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DHL Express India Pvt Ltd Versus Commissioner of Service Tax, Mumbai

2015 (12) TMI 1105 - CESTAT MUMBAI

Demand of service tax - best judgement assessment - wrong filing of ST-3 return - appellants have adjusted the payables against receivables in the figures given in the return - Classification of service tax - Business Support service or courier service - Taxability of network fee - Export of Service - Bar of limitation - Imposition of penalty - Cum Tax benefit - Held that:- DHLI are the service receivers and they have hired the appellants for the job. The entire operation takes place within Indi .....

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s a more specific classification available it has to be preferred over a more general classification. Thus it is a clear case of courier service provided by the appellants to DHLI.

It has been admitted that the network fee is only in respect of the Billed shipments as a compensation for funding the network costs. In fact the appellants receive services of the DHLI only for billed shipments. For Unbilled shipments no services are provided by DHLI to appellants. In respect of the Unbill .....

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tion of not only assessable value in respect of courier service provided by the appellants but also of the courier service received by the appellants.

Appellants are recouping their compensation i.e. costs as well as an arm' length margin (costs plus 10%), from the billed shipments contracted by them. In other words the consideration for the services provided by the appellant are adjusted against the money payable to DHLI for the services received in respect of billed shipments.
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the service received, or incentives and costs, is incorrect. The service tax in each case has to be paid on the Gross value of each service separately.

Circumstances prescribed in the said section do not exist in the instant case to enable the Commissioner to adopt the best judgment method. They claimed that they have indeed filed the returns and have assessed their liability correctly. The appellants have filed the returns but have, according to the Order, failed to assess the tax in .....

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b-rule (1) of rule 3 of the Export of Services Rules, 2005. In respect of this category the place of performance is critical in determining the factum of export. In the instant case the entire courier service provide by appellants to DHLI was performed in India. The documents to be couriered are delivered in India and the same are received in India. It is immaterial if the payment of the same is received in Foreign Currency.

The law is very clear that gross amount charges is to be dec .....

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limitation. - For the demand in respect of services provided by appellant to DHLI in respect of Unbilled consignments the benefit of calculation of tax on cum duty basis is allowed. - The penalty under Section 78 is reduced correspondingly to the revised amount of demand worked out after allowing cum duty benefit and limitation worked out - Penalty under Section 77 is upheld - Petition disposed of. - Appeal No. ST/MA(Ors)/97877 & ST/CO/91100/14, Appeal No. ST/85770/14 - Dated:- 30-10-2015 - M V .....

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k entities). According to appellant the courier network can be categorized into the origination leg, transit leg and destination leg. Each transportation step is not carried out on an isolated basis but all the steps are aligned and organized in such a manner of that the network entities undertake transportation activity within their own territory, either at origination or destination leg. In other words the collection and delivery of the consignments to individual clients is done by the network .....

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the Network in the Territory. b) To provide efficient and reliable services in the territory and to this and receive consignments arriving in the territory check them against the manifest and deliver them to the parties of individual consignees against receipt. c) In the case of transportation from the territory to destinations abroad through the Network, to collect consignments from the premises of individual consignors and to manifest the consignments in accordance with the documentation and .....

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L the remittances calculated by and in accordance with clause 4 thereof f) to file with DHL not later than thirty days following the end of each month financial statements and such reports and information from time to time prescribed by DHL in support of the costs incurred by the Company and of the remittances made or tobe made to DHL. g) To allow DHL (at its own cost) the right of audit of the Company's books of account to determine the accuracy and proper categorization of the Local Costs. .....

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ics of the Network in substantially the same combination arrangement and manner as developed and displayed by the network so that the company's business will be readily recognizable by customers or potential customers as having access to the network 3. DHL OBLIGATIONS 3.1 In consideration of the performances by the company of the obligations set out in clause 2 hereof, DHL agrees and undertakes to allow the company to have access to the network and a) to complete or to procure completion of .....

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n by DHL until the time it is delivered to the ultimate consignee; d) as evidence of the company's access to the network to process the inclusion of the name, address and telephone number of the company in the network's worldwide express directory and details of the stations operated by the company in the territory. 4. COMPENSATION 4.1 The company shall pay to DHL each month, from Company's revenue in the territory, such sum (the network fee) as represents the difference between (a) .....

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all pay to the company such sum as represents the excess within 30 days of DHL agreeing the company's computation of local costs. 4.3 For the avoidance of doubt, all the international costs shall be for the sole account of DHL and shall not be included in the calculation of local costs. 4.4 DHL shall render a monthly invoice to the company setting out the amount payable by the company in accordance with this clause 4 and based upon a statement of local costs agreed between the company and DH .....

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h day of the month following the actual date of delivery. 4.5 DHL agrees that throughout the duration of this agreement consolidated monthly total payables and receivables viz. network fees, international costs paid on behalf of DHL by the company, EXB charges billed and collected elsewhere, and EXB charges billed and collected locally shall be net off thereby permitting a net monthly remittance. 1.3 Thus it is seen that in terms of the contract the job of the appellant was to perform all functi .....

