2025 (9) TMI 400 - AT - Service Tax

Appeal allowed; payments were outsourced clearance and transport services, not commission-agent services; s.65(19) sub-clause unspecified

CESTAT allowed the appeal, set aside the service-tax demand and penalties. The tribunal found the payments were for outsourced clearance and transport ... Recovery of service tax not paid, with interest and penalty - business auxiliary services - Validity of demand without specifying the specific sub-clause classification of services under the category of ‘Business Auxiliary Service’ - Scope of nomenclature used in the books of accounts - impugned order have been passed without consideration of the submissions made before the Lower Authorities - gross violation of principle of natural justice - applicability of time limitation - HELD THAT:- The payments made by the Appellant though indicated in their books of accounts to be commission paid to the foreign company was for the purpose of clearance of the goods from the Customs Port in Ethiopia and thereafter transporting them to the desired location. In our view the appellant had outsourced certain activities in relation to the agreement entered by them with the Government of Ethopia, and were making payment to the said foreign company in respect of these out-sourced activities. The impugned order summarily dismissed the above without going into the details of the transactions made for the reason that these have been reflected as commission in the books of account. It is a settled proposition in law that for levy of tax its nature of the transaction which is material rather than the nomenclature adopted in the books of account. The services received by the Appellant cannot be called as commission agent service to be taxed under the category of ‘Business Auxiliary Service’ prior to 01.07.2012 - it is also observed that neither the Show Cause Notice nor any of the orders of the Lower Authorities specify the specific the sub-clause of Sub-Section 65 (19) of the Finance Act, 1994 for making demand under the category of ‘Business Auxiliary Services’ - thus, without specifying the specific sub-clause classification of services under the category of ‘Business Auxiliary Service’ cannot be justified. There are no merits in the demand under the category of “Business Auxiliary Services”. From 01.07.2012 the services provided are specific in nature on transportation of goods from the port to the specified location. These services fall under the category of transportation of goods by road which are covered by the negative list as per Section 66(D)(p). Further it is also found that for the period post 01.07.2012, these services being provided to the appellant in respect of the goods subsequent to delivery of the exported goods at foreign port, cannot be termed as import of service for levy of service tax on reverse charge basis by the appellant. There are no merits in the demand - no finding rendered on the issue of limitation - demand is set aside alongwith the penalties imposed - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether payments made to foreign entities for clearance and distribution of exported goods constitute 'business auxiliary services' (BAS) attracting service tax on reverse charge prior to 01.07.2012. 2. Whether, for demands under the BAS definition, the Show Cause Notice (SCN) / adjudication must specify the precise sub-clause of Section 65(19) relied upon by Revenue. 3. Whether services performed by foreign entities (clearance at foreign port and distribution in foreign territory) are taxable as import of services on reverse charge after 01.07/2012, having regard to Place of Provision of Services Rules including Rule 3 and Rule 4 and sections 66A/66C. 4. Whether the foreign parties' activities amount to commission agent services (taxable under BAS) or clearing/forwarding/consignment services (different classification and potential non-taxability), including the legal distinction between commission agent and consignment/clearing & forwarding agent. 5. Whether an SCN issued on the basis of departmental/internal audit is invalid for lack of independent investigation or for breach of natural justice. 6. Incidental: invocation of extended limitation, interest and penalties (not decided on limitation merits by the Tribunal but considered in lower orders). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of payments as 'Business Auxiliary Services' (BAS) prior to 01.07.2012 Legal framework: Definition of 'business auxiliary service' in Section 65(19) (sub-clauses (i)-(vii)) and the inclusion of 'services as a commission agent'. Precedent treatment: Tribunal and High Court decisions have required categorisation under specific limbs of BAS where relevant; some earlier decisions held that mere labelling in accounts is not decisive (nature of transaction governs). Cited decisions in the judgment (e.g., CMA CGM, Dwaraka Constructions, Enbee Education) illustrate scrutiny of factual matrix to determine whether activity amounts to promotion/marketing/commission agency. Interpretation and reasoning: The Tribunal examined the contracts/MOUs and the actual functions performed by the foreign entities (clearance at foreign port, physical distribution to specified locations). It emphasised that the true nature of the transaction (outsourcing of logistical/consignment functions) overrides the nomenclature 'commission' in books. On facts, services received were operational/transport and clearing tasks, not activities that caused sale/purchase on behalf of the principal or promoted/marketed the appellant's goods prior to their delivery overseas. Ratio vs. Obiter: Ratio - where foreign entities merely perform clearing/forwarding and distribution after goods reach foreign port, such services do not constitute commission agent BAS prior to 01.07.2012. Obiter - comments on reliance on audited books as indicia of nature of payment (useful but fact-sensitive). Conclusion: Demand under BAS for the period prior to 01.07.2012 cannot be sustained on the facts; the services are outsourcing of logistical/consignment functions rather than commission agency or promotional BAS. Issue 2 - Requirement to specify sub-clause of Section 65(19) in SCN/adjudication Legal framework: Principles of adequate disclosure in SCNs and requirement that chargeable service be identified with sufficient particularity to enable respondent to meet allegations. Precedent treatment: Tribunal repeatedly held that where BAS comprises