2025 (5) TMI 406 - AT - Service Tax

Levy of service tax - Business Auxiliary Services - activities of cleaning and grading of agricultural produce carried out by the appellants - Cargo Handling Agency services - handling and transportation services related to agricultural produce provided by the appellants - cleaning grading handling and transportation service - legal consultancy fees under reverse charge mechanism - extended period of limitation. Activity of cleaning and grading carried out by the appellants - HELD THAT - It is an admitted fact that the department based on intelligence sought information from the appellants regarding the nature of their activities. Based on the said information the Department formed an opinion that the appellants were renting godowns/warehouse for commercial purposes and furtherance of business. In addition the appellants were also providing handling and transportation services cleaning and grading services to their clients. The Department also noted that the appellants were making payment for receiving legal services. In the instant case the appellants were providing cleaning and grading services for few of the agricultural products which were warehoused by them for their clients which did not change the essential characteristics of the agricultural product stored /warehoused by the appellant. Consequently the activity has to be considered to be in relation to the agriculture and is exempted from payment of service tax for the period upto 30.06.2012. In this context support drawn from Hon ble Supreme Court s judgment in M.L. Agro Products Ltd. 2018 (7) TMI 1581 - SC ORDER wherein the Apex Court held that threshing and redrying of tobacco leaves being an activity in relation to agriculture is covered under entry production of goods on behalf of client in relation to agriculture which is entitled for exemption under Notification No. 14/2004-S.T. - As regards the period from 01.07.2012 the negative list under section 66D clause (v) of the Act exempts the entire gamut of services related to agricultural produce - the activity of cleaning and grading carried out by the appellants stood exempted for both pre and post negative period. Handling and transportation charges - denial of benefit of the N/N. 10/2002 dated 1.08.2002 - HELD THAT - A close reading of the said notification reveals that it exempts the taxable service provided to any person by a Cargo Handling agency in relation to agricultural produce or goods intended to be stored in cold storage from whole of the service tax leviable thereupon. Cargo Handling Service is defined in Circular No. B11/1/2002-TRU dated 01-08-2002 as services of transporting coupled with loading unloading packing unpacking if those are done by the authorities as that of Container Corporation of India Airport Authority of India Inland Container Depot Container Freight Stations etc. Clearly the appellant herein are not covered by the aforesaid definition - it is noted the departmental Circular no. B11/1/2002 -TRU dated 1.08.2002 which clarifies that the cargo handling services provided in relation to storage of agricultural produced are covered under storage and warehousing services and have been exempted from the levy of service tax - the handling and transport of agricultural produce was not taxable even prior 1.07.2012. This activity is also stood exempted from levy of service tax for the period 01.07.2012. Service tax on legal fees paid during the years 2012-13 to 2015-16 - HELD THAT - As per Notification No.30/2012-ST dated 20.06.2012 legal service provided by any person as represented to any business entity the service tax is liable to be paid by the Recipient of the Service. The appellants being a business entity were liable to pay service tax on such legal consultancy charges on reverse charge basis. In view of the above the demand on such legal fees upheld. Extended period of limitation - HELD THAT - The extended period cannot be sustained as the department has not been able to establish any intent to evade by the appellant. Conclusion - i) Demand of service tax on cleaning and grading services is set aside. ii) Demand of service tax on handling and transportation services is set aside. iii) Demand of service tax on legal consultancy fees is upheld for the normal period. iv) Extended period demand and penalties are set aside. The appeals are allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

(a) Whether the activities of cleaning and grading of agricultural produce carried out by the appellants are taxable under Business Auxiliary Services or exempted under relevant notifications and provisions.

(b) Whether the handling and transportation services related to agricultural produce provided by the appellants constitute taxable Cargo Handling Agency services or are exempted.

(c) Whether the services of cleaning, grading, handling, and transportation should be treated as standalone taxable services or as composite services bundled with the principal service of storage and warehousing of agricultural produce, thereby affecting their taxability.

(d) Whether the appellants were liable to pay service tax on legal consultancy fees received during 2012-13 to 2015-16 under reverse charge mechanism.

(e) Whether the extended period of limitation for demand of service tax could be invoked against the appellants in absence of any suppression of facts or intent to evade tax.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Taxability of Cleaning and Grading Services

Relevant Legal Framework and Precedents: The Tribunal examined the definition of Business Auxiliary Service under Section 65(19) and the taxable services under Section 65(105)(zzb) of the Finance Act, 1994. The key notifications considered were Notification No. 14/2004-ST dated 10.09.2004 and its amendment Notification No. 19/2005-ST dated 07.06.2005, which exempted services related to production or processing of goods for or on behalf of the client in relation to agriculture from service tax. The Tribunal also relied on CBEC Circular No. 143/12/2011-S.T. dated 26.05.2011 clarifying that processing of agricultural produce retaining its essential characteristics is exempted. The Supreme Court decision in Commissioner vs. M.L. Agro Products Ltd. was cited, which upheld exemption for activities "in relation to agriculture."

Court's Interpretation and Reasoning: The Tribunal found that cleaning and grading were carried out on agricultural produce without altering its essential characteristics, thus qualifying as processing "in relation to agriculture." The exemption under the aforementioned notifications applied both pre and post 30.06.2012 (the date of introduction of the negative list regime under Section 66D). The Tribunal held that the exemption continued post 01.07.2012 as the negative list under Section 66D clause (v) exempts all services related to agricultural produce.

Key Evidence and Findings: The appellants provided cleaning and grading services only in a few instances necessary for storage. The essential character of the agricultural produce remained unchanged. The Tribunal noted the admitted facts and the relevant notifications and circulars.