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were also required to pay the DHLI remittance in terms of in terms of clause 4 of the agreement. 1.4 The Obligation of the DHLI are given in clause 3 of the agreement. It is seen from the clause 3.1 (a) of the agreement that the operational obligation of the DHLI was to complete or to procure completion of the delivery of the consignments collected by the company in the territory to their ultimate destinations outside the territory supplying (if required and reused by the company) a signed rece .....

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but also in respect of consignments not booked by it but by other franchisee's of DHLI located abroad. 1.5 The arrangement between them has been explained in simple terms in their additional submissions to the Commissioner dated 26 th Nov 2013 (Exhibit 5 of this appeal). They have explained the contract as in para 2 of the letter as follows: 2. Network Agreement 2.1 DHL India has entered into a contract ( Network Agreement') with DHLI on principal to principal basis. 2.2 As per the Netw .....

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ble for delivering shipments billed by DHL entities outside India, to consignees located in India (Unbilled shipments). 2.5 DHL India discharges service tax on gross revenue earned from its customers. DHL India also discharges service tax under reverse charge on the Network fees paid to DHLI.' From the above it would appear that appellants pay Network Fee to fund the cost of network, at avail access to global DHL Network. Global DHL network is accessed by appellant to perform delivery or pro .....

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nsactions. In these cases the retail clients pay the appellants directly for the service of delivering or collecting consignments. These transactions were termed as Billed transactions by the appellants. The 2 nd category are those cases where the network entities, i.e. DHLI Franchisees located outside India, are engaged by the retail clients for the service. In those cases the appellants undertake the activity of either collecting the consignments from the consignor and delivering the same to t .....

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tly and the unbilled transactions are where they receive no consideration from the retail client. The costs incurred by them in this regard are reimbursed along with a margin of 10% as consideration by DHLI. 1.7 The appellants are paying service tax on the amount received from the retail clients in respect of billed consignments. The show cause notice alleges that in addition to the services provided to the retail clients, the appellants are also providing services to DHL International in respec .....

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clients and delivering the same to DHLI hub in India is Courier service' provided by the appellants to DHL International. It was alleged that no service tax has been paid on the services provided in respect of Unbilled transactions. 1.8 In order to Levy service tax it was necessary to arrive at the correct assessable value. In this case there was no separate payment made by the service receiver namely DHL International to the appellant. A consolidated payment was being paid on the Coast plu .....

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ents). In order to arrive at the compensation being received by the appellant's in respect of the courier services being provided by appellants to DHL International, the total compensation received form DHL International had to be apportioned between the billed and unbilled consignments. To arrive at the compensation received for the courier services given to DHL International in respect of the unbilled consignments the show cause notice suggested apportionment on the basis of the weight of .....

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mpensation received for billed consignments was ₹ 40 and for unbilled consignments it was 70. For this calculation the necessary data was to be submitted by the appellant. However it was noticed that the appellant's could not give the breakup of total out bound shipments and hence the notice calculated the demand without bifurcations of the outbound consignments resulting in an inflated demand on account of the fact that part of the outbound consignments had already suffered service ta .....

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year 2007-08. 1.9 The appellants were receiving services from DHL International in respect of billed consignments. In respect of billed consignments, either deliveries were being made abroad or collection of consignments form abroad was being done by DHLI, as a service provided t the appellants. The appellants were paying a certain fee to the DHLI for these services. According to appellants the network fee' paid by them to DHLI is the consideration for the said service and they paid service .....

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investment rebate, which was set off against the network fee. It was noticed that while paying network fee certain other amounts were being deducted. These deductions on which no service tax was paid and the values excluded for the purpose of service tax on reverse charge matter were Customs clearance cost and finance cost. The custom clearance cost comprised mainly of CHA cost and other clearance charges. It was alleged that these deductions are not in nature of the reimbursement of expenses m .....

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llants to DHL International are in the nature of business support service and not courier service. On the basis of date of bifurcations of the outbound consignments provided by the appellants, the demand in respect of billed outbound consignments was dropped. 1.11 It was held in the order that W.E.F. 16.05.2008, when the definition of courier service was amended by replacing the words service provided to customers' by the words service provided to any person', the service provided by the .....

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y, called co-loaders. The co-loader undertakes to transport the documents, goods or articles on behalf of the courier agency and charges the courier agency for such services. A question has been raised whether under these circumstances the co-loaders are also liable to pay service tax. 16. In this context, it is clarified that co-loaders provide service to the courier agencies as such. They do not provide directly any service to the customer who gives the documents, goods or articles to the cour .....

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m the customer and these charges are included in the gross amount charged by the courier agencies from customers on which the service tax is computed.' The commissioner observed that the circular was based on the definition of courier service and the said definition has been amended from 16.05.2008. The Commissioner reached a conclusion that the circular would not apply after the amendment in the definition of courier service. Thus he held that the said circular will not have any application .....

