2023 (9) TMI 184 - AT - Service Tax

Tribunal sets aside service tax demand, citing single service provision. Circulars rejected. Demand annulled.

M/s. Network Advertising Pvt. Ltd. Versus Commissioner of Service Tax-V, Mumbai

M/s. Network Advertising Pvt. Ltd. Versus Commissioner of Service Tax-V, Mumbai - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether sub-rule (2) of Rule 6 of the Cenvat Credit Rules, 2004 is attracted where a service provider collects consideration from an ultimate customer and passes on a major portion (collected as media cost) to publishers, retaining a commission on which service tax is paid. 2. Whether the activity of arranging/placing advertisements (whether classified as 'advertising agency' or 'business auxiliary service') constitutes more than one output service such that any portion can be treated as an exempted service for the purpose of invoking Rule 6(2) CCR, 2004. 3. Whether alternative invocation of Rule 6(3A) (proportional Cenvat credit) by the adjudicating authority affects the demand founded on Rule 6(2), and whether the demand, interest and penalties confirmed under the original orders are sustainable. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of sub-rule (2) of Rule 6 CCR, 2004 to pass-through media costs Legal framework: Sub-rule (2) of Rule 6 CCR, 2004 requires that where a provider of output service avails Cenvat credit and provides output services that are both taxable and exempt, separate accounts must be maintained and credit taken only for inputs/input services intended for taxable output services; the statutory language contemplates provision of more than one service ('chargeable to duty or tax as well as exempted goods or services'). Precedent treatment: The Court considered administrative clarifications (CBEC circulars) addressing valuation and classification of advertising/agency services but treated the statutory text of Rule 6(2) as determinative of whether the provision can be invoked. Interpretation and reasoning: A plain reading of Rule 6(2) shows that its scheme activates only when a service provider renders multiple services of differing tax character (taxable and exempt). The phrase 'as well as' signals the need for distinct co-existing outputs. Mere receipt and onward payment of amounts collected from customers to third-party publishers (i.e., pass-through of media cost) does not, by itself, create multiple distinct output services. The Tribunal found Revenue failed to establish that the appellant provided more than one service (taxable and exempt) such that Rule 6(2) would be applicable. Ratio vs. Obiter: Ratio - Rule 6(2) requires more than one output service with differing tax treatment for it to apply; pass-through collections remitted to publishers do not transform a single service provider's activity into multiple services for the purpose of Rule 6(2). Conclusion: Rule 6(2) CCR, 2004 is not invokable in the present factual matrix; the demand premised on its application could not be sustained. Issue 2 - Classification of activity (advertising agency v. business auxiliary service) and impact on taxable value Legal framework: Classification of services and administrative circulars relevant to advertising agencies and commission-based canvassing can inform valuation and taxable incidence; however, the statutory test for Rule 6(2) remains whether multiple services (taxable + exempt) are provided. Precedent treatment: Revenue relied on a later CBEC clarification that canvassing on commission may be treated as business auxiliary service; appellant relied on an earlier circular concerning advertising agency valuation. The Tribunal did not base its decision on favouring one circular over another but on the statutory construction of Rule 6(2). Interpretation and reasoning: Regardless of whether the activity is described as advertising agency service or business auxiliary service, the decisive question is the number and nature of output services rendered by the service provider. Where there is a single service (arranging/placing advertisements) and the provider retains commission on which service tax is paid, the mere onward payment of media cost to publishers does not convert a single service into separate exempted and taxable services. Ratio vs. Obiter: Ratio - Classification labels (advertising agency v. business auxiliary) do not alter the Rule 6(2) requirement of distinct co-existing taxable and exempt services; the statutory test controls. Conclusion: The label of the service does not justify invoking Rule 6(2); exclusion of the pass-through portion from the provider's assessable value (where the provider does not retain it) is consistent with the statutory analysis and administrative practice considered. Issue 3 - Effect of alternative reliance on Rule 6(3A), and sustainability of demand, interest and penalties Legal framework: Rule 6(3A) provides machinery for proportional attribution of Cenvat credit to exempted output where applicable; adjudicating authorities may from time to time resort to alternative provisions in the Rules in framing demands. Precedent treatment: The adjudicating authority in one order applied Rule 6(3A) as an alternative and confined the confirmed demand to a small proportional Cenvat credit amount, dropping a larger demand. In the other order the authority invoked Rule 6(2) to demand tax on the pass-through portion. Interpretation and reasoning: Because Rule 6(2) was found inapplicable as a matter of statutory construction (see Issue 1), demands and penalties premised on its invocation could not stand. The Tribunal therefore set aside the larger demand based on Rule 6(2) and the associated interest and penalties. Where Rule 6(3A) had been applied as an alternative and only a proportional Cenvat credit amount was confirmed and appropriated, the Tribunal set aside that order as well to the extent it was founded on the same faulty premise (i.e., treating pass-through collections as exempt outputs of the provider). The Tribunal's decision addresses both the primary invocation of Rule 6(2) and the alternative appropriation under Rule 6(3A) insofar as both rested on the same mischaracterisation of the provider's output. Ratio vs. Obiter: Ratio - Where the foundational legal premise (that the service provider renders exempt output alongside taxable output) is absent, neither Rule 6(2) nor alternative application of Rule 6(3A) can sustain demands, interest or penalties based on inclusion of pass-through amounts in the provider's tax base. Conclusion: Confirmed demands, interest and penalties based on treating the 85% pass-through component as exempt output of the provider (thereby invoking Rule 6(2) or Rule 6(3A)) are unsustainable and were set aside; both appeals were allowed.