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TMI Blog2022 (2) TMI 955X X X X Extracts X X X X X X X X Extracts X X X X ..... en filed by the appellant to assail the order dated 18.05.2018 passed by the Commissioner confirming the demand of Rs. 117,49,52,281/- under section 73(2) of the Finance Act with interest and penalty. This order adjudicates the show cause notice dated 18.05.2018 issued to the appellant for the period 01.10.2014 to 31.03.2016. 3. Service Tax Appeal No. 51698 of 2017 has been filed by the Commissioner against that part of the order dated 16.01.2017 by which the penalty against the appellant has been dropped for the reason that benefit of waiver of penalty was available to the appellant under section 80 of the Finance Act. 4. The appellant, which is a wholly owned undertaking of the Government of Rajasthan [the State Government ] , acts as a nodal agency in the implementation of various Information Technology related projects of the Department of Information Technology and Communication[Department of IT&C]in the State Government. 5. The process involved in execution of the projects has been explained by the appellant in the following manner: 6. The various public benefit schemes, for whose implementation the appellant had been appointed as a nodal agency, are pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the levy of service tax on the amount collected/forfeited as liquidated damages by the appellant from the vendors on account of breach of contract. 11. It is these two orders dated 16.01.2017 and 18.05.2018 that have been assailed by the appellant in the first two appeals. In the order dated 16.01.2017, the penalty proposed against the appellant was dropped on the ground that benefit of waiver of penalty was available to the appellant under section 80 of the Finance Act. This part of the order has been assailed by the Revenue in the third appeal. 12. Shri B.L. Narasimhan, learned counsel appearing for the appellant made the following submissions: i. The amount received from the State Government for payment to vendors is not towards any consideration and, therefore, not taxable. In terms of section 67(1) of the Finance Act, the value of any taxable service is the gross amount charged by the service provider from the service recipient 'for such service'. The phrase 'for such service' is required to be understood to mean that the consideration should necessarily have a direct nexus with the service. Thus, only such amount can be subjected to service tax which rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not repeated. Thus, no service tax is leviable on liquidated damages. In this connection, reliance has been placed on the decision of the Tribunal in M/s. South Eastern Coalfields Ltd. vs. Commissioner of Central Excise and Service Tax [2020 (12) TMI 912 - CESTAT, New Delhi]; viii. No service tax can be levied in the absence of consideration; ix. Amount returned by the appellant to the State Government is required to be reduced from the taxable value; x. Demand should be dropped on account of being revenue neutral; xi. Cum-tax computation should be extended; xii. The extended period of limitation could not have been invoked in the facts and circumstance of the case; and xiii. No penalty could have been imposed. 13. Dr. Neha Garg, learned authorized representative appearing for the department, however, supported the impugned order and made the following submissions: i. The appellant did not act as a pure agent since it did not fulfill all the conditions of rule 5(2) of the Valuation Rules; ii. The appellant is liable to pay service tax on the amount received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilization certificate to the State Government. 16. It has to be determined whether the amount received by the appellant from the State Government for payment to vendors would be a consideration for any service provided by the appellant to the State Government and, therefore, taxable. It needs to be remembered that on the service charges received by the appellant from the State Government Departments, service tax was paid by the appellant and this fact is not in dispute in the appeals. The dispute is about the amount received from the State Government Departments, which amount was paid by the appellant to the vendors. The Revenue has demanded the service tax on this amount. 17. The submission of the learned counsel for the appellant is that no service tax can be levied on the amount received for onward payment to the vendors and in this connection, reliance has been placed on section 67 of the Finance Act which deals with valuation of taxable services. The relevant portion of this section is reproduced below: "67. Valuation of taxable services for charging service tax (1) Subject to the provisions of this Chapter, service tax chargeable on any taxable servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew that the charge of service tax under section 66 of the Finance Act has to be on the value of taxable service i.e. the value of service rendered by the assessee and the quantification of the value of service can, therefore, never exceed the gross amount charged by the service provider for the service provided by him. On that analogy, the High Court opined that the scope of rule 5 of the Valuation Rules goes beyond the scope of section 67 which was impermissible as rules could be framed only for carrying out the provisions of the Finance Act. In taking this view, the High Court observed that the expenditure or cost