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stment allowance against the network fee. 2. The appellants are in appeal against the said order of Commissioner. They challenged it on following grounds i) The classification of service provided to DHLI by the appellant, in respect of unbilled consignments, is not courier service but Business Support Service. ii) The network agreement is not an agreement for provision of service but merely on agreement to ascertain network fee. iii) No separate consideration is paid by DHLI to appellants for th .....

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ee paid to DHLI therefore there cannot be any more liability. vii) The service provided by them to DHLI is an export of service. The cost plus consideration adjusted against the Network Fee results in savings of foreign exchange for this purpose. viii) Network fee is the consideration paid to DHLI for the services provided by the DHLI in respect of the billed consignments. The investment rebate, customs clearance charges and finance costs are deductible from the Network fee. ix) Best judgement m .....

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e. They have argued that they are operating under a contract and doing an outsourced job on behalf of DHLI. It is pertinent to point out that they have not disputed the other aspects of the courier service. The courier service has been defined as follows "courier agency" means a (any person) engaged in the door-to-door transportation of time-sensitive documents, goods or articles utilizing the services of a person, either directly or indirectly, to carry or accompany such documents, go .....

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ooks a courier he is essentially outsourcing the delivery of his documents. When a company gives a works contract, it is outsourcing. When a company avails manpower recruitment agency, it is outsourcing. Service industry is generally an outsourcing industry. Thus it would be incorrect to classify every such service as Business Support Service, in preference to the specific services defined under the Act. The DHLI have engaged the appellants, in respect of unbilled consignments for i) collection .....

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aluation of prospective customers, telemarketing, processing of purchase orders and fulfilment services, information and tracking of delivery schedules, managing distribution and logistics, customer relationship management services, accounting and processing of transactions, operational or administrative assistance in any manner, formulation of customer service and pricing policies, infrastructural support services and other transaction processing. Explanation . -For the purposes of this clause, .....

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es of this Chapter, classification of taxable services shall be determined according to the terms of the sub-clauses (105) of section 65; (2) When for any reason, a taxable service is prima facie, classifiable under two or more sub-clauses of clause (105) of section 65, classification shall be effected as follows :- (a) the sub-clause which provides the most specific description shall be preferred to sub-clauses providing a more general description; (b) composite services consisting of a combina .....

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with effect from such date as the Central Government may, by notification, appoint.] The activity being carried out by the appellants is transportation of time-sensitive documents, goods or articles utilising the services of a person, either directly or indirectly, to carry or accompany such documents, goods or articles' from DHLI office to consignor's premises or from consignee's premises to DHLI premises. Since this is a more specific classification available it has to be preferred .....

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DHL International will only pay to the appellant if the total recoveries of the appellant for short of the 110% of the costs as stipulated in the agreement. The funding cannot be considered as a consideration for any service provided. He argued that the Customs clearance costs and finance expenses are reimbursable local costs as per agreement. He argued that appellant do not undertake a separate activity for separate consideration and therefore are not liable to tax. He further argued that valu .....

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provide for a separate consideration and the notice wrongly seeks to allocate costs as consideration. He further argued that as a result of this the local costs will be taxed twice. He argued that the value of the billed consignments, on which tax has been paid, already include the local costs incurred by the appellants. He argued that it is a case like that of warranty provider where the authorized dealer provides the services but the consideration is paid by the manufacturer. Similarly in the .....

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llants generate revenue only form the billed consignments and no separate revenue is generated from activities undertaken for the Shipments under the Network Contracts. He argued that the order seeks to tax the costs incurred in generating revenue from the customers in India. He argued that the only consideration received by the appellants is from the billed consignments in India. He argued that service tax is paid on the entire amount of billed consignments and the notice seeks to recover tax a .....

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e cited by them) 2.2.1 In short the arrangement between DHL operations BV (DHLI) and DHL worldwide express (India) Private Ltd (appellants) is of a kind of where DHLI conducts all the activities happening outside India in respect of all the consignments and appellants conducts all the activities happening within India. In simple terms when any consignment is either to be collected or to be delivered in India the same activity is done by appellants. When any consignment is either to be collected .....

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rms of clause 4 of the agreement (reproduced in para 1.1 above). The agreement stipulates that DHL will pay the company for all its costs and over and above 10% extra. The international costs will be for the sole account of DHL and shall not be included in the local costs. 2.2.2 The appellant, when it receives the payment from retail client, terms it as a billed consignment, whereas when the appellants undertakes the activity of picking up or delivering for DHLI, they term it as an unbilled tran .....

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er compensation arrangement. DHLI pays the same to the company. If it is more, the same is termed as network fee, and paid by appellant to DHLI. The net difference between the billed amount and the cost plus consideration, if positive, is called network fee. If the same is negative it is not termed as network fee. 2.2.3 The appellants are paying serviced tax on all the billed transactions on gross value received from retail customer. Thus whenever the appellant is approached by a client to pick .....

