2025 (10) TMI 8 - AT - Service Tax

Appeal allowed: service tax demand quashed as supplier promoted own goods, services not taxable and demand time-barred

CESTAT Chandigarh (AT) allowed the appeal, holding the impugned demand unsustainable. The tribunal found the appellant was promoting its own manufactured ... Taxability - Business Auxiliary Service (BAS) or not - participation of the appellant in the promotional schemes - promotion or marketing or sale of goods produced or provided by or belonging to the client - invocation of extended period of limitation - interest and penalties - HELD THAT:- Refernce made to the decision of the Allahabad Bench of the Tribunal in the case of M/s Hindustan Coca Cola Beverages Pvt Ltd [2025 (1) TMI 73 - CESTAT ALLAHABAD], which dealt with the same and held that “The appellant has undertaken promotion, marketing of their final product i.e. beverages and not that of concentrates (i.e. industrial input), therefore, the conditions specified in clause-(i) of Section 65(19) of the Act are not fulfilled. Accordingly, the demand in the present case is liable to be set aside.” Similarly, in the case of CCE & ST, Lucknow vs. M/s Brindavan Bottlers Limited [2019 (3) TMI 1428 - CESTAT ALLAHABAD], the Allahabad Bench of the Tribunal has held that “There is no element of service in expenses for achieving the sales target, incentive or advertisement and publicity expenses reimbursed to the appellant by the Coca-Cola Company Ltd. There is no element of service and the appellant therein is not providing any service to the Coca-Cola Company Ltd and the appellant therein and Coca-Cola are working on a Principal-to-Principal basis”. Moreover, the appellant in the present case is not promoting the goods belonging to CCIPL rather it is promoting its own goods manufactured by them, therefore, no service tax is leviable when the appellant is promoting and marketing its own goods as held in the cases cited by the appellant. Extended period of limitation - HELD THAT:- It is found that the entire demand is barred by limitation as the appellant had been filing the ST-3 returns and had a bona fide belief that no service tax is payable. Moreover, the issue involved was legal and there has been widespread industry practices and it involves interpretation of law, therefore, invocation of extended period of limitation is bad in law. Moreover, the issue was raised during the audit and it is settled position of law that when demand is proposed on basis of an audit, extended period of limitation cannot be invoked. Interest and penalties - HELD THAT:- The demand of service tax is not sustainable then the interest and penalties are also not sustainable in law. The impugned order is not sustainable in law - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the appellant's participation in manufacturer/distributor promotional schemes (reduced MRP, free bottles/combo packs) amounts to a taxable Business Auxiliary Service (BAS) under clause (i) of Section 65(19) of the Finance Act, 1994 - namely 'promotion or marketing or sale of goods produced or provided by or belonging to the client'. 2. Whether a Principal-Agent relationship existed between the appellant and the concentrate supplier such that BAS could be invoked, or whether the relationship was Principal-to-Principal (precluding BAS liability). 3. Whether the goods allegedly promoted were 'goods produced or provided by or belonging to the client' (i.e., concentrates) or the appellant's own goods (i.e., finished beverages), and the legal consequence of that characterization for BAS liability. 4. Whether the demand for service tax could be sustained by invoking the extended period of limitation given (a) the appellant's filing of ST-3 returns, (b) the matter arising from an audit, and (c) the existence of bona fide/legal controversy and widespread industry practice. 5. Whether interest and penalties attached to the impugned demand are sustainable when the underlying service tax demand is held unsustainable. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether participation in promotional schemes attracts BAS under clause (i) of Section 65(19) Legal framework: Clause (i) of Section 65(19) defines Business Auxiliary Service to include 'promotion or marketing or sale of goods produced or provided by or belonging to the client'. For BAS to be attracted the activity must be promotion/marketing/sale and such activity must be of goods that are produced/provided by or belonging to the client. Precedent Treatment: Multiple tribunal decisions on identical industry practices have held against classifying such activities as BAS where the activity promoted the appellant's own finished product rather than the client's input/concentrate. Interpretation and reasoning: The Court examined the substance of the promotional activity and the object of the promotion. The appellant sold and promoted finished beverages manufactured by it under its own brand; the promotional concessions were financial adjustments reimbursed by the concentrate supplier to protect margins. The promotional activity targeted the finished product and not the concentrate (industrial input). Thus the essential requirement that the promotion be 'of goods ... belonging to the client' was not met. Ratio vs. Obiter: Ratio - BAS clause (i) is not attracted where the promotion/marketing pertains to the appellant's own goods (finished beverages) rather than the client's goods (concentrates). Observations on industry practice and factual findings are supportive but ancillary. Conclusion: Demand under BAS for the promotional schemes cannot be sustained because the activities constituted promotion/marketing