT NEW DELHI] decision dated  20 June 2008  in Appeal No. - 132-136 of 2006 and 407 & 512 of 2007

In this case the Revenue contend that when a specified quantity of levy or  free sale sugar is held  by appellant sugar mills as unsold for a longer  specified period as per the orders of Government of India, and the  GOI  subsidies or  reimbursed  some of exepneses by  provided subsidy  or grants then the , amounts received is for rendering service to  the Government by way of  Storage and Warehousing Service. Not accepting contention of the revenue Tribunal held that just because the storage period of free ( there can also be  levy sugar)  sale sugar had to be extended at the behest of the GOI, neither the Appellant become "storage or warehouse keeper" nor the GOI become their client. Therefore service tax was not payable. The facts and circumstances of appeals decided are discussed and analyzed below:

Appeals:  The appellants in appeal No. ST/132, 133, 134,135 and 136/06 and No. ST/512/07 and the respondents in the Revenue's appeal No. ST/407/07 are Sugar Mills. The appeal No. ST/512/07 and the Revenue's appeal No. ST/407/07 are against the same order-in-appeal passed by CCE (Appeals), Chandigarh.

The sugar mills (appellants in the appeal No. 132-136/06 and 512/07) are required to maintain, as per the orders of the Ministry of Consumer Affairs, Government of India, certain stock of free sale sugar for a specified period and the Appellant cost of storage, insurance and interest on the stock is reimbursed by the Government in form of subsidy.

On expiry of the specified storage period, the appellant sugar mills are free to sell the sugar to whomsoever they want.

Contention of revenue:

 that manufacturing the stock of a specified quantity of free sale sugar by the appellant sugar mills for a specified period as per the orders of the Ministry of Consumer Affairs, Government of India, the expenses for which are reimbursed by the Government, amounts to providing to the Government Storage and Warehousing Service which is taxable under Section 65 (105) (zza) read with Section 65 (102) of the Finance Act, 1994.

The demands of service tax on the subsidy amount received by the sugar mills /appellant on account of storage, insurance as well as interest  sugar mills is justified because subsidy  consists of three components interest on stock, insurance and storage charges and they are in nature of consideration for storage services.

In the appeals No. ST/132-136/06, the CCE (Appeals), upheld the Joint Commissioner's order in toto. However, in appeal No. ST/512/07, the CCE (Appeals) upheld the demand of service tax only on the storage and insurance charges and set aside the demand of service tax on the reimbursement for interest on stock and against the portion of order dropping the demand of service tax on the interest charges. Therefore, the Revenue has filed appeal No. ST/407/07 before this Tribunal.

Common point of dispute:

 Whether, maintaining stock of a specified quantity of free sale sugar for a specified period by the appellant sugar mills, as per directives of GOI  amount to providing service and therefore,  reimbursed by the Government in form of a subsidy, can be considered as charges for  storage & warehousing service as defined under Section 65 (105) (zza) read with Section 65 (102) of the Finance Act, 1994 and whether the entire subsidy amount received by the appellant sugar mills would attract service tax under Section 66 of the Act.

After hearing both the sides the Tribunal found contentions of parties as follows:

Contentions on behalf of sugar mills:

(1) The Government of India, in order to maintain a buffer stock of sugar has directed the sugar mills to maintain stock of a specified quantity of free sale sugar for a specified period for which the sugar mills, are compensated by reimbursement of expenses towards interest, warehousing and insurance. The appellant sugar mills, therefore, have not provided the "storage and warehouse service" to the Government.

(2) The maintenance of buffer stock of sugar as per the direction of the Government of India is a statutory duty. Payment of certain amounts by the Government to the mills is not a charge for availing of any warehousing service but for compensating the sugar mills for the loss suffered by them for holding up their stock for which provision has been made under Rules 49 (14), 49 (15) and 49 (16) of the Sugar Development Rules.

(3) There are clarifications to the effect that when any activity involves exercise of statutory functions like providing of security by police or para-military organizations, then it is beyond the provisions of service tax. On the same rationale, no service tax would be leviable on the subsidy paid by the Government of India to sugar mills for maintenance of buffer stock.

(4)  that it is a case of storage of the mill's own goods by them.

(5) Hon'ble Tribunal in case of Karnataka State Beverages Corporation Ltd. vs. Commissioner of Service Tax, Bangalore [2007 -TMI - 2295 - CESTAT, BANGALORE] held that when, Karnataka State Beverage Corporation, purchased liquor from the distilleries, stored the same in hired storage godown and thereafter sold the liquor to various wholesalers holding licenses, the demurrage fee of Rs. 2/- per day charged by the corporation from the distilleries in the case the stock of liquor purchased by them was not lifted within 90 days, would not attract service tax under "storage and warehousing service" as the ownership of the goods during the demurrage period vested in the Karnataka State Beverages Corporation and they can not be said to have provided "storage and warehousing service".

(4) These exist no ground to hold that the appellant sugar mills deliberately concealed on suppressed material facts from the Revenue with mala fide intention, thereby justifying application of extended period of limitation and liability to penalty and interest.

