M/S International Merchandising Company Llc (Earlier Known As International Merchandising Corporation) vs Commissioner Service Tax New Delhi

Reportable

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

Civil Appeal Nos 3532-3536 of 2020

M/s International Merchandising Company, Appellant LLC (Earlier Known as International Merchandising Corporation)

Versus

Commissioner, Service Tax, New Delhi Respondent

JUDGMENT

Dr Dhananjaya Y Chandrachud, CJI

1. These appeals arise from a judgment dated 29 May 2020 of the Customs,

Excise and Services Tax Appellate Tribunal1 in a batch of service tax appeals. The

appeals before the Tribunal arose from an order dated 1 August 2013 of the

Commissioner (Adjudication) which dealt with five show cause notices dated 20

October 2009, 20 April 2010, 20 April 2011, 23 March 2012 and 23 April 2013. The

first of the five show cause notices invoked the extended period of limitation.

Signature Not Verified Digitally signed by CHETAN KUMAR Date: 2022.11.21 16:56:46 IST Reason:

1 “Tribunal”

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2. The appellant is engaged in providing diversified sports, entertainment and

media services. It is registered with the jurisdictional service tax authorities under

Chapter V of the Finance Act, 1994 for taxable event categories such as

management consultant services, event management services, business auxiliary

services, business exhibition services, and TV or radio programme production

services. The appellant organizes events such as the Chennai Open Tennis

Tournament and Lakme Fashion Week. It entered into various agreements, both

domestic and international, with regard to the hiring of celebrities for appearances

at the events, selling broadcasting rights, sharing IT services with group companies

abroad, and secondment with group companies.

3. The appellant entered into an agreement on 1 January 2005 with an entity

by the name of First Serve Entertainment 2 for the appearance of Mr Vijay Amritraj 3,

a noted tennis player, in connection with the Chennai Open Tennis Tournament.

On 3 January 2005, the appellant entered into an agreement with a tennis player

of Thai origin, Mr Paradorn Srichaphan, for his participation in the same

tournament.

4. The contents of the agreement with FSE for appearance and participation

of VA are extracted below:

“2. Appearance and Participation, IMC hereby engages First serve for appearance and participation of Amritraj of First Serve in connection with Chennai open. Amritraj will appear and participate in the opening and closing ceremonies and also play in the charity auction match at the Chennai open [and] First Serve hereby accepts such engagement and agrees to cause Amritraj to

2 “FSE” 3 “VA”

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appear and participate in the Chennai open in accordance with all applicable laws and regulations.

3. Terms, (a) The term of this Agreement (the Term, subject to the provisions of sub section (b) immediately below) is five (5) consecutive years as of January 1, 2005 and concluding on December 31, 2009 unless terminated earlier as provided herein.

(b) If (I) IMC, in its reasonable judgment, determines that the Chennai open is no longer economically viable (meaning that IMC is no longer able to conduct the Chennai open as a going concern and must cancel the Chennai open in any year(s) during the Term due to economic losses due to, as an example, insufficient or non existent sponsorship income), or (II) the Chennai open is no longer held at the venue for any reason, then this Agreement will be automatically terminated by IMC without liability or father [sic] obligation of either party other than (if applicable) First Serve’s pro rata repayment of any fee received for the cancelled Chennai open(s) during the Term, except for any obligation expressly intended to survive the termination of this Agreement. If economic circumstances change, or the Chennai open returns to its original venue and IMC intends to reinstate the Chennai open during the Term, then IMC shall promptly notify first serve and the parties shall discuss in good faith whether to reinstate this agreement.

4. Fees, in consideration for the participation of Amritraj, IMC agrees to pay First Serve an annual fee in the amount of US $ 140,000 (each a fee). Each fee will be paid to First Serve after the conclusion of the Chennai Open in each year upon the presentation of an invoice from First Serve to IMC, *** ”

(emphasis supplied)

5. In November 2016, an agreement was executed between the appellant and

Zee Telefilms to license the rights to broadcast the Chennai Open Tennis

Tournament on Zee Sports channel in India. The relevant extracts of the License

Agreement with Zee Telefilms are set out below:

“A. Programmes/Events

Licensor is the owner of an ATP Tour, Inc. (“ATP”) Tour International Series event which shall be names “The Chennai Open Tennis Championships” (“the Event/Programme”) or such other name to be determines by Licensor and Licensor has agreed to provide Licensee the right to broadcast the Event on Licensee’s Satellite Television Channel “Zee Sports” in India oil [sic] the terms and conditions more particularly described herein.