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e activities whatever costs are incurred, the company is compensated 110% of costs by way of consideration from DHLI. 2.2.4 A notice was issued to the appellants for the courier service provided in respect of unbilled transactions. In respect of unbilled transactions either pickup or delivery is done from the premises of DHLI and corresponding delivery/pickup is done from the client. In the process of pickup/delivery of these unbilled consignments the appellant is compensated by 110% of the cost .....

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e discussion it is clear that there are 4 activities being undertaken by the Appellant. These categories are Billed (Bills raised by Appellant) Unbilled (Bills not raised by Appellant but by DHLI or it's franchisees abroad) Export of consignments Collection of consignments from client in India and delivery to DHLI in India A C Import of consignments Delivery of consignments to consignees in India after collection of the same from DHLI in India B D A. Collection of Consignments in India for d .....

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no separate payment is received by appellant. D Delivery of consignments to Consignees in India, after collection of consignments from DHLI in India received from any foreign country, where no separate payment is received by appellant 2.3.2 The detailed features of each category are given in the table below OVERVIEW OF THE TRANSACTIONS S NO (A) (B) (C) (D) 1 Categories of transaction Consignments where payment received by appellant for collection of consignments in India and delivery of consign .....

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ign country, at behest of DHL, on 110% of cost compensation model 2 Consigner location India Abroad India Abroad 3 Consignee location Abroad India Abroad India 4 Payment received by the appellant From Retail client From Retail client From DHLI, as part of cost plus consideration From DHLI, as part of cost plus consideration 2.3.33 They have admitted in their appeal that they have engaged in the net transaction by setting off the receipts against payables. To bolster their claim that they have re .....

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der to prevent outflow of foreign exchange, can be considered as receipt of foreign exchange for the purpose of compliance with the export rules." In other words they have claimed that they have adjusted the not only the payments to be made by DHLI for billed and unbilled transactions against the Network fee, but also cost and incentives. As a result they had to pay Net amount as Network fee. In para 1.3 of the appeal the appellants have asserted that '1.3 In this regard, it is submitte .....

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curred on by appellant on unbilled consignments. The network fee is only an account of monthly settlement between appellants and DHLI. The mechanism of calculating Network fee is as follows Revenue from billed consignments less 110% of local Costs incurred on billed consignments less 110% of local Costs incurred on unbilled consignments less Investment rebate less Customs clearance costs less Finance costs Network Fee Thus it is seen that the network fee is only the calculation of setting off al .....

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settlement of receivables against payables. 2.3.4 The arrangement between them has been explained in simple terms in their additional submissions to the Commissioner dated 26 th Nov 2013 (Exhibit 5 of this appeal). They have explained the contract as in para 2 of the letter as follows, 2 Network Agreement 2.1 DHL India has entered into a contract ( Network Agreement) with DHLI on principal to principal basis 2.2 As per the Network Agreement DHL India is granted access to the global DHL Network s .....

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consignees located in India (Unbilled shipments). 2.5 DHL India discharges service tax on gross revenue earned from its customers. DHL India also discharges service tax under reverse charge on the Network fees paid to DHLI. It has been admitted that the network fee is only in respect of the Billed shipments as a compensation for funding the network costs. In fact the appellants receive services of the DHLI only for billed shipments. For Unbilled shipments no services are provided by DHLI to app .....

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in their own appeal. 2.3.5 The Network fee is payable by the appellants to the DHLI for access to the DHLI network outside India. The appellants access that network only for delivery or collection of billed consignments outside India. The network is not used for the by the appellants for the Unbilled consignments, where they are the service providers and not service users. A perusal of the invoice issued for the Network fee the description reads as under 'Network fee due to us as per operat .....

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required to pay to the appellants only as an incentive. The Schedule A to the Network agreement clarifies that '3 As a special incentive to ensure the upgrading of facilities and improvement of the Service in the Territory, during the term of the agreement, the Network Fee shall be rebated by an amount equivalent to 15% of the value of the fixed assets purchased by the company during the relevant period. This incentive is provided on an exceptional basis for a maximum period of three years s .....

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y Appellants to DHLI, or vice versa, the investment rebate has no role to play. The quantum of investment rebate does not depend on the service provided by the DHLI to appellant by on the value of the fixed asset purchased by the appellants. It is an amount given by DHLI to appellant as an incentive but they have decided to adjust it against the amounts payable by appellant to DHLI, resulting in understatement of the Network fee. Just because the appellants are maintaining a consolidated account .....

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oms clearance costs/Finance cost are not part of the local costs therefore the mark-up of 10% is not being given to the appellants. Had it been the local costs the appellants would have got the 10% mark-up on the same. This is what the Schedule A to the Network agreement also confirms. It clarifies that 'D) Reimbursible Costs shall mean the following costs, which will be reimbursed without any uplift i) Interest expenses (income) excluding Hire Purchase Interests ii) Customs clearance activi .....

