M/S. Dabur India Ltd vs C.C.E.&S.T., Ghaziabad

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 would be released under Rule 27 of the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? Yes 3. Whether Lordships wish to see the fair copy of the order? Seen 4. Whether order is to be circulated to the Department Authorities? Yes

Appeal No.ST/670/2009-CU[DB]

[Arising out of Order-in-Original No.07/Comm/ST/2009, dated 15.05.2009 passed by the C.C.E.&S.T., Ghaziabad]

M/s. Dabur India Ltd. Appellants

Vs.

C.C.E.&S.T., Ghaziabad Respondents

Appearance

Shri Manish Gaur, Advocate - for the appellants

Shri AK Mishra, DR - for the respondents

CORAM: Honble Honble Justice G. Raghuram, President

Honble Mr. R.K. Singh, Member (Technical)

Final Order No.51464/2015, dated 27.02.2015

Per Mr. R.K. Singh :

Appeal has been filed against Order-in-Original No.07/Comm/ST/2009, dated 15.05.2009 in terms of which service tax demand of Rs.59,07,000/- along with interest and penalties for the period 01-04-2001 to 31-03-2005 has been confirmed under the category of Management Consultant service under Section 65(65)/65(105)(r) of the Finance Act, 1994.

2. The facts of the case are as under: During the audit of the appellants it was noticed that they received an amount of Rs.801.89 lakhs during the period 01-04-2001 to 31-03-2005 on account of royalty for the use of their trade mark from three foreign based companies namely M/s. Redrock Ltd., UK, M/s. DNPL, Nepal and M/s. ACCL, Bangladesh. The impugned demand was confirmed on the ground that such use of trade mark fell under the category of Management Consultant Service liable to service tax during the relevant period. The adjudicating authority also held that the said service rendered did not amount to export of service because the amount of royalty received as shown in the balance sheet was shown in Indian currency and that the claim of the appellants that they did not receive any amount from M/s. Dabur Nepal (Pvt.) Ltd. (DNPL) is not correct because in their letter dated 28.08.2006 they confirmed the receipt as royalty from M/s. Redrock Ltd., U.K., M/s. DNPL, Nepal and M/s. ACCL, Bangladesh.

3. The appellants have contended that:-

(i) They were not providing any management consultant service as they were only getting payments on account of royalty for allowing the use of their trade mark to the said three foreign companies as is evident from the agreements entered into by the appellants with each of them.

(ii) Such services are specifically covered under Intellectual Property Service and not under Management Consultant service. They cited several judgements including the judgement of CESTAT in the case of Castrol Ltd. Vs. CCE, Raigad [2007 (8) STR 254 (Tri.- Mum.)], to assert that the agreement providing for royalty payment on sale of product would not be covered under Management Consultant service.

(iii) There can be no service tax liability on royalty amount not received by the appellant during the relevant period and they had not received any amount from M/s. ACCL, Bangladesh during the relevant period.

(iv) The royalty received from M/s. Redrock Ltd. by the appellants was in convertible foreign currency and so in terms of Notification No.6/99-ST, dated 09.04.1999 and No.21/2003-ST, there was no service tax payable by the appellants. The services were provided by the appellants to companies located abroad and such services qualify as Export of Service in terms of Circular No.56/5/2003-ST, dated 25.04.2003 and Export of Service Rules, 2005.

(v) The services rendered outside India were not liable to service tax.

(vi) There has been no suppression or wilful mist-statement of facts and therefore, the demand is also time barred and

(vii) The manner of calculation of tax liability was incorrect,

4. Ld. Departmental Representative, on the other hand, contented that the services rendered by the appellants are covered under the scope of Management Consultant Service, as defined under the Finance Act, 1994. as is evident from the description of services rendered in terms of the agreements entered into by the appellants with the service recipients abroad.

5. We have considered the contentions of both sides. We find that the Show Cause Notice merely stated that the appellants had received payments on account of royalty for use of their trade mark and that the use of trade mark falls under the category of Management Consultant taxable service, This view has been upheld by the adjudicating authority. The appellants have contended that the royalty for allowing use of their trade mark is more appropriately covered under the scope of Intellectual Property Service, which came into effect from 10.09.2004. However, the exact scope of service rendered can be ascertained only from the description of service contained in the specific agreements entered into by the appellants with the foreign recipients of service. We find that the agreement entered into with M/s. Redrock Ltd., UK specifically states as under:-

Technical Support etc. to be provided by Dabur

During the term of this agreement Dabur will provide outside-India ongoing technical and R & D support, know-how information, operational improvements and skills in the areas of cost management, manufacturing, production procurement, sale marketing, and distribution of the products in the Territory and in such other areas as may be agreed upon between parties from time to time.

