TMI Blog2022 (2) TMI 857X X X X Extracts X X X X X X X X Extracts X X X X ..... sable expenses are interchangeably used by the appellant in their accounts representing the charges received in the form of cash rebate, gift items and other expenses on behalf of their clients. It is thus clear that these are receipts reimbursed for the expenses incurred for providing the services - the finding by the adjudicating authority is confined to the alleged mark up on the expenses incurred being 15% of the cost and shown as management fee in the table of the agreement. The appellant has collected and accounted the service tax on variable management fee also. Department who has conducted extensive scrutiny of the accounts do not have a case that the service tax collected under these invoices are not deposited to the Government. There is no such allegation in the show cause notice. The Department has accepted and admitted in the show cause notice as well as impugned order that appellant has discharged service tax on management fee. Further, the table of show cause notice itself describes the amounts on which tax is demanded as reimbursements and not as management fee - the entire demand is raised on costs/expenses incurred by the appellants for providing the Business A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income had been shown in two accounting heads, viz. service charges and sales. It was noticed from the balance sheets for the financial years 2006-2007 to 2010-2011, and relevant service tax returns for the period 2006-2007 to 2010-2011 that the appellant had not discharged their service tax liability on the gross amount received from their clients for providing Business Auxiliary Services (hereafter mentioned as BAS). 2. It appeared that appellant had not paid service tax on the cost of the goods used for distribution to their clients channel partners. The appellant had accounted cost of such deliverable goods and materials in two heads, viz.; redemption and sale of goods for the year 2007-2008 to 2010-2011. For the year 2006- 2007, the appellant accounted the cost of the deliverable goods and materials in the head viz.; redemption and reimbursements . After detailed scrutiny of accounts it appeared that appellant had discharged service tax only on management fee and had not included reimbursable expenses in the taxable value for discharging their service tax liability. The appellant was issued show cause notices for different periods. Show cause notice dated 20.04.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its clients, who were based in India and abroad. The services were provided under agreement (s) executed with respective clients. In such agreements, the scope of work, reporting to the client, obligation of each of the parties, terms of remuneration, feedback, management fees, other costs, Government dues etc. were stipulated. The appellant was holding centralized registration for providing BAS to various Indian as well as overseas clients. The appellant discharged service tax on the consideration received for providing BAS and filed returns accordingly. 6. The appellant rendered its services to various clients by designing/executing various schemes, programs, strategies etc. as formulated or directed by the clients for the benefit of the clients by way of promotion of the sales of such clients. These schemes included loyalty and incentive schemes for promoting the business of the clients, such as distribution of gifts, rewards, etc. to the distributors and customers of the Appellant s clients. For distribution of the gifts under the promotional schemes, the Appellant purchased the items or gifts on behalf of its clients and delivered them to the distributors/customers of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which are reproduced at Table II on page 3 of the Impugned Order. The Appellant also submitted a detailed note on the activities undertaken by them, vide letter dated 12.12.2011 (reproduced at Para 1.4 of the Impugned Order). It was also clarified that reimbursement of expenses were not booked to sales account since the parties were not debtors of the Appellant and the Appellant only charged management fees and booked it in the income account of the company. 10. The learned Counsel submitted that the entire demand is raised on reimbursable expenses. It is very much clear from the show cause notice as well as the impugned order that the demand is raised and confirmed on reimbursable expenses. The appellant had incurred various expenses for providing BAS to its clients. These expenses were reimbursed in different ways to the appellant. As per Section 67 of the Act, as it stood during the relevant period, only the consideration received is subject to levy of service tax. The reimbursements received from the client for the expenses incurred for providing the services is not to be included. This issue is settled by the decision of the Hon ble Supreme Court in the case of Union of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demptions for distribution of goods . 14. He adverted to para 10.1 of the impugned order and submitted that the adjudicating authority has noted that there is no dispute regarding payment of service tax on management fee. Further in para 13, the adjudicating authority has stated that redemption receipts and reimbursable receipts are interchangeable terms used by the noticee (appellant) representing charges received from their clients on account of cash rebate, gift items and other expenses on behalf of their clients. Having so held, the adjudicating authority erred in proceeding to confirm the demand disregarding the judgment of the Hon ble Apex Court. 15. Though the judgment of the Hon ble Supreme Court was brought to the notice of the adjudicating authority, the same was not considered and the adjudicating authority chose to selectively cite the judgment of the Hon ble Delhi High Court and proceeded to confirm the demand. The Apex Court has clearly held that Section 67 did not include reimbursable expenses for the period prior to 14.05.2015. 