M/S Blossom Industries Limited vs Commissioners Of Central Excise

[ Arising out of OIO-DMN-EXCUS-000-COM-0046, 0047, 0048, 0049 -14-15 all dtd 28.2.2015 Passed by Commissioner of Central Excise, Customs and Service Tax-DAMAN ]

M/s Blossom Industries Limited - Appellant(s)

Vs.

Commissioners of Central Excise, Customs and Service Tax-DAMAN - Respondent (s)

Represented by :

For Assessee : Shri S Jaikumar, Advocate Shri R Subramanya, Advocate For Revenue : Shri J Nagori, Authorised Representative

For approval and signature :

Mr. P.K. Das, Hon'ble Member (Judicial) Mr. P.M. Saleem, Honble Member (Technical)

1 Whether Press Reporter may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?

No 2 Whether it should be released under Rule 27 of CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?

No 3 Whether their Lordships wish to see the fair copy of the Order?

Seen 4 Whether Order is to be circulated to the Departmental authorities?

Yes

CORAM :

Mr. P.K. Das, Hon'ble Member (Judicial) Mr. P.M. Saleem, Honble Member (Technical)

Date of Hearing / Decision : 1/9/2015

ORDER No. A/ 11364-11367/2015 dtd 1.9.2015

Per : Mr.P.K. Das,

Common issue is involved in these appeals and, therefore, all are taken up together for disposal.

2. The relevant facts of the case, in brief, are that the appellants were engaged in the manufacture of Alcoholic Beverages (i.e., Beer), which is not covered within the purview of the Schedule to the Central Excise Tariff Act, 1985. They were registered with the Service Tax Authorities for GTA Service. The appellants were manufacturing Beer on their account and also for M/s United Breweries Ltd (in short UBL) in terms of license agreement for manufacture and sale of Beer. By Finance (No.2) Act, 2009, the definition of Taxable Service, viz., Business Auxiliary Service (BAS) was amended. The activities of the appellant in so far as the manufacture of Alcoholic Beverages on job work basis, was included in service tax net with effect from 1.9.2009. The appellants had challenged the constitutional validity of levy of the Service Tax on the manufacture of Alcoholic Beverages on job work basis, before the Honble Bombay High Court by filing Writ Petition. The Honble High Court by Order dtd 14.10.2010 was pleased to admit the Writ Petition and observed that the Revenue would be at liberty to proceed with the Show Cause Notice. In the meantime, four show Cause Notices were issued proposing demand of Service Tax alongwith interest and to impose penalties for the period from 23.11.2009 to 30.12.2012. By the impugned orders, the Adjudicating authority confirmed the demand of Service Tax alongwith interest and also imposed penalties and also appropriated the amount as deposited by the appellant.

3. The Learned Advocate on behalf of the appellant submits that they have already challenged the constitutional validity of levy of tax on the activities of manufacture of the goods on job work basis, which is pending before the Honble High Court. He further submits that the demand of Service Tax was not properly quantified in terms of the CBEC instructions 332/17/2009-TRU dtd 30.9.2009. They have paid tax according to their calculation. There is no suppression of the fact with intend to evade payment of tax and therefore, the imposition of penalty under Section 78 against Show Cause Notice dtd 5.10.2010 cannot be sustained. He further submits that it is a new levy and the appellant already paid the tax alongwith interest as per their calculation and therefore it is a fit case for invocation of Section 80 of the Finance act 1994 for waiver of the other penalties.

4. The Learned Authorised Representative on behalf of Revenue reiterates the findings of the Adjudicating authority. He strongly opposed the waiver of penalties.

5. Heard both sides and perused the records.

6. We find that CBEC Circular F. No 332/17/2009-TRU dtd 30.10.2009 was issued to clarify the determination of the taxable value for payment of Service Tax in respect of amendment of definition of BAS w.e.f. 1.9.2009, to include manufacture of Alcoholic Beverages on job work basis. The relevant portion of the said Circular is reproduced as under :