The definition of Management Consultant given in Section 65(65) of Finance Act, 1994 is reproduced below for convenience:-

65 (65) management consultant means any person who is engaged in providing any service, either directly or indirectly, in connection with the management of any organisation in any manner and includes any person who renders any advice, consultancy or technical assistance, relating to conceptualising, devising, development, modification, rectification or upgradation of any working system of any organisation;

It is evident that as per agreement cited above, Dabur inter alia provided operational improvements and skills in the areas of cost management, manufacturing, production, procurement, sale, marketing and distribution of the product in the territory and in such other areas as may be agreed upon between the parties from time to time. Thus, the appellants provided services in connection with the management of organisation and rendered technical assistance relating to upgradation of most of the working systems of the organisation, be it cost management, manufacturing, sales, marketing, distribution, etc. It is also seen from the agreement that the consideration to be paid by M/s. Redrock Ltd. UK was only 1% of the FOB sales of M/s. Redrock of Dabur branded products, which are developed by M/s. Redrock or sourced by them from any other party without technical and R&D support from Dabur while it is 3% of FOB sales of M/s. Redrock, of Dabur branded products which are developed and marketed by Redrock through technical and R&D support from Dabur and which are manufactured in accordance with the technical specifications detailed by Dabur. Consequently the services rendered as per the agreement between the appellant and M/s. Redrock qualify to be Management Consultant service as appellants clearly gets covered within the ambit of definition of Management Consultant quoted above in the wake of provisions of Section 65A(2) (b) ibid. We have perused the judgement of CESTAT in the case of M/s. Castrol Ltd. (supra) and find that the service rendered under the appellants agreement with M/s. Redrock are not only not identical to those covered in the said case but are also much wider in scope which makes the said judgement inapplicable here.

6. As regards service provided to M/s. DNPL, it is seen that as per the agreement entered into between them (i.e., M/s. DNPL and the appellants):-

(i) DNPL shall be entitled to use the trade mark of Dabur for sale of product in Nepal, India and abroad for the duration of the said agreement, and

(ii) Dabur will also assist in recruitment of specialised personnel and to train and impart information on technical know-how and marketing of products to such personnel at its production works in India.

It is seen that as per this agreement only, the second component of service rendered can be arguably said to have elements, which could be covered under the scope of Management Consultant service. However, it is clearly mentioned in the agreement that Dabur is not to charge anything from them for the said second component of the service rendered and therefore the question of any service tax being levied in respect thereof simply does not arise even if it was held to be covered under Management Consultant service. Needless to say that allowing the use of trade mark does not fall within the scope of Management or Business Consultant service as has also been held in the case of CCE, Jalandhar Vs GNA Sons [2009 (14) STR 467 (Tri.- Del.)] and the said service is clearly covered under Intellectual Property service.

7. It is seen from the agreement entered into between the appellants and M/s. ACCL that the service provided by the appellants was not merely to allow the use of their trade mark. In para 9 of the said agreement relating to respective duties of the licensor and the licensee, the appellants agreed as under:-

9.1 Subject to and upon the terms and conditions set forth in this Agreement, Licensor agrees to make available to Licencee the Know-how and technical support for the purpose of production of the Products at the facilities of Licensee.

9.2 Licensor shall advise and make available to Licensee the Know-how in relation to:

9.2.1 production information, formulations, ingredients, functions and usage factors;

9.2.2 specification for the Products, including data, techniques and procedure for quality control, packaging, handling and storage;

9.2.3 assistance in sales promotion, advertisements and other promotional literature and materials;

9.2.4 any other data and information as the Licensor and Licensee may deem useful and/or necessary for the purpose of the manufacturing and marketing of the Product.

It is evident that the appellants were to advise (apart from making available the know-how and technical support) in relation to several aspects of management of an organisation which included advice and technical assistance in relation to several working systems (of organisation). Thus although the consideration received is called royalty (equal to 6% of the FOB sales), the duties of the appellants clearly included the services which are covered under the scope of Management Consultant service. The appellants cited the case of Castrol Ltd. (supra) but the same is inapplicable here also precisely for reasons given in para 5 above.