incurred by the service provider for providing the taxable service can never be considered as the gross amount charged by the service provider "for such service" provided by him. Paragraph 18 of the judgment of the High Court is reproduced below: "18. Section 66 levies service tax at a particular rate on the value of taxable services. Section 67(1) makes the provisions of the section subject to the provisions of Chapter V, which includes Section 66. This is a clear mandate that the value of taxable services for charging service tax has to be in consonance with S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006 or after this amendment and if this be so, then rule 5 of the Valuation of Rules went much beyond the mandate of section 67 of the Finance Act. Paragraph 26 of the judgment of the Supreme Court is reproduced below: "26. 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 services. As a fortiori, any other amount which is calculated not for providing such taxable service cannot be a part of that valuation as that amount is not calculated for providing such "taxable service". That according to us is the plain meaning which is to be attached to Section 67 (unamended i.e. prior to 1-5-2006) or after its amendment, with effect from 1-5-2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasised that Rule 5 of the Rules went much beyond the mandate of Section 67. We, therefore, find that the High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable service shall be the gross amount ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it be regarded as a consideration for the service provided by the service provider. In fact, it has no nexus whatsoever with the taxable services for which value is sought to be determined" (emphasis supplied) 22. The factual position described above would clearly indicate that as a nodal agency appointed by the various State Government Departments, the primary responsibility of the appellant was to supervise and monitor the overall execution of projects; computation of estimate of cost; issuance of notice inviting tenders; and appointment of vendors. The vendors so appointed by the appellant then entered into the contracts with the appellant on behalf of the State Government. The vendors performed their obligations stipulated in the contracts for execution of the projects and upon completion of the projects, a working report with utilization certificates and invoices were furnished by the appellant to the concerned Departments, which thereafter released the sanctioned amount to be paid to the vendors through the appellant. 23. It would, therefore, be seen that two independent activities were performed for which consideration was received. When the appellant supervis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Labour Department Management System (LDMS)", hereinafter referred to as the "project". And whereas As part of this MoU, the DoL, GoR hereby agrees to appoint RISL as "Nodal Agency" to the DoL, GoR to undertake the project execution work for the Pilot LDMS project as defined below in Para 5 of this MoU. And whereas RISL is exempted from payment of EMD/SD under Rule 57(2)(a)(i) of GF&AR Part-II. Now it is hereby agreed to by and between the parties hereto as under:- 1. Project Background/Overview a) ***** b) LDMS has been identified as one of the State Mission Mode Project under State eGovernance Action Plan owing to its functional critically and high-level of direct citizen interaction. The proposed LDMS has been designed taking into consideration the strengths and limitation of DoL. The project focuses on computerization and automation of processes and services offered by DoL to citizens. c) ***** d) ***** ******* 3. Roles & Responsibilities of RISL a) To coordinate with all the stakeholders of the project viz. DoL, DoIT&C, NIC and Implementing Agency b) Review and approve the overall LDMS solution design, implemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Clause No. 3 above. ******* 7. Project Cost The total estimate project cost, including 2% contingency and RISL Service charges is as under: - Phase-I Cost Phase-II Cost Total Proj. Cost Total CAPEX (In Rs.) INR 3,76,17,750 INR 1,19,45,500 INR 4,95,63,250 Total OPEX (In Rs.) INR 72,27,906 INR 2,95,48,906 INR 3,67,76,813 Contingency @2% of CAPEX+OPEX INR 8,96,913 INR 8,29,888 INR 17,26,801 RISL Service Charge (In Rs.) Excl. Taxes INR 38,59,406 INR 35,85,944 INR 74,45,349 Total Project Cost (In Rs.) INR 4,96,01,975 INR 4,59,10,238 INR 9,55,12,213 INR 4.96 Crores INR 4.59 Crores INR 9.55 Crores 8. Taxes/Duties: The DoIT&C shall pay all tax/duties, as applicable, at the time of billing 9. Payment terms and conditions: RISL, upon successful completion of the respective milestones as per Clause No. 6 above, shall raise the Invoice to DoIT&C, GoR for payments to the implementing agency including RISL service charges." 28. The appellant had submitted a statement of estimate of expenditure to the State Government regarding computerization and the same i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e No. F4.2(63)/RISL/Tech/2012/ dated 28/03/2014 Sir, With reference to the above, please find below the requisite details." S.No. Details of the Work/Description Amount (INR) 1 RISL's approved service charges @10% calculation on Rs. 22,53,250.00/- as per details given in Utilisation Certificate No. F4.2(63)/RISL/Tech/2012 dated 28/03/2014 2,25,325.00 2. Service Tax including cess @12.36% on S.No. 1 above 27,850.00 Total Amount (In Figures): 2,53,175.00 Total Amount (In Words): Rupees Two Lakhs Fifty Three Thousand One Hundred Seventy Five Only 33. It would, therefore, be seen that the amount paid by the State Government Departments to the appellant are reimbursements, which cannot be subjected to levy of service tax. The only consideration received by the appellant was the 'service charge' on which service tax was discharged by the appellant. 