Application of Law to Facts: Applying the exemption notifications and circulars, the Tribunal concluded that cleaning and grading services were exempted from service tax for the entire period under consideration.

Treatment of Competing Arguments: The Department argued that cleaning and grading fell under taxable Business Auxiliary Services, but the Tribunal rejected this, relying on the exemption notifications and Supreme Court precedent.

Conclusions: The demand of service tax on cleaning and grading services was set aside.

Issue (b): Taxability of Handling and Transportation Services (Cargo Handling Agency Services)

Relevant Legal Framework and Precedents: The Department invoked Notification No. 10/2002-ST dated 01.08.2002, which exempts cargo handling agency services related to agricultural produce or goods intended to be stored in cold storage. The Tribunal also referenced Circular No. B11/1/2002-TRU dated 01.08.2002 clarifying the scope of cargo handling services and the definition of Cargo Handling Agency.

Court's Interpretation and Reasoning: The Tribunal observed that the exemption under Notification No. 10/2002-ST applies to cargo handling agencies such as Container Corporation of India, Airport Authority of India, etc., and not to the appellants. However, the Tribunal also noted that handling and transportation of agricultural produce are integrally linked to storage and warehousing services, which are exempted. The Tribunal held that handling and transportation activities related to agricultural produce were exempted both pre and post 01.07.2012.

Key Evidence and Findings: The appellants performed handling and transportation services as part of storage activities. The Department's denial of exemption was based on a narrow interpretation limiting exemption to cold storage-related cargo handling only.

Application of Law to Facts: The Tribunal applied the exemption notification and circulars, concluding that the handling and transportation services were part of the exempted storage and warehousing services.

Treatment of Competing Arguments: The Department's argument that handling and transportation were separate taxable services was rejected in light of the exemption notifications and the composite nature of the services.

Conclusions: The demand of service tax on handling and transportation charges was set aside.

Issue (c): Classification of Services as Composite or Standalone

Relevant Legal Framework and Precedents: Section 65A of the Finance Act, 1994 provides for classification of composite services based on the service which gives the composite its essential character. The Tribunal also referred to CBEC Letter No. 334/4/2006 dated 28.02.2006, which clarifies that composite services should be classified according to the principal service.

Court's Interpretation and Reasoning: The Tribunal held that cleaning, grading, handling, and transportation services were bundled with the primary service of storage and warehousing of agricultural produce. These ancillary services were performed only in a few instances to facilitate storage. The Tribunal invoked Section 66F(3)(a) to treat these naturally bundled services as one single service, classified according to the essential character, i.e., storage and warehousing.

Key Evidence and Findings: The appellants charged separately for these services but performed them as part of the overall warehousing activity.

Application of Law to Facts: The Tribunal applied the principle of essential character to classify the composite service as storage and warehousing, which was exempted.

Treatment of Competing Arguments: The Department's stance that the services were distinct and taxable was rejected.

Conclusions: The ancillary services were to be treated as part of the exempted storage and warehousing service.

Issue (d): Liability to Pay Service Tax on Legal Consultancy Fees

Relevant Legal Framework: Notification No. 30/2012-ST dated 20.06.2012 mandates that legal services provided to a business entity are taxable under reverse charge mechanism, with the recipient liable to pay service tax.

Court's Interpretation and Reasoning: The Tribunal found that the appellants, being business entities, were liable to pay service tax on legal consultancy fees received during 2012-13 to 2015-16 under reverse charge.

Key Evidence and Findings: The appellants admitted to receiving legal consultancy services and making payments for the same.

Application of Law to Facts: The Tribunal upheld the demand for service tax on legal fees for the normal period.

Treatment of Competing Arguments: The appellants did not dispute the applicability of reverse charge but challenged other demands.

Conclusions: The demand for service tax on legal consultancy fees was upheld.

Issue (e): Invocation of Extended Period of Limitation

Relevant Legal Framework and Precedents: Section 73 of the Finance Act, 1994 provides for extended period of limitation in cases involving suppression of facts with intent to evade tax. The Tribunal referred to Supreme Court judgments (Pushpam Pharmaceuticals, Anand Nishikawa Co. Ltd.) and Delhi High Court decision (Bharat Hotels Ltd.) emphasizing the requirement of intent to evade for extended period applicability.

Court's Interpretation and Reasoning: The Tribunal found no evidence of suppression or intent to evade tax by the appellants. Hence, the extended period of limitation was not applicable.

Key Evidence and Findings: No facts were established to show willful suppression or evasion.

Application of Law to Facts: The Tribunal set aside the demand raised beyond the normal period.

Treatment of Competing Arguments: The Department failed to prove intent to evade tax.

Conclusions: Extended period demand was not sustainable.

3. SIGNIFICANT HOLDINGS

"The activity of cleaning and grading carried out by the appellants stood exempted for both pre and post negative period."

"Handling and transport of agricultural produce was not taxable even prior to 01.07.2012 and stood exempted from levy of service tax for the period post 01.07.2012 as well."

"Services of cleaning & grading and handling & transportation are bundled services with storage and warehousing and hence, in view of Section 66F(3)(a), should be treated as a single service giving its essential character."

"The appellants being business entities were liable to pay service tax on legal consultancy charges on reverse charge basis."

"The extended period of limitation cannot be invoked in absence of any suppression of facts or intent to evade tax."

Core principles established include the application of exemption notifications to processing of agricultural produce retaining essential characteristics, the principle of essential character in classification of composite services, and the strict requirement of intent for invocation of extended limitation period.

Final determinations:

(i) Demand of service tax on cleaning and grading services is set aside.

(ii) Demand of service tax on handling and transportation services is set aside.

(iii) Demand of service tax on legal consultancy fees is upheld for the normal period.

(iv) Extended period demand and penalties are set aside.