 2. Under section 67 of the Finance Act, 1994, service tax is chargeable on the gross amount charged by the service provider for providing taxable services. As per CIABC the gross value of sales, as per invoices, includes the following elements:

i) Bottling/job charges  paid to CBU

ii) Distribution costs including freight, transit insurance etc  paid to CBU

iii) Other reimbursable  paid to CBU

iv) Cot of raw materials  paid to CBU

v) Cost of packing materials  paid to CBU

vi) State excise duty and VAT  paid to State Government

vii) Surplus/profit  retained by BO

It was their plea that if the entire amount charged by CBU is subject to service tax, it would amount to charging tax on goods. The CIABC, therefore, requested that the service tax should be charged on the amount representing the charges for service alone. Accepting their plea, Notification No 39/2009-ST dtd 23.9.2009 was issued wherein exemption from service tax has been provided on the value which represents the value of inputs ie., raw materials and packaging materials used in the manufacture of such alcoholic beverages.

3. The CIABC has now sought clarification on the tax base on which the service tax would be chargeable after allowing the deduction provided in the Notification. In short, they want to know as to how many of the above 7 elements (para 2 above) would be includible in the value for the purpose of charging service tax.

4. For removal of doubts and with a view to avoid disputes on valuation, it is clarified that:

a) Service tax would be payable on the bottling/job charges, distribution costs and other reimbursable.

b) So far as inputs ie., raw materials and packing materials are concerned, one of the conditions of exemption notification No 39/2009-ST is that there should be documentary proof specifically indicating the value of these inputs. Therefore, service tax on the value of raw materials and packaging materials would be exempt only when such charges are specifically mentioned in the invoice raised/documents maintained by the CBU.

c) As regards the statutory levies, namely, excise duty/VAT, they do not present any consideration for rendering the service. Whether such amount is paid by BO or by CBU, they have no nexus with the provision of service. As such, these levies will not be included for charging service tax.

d) Similarly, the surplus/profit earned by the BO being in the nature of business profit (which falls within the purview of direct taxes), will not be chargeable to service tax.

5. This position may be clarified suitably to the field formations.

7. The Learned Advocate fairly submits that in the impugned Adjudication order, the Adjudicating authority while determining the taxable value has excluded cost of raw materials, cost of packing materials and State Excise duty and Vat. He submits that the Adjudicating Authority included the surplus/profit retained by the Brand owners (BO, M/s UBL) which is contrary to Board Circular. He submits that the appellant sold the Beer to the persons nominated by UBL. In such case, the Beer was sold to the persons nominated by UBL, and after deducting the various expenses, the surplus/profit amount was returned to UBL. We find that as per Board Circular the surplus/profit amount of the principal cannot be included in the value of taxable service for the payment of Service Tax. The Learned Authorised Representative on behalf of the Revenue drew the attention of the Bench to the relevant portion of the Adjudication order. The Adjudicating authority observed that the quantum of business profit included in the business income of UBL is not provided by the appellant and in absence of which they have claimed for deduction of entire amount remitted to the UBL cannot be accepted. It is noticed that the Adjudicating authority proceeded on the basis that the business income in this case is business profit of the Brand owner. On plain reading of the Board instruction, it is clear that one of the elements of gross value of invoice is surplus/profit retained by BO, which would not be included in taxable value. In other words, the amount returned to BO is in so far as surplus/profit of BO, cannot be included in the taxable value. The amount surplus/profit retained by BO as claimed by the appellant, had been returned to BO and therefore such amount cannot be included in the taxable value.