Contentions on behalf of Revenue:

(1) The storing of a specified quantity of free sale sugar for a specified period by the appellant mills, as per the Government of India orders, and for which they have paid a compensation in form of subsidy, is covered by the definition of "taxable service" in relation to storage and warehousing of goods, as given in Section 65 (105) (zza) read with Section 65 (102) of the Finance Act, 1994;

(2) The words "to any person" in the definition of "taxable service" in relation to storage and warehousing of goods, as given in Section 65 (105) (zza) are very vide and would cover the Government of India and therefore this service would be taxable even if it is provided to Government of India, as per the statutory provisions; and

(3) The fact that during the period of storage the ownership of the good remained with the appellants/ sugar mills, is immaterial and what is material for attracting the service tax liability is that the taxable service of storage and warehousing has been provided by the appellant sugar mills to the Government of India, for which they have received payment from the Government in form of subsidy.

Tribunals conclusions:

Tribunal held that on careful consideration to the submission of both the sides, there is no dispute about the facts that -

(a) The appellant sugar mills are required to maintain stock of specified quantity of free sale sugar for a specified period and for which they receive compensation from the Government of India in form of subsidy, as compliance with the provision of The Sugar Development Fund Rules, 1983, framed by the Government of India under Section 9 of the Sugar Development Fund Act, 1992.

(b) The subsidy received by the appellant sugar mills from the Government is only to cover their expenses towards interest on stock, insurance of stock during the period of storage and storage ; and

(c) The ownership of the goods during the period of storage remains with the appellant sugar mills, and on issue of release order from the Government, the Mills are free to sell the sugar to whomsoever they want.

(d)  As per the provision of Section 65 (105) (zza), "taxable service" in relation to storage and warehousing means any service provides or to be provided to any person, by a storage or warehouse keeper in relation to storage and warehousing of the goods.

(e)   As per Section 65 (102) "Storage and warehousing includes storage and warehousing service if goods including liquids and gases but does not include any service provided for storage of agricultural produce or any service provided by a cold storage.

(f)  Section 66 is the charging section which provides for levy of service tax at the rate specified in it on all the "taxable services", defined in various sub-clauses of clause (105) of Section 65.

(g)  from a combined reading of Section 65 (102), Section 65 (105) (zza), and Section 66, it is clear that in case of storage and warehousing, service tax would be attracted when the service of storage or warehousing of goods other than agricultural produce or cold storage, is provided by a storage or warehouse keeper to a person. The Appellant Sugar Mills, in normal course would have stored the free sale sugar in their godown as warehouses till its sale. But because of Government of India's orders, they are required to store a specified quantity of free sale sugar for a period, as specified by the Government, for which they receive a compensation from the Government to cover their expenses towards interest on stock, insurance and storage.

(h) The ownership of the goods remains with the Appellant Sugar Mills and on receipt of the release order from the Government they are free to sell the sugar to any customer.

( i) In these circumstances, just because the storage period of free sale sugar had to be extended at the behest of the Government of India, neither the Appellant Sugar Mills become "storage or warehouse keeper nor the Government of India become their client in this regard.

(j) Storage of a specified quantity of free sale sugar for a specified period to comply with the provisions of the Sugar Development Fund Act, 1982 of the Rules made thereunder can not be treated as, providing "Storage and warehousing service" to the Government of India.

JAGRAON CO-OP. SUGAR MILLS LTD. Versus CCE , LUDHIANA  [2009 -TMI - 33757 - CESTAT, NEW DELHI]  appeal No. - ST/440/2008 order No. - ST/436/2008(PB) dated - 31 October 2008

In this case also similar issue is pending as revenue has demanded service tax on buffer sugar stock subsidy. The appellant sugar mills applied for stay and to dispensewith requirement of pre-deposit. Tribunal noticed the above mentioned decision in the case of M/s Nawanshahr Co-operative Ltd. [2008 -TMI - 30098 - CESTAT NEW DELHI] and allowed stay petition. The matter is pending fro decision. It is hoped that the issue will be decided in favour of the sugar mill/ appellant.

Applicability of ratio in other cases:

The principals as discussed above and the ratio decided in the above case can be applied to other cases also where government allows some sort of subsidy or grant to any trade or industry in specified circumstances. To maintain availability and price under control many times subsidy is allowed. In some cases transport subsidy is allowed for transportation of goods in difficult areas. In some situations subsidy to producers is allowed for extended period of production for example in case of sugar shortage sometimes subsidy is allowed for early and later crushing of sugar cane to sugar mills. All such subsidy, grant, allowances or re-imbursements by governments are allowed in public interest for some public purposes. There is no relationship of a service receiver while announcing such schemes, there cannot be a case of service receiver and service provider in all such cases. Therefore, the revenue should take practical view of situation before raising demands in such cases.

Fit cases for cost of appeal as well as damages:

As can be seen from above discussions that the revenue is indulging in unnecessary litigation by issuing SCN, raising demands and also disputing orders/ judgments of  appellate authorities / courts, where in fact the revenue has no case at all. In all such cases the public/ service provider/ taxpayer suffer lot of difficulties and harassment. The Tribunals and courts can mitigate hardship of taxpayers by awarding cost of appeals in favour of taxpayer in all such cases. In fact for the loss and damages suffered by public/ taxpayer, there should be reasonable compensatation in all such matters so that the revenue officials will have to think before raising totally unjust demands.