16. The judgment of the Apex Court in Intercontinental Consultants and Technocrats Pvt. Ltd. (supra) has been subsequently fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vely upset. The obvious basis of the principle against retrospectivity is the principle of fairness as it was observed in the case of L s Office Cherifien Des Phosphates v. Yamashita-Shinnihon Steam Ship Company Ltd. - 1994 (1) AC 466. It was clarified in this case that the Legislatures which modified accrued rights or which imposed obligations or imposed new duties or attached a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect unless the legislation is for the purpose of supplying an obvious omission in a former legislation or to explain a former legislation. Since the amendment in Section 67 in the year 2015 do not fall in any of the later categories as discussed, it cannot be applied retrospectively. As a result of entire above discussion it stands clear that according to legislative intent of the Finance Act for the impugned period the value of taxable service shall be the gross amount charged by the service provider for such service and the valuation of tax for the service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service . 19. In Baj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses reimbursed by the client Seagate Singapore International Pvt. Ltd. (SSIRL) cannot be sustained as these services were rendered to overseas client and tantamount to export of services. The BAS rendered by the appellant to its overseas client located outside India against consideration received in foreign currency qualified as export of service under the provisions of Export of Service Rules, 2005 which were in force upto 30.06.2012. The CBEC vide Circular dated 24.02.2009, has clarified that the relevant factor for determining whether the service (BAS) was exported was the location of the service recipient and not the place of performance of service. The appellant had also relied on the decisions rendered in the cases of IBM India (P) Ltd. 2010 (19) S.T.R. 520 (Tri. Bang.), Microsoft Corporation (I) (P) Ltd. - 2014 (36) S.T.R. 766 (Tri. Del.), Vodafone Essar Cellular Ltd. 2013 (31) S.T.R. 738 (Tri. Mumbai) and Canon India Pvt. Ltd. 2018 (2) TMI 936 (CESTAT, Chandigarh). 22. Though it was export of services, the Appellant had discharged service tax on the management fee received from SSIPL. Merely because the Appellant paid tax on the services rendered to SSIPL e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns across wide spectrum of segments for promoting their sales. (iii) Management of projects business which can be of any of the services mentioned above and for a short duration. These services could be selling an event or profiling customers etc. These activities are characterized as Business Auxiliary Services as defined under Section 65 (105) (zzb) of the Finance Act, 1994 (hereinafter referred to as The Act ) upto 30.06.2012 and thereafter a service and a taxable service in terms of clause 44 and 51 of Section 65B of the Act. The Appellant is providing the aforesaid services under agreements executed with its clients located in India and outside India. As per terms of agreements, Appellant gets consideration which described in books of accounts as :- (i) Management fee; (ii) Redemption receipts ; (iii) Reimbursement receipts; and (iv) Amount received against sale of goods . 26. The findings of the adjudicating authority on redemption receipts and reimbursable receipts are as under :- 3.1 The redemption receipts and reimbursable receipts are interchangeable terms used by noticee representing charges received from their clients on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /expenses for distribution to their clients dealers, it is observed that this management fee @15% is nothing but a mark up on the said expenses being incurred by the Appellant for providing the said services and therefore the total amount, including fixed monthly retainer/service fee, cost of cash reward/gift items/expenses and the mark up in form of 15% management fee, is in respect of service being provided by appellant to the clients and constitutes the value of such taxable service. 28. That as can be observed from Clause V (A) of the agreement with M/s Symantec Software Solutions Private Ltd., it provides for a fixed service price of ₹ 70,500/- in a month in lieu of services provided by Appellant to M/s Symantec Software Solutions Private Ltd. Apart from this in terms of clause V (b) of the agreement, Appellant also charges for the various expenses such as (i) Collateral or additional web development, travel, telecom, communication, courier costs a tactical promotional expenses; (ii) Selection, procurement and redemption of rewards /gifts to consumer and retail channel partners of the client; and (iii) Purchase of media space in Indian print publications and web ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore the contention of Appellant that they received the reimbursement without any mark up is not sustainable. 31. That as regards relying upon decision of Hon ble Supreme court in the case of M/s Intercontinental Consultants Technocrats Pvt. Ltd. holding that reimbursable expenses are not includible in the value of taxable service, it is argued by Revenue that the facts of the relied upon case are completely distinguishable from the present case. In the case of M/s Intercontinental Consultants Technocrats Pvt. Ltd. the demand of service taxwas on the gross value including reimbursable and out of pocket expenses such as travelling, boarding and lodging, transportation, office rent, office supplies and utilities, testing charges etc. which, according to department, were essential expenses for providing the taxable services of consulting engineers under sub-rule (1) of Rule 5 of Valuation Rules. However, in the present case, the issue is that the Appellant has received amount from the service recipients on account of expenses for direct costs such as purchase of goods to be delivered to the distributors/dealers of its clients including a percentage of cost of goods/expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,18,13,191 452761 - 4,22,65,952 12.36% 52,24,072 2008- 09 4,70,83,777 0 - 4,70,83,777 12.36% 58,19,555 2009- 10 10,92,39,828 4403214 - 11,36,43,042 10.30% 1,17,05,233 2010- 11 12,21,85,352 15720564 - 13,79,05,916 10.30% 1,42,04,309 Total for SCN- I 34,43,06,030 2,05,76,539 33,85,887 36,82,68,456 4,03,03,229 SCN- II 2011- 12 16,13,17,124 - - 16,13,17,124 10.30% 1,66,15,664 SCN- III 2012- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands confirmed by the adjudicating authority as seen from the show cause notice is on redemption receipts and reimbursement receipts. In para 13 of the impugned order it is observed by the adjudicating authority that the terms redemption receipts and reimbursable expenses are interchangeably used by the appellant in their accounts representing the charges received in the form of cash rebate, gift items and other expenses on behalf of their clients. It is thus clear that these are receipts reimbursed for the expenses incurred for providing the services. 