8. The other contention of the Learned Advocate is that the other reimbursable paid to CBU as mentioned in the Board Circular would cover under Rule 5(i) of Service Tax (Determination of Value) Rules 2006. The Honble Delhi High Court in the case of M/s Intercontinental Consultants and Technocrats Pvt Ltd vs UOI - 2013 (29) STR 9 (Del) held that Rule 5(i) of Service Tax Valuation Rules, 2006 is repugnant to Section 66 and 67 of the Finance Act, 1994 and to that extent it is ultra vires. He submits that the decision of the Honble Delhi High Court came after the Board circular and therefore, reimbursement expenses cannot be included in the taxable value. The Learned Authorised Representative on behalf of the Revenue submits that the decision of the Honble Delhi High Court in the case M/s Intercontinental Consultants and Technocrats Pvt Ltd (supra) is in the context of the expenses such as telephone charges, air travel tickets, hotel accommodation etc. We find that the Honble High Court had given such illustration to show how the boundaries of Section 67 are breached by the Rule 5(i) of the Service Tax Valuation Rules. It is observed that apart from travelling beyond the scope and mandate of the section, the Rule may also result in double taxation. If the expenses on air travel tickets are already subject to Service Tax and included in the bill, to charge service tax again on the expenses would certainly amount to double taxation. We find that Rule 5(i) of Service Tax (Determination of Value) Rule 2006 provides where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging tax on the said service. In case of M/s Intercontinental Consultants and Technocrats Pvt Ltd (supra), the Honble Delhi High Court held that Rule 5(i) is ultra vires. The relevant portion of the decision of the Honble 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 Section 66 which levies a tax only on the taxable service and nothing else. There is thus inbuilt mechanism to ensure that only the taxable service shall be evaluated under the provisions of 67. Clause (i) of sub-section (1) of Section 67 provides that the value of the taxable service shall be the gross amount charged by the service provider for such service. Reading Section 66 and Section 67(1)(i) together and harmoniously, it seems clear to us that in the valuation of the taxable service, nothing more and nothing less than the consideration paid as quid pro quo for the service can be brought to charge. Sub-section (4) of Section 67 which enables the determination of the value of the taxable service in such manner as may be prescribed is expressly made subject to the provisions of sub-section (1).

The thread which runs through Sections 66, 67 and Section 94, which empowers the Central Government to make rules for carrying out the provisions of Chapter V of the Act is manifest, in the sense that only the service actually provided by the service provider can be valued and assessed to service tax. We are, therefore, undoubtedly of the opinion that Rule 5(1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. It purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider in the course of providing taxable service. What is brought to charge under the relevant Sections is only the consideration for the taxable service. By including the expenditure and costs, Rule 5(1) goes far beyond the charging provisions and cannot be upheld. It is no answer to say that under sub-section (4) of Section 94 of the Act, every rule framed by the Central Government shall be laid before each House of Parliament and that the House has the power to modify the rule.

As pointed out by the Supreme Court in Hukam Chand v. Union of India, AIR 1972 SC 2427 :-

9. In view of the decision of the Honble Delhi High Court, we hold the reimbursable expenses paid to the appellant in so far as cost and expenditure as stipulated under Rule 5(i) Service Tax Valuation Rules, 2006 can not be included in the taxable value.

10. The appellant contended that it is a new levy and therefore imposition of penalty cannot be sustained. The Learned Advocate submits that in respect of Show Cause Notice dtd 5.10.2010 penalty was imposed under Section 78 and 77 of the Act 1994. He further submits that in respect of the other three Show Cause Notices, penalty was imposed under Section 76 and 77. We find that it is a new levy introduced with effect from 1.9.2009. CBEC Circular was issued on 30.10.2009. The appellant had not registered with the Central Excise Authorities and challenged the constitutional validity of levy before the Honble High Court. The Honble High Court admitted the Writ Petition and was pleased to issue Rule returnable. The Honble High Court was pleased to observe that the Revenue would be at liberty to proceed with the Show Cause Notice. The Learned Authorised Representative on behalf of the Revenue submits that the levy was introduced with effect from 1.9.2009 and they should have obtained the registration within one month as per Service Tax Rules, instead of they have filed writ petition just one day before of the issue of Show Cause Notice dtd 5.10.2010. Thus, it cannot be considered that the appellant was entertained bonafide belief of the levy of the tax. We find that the appellant filed writ petition challenging constitutional validity of the levy of tax, which was admitted by the Honble High court and therefore, it can be said that the appellant entertained the doubt of the levy of the tax. There is no material available of suppression of fact with intent to evade payment of tax and therefore imposition of penalty under Section 78 cannot be sustained.

11. We find that the appellant challenged the constitutional validity of the Show Cause Notice, which is pending before the Honble High Court and they have paid the tax of Rs 17,66,51,082/- alongwith interest of Rs 3,27,50,955/- out of the confirmed demand of service Tax of Rs 28,60,30,676/-. We have already observed that demand of tax on some of the issues can not be included in the taxable value. In our considered view, despite the fact that Writ Petition is pending before the High Court, the appellant paid tax with interest and there is reasonable cause to invoke the Section 80 for waiver of the penalty under Section 76 of the Act.