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B. Rights and Definitions: The following rights and terms shall be defined as set forth below for the purposes of this Agreement:

Designated Rights Cable, satellite and terrestrial television

Licensed Period From the date of commencement of the Event held in 2007 till the conclusion of the Event held in 2009

Licensed Territory India

Licensed English and Hindi Language

The above Rights with regards to the Event, whose Programmes shall be produced and supplied by Licensor and which are granted to Licensee in the Licensed Language on an exclusive basis in the Licensed Territory.

(emphasis supplied)

6. The appellant entered into an agreement with Trans World International on

16 September 2010 for the sale of telecast rights of the Chennai Open Tennis

Tournament in territories outside India. The relevant extracts of the agreement

between the appellant and Trans World International are as follows:

“WHEREAS

A) IMC owns the rights to organize, promote and conduct a men’s international series tennis event in (the “Tournament”), once each year, at Chennai in India;

B) The company is the television arm of the International Management Group of companies and has agreed to sell telecast rights for the Tournament (the “Rights”) in territories across world except India.

C) The parties have agreed to the terms under which the Company would perform such activities for sale of the rights globally except India and desire by this instrument to record their agreement.

It is agreed as follows:- ***

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2. Activities to be performed by the Company:

For the Chennai Open 2011, the company shall sell telecast rights in the Territory by using all reasonable commercial endeavours consistent with its best business judgment to maximize revenue for the Tournament.

Relationship between company and IMC is on principle to principle basis. Company shall sell the rights to clients and collect the money from them.”

7. The records of the appellant were audited by the officers of the Delhi

Services Tax Commissionerate during May 2009 for the period 2004-2005 to 2007-

2008. The Commissioner issued a demand of service tax to the appellants under

various heads, including manpower recruitment or supply agency service under

reverse charge, programme producer service, sponsorship service, and other

services. Five show cause notices, as stated above, were issued to the appellant

cumulatively for the period April 2004 to March 2012, which resulted in a common

order of the Commissioner (Adjudication). The Commissioner adjudicated all the

five show cause notices and confirmed the demand of service tax by an order dated

1 August 2013.

8. The Commissioner ruled that the consideration paid to FSE for appearance

of VA for a sports tournament is taxable under the definition of “manpower

recruitment or supply agency”. The Commissioner observed that the source of

supply of skilled manpower is outside India and has been received by the appellant

in India. The Commissioner further ruled that any programme made by a

programme producer and then offered for sale to different TV channels or

broadcasters for relay is a taxable activity. The Commissioner concluded that the

transaction made by the appellant with Zee Telefilms includes element of service

and is taxable.

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9. Aggrieved by the order of the Commissioner, the appellant lodged appeals

before the Tribunal. The Tribunal by its judgment dated 29 May 2020 held against

the appellant. It observed that the services provided by FSE were in the nature of

supplying, recruiting, and providing players for sport events organized by the

appellant. It held that such services will be covered under the definition of

“manpower recruitment or supply agency” under section 65(105)(k) read with

section 65(68) of the Finance Act, 1994. The Tribunal further relied upon the

decision in Board of Cricket Control for India v. Commissioner 4 to uphold the

order of the Commissioner imposing the demand of service tax under the category

of programme producer services during the relevant period. The Tribunal did not

accept the argument of the appellant that the Commissioner could not have

invoked the extended period of limitation as the issues involved interpretation of

legal provisions. On the issue of imposition of penalty on the appellant, the Tribunal

directed the Commissioner to redetermine the amount of penalty in remand

proceedings.