multiple, mutually exclusive limbs, Revenue must indicate under which limb the demand is raised (CMA CGM, Enbee Education, United Telecom and others cited). Interpretation and reasoning: The Tribunal observed both the SCN and adjudication orders failed to point to any specific sub-clause of Section 65(19). Given the varied and mutually exclusive activities covered by BAS, failure to identify the specific sub-clause renders proceedings flawed because the appellant cannot effectively defend or the adjudicator cannot sustain a charge that is not particularised. Ratio vs. Obiter: Ratio - SCN/adjudication must specify the specific sub-clause of BAS relied upon where classification is material; absence of such specification is fatal to demand. (This is applied as decisive reasoning for setting aside pre-01.07.2012 demand.) Conclusion: Demand cannot be upheld where Revenue did not specify the exact limb of BAS on which tax was sought to be levied. Issue 3 - Place of provision and reverse charge post 01.07.2012 (Sections 66A/66C & Rules 3/4) Legal framework: Sections 66A (charge on services received from outside India) and 66C (place of provision) and Place of Provision of Services Rules 2012 - Rule 3 (place generally is location of recipient) and Rule 4 (performance-based services: place where services are actually performed). Precedent treatment: Decisions (WANBURY, Genom Biotech and others) address treatment of services rendered abroad in connection with goods after arrival in foreign country and hold such services are not taxable in India where performance and benefit occur outside India. Interpretation and reasoning: The Tribunal found that services were performed outside taxable territory (clearance and distribution in Ethiopia) and were performance-based services relating to goods already delivered at foreign port. Under Rule 4, such services are treated as performed where actually performed. Consequently, they are not import of services taxable in India on reverse charge even if recipient is in India. Ratio vs. Obiter: Ratio - performance-based services rendered abroad with respect to goods delivered abroad are outside the taxable territory and not taxable on reverse charge in India; Rule 4 governs such cases. (Applied to post-01.07.2012 period.) Conclusion: For the period from 01.07.2012 the impugned demand as import of services on reverse charge is not maintainable because the place of provision is outside India. Issue 4 - Distinction between commission agent and consignment/clearing & forwarding agent; implications for classification Legal framework: Statutory definitions/explanations within BAS and separate tariff/definitions for clearing & forwarding/consignment agents; CBEC Circular No. 59/8/2003 clarifies distinction between commission agent and consignment/consignment agent. Precedent treatment: Authorities (Kulcip Medicines, Enbee, others) analyse conjunctive/disjunctive reading of clearing and forwarding definitions and emphasise factual inquiry whether service relates to sale/purchase or to receipt/dispatch of goods under principal's directions. Interpretation and reasoning: The Tribunal applied the statutory and circular distinctions: commission agent causes sale/purchase or procures orders; consignment/clearing agent receives and dispatches goods per principal's instructions. The foreign entities carried out receipt from principal, customs clearance, and dispatch to specified locations - activities aligning with consignment/clearing & forwarding, not commission agency. Ratio vs. Obiter: Ratio - where agent's role is limited to receiving, clearing and dispatching goods per principal's directions, the activity is consignment/clearing & forwarding and not commission agent BAS; classification must follow true nature of services. Conclusion: The foreign parties' activities were properly characterised as clearing/forwarding/consignment functions on the material; such classification negatives BAS/commission agent characterisation advanced by Revenue. Issue 5 - Validity of SCN issued on the basis of audit and claim of breach of natural justice Legal framework: Validity of departmental audit as basis for initiation of proceedings; principles of natural justice require adequate opportunity but do not preclude proceedings initiated from audit findings. Precedent treatment: Administrative practice recognises internal audit as investigative source sufficient to issue SCNs where audit occurs in premises and investigation has been undertaken; SCN must still comply with principles of natural justice. Interpretation and reasoning: The Tribunal accepted that audit of records conducted at the assessee's premises involves necessary investigation and can justify issuance of SCN. The plea that SCN was solely based on internal audit without verification was rejected; however, that acceptance did not validate the substantive classification or place-of-provision conclusions which were determined on merits. Ratio vs. Obiter: Ratio - SCN based on departmental/internal audit is not per se invalid; such audit constitutes investigative basis to proceed, provided natural justice is respected in adjudication. Conclusion: The challenge to SCN's validity on the sole ground of being founded on internal audit or alleged breach of natural justice fails; but SCN still must specify charges with sufficient particularity (see Issue 2). Issue 6 - Limitation, interest and penalties Legal framework: Sections 73(1) proviso (limitation), Section 75 (interest), Sections 77 & 78 (penalties) of the Finance Act; principles for invoking extended period and imposing penalties depend on material showing suppression/intent. Precedent treatment: Numerous authorities cited by parties address extended period and penalties; Tribunal observed lower authority discussed these matters in detail. Interpretation and reasoning: The Tribunal decided the appeal on merits of classification and place of provision and expressly declined to render findings on limitation and some other ancillary issues. Ratio vs. Obiter: Obiter - comments on lower authority's treatment of limitation/penalties are not binding ratio since Tribunal disposed the appeal on substantive classification and place-of-provision grounds without adjudicating the limitation question. Conclusion: Demand and penalties set aside on merits; Tribunal did not decide the correctness of invocation of extended limitation or detailed penalty findings, having resolved the substantive taxability issue in appellant's favour.