2018 (5) TMI 404 - AT - Service Tax

Business support services - collection of monthly licence fee - With effect from 1-2-2005 TASMAC granted permission to contractors to sell eatables in the bar and to collect the empty liquor bottles left in the bars for a monthly license fee payable by such contractors to it - It appeared to the department that the contractors can conduct their business only after issue of a licence by TASMAC on payment of licence fee; that without the support of TASMAC in the form of giving permission to sell eatables and to collect empty bottles contractors would have no business; therefore upto 30-06-2012 the services rendered by TASMAC is a taxable service under Support Service of Business or Commerce under Section 65 (104c) read with Section 65 (105) (zzzq) of the Finance Act 1994; that after 1.7.2012 the services are continued to be taxable since they are not covered under the negative list or otherwise exempted. Held that - An analysis of the definition in Section 65 (104c) indicates that while it is indeed an inclusive definition the type of services sought to be taxed are those of the genre and outsources services normally prevalent in business and commerce like evaluation of prospective customers telemarketing processing of purchase orders and fulfilment services information and tracking of delivery schedules etc. In our view the intention of the legislature to bring within the ambit of Business Support Services only outsourced activities relating to management logistics and customer relations etc. is vindicated by the Explanation to the said definition which exemplifies infrastructural support services as providing office along with office utilities lounge reception with competent personnel to handle messages secretarial services internet etc. There then is no doubt in our mind that all these examples indicated in the definition are those relating to outsourcing of business commerce strategy planning logistics planning and management customer services marketing assistance etc. We are unable to fathom how permission to run a bar adjacent to TASMAC wine shop along with a responsibility cast on the successful contractor to sell eatables and collect empty bottles albeit for a fee can be said to be analogous and in immediate connection with the type of activities exemplified in the inclusive definition of Support Services of Business or Commerce - For the period October 2008 to 30.06.2012 the demand of service tax on the appellant under Support of Business and Commerce Services is not sustainable and is set aide W.e.f. 1-7-2012 all services except those excluded by Section 65B (44) in particular transfer of title in goods deemed sale transaction in money etc. will be liable to service tax or those falling in the negative list of services under Section 66D ibid or those which were specifically exempted otherwise would be exigible to service tax levy. Appellants will be exigible to service tax liability in respect of the impugned activities only for the period 1.7.2012 to 28.03.2013 as taxable service under Section 65B (44) of the Finance Act 1994 - There will not be any service tax liability during the period of dispute from 29.03.2013 onwards. Penalty - Held that - the entire dispute is one of interpretation and even from the record we find that there are at least two circulars before introduction of negative list regime and one subsequent to that which have found it necessary to dwell upon the liability to service tax in respect of such activities performed by instrumentalities of the State - Penalty set aside. Appeal allowed in part.

The core legal questions considered by the Tribunal include:

1. Whether the activities of the appellant, a government-owned corporation vested with exclusive rights to wholesale and retail Indian Made Foreign Liquor (IMFL) in Tamil Nadu, in granting permission to contractors to run bars and sell eatables adjacent to its liquor shops, constitute a taxable "Support Service of Business or Commerce" under the Finance Act, 1994, prior to and after the introduction of the Negative List regime effective 1.7.2012;

2. Whether such activities carried out by the appellant amount to sovereign functions of the State and are thus exempt from service tax;

3. The applicability and interpretation of the definitions of "Support Service of Business or Commerce" under Section 65(104c) and "service" under Section 65B(44) of the Finance Act, 1994;

4. The effect of statutory amendments, specifically the insertion of Rule 9A in the Tamil Nadu Liquor Retail Vending Rules, 2003, empowering the appellant to grant privileges to run bars by tender and collect amounts on behalf of the State;

5. The validity of penalties imposed under Sections 77 and 78 of the Finance Act, 1994 for alleged non-compliance with service tax provisions.

Issue-wise Detailed Analysis:

1. Taxability of Activities as 'Support Service of Business or Commerce' Prior to 1.7.2012

The Tribunal examined the definition of 'Support Service of Business or Commerce' under Section 65(104c) of the Finance Act, 1994, which is an inclusive definition encompassing services such as evaluation of prospective customers, telemarketing, processing of purchase orders, fulfillment services, customer relationship management, and infrastructural support services (including office utilities, reception, secretarial services, internet, and telecom facilities).

The Tribunal applied the principle of statutory interpretation embodied in the maxim noscitur a sociis, which mandates that the meaning of a word is to be judged by the company it keeps. The examples provided in the definition suggest that the taxable services are essentially outsourced business support activities related to management, logistics, marketing, and customer services.

On this basis, the Tribunal found that the appellant's activity of granting permission to contractors to run bars, sell eatables, and collect empty liquor bottles, for a fee, does not align with the nature of services described in the definition. These activities were not analogous to the outsourced business support services contemplated by the statute.

Therefore, the Tribunal concluded that the income derived by the appellant from such activities prior to 30.06.2012 could not be subjected to service tax under the category of 'Support Service of Business or Commerce'.