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ce between revenue and the 110% of the local costs. Just because the appellants are maintaining a consolidated account, where all payables are adjusted against receivable, they are they cannot alter the value for the purpose of service tax by deducting customs clearance cost or Finance costs. The clause reads as under 4 COMPENSATION 4.1.1 The company shall pay to DHL each month, from Company's revenue in the territory, such sum(the network fee) as represents the difference between (a) its bi .....

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I had to return it to the appellant. Instead of giving it separately it chose to deduct it form the Network fee, though the formula for network fee given in the clause 4 of the Network agreement did not provide for it. Thus they are calculating network fee as a means for setting off all receivables against payables, to arrive at monthly settlement. It sets off payables against receivable not only in respect of services given or taken but also in respect of incentives and reimbursable expenses an .....

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They have claimed that the Rule 5 of the Valuation Rules provide for the reimbursement of expenditure or costs incurred by the service provider in the course of the provision of service to the service recipient. It has been claimed that there is no provision to deal with the costs incurred by the service recipient could be added. They have claimed that rule 7 of the Valuation rules provides that the value of taxable service provided by a service provider outside India to a service recipient in .....

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ependently. They cannot set off value of service provided against value of service availed to arrive at assessable value. In this case it appears that they have adjusted the amount payable for services received from DHLI in respect of services received for billed consignments, against amount receivable for services provided to DHLI for Unbilled consignments to arrive at Network fee. It is clear from analysis above that the network fee is only the calculation of setting off all receivables agains .....

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that there I no separate consideration, it is submitted that though the appellant is not receiving any foreign exchange, the balancing payment in order to prevent outflow of foreign exchange for the purpose of compliance with the export rules." 2.4.1 To arrive at the correct assessable value each of the four activities are to be assessed for the purpose of service tax liability. The appellants have given their summary accounting statement as an example in para 2.20 of the appeal as follows .....

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t situation (Categories A, B, C and D) by breaking up the above figures (given as a example) in equal part for assigning to each category. For the sake of example let us divide the expenses equally in all four scenarios A, B C and D, and examine how the statement would look like for each of the transactions separately. Considering equal local expense (Rs 75 each) in all four categories and equal revenue (Rs 500 each) for both billed categories, there being no revenue for unbilled categories. Dr .....

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ty if only activity listed in category (A) is carried out and no other activities are happening. It can be seen that the franchisee in India receives consignments in India and receives payment of entire courier charges. It carries it and delivers the same to DHL office in India. DHL carries it form it's office in India to the consignee's premises abroad. The entire courier charges received by the appellant from the client is for the courier services of carrying the consignment from the c .....

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lity. The accounting statement for CATEGORY A will be as follows Dr Cr Local Expenses 75 NA Revenue billed to local customers 500 Assessable value Mark up 7.5 Network fee payable to DHLI (Revenue billed less local cost plus mark up ie ₹ 500 less ₹ 82.5) 417.5 Assessable Value for the purpose of Service tax under reverse charge The total billing by appellant will be ₹ 500/. The expenses will be ₹ 75/- and DHLI would pay a markup of ₹ 7.5/- to the appellant. The Netwo .....

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o receive the consignments abroad. It carries it to DHLI office in India and delivers the same to the appellants in India. The entire courier charges is received by the appellant form the client. The entire money received from the client is for the courier services of carrying the consignment from the consignor abroad to the consignee in India, and that becomes the Assessable Value for the purpose of Service Tax at the hands of the franchisee. The appellant receives the money from the client and .....

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l billing will be ₹ 500/-. The expenses will be ₹ 75 and DHLI would pay a markup of ₹ 7.5/- to the appellant. The Network fee would work out to Revenue billed (Rs 500/-) less local cost plus markup (Rs 82.5) ie ₹ 500 less ₹ 82.5 or ₹ 417.5/-. 2.6.3 CATEGORY C If only activity listed in column (C) is carried out and no other activities are happening. The consignments are booked by DHLI or its franchisees abroad. It can be seen that the franchisee in India colle .....

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mises and bringing the same to the DHLI office in India. The 110% of the appellant's costs, is paid by DHLI to the appellant for this service as per agreement. The DHLI (or its franchisees abroad) gets all the money from the client and DHLI pays the appellant the 110% of appellant's costs. The money received by the appellant for picking up the consignment from the consignor's premises and delivering the same to the DHLI office in India, i.e. 110% of the appellant's costs, becomes .....

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eds revenue) 0 Revenue received by appellant from the customer i.e. DHLI 82.5 Value for the purpose of Service Tax 26.4 CATEGORY D If only activity listed in column (D) is carried out and no other activities are happening. It can be seen that the DHLI organizes to receive consignments abroad and delivers the same to the appellant at the DHLI office in India. The appellant carries it and delivers the same to consignee in India. The entire courier charges, for carrying the consignment, from the co .....