10. Mr S Ganesh, senior counsel appearing on behalf of the appellant submits

that:

(i) The appellant identified VA for his participation in the tennis tournament

and that it was at his behest that an agreement was entered into with

FSE in terms of which VA would appear in or participate in the

tournament conducted by the appellant;

4 2015 (37) ELT STR 785 (T-MUM)

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(ii) FSE is not a supplier of manpower because VA is an identified person

and hence the activity does not befit the description of manpower supply;

(iii) In the event that the appellant was to recruit VA directly, there would be

no levy of service tax and hence in a situation where the appellant

entered into an agreement with FSE at the behest of VA, the same

position should obtain;

(iv) The contract between the appellant and FSE is a commercial contract

and must hence be construed in a manner consistent with the

commercial sense and understanding between the parties under the

contract;

(v) The Central Board of Excise and Customs 5 has issued a circular dated

23 August 2007 clarifying this head of charge of service tax and the

circular makes it clear that the trigger for the levy of service tax is the

existence of an employer-employee relationship between the service

provider and the person whose service is provided to the customer;

(vi) In the present case, the appellant intended to secure the presence of VA

who is a famous tennis player for which purpose the appellant arrived at

an understanding with VA, which was followed by a formal contract with

a one-man company owned and controlled by him;

(vii) The Tribunal has based its conclusion on the premise that VA and his

company constitute separate and distinct legal entities by disregarding

5 “CBEC”

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the provisions of the circular dated 23 August 2007 which specifies the

requirement that the service provider and the person whose service is

provided must be governed by an employer-employee relationship in

order for the provisions of Section 65(68) to be attracted.

11. These submissions have been controverted by Mr N Venkataraman,

Additional Solicitor General appearing on behalf of the respondent. The Additional

Solicitor General submitted that:

(i) The provisions of Section 65(68) do not stipulate that there must exist an

employer-employee relationship between the service provider and the

person whose services are provided;

(ii) The circular dated 23 August 2007 issued by the CBEC must be

understood in terms of its context: and

(iii) It would not be permissible to restrict the plain terms governing the

definition in Section 65(68) by reference to the circular of the CBEC when

the circular has been issued in a completely different context.

12. In the counter-affidavit filed by the respondent, it has been averred that the

agreement between the appellant and FSE indicates that the latter has caused

the participation of VA in terms of the requirement of the appellant. Therefore, the

said activity was specifically covered under “manpower recruitment or supply

agency” as defined under section 65(68) read with section 65(105)(k). As regards

the demand of service tax on programme producer services, the respondent

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averred that production of programmes for telecast on TV channels falls under the

category of program producer services and was taxable.

13. The first issue which falls for determination bears upon the interpretation of

the provisions of Section 65(68) read with Section 65(105)(k) of the Finance Act

1994. The definitions of “manpower recruitment or supply agency” and “taxable

service” under section 65 of the Finance Act, 1994 are as follows:

65. Definitions – In this Chapter, unless the context otherwise requires, -

***

(68) “manpower recruitment or supply agency” means any person engaged in providing any service, directly or indirectly, in any manner for recruitment or supply of manpower, temporarily or otherwise to any other person.”

***

(105) “taxable service” means any service provided or to be provided –

(k) to any person, by a manpower recruitment or supply agency in relation to the recruitment or supply of manpower, temporarily or otherwise, in any manner;

[Explanation – For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, recruitment or supply of manpower includes services in relation to pre-recruitment screening, verification of the credentials and antecedents of the candidate and authenticity of documents submitted by the candidate]

14. While analysing the rival submissions, it would be necessary to set out the

essential ingredients of the definition contained in Section 65(68). The provision

defines a “manpower recruitment or supply agency” to mean (i) any person

engaged in providing any service; (ii) directly or indirectly; (iii) in any manner; (iv)

for recruitment or supply of manpower; (v) temporarily or otherwise; and (vi) to any

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other person. In other words, the definition encompasses a situation where a

person is engaged in providing a service for the recruitment or supply of manpower

to any other person. The definition incorporates a recruitment as well as a supply

of manpower. The expression ‘supply’ is of a wider connotation than recruitment.

Moreover, the width of the provision is abundantly clear by the use of the

expressions “directly or indirectly”, “in any manner” and “temporarily or otherwise”.

15. In the present case, there can be no manner of doubt that FSE, which is

admittedly a company with a distinct legal identity, had an agreement with the

appellant in terms of which the services of VA were to be provided. There was

undoubtedly nothing on the record to indicate that VA was an employee of FSE.

The issue however is as to whether the definition which has been extracted earlier

of “manpower recruitment or supply agency” must be constrained by a further

requirement of the existence of an employer-employee relationship between the

manpower supply agency and the person whose services are provided. Plainly, the

definition does not incorporate such a requirement or condition.

