2024 (5) TMI 1639 - AT - Service Tax

Cost-sharing held not taxable Business Support Service pre-1.5.2011; pure agent, revenue neutrality, extended period time-barred

M/s. Tata Motors Limited, Jamshedpur Versus Commissioner of Central Excise, Jamshedpur

CESTAT Kolkata allowed the appeal, holding that the appellant's cost-sharing arrangements for township and common facilities (transport, utilities, ... Levy of service tax - Business Support services - sharing of common cost - Appellant had made a township in the area thereby providing house, roads, electric, water, medical facilities, etc. to its employees which were also enjoyed by all the divisions operating under the Appellant - revenue neutrality - extended period of limitation - HELD THAT:- The activity undertaken by the appellant is for managing transportation of personnel, importation costs, crèche, education, sports, medical and health, legal services, housekeeping, water supply, timekeeping, HR management, town planning service, rural and community development, audit, quality control services, compressor house, common stationery items, factory maintenance, etc., does not fall under the category of ‘business support service’ prior to 01.05.2011 as the words “operational assistance for marketing” was replaced as “operational or administrative assistance in any manner”. The same view was taken by this Tribunal in the case of Reliance ADA Group Pvt. Ltd. [2016 (3) TMI 810 - CESTAT MUMBAI] wherein it was observed that 'The amount recovered by the Appellant from the Participating Group Companies is precisely the same as has been paid by the Appellant to the third party vendors/service providers. The goods or services procured by the Appellant for the use of Participating Group Companies are not availed by the Appellant for its own use or consumption, and the Appellant has no function or existence other than as Trustee/Manager (agent) of the Participating Group Companies cost sharing arrangement. We therefore, find no bones in observing that the Appellant completely satisfies the conditions of a ‘Pure Agent’ as set out in Rule 5(2) of the Valuation Rules.' Thus, prior to 01.05.2011, the cost sharing basis services obtained by the appellant for themselves and their group companies, do not fall under the category of “business support service”. Therefore, on merit, no service tax is payable. Revenue neutrality - HELD THAT:- The fact is noted that whatever service tax is paid by the appellant, the same is entitled as CENVAT Credit by their group companies. Therefore, it will be termed as “service has been provided to self”. In these circumstances, it is a revenue neutral situation and therefore, no service tax is payable the appellant. Extended period of limitation - HELD THAT:- It is found that the period involved in this matter is from 01.05.2006 to 09.05.2008 and the appellant has explained why they are not liable to pay service tax, on 03.10.2007, and no proceedings were initiated against the appellant; only Show Cause Notice has been issued on 14.09.2010 by invoking extended period limitation. Thus, the same is barred by limitation. Accordingly, on limitation also, the appellant succeeds. The impugned order does not have any merit. Accordingly, same is set aside - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether apportionment/recovery of common costs by an enterprise from its erstwhile group companies pursuant to cost-sharing agreements constitutes a taxable 'support services of business or commerce' (business support service) for the period prior to 01.05.2011. 2. Whether amounts recovered by the enterprise from group companies in respect of costs incurred for procurement of third-party services are consideration for a taxable service or merely reimbursements as a 'Pure Agent' under valuation rules. 3. Whether service tax paid (if any) by the enterprise would produce revenue neutrality because group companies were entitled to and availed CENVAT credit. 4. Whether invocation of the extended period of limitation to issue the Show Cause Notice was permissible in the factual matrix where enquiries and explanations had been furnished prior to issuance of the SCN. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of cost-sharing recoveries as 'Business Support Service' (period prior to 01.05.2011) Legal framework: The inclusive definition of 'support services of business or commerce' operative during the relevant period (pre-01.05.2011) enumerated specific activities and included 'operational assistance for marketing'; the scope of the inclusive list governs whether an activity falls within the taxable category. Precedent treatment: The Tribunal's prior decision in Reliance ADA Group Pvt. Ltd. (addressed by the impugned order and relied upon by the appellant) held that cost-sharing arrangements where the central entity merely procures services for group companies and recovers exact costs are outside the scope of the definition prior to the 01.05.2011 amendment. That decision was followed. Interpretation and reasoning: The Tribunal analysed the nature of activities (transportation of personnel, crèche, education, medical, housekeeping, factory maintenance, HR/timekeeping, town planning, audit, quality control, etc.) and found they are not among the specific activities described in the inclusive part of the definition as it then stood. The 01.05.2011 amendment replacing 'operational assistance for marketing' with 'operational or administrative assistance in any manner' expanded the scope prospectively; that amendment cannot be read back to tax pre-amendment conduct. The Tribunal emphasised that imputing a taxable service requires evidence that the appellant provided one of the specified services in its own capacity to the group companies, not merely acted as procurer/agent. Ratio vs. Obiter: Ratio - where an enterprise merely procures services for group companies and recovers