2009 (2) TMI 89 - HC - Service Tax

Assessee not liable for service tax on forwarding activities when no clearing function performed

The Punjab and Haryana HC ruled that the assessee was not liable for service tax on clearing and forwarding activities. The court interpreted the word ... Interpretation of word 'and' occurring between ‘Clearing’ and ‘Forwarding’ - Liability to pay Service Tax - category of 'Clearing and Forwarding Agent' - agent performs only forwarding activities without clearing goods from the principal's premises - HELD THAT:- It appears to be fairly well settled that the context and intention of legislature are the guiding principles. In that regard reliance may be placed on the judgement of Hon'ble the Supreme Court in the case of Mazagaon Dock Ltd. V CIT [1958 (5) TMI 2 - SUPREME COURT]. By necessary intendment the expression a clearing and forwarding agent in relation to clearing and forwarding operations, in any manner' contemplates only one person rendering service as 'clearing and forwarding agent' in relation to 'clearing and forwarding operations'. To say that if, one person has rendered service as 'forwarding agent' without rendering any service as 'clearing agent' and he be deemed to have rendered both services would amount to replacing the conjunctive 'and' by a disjunctive which is not possible. The counsel for the revenue has not been able to bring on record any material to show the word 'and' should be construed as disjunctive. He has not shown any 'trade practice' which may lead to a necessary inference that service of one kind rendered by one is invariably considered to comprise both. No argument has been advanced before us by him to canvass that the legislature intention is discernible from the scheme of the statute or from any other relevant material. Therefore the word 'and' should be understood in a conjunctive sense. (See Maharaja Sir Pateshwari Prasad Singh v. State of U.P. [1963 (3) TMI 3 - SUPREME COURT]. In these circumstances if we read the word 'and' as 'or' then it would amount to doing violence to the simple language used by Legislature which cannot be imputed ignorance of English language. The question of law raised is decided against the revenue and in favour of the assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered by the Court was whether a person acting as an agent under an agreement with a principal for handling and distribution of the principal's products, entrusted with receiving, storing, and distributing those products to authorized stockists and distribution centers, is liable to pay Service Tax under the category of 'Clearing and Forwarding Agent' when no clearing activity from the manufacturer's premises is undertaken by the agent. Specifically, the issue was whether Service Tax is leviable under the category 'Clearing and Forwarding' only if the agent renders both clearing and forwarding services, or whether rendering forwarding services alone suffices to attract the levy.2. ISSUE-WISE DETAILED ANALYSISIssue: Interpretation of the phrase 'clearing and forwarding operations' in relation to Service Tax liability of an agent who performs only forwarding activities without clearing goods from the principal's premises.Relevant legal framework and precedents: The applicable statutory provision is clause (j) of Section 65(105) of the Finance Act, 1994, which defines 'taxable service' to include any service provided to a client by a clearing and forwarding agent in relation to clearing and forwarding operations 'in any manner.' The Finance Act, 1994, read with Service Tax Rules, 1994, governs the imposition and collection of Service Tax. The relevant circular issued by the Central Board of Excise and Customs (Circular No. 2/1/2002-ST dated 20.4.2002) clarifies that an essential characteristic of services falling under the category of clearing and forwarding agents is that the agent carries out all activities from the stage of clearance from the principal's premises to storage and delivery.Precedential decisions considered include the Tribunal's earlier ruling in M/s Mahavir Generics v. Commissioner of Central Excise, Bangalore, which held that if the dealer does not act as a clearing and forwarding agent (i.e., does not perform clearing operations), the service rendered cannot be taxed under the clearing and forwarding category. The revenue's reliance on a larger Bench decision in Medpro Pharma Pvt. Ltd. v. Commissioner of Central Excise, Chennai, was also analyzed, where the larger Bench took the view that the phrase 'clearing and forwarding operations' is a compendious expression and that rendering forwarding services alone attracts Service Tax as part of the composite category.Court's interpretation and reasoning: The Court emphasized the conjunctive nature of the word 'and' in the phrase 'clearing and forwarding operations,' holding that it must be interpreted in its usual conjunctive sense rather than as disjunctive. The Court reasoned that the legislative intent, the plain language of the statute, and established principles of statutory interpretation require that both clearing and forwarding services be rendered by the agent to attract Service Tax