16. But, the submission of Mr S Ganesh, senior counsel for the appellant is that

the CBEC having issued a circular dated 23 August 2007, the excise authorities

would be bound by the circular which has the effect of narrowing the ambit of the

statutory definition contained in Section 65(68). There can be no doubt as a matter

of first principle that the revenue is bound by its own circulars. Equally, it is

necessary to understand the context in which the circular dated 23 August 2007

was issued by the CBEC. The circular narrates that after the introduction of service

tax in 1994, several clarifications in the form of circulars, instructions and letters

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were issued by the CBEC and the Directorate General Service Tax. The Union

Government decided to undertake a comprehensive review of all the clarifications

having due regard to the changes which have been brought about by statutory

provisions and judicial pronouncements. A Committee was constituted for that

purpose which invited the opinions of all stake holders. Following the report of the

Committee, the Union government issued the circular so as to reflect the

interpretation of the law and the current practice of the department. Yet, paragraph

8 of the circular clarifies that the circular would not override legal provisions. The

relevant part of the circular which forms the subject matter of the submissions

urged in the present case reads as follows:

Issue Clarification

010.02/ Business or industrial Employer employee 23.08.07 organizations engage services relationship in such case exists of manpower recruitment or between the agency and the supply agencies for temporary individual and whether service supply of manpower which is tax is liable on such services engaged for a specified period under manpower recruitment or for completion of particular or supply agency’s service projects or tasks. In the case of [section 65(105)(k)] not supply of manpower, between the individual and the individuals are contractually person who uses the services employed by the manpower of the individual. recruitment or supply agency. The agency agrees for use of Such cases are covered within the services of an individual, the scope of the definition of the employed by him, to another taxable service [section

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person for a consideration. 65(105)(k)] and, since they act as supply agency, they fall within the definition of “manpower recruitment or supply agency” [section 65(68)] and are liable to service tax.

17. The second column of the circular which has been extracted above deals

with the issue while the third column contains the clarification. The issue which was

flagged is that services of manpower recruitment or supply agencies are engaged

by business or industrial organizations for the temporary supply of manpower

which may be engaged either for a specified period or for the completion of

particular projects or tasks. The question was whether service tax would be liable

to be charged on such services under the ‘manpower recruitment or supply agency’

service. In other words, the issue which is dealt with is whether service tax would

be attracted where at the behest of a business or industrial organization, the

services of a manpower or supply agency is engaged for the supply of manpower

for specified periods, projects or tasks. The clarification is that in such cases

governing the supply of manpower, individuals are contractually employed by the

manpower recruitment or supply agency. The agency agrees with another person

to supply the services of that individual employed by the agency for a

consideration. An employer-employee relationship exists between the agency and

the individual and not between the individual and the person who uses the services

of the individual. Such cases were held to be governed by the definition of

“manpower recruitment or supply agency” in Section 65(68) and hence liable to

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service tax. The CBEC circular dated 23 August 2007 deals with a situation where

there exists a relationship of employer and employee between the agency which

supplies the service and a person whose service is supplied. But it does not

postulate that such a relationship must exist for the statutory definition to be

attracted. Hence, the fact that there may be no relationship of employment between

VA and FSE would not be dispositive for the purposes of the statutory definition in

Section 65(68). For the above reasons, we are of the view that the decision of the

Tribunal on this aspect of the matter cannot be faulted with.

18. The second submission which has been urged on behalf of the appellant by

Mr S Ganesh, senior counsel relates to the definition of the expression “programme

producer” in Section 65(86b) of the Finance Act 1994 as amended. Section 65(86b)

is extracted below:

“programme producer’ means any person who produces a programme on behalf of another person.”

19. The essence of the definition of “programme producer” is that a person must

produce a programme on behalf of another person. The appellant had agreements

with Zee Telefilms and with Trans World International. On examination of the terms

of the agreement with Zee Telefilms, it becomes evident that the appellant licensed

the right to broadcast the Chennai Open Tennis Tournament owned by the

appellant on the Zee Sports television channel. Likewise, the agreement with Trans

World International was a contract for the sale of telecast rights in territories outside

India in relation to the Chennai Open Tennis Tournament. Plainly, the definition in

Section 65(86b) was not attracted. The expression “programme producer” would

implicate a situation where a person has produced a programme on behalf of

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another person. In the present proceedings, the appellant produced the

programmes and sold the telecast rights to Zee Telefilms and Trans World

International. There was no production of a programme on behalf of the appellant

either by Zee Telefilms Limited or by Trans World International. The factual position

is not in dispute during the course of the hearing of the appeal.