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the same to the consignor's premise, i.e. 110% of the appellant's costs, becomes the Assessable Value for the purpose of Service tax at the hands of the franchisee. For accounting purposes the DHLI gets all the money from the client and pays the franchisee the 110% of the costs. In accounting terms CATEGORY D will be as follows Dr Cr Local Expenses 75 NA Revenue billed to local customers Mark up 7.5 Network fee payable to DHLI (Nil, as revenue of appellant is Nil and expenditure exceeds .....

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rs Cat A 500 Cat B 500 1000 Assessable value of Billed consignments Mark up Cat A 7.5 Cat B 7.5 Cat C 7.5 Cat D 7.5 30 Network fee payable to DHLI (Nil as revenue of appellant is Nil and expenditure exceeds revenue) CAT A ₹ 417.5 CAT B ₹ 417.5 835 Assessable Value for the purpose of paying service tax on reverse charge basis Amount to be paid by DHLI to Appellants Category C ₹ 82.5 Category C ₹ 82.5 175 Assessable value of Unbilled consignments It can be seen that the ser .....

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ost plus consideration paid to the appellants by DHLI. It has been paid only on amount appearing after adjustment. Not only they have not paid service tax on the transactions of Category C and D but also on Network fee payable. They have in their appeal also admitted to this adjustment and netting of transaction as can be seen in para 2.8 below. 2.8 They have admitted that they are setting of the payables against receivables. They have claimed that they have adjusted the payments to be made by D .....

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e revenue 2.3 For such access, DHL India compensates DHLI in the form of monthly Network Fee, inorder to fund the network costs. The network fee is computed as the difference between the revenues earned by DHL India from its customers and 110% of the local costs (direct and indirect costs, as defined in the network agreement). 2.4 DHL India is also responsible for delivering shipments billed by DHL, entities outside India, to consignee located in India (Unbilled shipments). 2.5 DHL India dischar .....

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ices to the DHLI. While doing so they are maintaining a consolidated account of amounts to be paid and only net transaction are made on monthly basis. From above it is apparent that as a result of the setting off of amounts payable against receivables there has been a undervaluation of not only assessable value in respect of courier service provided by the appellants but also of the courier service received by the appellants. 2.9 The appellants in their appeal in para 4 have explained this as fo .....

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ie the Network Contracts' Thus admittedly, the appellants are recouping their compensation i.e. costs as well as an arm' length margin (costs plus 10%), from the billed shipments contracted by them. In other words the consideration for the services provided by the appellant are adjusted against the money payable to DHLI for the services received in respect of billed shipments. 2.10 The appellants in para 4.1 of the written submissions filed in tribunal, have given following illustration .....

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rk-up cannot be recovered from revenue earned in India 210 Network fee (since the cost plus mark up is 1210,the revenue billed is in excess of the cost. Hence, no network is payable) - In respect of the illustratin 2 they have stated that if such a scenario arises where when the revenue from the billed consignment is less than the 110% of the local expenses of the local expenses, they would be required to compensate for it. They have also admitted that in such a scenario they would be liable to .....

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ns to/from India. The appellants have in para 4.19 of the appeal the appellants have submitted as follows "4.19 If it is argued by the service tax authorities that the cost plus mark up reflects consideration, it is submitted that where the service provider nets off its foreign exchange remittance payable against its receivables, the same can be construed as foreign exchange received. 4.20 As provided in the preceding submissions, the following two transactions are i) where services are pro .....

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f foreign exchange, can be considered as receipt of foreign exchange for the purpose of compliance with the export rules." There is an obvious admission by the appellant that they are setting off the consideration and a net amount is paid to DHLI. This is the net amount of what is payable from appellant to the DHLI for services provided by DHLI to appellant and the cost plus compensation that the DHLI is supposed to pay the appellants for the Unbilled consignments'. For the billed consi .....

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by DHLI to appellants and other costs. Thus it is held that adjustment of the receivables for service provided against the amounts payable for the service received, or incentives and costs, is incorrect. The service tax in each case has to be paid on the Gross value of each service separately. 2.11 It was also argued that the Service tax law at the material time did not provide a mechanism to determine value of services in the instant case. They argued that the consideration received by them ca .....

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- (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, b .....

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n not wholly or partly consisting of money' in terms of Rule 3 of the said rules. It was argued that this method only applied to cases covered under clause (ii) of subsection 1 of section 67 and not to cases covered under clause (iii) of subsection 1 of section 67. No method has been prescribed to cover cases specified under clause (i) of subsection 1 of section 67. It was argued that since no method has been prescribed no tax can be charged. For this reliance was placed on i) Govind Saran G .....

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refore the assessable value cannot be ascertained under section 67 of the Act and therefore reliance has to be placed on the rules. The position of the appellant is that there are no rules to cover the situation and therefore assessable value cannot be determined and therefore no duty can be charged. The impugned order however relies on the Section 67 to arrive at the Assessable Value. An examination of the Section 67 and the Rules as they existed at the material time shows that, in case the pro .....