of the appellant's own goods, not goods of the client; therefore clause (i) of Section 65(19) is not fulfilled. Issue 2 - Existence of Principal-Agent relationship vs Principal-to-Principal dealings Legal framework: BAS liability under the statute assumes that the service relates to promotion/marketing of client's goods; where a Principal-Agent relationship exists, agent services may fall within BAS. Conversely, Principal-to-Principal purchase/sale of inputs suggests independent commercial dealings and not agency services. Precedent Treatment: Tribunal decisions have consistently held that in bottler/contract manufacturing/distribution arrangements where inputs are purchased on Principal-to-Principal basis, no Principal-Agent relationship subsists that would render promotional/reimbursement activities as service by agent to principal. Interpretation and reasoning: The contractual terms and commercial reality established that concentrates were purchased by the appellant from the supplier on a Principal-to-Principal basis. No agency control or obligation to promote the supplier's goods was shown. Therefore the necessary element for BAS based on agency services is absent. Ratio vs. Obiter: Ratio - absence of Principal-Agent relationship precludes characterization of reimbursements for promotional support as BAS. Remarks on contract interpretation and commercial substance are ratio as they determine legal characterization. Conclusion: BAS cannot be invoked in the absence of a Principal-Agent relationship where the parties operate on a Principal-to-Principal basis. Issue 3 - Characterization of the goods promoted (client's goods vs appellant's goods) Legal framework: Clause (i) requires promotion/marketing of goods 'produced or provided by or belonging to the client'. The legal consequence turns on whether the promoted item is the client's good or the promotor's own good. Precedent Treatment: Tribunals have held that manufacturers/promoters cannot be taxed under BAS for promoting their own finished products; promotion of inputs supplied by another does not arise where the promoted article is the finished product owned by the promoter. Interpretation and reasoning: The appellant manufactured and sold the finished beverages; the promotional activity increased sales of those beverages. The concentrates are an input; the appellant did not promote concentrates as marketable goods. The departmental case did not specify or establish that concentrates were being promoted. The promotional nexus therefore was with the appellant's goods, not with client's goods. Ratio vs. Obiter: Ratio - promotion of one's own goods does not constitute BAS in terms of clause (i). Finding that department failed to establish that concentrates were promoted is part of the operative ratio. Conclusion: The goods promoted were the appellant's finished beverages; clause (i) of Section 65(19) is not attracted. Issue 4 - Extended period of limitation: applicability and bar Legal framework: Levy of service tax beyond the normal limitation period requires satisfaction of statutory exceptions (e.g., suppression with intent). Invocation of extended period is examined against return filing, audit basis for demand, bona fide belief and legal controversy. Precedent Treatment: Authorities have held that where demands arise from audit findings or where assessees have been filing returns and there exists a bona fide legal controversy or widespread industry practice, extended limitation cannot be invoked absent proof of suppression with intent. Interpretation and reasoning: The appellant regularly filed ST-3 returns for the relevant period; the issue concerned widespread industry practice and an arguable point of law for which the appellant had a bona fide belief that no service tax was payable. The demand originated from an audit. There was no finding of deliberate suppression with intent to evade tax. On these facts, invoking the extended period was held impermissible. Ratio vs. Obiter: Ratio - where the demand stems from an audit, returns were filed, and the issue involved bona fide legal controversy/industry practice without evidence of suppression with intent, extended limitation cannot be invoked to sustain the demand. Conclusion: The entire demand is barred by limitation; invocation of extended period is not sustainable on the facts. Issue 5 - Interest and penalties where the underlying tax demand is unsustainable Legal framework: Interest and penalties flow from the existence of an assessable tax/demand; their sustainability is contingent on the validity of the principal demand. Precedent Treatment: Jurisprudence supports that when the principal tax demand is not sustainable in law, consequential interest and penalties cannot be sustained. Interpretation and reasoning: Since the Court concluded the BAS demand was unsustainable both on substantive characterization and limitation grounds, the imposition of interest and penalties lacked legal basis. Ratio vs. Obiter: Ratio - interest and penalties cannot survive where the substantive tax demand is set aside. Conclusion: Interest and penalties attached to the impugned service tax demand are not sustainable and are set aside along with the principal demand. Overall Disposition The Tribunal followed prevailing tribunal precedents on the identical issue, held that promotional activities related to the appellant's own finished goods and not to goods of the client; found no Principal-Agent relationship; held extended period of limitation inapplicable; and accordingly set aside the service tax demand together with interest and penalties. The conclusions above constitute the operative ratio of the decision.