only the actual amounts under a cost-sharing mechanism, such receipts do not qualify as 'support services of business or commerce' prior to the 01.05.2011 amendment. Obiter - ancillary observations on the precise list of activities and the ambit of 'operational assistance' beyond the expressed conclusion. Conclusion: Cost-sharing recoveries for the period 01.05.2006-09.05.2008 do not fall within 'business support service' and are not subject to service tax on merits for the pre-01.05.2011 period. Issue 2 - Whether recoveries are consideration for taxable service or reimbursements as 'Pure Agent' (valuation/Rule 5(2)) Legal framework: Valuation Rules and the concept of 'Pure Agent' under Rule 5(2) permit exclusion of reimbursed amounts from the value of taxable service where conditions for pure agency are satisfied (procurement on behalf of the recipient, no profit element, proper documentation, and passing through exact amounts payable to third parties). Precedent treatment: Tribunal decisions (including Pharmalinks Agency) have treated similar pass-through reimbursements and freight reimbursements as actions of a Pure Agent where conditions are met; the Reliance ADA analysis was applied to affirm Pure Agent characterisation. Interpretation and reasoning: The Tribunal found that the appellant procured third-party services for the participating group companies pursuant to contractual authorisations, issued invoices reflecting only the amounts paid to third parties, did not retain any markup, and had documentation (including CA certificates and invoices) to substantiate the payments and CENVAT credits. Consequently the appellant's role was that of agent/trustee facilitating procurement, satisfying the Pure Agent criteria. Ratio vs. Obiter: Ratio - reimbursements of actual third-party costs recovered under a pass-through cost-sharing mechanism, where the conditions of Pure Agent are met, do not constitute taxable consideration for a service. Observations about documentary non-production by the adjudicating authority are supportive but ancillary. Conclusion: The amounts recovered were reimbursements by a Pure Agent and are not includible as consideration for a taxable service. Issue 3 - Revenue neutrality/CENVAT credit implications Legal framework: CENVAT credit mechanism allows registered service recipients to avail credit of service tax paid on inputs/services used in taxable output; where the recipient avails credit, net fiscal incidence on the exchequer may be neutral. Precedent treatment: The adjudicating authority itself recorded findings acknowledging revenue neutrality; the Tribunal relied on documentary evidence that group companies were registered and claimed CENVAT credit in ST-3 returns for the relevant years. Interpretation and reasoning: The Tribunal noted that any service tax paid by the appellant would have been claimed as CENVAT credit by the group companies (who were registered and filing returns), making the transaction revenue neutral and negating any intention to evade tax. This supports both the Pure Agent characterisation and the absence of taxable service liability. Ratio vs. Obiter: Ratio - established revenue neutrality, evidenced by availability and availing of CENVAT credit by group companies, is a relevant factor negating taxable liability; ancillary commentary on intention and penalty mitigation is obiter to the extent it addresses motive. Conclusion: The arrangement produced revenue neutrality; therefore, even if taxed, the net fiscal effect would be neutral and supports non-levy in the present facts. Issue 4 - Invocability of extended period of limitation Legal framework: Extended period of limitation for service tax demands can be invoked only where conditions in the law are satisfied (e.g., suppression of facts or fraud); ordinary limitation applies where explanations were furnished and there is no triggering circumstance for extension. Precedent treatment: The Tribunal applied established principle that extended limitation cannot be invoked where the assessee had provided explanation in good time and there was no material indicating suppression or fraud; reliance on the earlier adjudicatory finding that the appellant had explained position on 03.10.2007 was noted. Interpretation and reasoning: The appellant explained why it was not liable on 03.10.2007 and later commenced voluntary payment of service tax from 10.05.2008; no proceedings were initiated between the explanation and the SCN dated 14.09.2010. In absence of evidence of suppression or wilful mis-statement, extended limitation could not be validly invoked. The Tribunal also observed that adjudicating authority accepted examinable facts pointing to revenue neutrality and interpretational issues, which militated against invoking extended limitation. Ratio vs. Obiter: Ratio - extended period of limitation cannot be invoked where (i) the assessee had proactively explained non-liability during the relevant period, (ii) there is no evidence of suppression or fraud, and (iii) interpretational issues existed; thus the demand issued under extended limitation is time-barred. Observations concerning the adjudicating authority's reasoning deficiencies are supportive but ancillary. Conclusion: The Show Cause Notice issued by invoking the extended period was barred by limitation; accordingly the demand could not be sustained on limitation grounds. Overall Conclusion The Tribunal held that (i) the cost-sharing recoveries did not constitute 'business support service' for the pre-01.05.2011 period, (ii) the recoveries were reimbursements by a Pure Agent and not taxable consideration, (iii) the arrangement was revenue neutral because group companies availed CENVAT credit, and (iv) the Show Cause Notice issued under extended limitation was time-barred. The impugned order confirming service tax demand was set aside and the appeal allowed with consequential relief.