39. In page 239, the adjudicating authority has reproduced part of the agreement entered by appellant with their client JK Paper Ltd. Clause IV of the agreement stipulates the consideration and cost that is to be paid by the client to the appellant. It reads as under:- IV: Management Fees: A fixed Management Fee of ₹ 1,59,850/- per month would be paid to EBPL on a monthly basis on top of the following cost heads :- Fixed Retainer Program Manager 25,000 Database Manager Shared Cost 15,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 240 reads as under :- As a part of the services being provided by the Noticee to its clients, they are also required to incur various expenses on marketing and promotional activities including distributing cash rewards and gift items to the distributors/dealers of the clients, on which besides the actual expenses being incurred by them, they are also adding a management fee of 15%, as is evident from Clause 14 (iii) of the Agreement referred above. I accordingly observe that the noticee is receiving three types of payments from its clients;, (i) Fixed Retainer fee/Service Fee per month; (ii) Cost of cash reward/gift items/expenses at actual and (iii) a mark up in form of Management fee @ 15% on these expenses. Now, since there is specific provision for fixed retainer/service fee per month for the services being provided by the Noticee to their clients separately, which is over and above the cost of cash reward/gift items/expenses for distribution to the clients dealers, I observe that this management fee @ 15% is nothing else but a mark up on the said expenses being incurred by the Noticee for providing the said services and therefore, the total amount, including fixed monthl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iverable goods and materials. The assessee does not appear to fulfill all the conditions of pure agent as per Rule 5 (2) of Service Tax (Determination of Value) Rules, as the assessee has received the mark up from the client on the purchase cost of the deliverables and materials used for distribution. Therefore, the assessee does not appear to qualify as a pure agent in terms of Rule 5 (2) of Service Tax (Determination of Value) Rules, as the assessee has received the mark up from the client on the purchase cost of the deliverables and materials used for distribution. Therefore, the assessee does not appear to qualify as a pure agent in terms of Rule 5 (2) of Service Tax (Determination of Value) Rules, 2006 as the conditions (ii), (vii) (viii) ibid do not satisfy as much as that the client distributes the merchandise goods by realizing the mark up on the cost of such goods and the activity of procurement of these merchandise goods is not in addition to the provision of taxable service, but is an essence of such service . 43. The learned Counsel appearing for the appellant has asserted that they have discharged service tax on both the fixed management fee as well as variable m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e., in the absence of any such Rule, the valuation was to be done as per the provisions of Section 67 of the Act. 22. Section 66 of the Act is the charging Section which reads as under: there shall be levy of tax (hereinafter referred to as the service tax) @ 12% of the value of taxable services referred to in sub-clauses of Section 65 and collected in such manner as may be prescribed. 23. Obviously, this Section refers to service tax, i.e., in respect of those services which are taxable and specifically referred to in various sub-clauses of Section 65. Further, it also specifically mentions that the service tax will be @ 12% of the value of taxable services . Thus, service tax is reference to the value of service. As a necessary corollary, it is the value of the services which are actually rendered, the value whereof is to be ascertained for the purpose of calculating the service tax payable thereupon. 24. In this hue, the expression such occurring in Section 67 of the Act assumes importance. In other words, valuation of taxable services for charging service tax, the authorities are to find what is the gross amount charged for providing such taxable service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke away what was conferred by the Act or whittle down its effect. 29. In the present case, the aforesaid view gets strengthened from the manner in which the Legislature itself acted. Realising that Section 67, dealing with valuation of taxable services, does not include reimbursable expenses for providing such service, the Legislature amended by Finance Act, 2015 with effect from May 14, 2015, whereby Clause (a) which deals with consideration is suitably amended to include reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service. Thus, only with effect from May 14, 2015, by virtue of provisions of Section 67 itself, such reimbursable expenditure or cost would also form part of valuation of taxable services for charging service tax . 46. The Hon ble Apex Court has categorically held that prior to 14.05.2015 reimbursable expenses for providing taxable service are not includable in the assessable value. 47. Another contention raised by the Revenue is that the appellant is not a pure agent as they have received mark up on the sale value of goods. Though the decision of the Hon ble A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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