12. The Honble Karnataka High Court in the case of CCE, Bangalore vs. Motor World - 2012(27)STR.225 (Kar.) observed that even if ingredients of Section 76 and 78 of Finance Act 1994 exist, imposition of penalty is not automatic and in view of non-obstante clause in Section 80 thereof, authority has to find out whether there was any reasonable cause for assessee for such failure to comply with the requirements of law. Section 80 of the Finance Act 1994 provides penalty not to be imposed in certain cases notwithstanding it provides any thing contained in the provisions of Section 76, 77, 78 or Section 79, no penalty shall be imposable on the assessee for any failure referred to in the said provision, if the assessee proves that there was reasonable cause for the said failure. The relevant portion of the said decision in the case of Motor World (supra) is reproduced below:

 13.?Therefore, given the language of Section 80 of the Act, which confers discretion on the Service tax authorities not to impose penalty if there is reasonable cause in given case, the imposition of penalty under Sections 76, 77 and 78 is not automatic. The existence of grounds/ingredients postulated in the said provisions is a condition precedent for attracting penalty. Therefore, first, we have to find out whether in the facts of a given case whether those ingredients exist. Once it is held that those ingredients exist and the provisions are attracted, then if the language used in the said provisions do not leave any discretion in authority in the matter of imposition of penalty, penalty is to be imposed in terms of the said provision. However, if any discretion is left, then the said quasi judicial discretion is to be exercised reasonably. Before levying penalty, the authority is required to find out whether there was any failure referred to in the concerned provision and the same was without a reasonable cause. The initial burden is on the assessee to shown that there existed reasonable cause, which was the reason for the failure referred to in the concerned provision. Thereafter the authority has to consider the explanation offered by the assessee for failure and whether it constitutes a reasonable cause. Reasonable cause means an honest belief founded upon reasonable grounds, of the existence of a state of circumstances, which assuming them to be true, would reasonably lead any ordinarily prudent and cautions man, to come to the conclusion that the same was the right thing to do. Only if it found to be frivolous, without substance or foundation, the question of imposing penalty would arise. 

13. The Honble Gujarat High Court in the case of CCE Vs National Security Force reported in 2014(35)STR.303 (Guj) held as under :

 2.?The short question is with respect to invocation of Section 80 of the Finance Act, 1994 by the Tribunal while deleting the penalty imposed on the respondent-assessee for short payment of service tax. The respondent is engaged in providing security services. For the period under consideration, he had short paid the service tax. The proceedings were initiated for recovery as well as penalty. The Commissioner holding that the respondent had manoeuvring intention in not paying the service tax in full. The respondent approached in appeal. The Tribunal in facts of the case held that the assessee had bona fide belief that as his clients did not pay Service Tax as indicated in the invoice, his liability to pay the same to the Department did not arise. The Tribunal noted that such non-payment was by the service requirement of the assessee, which included Vadodara Municipal Corporation, Surat Municipal Corporation and Gujarat Electricity Corporation/Board. It was also noted that as and when he had received the payments, he had promptly paid the same with the authority. The Tribunal relied on the decision of the Karnataka High Court in the case of Commissioner of Income-tax, Bangalore v. Motor World, reported in 2012 (27) S.T.R. 225 (Kar.). When Section 80 of the Act gives discretion not to impose penalty, if the assessee shows sufficient cause for not depositing the service tax and when the Tribunal has adverted to relevant facts to hold that there was sufficient cause on the part of the assessee, in our opinion, no question of law arises. 

14. In the present case, we find that the appellant, while challenging constitutional validity of the levy before the Honble High Court, they also paid their Service Tax alongwith interest as per their determination before issue of the Adjudication order. In such situation, the appellant shown the reasonable cause for waiver of penalty under Section 76 and 78.

15. In view of the above discussions, the impugned order is modified to the extent that the taxable value would be computed by excluding the amount of surplus/profit returned to the BO and the other reimbursable expenses paid to the appellant, covered under Rule 5(i) of the Service Tax Valuation Rules. The Adjudicating authority is directed re-determine demand of tax alongwith interest. The penalty imposed under Section 77 is upheld. The other penalties are set aside.

(Dictated and pronounced in the Court)

(P.M. Saleem) (P.K. Das) Member (Technical) Member (Judicial)

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