2. Taxability under the Negative List Regime Effective 1.7.2012 to 28.03.2013

With the introduction of the Negative List regime effective 1.7.2012, the definition of 'service' was broadened under Section 65B(44) of the Finance Act, 1994. Under this regime, all services are taxable except those specifically excluded, such as transfer of title in goods, transactions in money, or services provided by government in the exercise of sovereign functions.

The appellant contended that its activities were sovereign functions performed on behalf of the State and thus exempt from service tax. However, the Tribunal rejected this contention, observing that the appellant is a statutory corporation and not the Government itself. The decisions to grant permissions to contractors were taken by the Board of Directors, which does not equate to sovereign functions exercised by the State.

The Tribunal relied on authoritative circulars issued by the Central Board of Excise and Customs (CBEC), which clarify that services provided by statutory bodies or corporations that are not in the nature of statutory activities but are rendered for consideration are leviable to service tax if they fall within the scope of taxable services.

Further, the Tribunal noted that the appellant's audited financial statements were prepared under the Companies Act, 1956, and the supplementary audit by the Comptroller and Auditor General (CAG) was also under company law provisions, indicating that the appellant's functions were corporate rather than sovereign.

Accordingly, the Tribunal held that the appellant's activities during the period 1.7.2012 to 28.03.2013 constituted taxable services under Section 65B(44) of the Finance Act, 1994.

3. Effect of Statutory Amendment w.e.f. 29.03.2013

The Tribunal considered the amendment to the Tamil Nadu Liquor Retail Vending Rules, 2003 by insertion of Rule 9A, which empowered the appellant to grant the privilege of running bars to private parties by tender, decide upset prices, collect tender amounts from successful bidders, remit the amounts to the Government, and retain 1% as agency commission.

This statutory backing was held to confer a sovereign character on the appellant's activities from 29.03.2013 onwards. Since the appellant was acting as an agent of the State in collecting and remitting the tender amounts, the Tribunal concluded that the services rendered after this date fell within the negative list of services and were exempt from service tax.

The Tribunal noted that subsequent departmental orders had accepted the appellant's liability to pay service tax only on the 1% commission retained, and declined to extend this concession to the period prior to the statutory amendment, as there was no legal basis for such extension.

4. Penalty Imposition under Sections 77 and 78

The Tribunal examined the imposition of penalties for alleged non-compliance with service tax provisions. It observed that the dispute was essentially one of interpretation of the scope of taxable services and that there was substantial legal ambiguity, including multiple circulars and judicial pronouncements on similar issues.

Given the debatable nature of the issue and absence of any evidence of fraud, wilful misstatement, or suppression of facts by the appellant, the Tribunal held that penalties were not justified and set aside the penalties imposed.

5. Treatment of Competing Arguments

The appellant argued that it was an instrumentality of the State performing sovereign functions and thus exempt from service tax. It relied on judicial recognition of its status as a government entity, statutory provisions empowering it to regulate liquor retailing, and the nature of the bar operations being subject to statutory control.

The department countered that the appellant was a statutory corporation distinct from the Government, and that the activities in question were commercial in nature, involving outsourcing to contractors and generation of income accounted as business revenue, thus falling within taxable services.

The Tribunal carefully weighed these arguments, applying statutory interpretation principles and referencing relevant circulars and case law. It distinguished between sovereign functions and commercial activities carried out by statutory corporations, ultimately concluding that the appellant's activities were taxable during the specified period until statutory amendment conferred sovereign character.

Significant Holdings:

"The intention of the legislature to bring within the ambit of 'Business Support Services' only outsourced activities relating to management, logistics and customer relations etc. is vindicated by the Explanation to the said definition which exemplifies 'infrastructural support services' as providing office along with office utilities, lounge, reception with competent personnel to handle messages, secretarial services, internet etc."

"We find merit in the argument made by Ld. AR that the decision by the Board of Directors of TASMAC giving permission to award such contractors for running a bar, supplying eatables, cleaning, collecting empty bottles etc. is only a decision of the Board and cannot be brought on par with sovereign function exercised by the State."

"If a sovereign / public authority provides a service, which is not in the nature of statutory activity and the same is undertaken for a consideration (not a statutory fee), then in such cases, service tax would be leviable as long as the activity undertaken falls within the scope of a taxable service as defined." (CBEC Circular No.89/7/2006)

"From 29.03.2013, the impugned services of TASMAC would definitely fall in the negative list of services as statutory function being carried out by them based on authority of law."

"There cannot be any penalty imposed on the appellant in view of the entire dispute being one of interpretation and the existence of circulars and judicial pronouncements on the issue."

In conclusion, the Tribunal determined:

o For the period October 2008 to 30.06.2012, the appellant's activities do not constitute taxable 'Support Service of Business or Commerce' and the service tax demand is unsustainable;

o For the period 1.7.2012 to 28.03.2013, the appellant is liable to pay service tax on the licence fees received, as the activities constitute taxable services under Section 65B(44) of the Finance Act;

o For the period from 29.03.2013 onwards, following the statutory amendment, the appellant's activities are exempt as statutory functions falling within the negative list;

o Penalties imposed under Sections 77 and 78 are set aside due to the debatable nature of the issue and absence of malafide conduct.

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