under this category. The Court referred to authoritative Supreme Court judgments establishing that the word 'and' should not be replaced by 'or' unless there is clear legislative intent or contextual necessity.The Court also gave binding effect to the Board's Circular dated 20.4.2002, which explicitly states that a clearing and forwarding agent carries out all activities from clearance at the principal's premises through to delivery. Since the respondent agent did not perform clearing activities-the consignments were cleared by the manufacturer and delivered to the agent's premises-the service rendered did not satisfy the statutory requirement of 'clearing and forwarding operations.'Key evidence and findings: The agreement between the respondent and the principal (manufacturer) showed that the respondent was entrusted only with receiving, storing, and forwarding goods, but not with clearing goods from the manufacturer's premises. The Tribunal found that the clearing function was performed by the principal, not the agent. The service tax demand was therefore unsustainable.Application of law to facts: Applying the conjunctive interpretation of 'clearing and forwarding operations' and the Board's circular, the Court held that forwarding services alone do not attract Service Tax under the clearing and forwarding agent category. Since the respondent did not perform clearing operations, the service rendered was not taxable under clause (j) of Section 65(105).Treatment of competing arguments: The revenue contended that the larger Bench decision in Medpro Pharma Pvt. Ltd. should prevail, which held that the phrase 'clearing and forwarding operations' is a holistic expression and that rendering forwarding services alone attracts Service Tax. The Court rejected this view, finding the reasoning metaphorical and unpersuasive, particularly the analogy comparing the operations to an orchestra. The Court also noted the absence of any legislative or trade practice evidence to justify interpreting 'and' as disjunctive.The respondent argued that expanding the scope of the clearing and forwarding agent category to include forwarding-only services would distort the plain language of the statute and violate the principle of strict construction of taxing statutes. The Court agreed with this position, emphasizing the importance of adhering to the statutory language and the binding Board circular.3. SIGNIFICANT HOLDINGS'By necessary intendment the expression 'a clearing and forwarding agent in relation to clearing and forwarding operations, in any manner' contemplates only one person rendering service as 'clearing and forwarding agent' in relation to 'clearing and forwarding operations'. To say that if one person has rendered service as 'forwarding agent' without rendering any service as 'clearing agent' and he be deemed to have rendered both services would amount to replacing the conjunctive 'and' by a disjunctive which is not possible.''The word 'and' should be understood in a conjunctive sense. In these circumstances if we read the word 'and' as 'or' then it would amount to doing violence to the simple language used by Legislature which cannot be imputed ignorance of English language.''The circular issued by the Board is to be considered as binding and cannot be deviated even by the department.''It is clear from the terms of the agreement that appellant herein does not attend to the clearing of the medicines manufactured by Cipla. Consignments of medicines are cleared from the factory by the manufacturer and delivered to the appellant at his premises. In this factual situation, it has to be held that there is no Clearing by the appellant and for that reason, the service rendered by the appellant does not satisfy the requirement of clearing and forwarding.''The question of law raised is decided against the revenue and in favour of the assessee.'Core principles established:The phrase 'clearing and forwarding operations' in the Service Tax statute must be interpreted conjunctively, requiring both clearing and forwarding services to be rendered by the agent for the levy to apply.Service Tax cannot be imposed on forwarding services alone under the clearing and forwarding agent category.Board circulars clarifying the scope of taxable services are binding and must be followed for uniformity.Statutory language in taxing statutes must be strictly construed; words like 'and' should not be read as 'or' without clear legislative mandate.Precedents accepting the conjunctive interpretation and limiting taxable services to combined clearing and forwarding activities are authoritative and binding unless overturned by competent authority.Final determinations on each issue:The Court held that the respondent, who performed only forwarding services without undertaking clearing operations from the principal's premises, is not liable to pay Service Tax under the category of clearing and forwarding agent. The demand for Service Tax and penalty was set aside. The Court rejected the revenue's contention based on the larger Bench decision and upheld the Tribunal's view and earlier precedents favoring the conjunctive interpretation of 'clearing and forwarding operations.'