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1 of section 67. The notice as well commissioner has chosen to provide deduction of the duty paid value from the gross amount charged, which is clearly determined as the cost plus compensation received from the DHLI. Thus in the instant case the consideration being solely in money terms the assessable Value has to be determined in terms of Clause (i) of the sub section (1) of section 67. It is a fact that the all transactions (and therefore amount charged) are solely in money terms. All cases wh .....

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missioner has taken the entire cost plus consideration received from the DHLI as Gross amount received and given a deduction of that portion of the consideration which pertained to billed transactions under the best judgment method prescribed under Section 72. The appellants have sought exclusion of certain costs amounting to ₹ 331,62,16,184/-, claimed to be exclusively attributable to billed shipments from the calculations. These cots are in respect of retail functions and sales costs. It .....

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certain circumstances. These circumstances being a) the assessee falls to furnish return under section 70; b) having made a return, fails to assess the tax in accordance with the provisions of the Act or rules made thereunder The appellants have claimed that the circumstances prescribed in the said section do not exist in the instant case to enable the Commissioner to adopt the best judgment method. They claimed that they have indeed filed the returns and have assessed their liability correctly .....

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the return in respect of services. The law requires them to declare the Gross amount charged for services. They have instead declared the net amount in the returns. They have adjusted the amount payable for the services received against the amount receivable for services provided to arrive at assessable value. Not only that they have adjusted even costs and incentives against these values. Thus it is clear that they have failed to assess the tax in accordance with the provisions of the Act or r .....

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e or repute in regard to asessee's circumstances. It is agreed that the best judgement is no an arbitrary power and has to be exercised in a reasonable manner. In para 12 of the SCN it is clearly stated that detailed bifurcation of the consideration for billed and unbilled transactions was called from the appellants but they failed to give the same. Under these circumstances the revenue adopted the alternate method of approximation by apportioning it on the weight basis. I do not find that t .....

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side India" Instances have come to notice that certain activities, illustrations of which are given below, are denied the benefit of export of services and the refund of service tax under rule 5 of the Cenvat Credit Rules, 2004 [notification No. 5/2006-CE (NT) dated 14.03.2006] on the ground that these activities do not satisfy the condition 'used outside India',- (i) Call centres engaged by foreign companies who attend to calls from customers or prospective customers from all aroun .....

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aging an Indian organisation to dispatch such remittances to the receiver in India. For this, the foreign financial institution pays commission to the Indian organisation in foreign exchange for the entire activity being undertaken in India. The departmental officers seem to have taken a view in such cases that since the activities pertaining to provision of service are undertaken in India, it cannot be said that the use of the service has been outside India. 2. The matter has been examined. Sub .....

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services (such as Rent-a-Cab operator, Market Research Agency service, Survey and Exploration of Minerals service, Convention service, Security Agency service, Storage and Warehousing service) where the place of performance of service can be established, it is provided that provision of such services would be 'export' if they are performed (or even partly performed) outside India. (iii) Category (III) [Rule 3(1)(iii)] : For the remaining services (that would not fall under category I or .....

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ctivities other than business or commerce to a recipient located outside India at the time when such services are provided. 3. It is an accepted legal principle that the law has to be read harmoniously so as to avoid contradictions within a legislation. Keeping this principle in view, the meaning of the term 'used outside India' has to be understood in the context of the characteristics of a particular category of service as mentioned in sub-rule (1) of rule 3. For example, under Archite .....

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use the place of performance is U.K. even though the benefit of such a seminar may flow back to the employees serving the company in India. For the services that fall under Category III [Rule 3(1)(iii)], the relevant factor is the location of the service receiver and not the place of performance. In this context, the phrase 'used outside India' is to be interpreted to mean that the benefit of the service should accrue outside India. Thus, for Category III services [Rule 3(1)(iii)], it is .....

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specified under clause 105(f) of section 65 of the Act. This falls under the category under clause (ii) of sub-rule (1) of rule 3 of the Export of Services Rules, 2005. In respect of this category the place of performance is critical in determining the factum of export. In the instant case the entire courier service provide by appellants to DHLI was performed in India. The documents to be couriered are delivered in India and the same are received in India. It is immaterial if the payment of the .....

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ule (1) of rule 3 of the Export of Services Rule, 2005, where the place of performance is the relevant criterion. In view of that the decision cited is not relevant to the case. Their claim that the recipient of service is located outside India or that the foreign exchange is received as a consideration is irrelevant. 2.13 Limitation 2.13.1 The appellants have claimed that they have declared all the necessary details. They claimed that they have disclosed the necessary details of the Network agr .....

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d letter they had explained the provisions of Network Agreement between them and DHLI vide letters dated 28 May 2008 and 30 th January 2009. 2.13.2 A perusal of the letter dated 29 th April 2008 shows it contains certain objections but there is no mention of any Network agreement being submitted by them. In fact in reply to this letter vide letter dated 28 th May 2008 they mentioned that the Network agreement has been taken by Service Tax Department by issue of Summons dated 24 th September 2007 .....