20. The Tribunal relied upon its decision in the case of Board of Control for

Cricket in India (supra). The extract from the decision which was relied upon by

the Tribunal is set out below, insofar as it is relevant:

1. “6.2 As per clause 2.1, BCCI has appointed the producer to exclusively produce the feed for and on behalf of BCCI and the feed means – the live and continuous clean audio and visual television signal of each match as described in detail in clause 3.2 of the agreement. Clause 3.1 of the agreement deals with production services and reads as - “the producer must produce the feed for each match of the events as per the production/technical specification detailed in schedule 3, using the personnel specified in clause 5, using the equipment specified in schedule 3 and otherwise in accordance with this agreement.” Clause 3.2 specifies that the feed for each match must be live, continuous and uninterrupted and should be in conformity with the specifications mentioned in sub-

clauses (a) to (g) thereof. Clause 4 of the agreement deals with the other obligations of the producer and clause 5 deals with personnel who should be engaged for production. Clause 6 deals with production and technical specifications relating to the equipment, use of the equipment, camera and key camera positions and so on. Clause 9 deals with assignment of the copyright by the producer to BCCI in respect of all the sound recordings, broadcasting and transmissions and so on. For the services rendered, clause 10 of the agreement specifies the consideration to be paid by BCCI to the producer for the production of the feed which includes all statutory taxes and charges, import duties and tariffs on imported materials and equipment, rise and fall, relevant award costs and allowances for the personnel.”

(emphasis supplied)

21. The above extract indicates that in terms of the contract, BCCI had

appointed the producer to exclusively produce the feed for and on behalf of BCCI

for each match. This is the distinguishable feature of the decision of the Tribunal in

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BCCI which is absent in the present case. Therefore, we are of the considered

view that the Tribunal was in error in holding that the decision would apply squarely

to the facts of the present case. The view of the Tribunal to that extent would have

to be and is accordingly reversed.

22. The final submissions which need to be considered is whether (i) the

extended period of limitation would stand attracted in the case of the first show

cause notice; and (ii) whether a valid ground for the imposition of a penalty was

made out. In this regard, reliance has been placed on behalf of the appellant on

the decision of this Court in Padmini Products v. CCE, Bangalore 6 to submit that

the extended period of limitation would not be attracted as the appellant has not

acted with dishonest or fraudulent intent.

23. In paragraph 4.20 of its order, the Tribunal has specifically observed that the

present case involves the interpretation of statutory provisions. Having said this,

the Tribunal in the concluding paragraph of its decision held that since the matter

was being remitted back to the Commissioner for re-determination of the quantum

of demand, the amount of penalty would have to be re-determined in accordance

with the duty demand confirmed in the demand proceedings.

24. We are of the considered view that the Tribunal having come to the

conclusion that the issue turned upon an interpretation of the provisions of Section

65(68) and Section 65(86b) of the Finance Act 1994, there was no warrant to allow

the invocation of the extended period of limitation and to direct the determination

of the penalty following the re-quantification of the demand. The extended period

6 (1989) 4 SCC 275

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of limitation would clearly not stand attracted in respect of the first show cause

notice dated 20 October 2009. The show cause notice shall hence have to be

confined to the normal period of limitation excluding the extended period.

25. As far as the penalty is concerned, we are of the considered view that there

was no warrant for the imposition of the penalty as the dispute in the present case

essentially turned on the interpretation of the statutory provisions and their inter

play with the circular issued by the CBEC. Finally, we also order and direct that the

view of the Tribunal on the applicability of the provisions of Section 65(86b) of the

Finance Act 1994 as amended has been reversed by this Court. On remand in

pursuance of the impugned order of the Tribunal, the adjudicating officer shall

abide by the above directions.

26. The appeals shall stand allowed in part in the above terms.

27. Pending applications, if any, stand disposed of.

….....…...….......………………........CJI.

[Dr Dhananjaya Y Chandrachud]

..…....…........……………….…........J. [Hima Kohli]

New Delhi;

November 01, 2022 CKB

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