8. The appellants have rightly claimed that the service was rendered in foreign countries; the payments therefor from M/s. Redrock, UK were received in foreign exchange. Thus the service rendered to M/s. Redrock would obviously get covered under the scope of Export of Service and hence would not be liable to service tax. Further as discussed above, the appellants did not charge M/s. DNPL for anything other than for allowing the use of trade mark and therefore there arises no tax liability under Management Consultant service. Regarding M/s. ACCL, Bangladesh, it was claimed that they have not received any payment at all. In absence of any payment from M/s. ACCL, Bangladesh the question of recovery of service tax does not arise. In the adjudication order, the adjudicating authority has inferred that the appellants claim that no amount against royalty had been received from M/s. ACCL was incorrect only on the ground that year-wise figures supplied by the appellants vide their letter dated 28.08.2006 clearly showed that they had received payments as royalty from M/s. Bedrock, M/s. DNPL and M/s. ACCL. We find that the figures provided by the appellants vide their letter dated 28.08.2006 were aggregate figures pertaining to all three companies and therefore the claim of the appellants that they did not receive any payment from M/s. ACCL, Bangladesh is not in inherent contradiction of the details given in their letter dated 28.08.2006. As regards the adjudicating authoritys contentions that they neither claimed the benefit of exemption for export of service nor submitted figures relating to the impugned services in their ST-3 Returns before the Show Cause Notice, it is to state that the appellants contention was that they were not providing any taxable service as their service did not fall under Management Consultant service and therefore the question of claiming the exemption for export of service simply did not arise. The appellants are well within their right to claim the exemption on account of export of service if their service was held taxable under Management Consultant service.

9. The appellants have cited several judgements to claim that service rendered by them did not fall in the category of Management Consultant service. But those case laws do not cover the entire gamut of impugned services rendered by the appellants. In the case of CIT Vs. Vacmat Corporation Pvt. Ltd. [1978 (115) ITR 554 (Guj)], the issue related to only know-how. In the case of Yamaha Ltd. Vs. CCE [2005 (186) ELT 161 (Tri.  Del)] cited by the appellants, the issue involved was acquisition of technology and trademark owned by a Japanese company. Several other judgements cited by the appellants related to Consultant Engineer service. The dictionary definition of Management Consultant, referred to by the appellants is also not of much use as the expression Management Consultant is defined in the Finance Act 1994 itself rendering it unnecessary and impermissible to refer to any other definition of Management Consultant.

10. The appellants have also argued that there is no suppression or wilful mis-statement on their part as they were under a genuine belief that they were not providing Management Consultant service and it was also a case of export of service. We are of the view that as is evident from the analysis above the issue does involve nuanced interpretation of definition of Management Consultant and therefore such a belief on the part of the appellants can scarcely be called unreasonable. Even the Show Cause Notice apparently suffered somewhat from an infirmity (even if possibly not fatal) in-as-much-as it alleged that use of trade mark fell under the category of Management Consultant service though it specifically got covered under Intellectual Property Service [Section 65 (55a)/(55b)] and in any case permitting use of trade mark on receipt of royalty was held to be not covered under Management Consultant service in the case of CCE, Jallandhar Vs. GNA Sons (supra). The Show Cause Notice has alleged suppression only on the ground that the appellants never registered themselves under Management Consultant service (para 7 of Show Cause Notice) and did not disclose that they were providing Management Consultancy on receipt of royalty for use of their trade mark. Given the nuanced interpretation involved, the infirmity of the Show Cause Notice indicated earlier and Supreme Courts repeated judgement (Gopal Zarda Udyog Vs. CCE, Delhi [2005-TIOL-123-SC-CX-LB], Chemphar Drugs Liniments [2002-TIOL-266-SC-CX]) that mere failure or negligence on the part of the assessee is not sufficient to sustain allegation of suppression and wilful mis-statement coupled with the appellants submissions in this regard, the allegation of suppression of facts is not sustainable, as a result of which demand is also hit by time bar.

11. In the light of the foregoing, we do not find the demand sustainable and therefore the appeal is allowed.

(Justice G. Raghuram)

President

(R.K. Singh)

Member (Technical)

SSK

-2-