34. It has also been submitted, in the alternative, by the learned counsel for the appellant that as the appellant was acting as a pure agent no service tax can be levied on the consideration paid by the service recipient (State Government) to the vendors. In this connection reference has been ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as his pure agent to incur expenditure or costs in the course of providing taxable service; (b) neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service; (c) does not use such goods or services so procured; and (d) receives only the actual amount incurred to procure such goods or services." 35. It would be seen from sub-rule (2) of rule 5 of the Valuation Rules that expenditure or cost incurred by the service provider as pure agent of service recipient has to be excluded from the value of taxable service if the conditions stipulated in the rule are satisfied. 36. The appellant has demonstrated as to how the conditions are satisfied and the same are reproduced below: Conditions as per rule 5(2) of the Valuation Rules Remark as to how the appellant is satisfying the conditions of the said rules (i) The service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or service procured The appellant acted as an agent of the State Government, whereby it facilitated the implementation of the projects. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion demonstrated by the appellant are clearly borne out from the record and the contracts. 38. Thus, as all the conditions of rule 5(2) of the Valuation Rules are satisfied, the appellant acted as a pure agent as a result of which the amount collected by the appellant from the State Government for payment to the vendors cannot be subjected to service tax. 39. In this connection reference can also be made to the clarificatory CBEC letter dated 19.04.2006, which is reproduced below: "4.1.8 The service provider in the course of providing any taxable service may incur certain expenditure or cost as a pure agent of the client. The service provider seeks to exclude such expenditure or cost incurred by him as a pure agent of his client (generally known as reimbursable expenditure) from the value of the taxable services. 4.1.9 There could be situations where the client of the service provider specifically engages the service provider, as his agent, to contract with the third party for supply of any goods or services on his behalf. In those cases such goods or services so procured are treated as supplied to the client rather than to the contracting agent. The service provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find that the assessee/respondent herein has only done the work of advising and assisting the sponsoring agency in selecting various venders, who would supply and /commission various items of work. The personnel, working with the respondent, are also by and large professionally equipped computer engineers." (emphasis supplied) 41. What follows from the aforesaid discussion is that the amount received by the appellant from the State Government for payment to vendors is not a consideration for any service said to be rendered by the appellant to the State Government and, therefore, no service tax could be levied. This is for the reason that the amount which the appellant has received is not a consideration for provision of any service. The appellant was appointed merely as a Nodal Agency to supervise and monitor the overall execution of the projects. Infact, the amount paid by the State Government Department to the appellant are reimbursements which cannot be subjected to levy of service tax and in any view of the matter the appellant was acting as a pure agent as all the conditions stipulated in rule 5(2) of the Valuation Rules are satisfied. 42. In view of the aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements in relation to the other two activities referred to in section 66E(e) of the Finance Act. 47. This issue was examined at length by a Division Bench of the Tribunal in M/s. South Eastern Coalfields Ltd. and the observations are as follows: "27. It is trite that an agreement has to be read as a whole so as to gather the intention of the parties. The intention of the appellant and the parties was for supply of coal; for supply of goods; and for availing various types of services. The consideration contemplated under the agreements was for such supply of coal, materials or for availing various types of services. The intention of the parties certainly was not for flouting the terms of the agreement so that the penal clauses get attracted. The penal clauses are in the nature of providing a safeguard to the commercial interest of the appellant and it cannot, by any stretch of imagination, be said that recovering any sum by invoking the penalty clauses is the reason behind the execution of the contract for an agreed consideration. It is not the intention of the appellant to impose any penalty upon the other party nor is it the intention of the other party to get penalized. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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