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he shipments to the local regional airports or customs port for further transportation - The shipments collected by DHL India from customers located in India for delivery to consignees located outside India, are accumulated at various hubs as per pre-decided routing operated by DHL ops. - As the hubs, DHL Ops carried out the activities of sorting the shipments and ultimately delivering the same to final destinations. The network fee is paid to DHL Ops for carrying the above activity of deliverin .....

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. They have not informed that the amounts receivable for service provided are getting adjusted for the amounts payable for services availed for arriving at network fee. Co-loaders is paid form out of revenue collected by service provider. Since service provider pays tax on entire revenue collected, the co-loader was not levied service tax since his revenue is part of tax paid revenue. However the operations of DHLI are not of co-loader in respect of Unbilled consignments, as all unbilled operati .....

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able to appellants as service charges for services received. Representing the Network fee as a fee for co-loading is a misrepresentation. It is seen that that what has been disclosed to audit is incorrect. They have not disclosed all the four kind of operations i.e. billed export and imports, and the Unbilled export and imports. Moreover the appellants have not disclosed that the entire consideration received for all kinds of operations (i.e. both Billed and Unbilled) is being set off against th .....

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nly in case of billed consignments. In respect of unbilled consignments the DHLI was not the co-loader but a service recipient has not been disclosed. Thereafter the audit in their letter dated 12 January 2009 the audit calls for the agreements to examine the aspect of taxability of Network fee received from 2003-04 to 2006-07. In reply to that too the same explanation as given to the earlier letter is given. However, a copy of the agreement was enclosed. The explanation given by them again fail .....

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imitation. I) SDL Auto Pvt Ltd vs CCE Delhi 2013 (294) ELT 577 where it has been held that when audit is conducted the audit officers are required to examine every issue in relation to audit period. The audit conducted in the instant case was for the period 2002-03 to 2006-07. This is beyond the audit period. Furthermore the explanation given by the appellants in respect of billed export consignments. In respect of these consignments the DHLI qualify as co-loader. They have not disclosed that Ne .....

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dicate the fact that no tax on freight is being paid. In the instant case there has been an express misrepresentation of the fact that Network fee is not same as co-loading fee. It is in fact an amount arrived at by setting off the amount receivable by the appellant against the co-loading fee payable by the applicant. The assessable values in the service tax returns have been declared after netting payables against receivable as against the requirement of declaring the Gross amounts charged. III .....

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e service tax returns have been declared after netting payables against receivable as against the requirement of declaring the Gross amounts charged. IV) The appellants have also relied on the decision of tribunal in case of Knit Foulds vs CCE 2008 (230) ELT 442, herein it has been held that non disclosure was due to lack of understanding of provisions of the notification, intention to suppress cannot be alleged. The said decision, the appellants claimed, has been approved by Hon High Court of P .....

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that the penalty under section 78 is not leviable as no circumstances prescribed under the section exist. They claimed that i) they have filed returns regularly ii) They have disclosed all documents during audit iii) The notice seeks to levy tax on a consideration where no consideration exists iv) They are remitting the network fee to DHLI and paying service tax on the same. They relied on the following decisions i) Hindustan Steel vs State of Orissa 1978 (2) ELT J159 (SC) and Akbar Badrudin vs .....

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llants had obtained service tax registration and filed returns, penalty cannot be impose. The Section 67 reads as under "SECTION [67. Valuation of taxable services for charging service tax.- (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall - (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service pr .....

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mount charged'. It is seen that they have not declared the Gross amount charged' but the net amount after adjusting payables against receivables. They have also admitted it in para 4.21 of the appeal. "4.21 In this Connection, it is submitted that instead of receiving consideration from DHLI and paying consideration to DHLI, a net amount is paid by the appellant to DHLI on monthly basis. Accordingly, without prejudice to our arguments that there is no separate consideration, it is s .....

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eived but also costs and incentives. 2.14.1 The appellants argued that Service tax demand under reverse charge, even if applicable, would be revenue neutral. The appellants have claimed the benefit of cum-tax price. They have claimed that if the consideration received form DHLI is indeed treated as consideration for services provided by them to DHLI then that amount may be treated as Cum tax amount. They relied on the decision of CCE vs Advance Media Consultants 2008 TIOL 548 CESTAT wherein it h .....

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ecisions in this regard. i) Aurobindo Pharma v CCE 2007 (216) ELT 389 ii) Sundaram Fastners vs CCE 2009 (237) ELT 55 iii) PR rolling vs CCE 2010 (249) ELT 232 (maintained by Hon SC) There is a certain part of demand in which pertains to services provided by DHLI to appellants in respect of Billed transactions. The service tax in that case was paid by appellants on reverse charge basis. The appellants themselves were entitled to get the benefit of CENVAT credit for such duty paid, since these ser .....

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