2025 (11) TMI 1879 - AT - Service Tax

Reverse charge partly set aside; overseas association fees non-taxable, inspection charges upheld; penalties waived under Section 80

M/s. ITC Ltd. Versus Commissioner of GST and Central Excise, Chennai

CESTAT allowed the appeal in part. It held that membership, subscription and participation fees paid in foreign currency to overseas packaging ... Applicablity of reverse charge mechanism - annual membership / subscription /participation fees paid in foreign currency - taxability of fees where the services are performed and consumed abroad/in India and where the relationship is one of mutuality - levy of service tax on participation fees paid to contest in the annual Sword of Honour in foreign currency to British Safety Council during 2007–2018 & 2008-2009 - levy of service tax on pre-shipment inspection charges paid to Intertek International Ltd. U.K. - invocation of extended period of limitation - penalties. Applicablity of reverse charge mechanism - annual membership / subscription /participation fees paid in foreign currency - taxability of fees where the services are performed and consumed abroad/in India and where the relationship is one of mutuality - HELD THAT:- The Department has not produced any tangible material to demonstrate that International Packaging Group (IPG) or International Packaging Forum Network (IPFN) were engaged in providing continuous or structured technical consultancy, data analysis, or knowledge-transfer services which were received or consumed within the taxable territory. The payments made by the appellant are in the nature of membership renewals and participation fees in international forums held abroad - reliance placed in the case of State of West Bengal & Ors. Versus Calcutta Club Limited and Chief Commissioner of Central Excise and Service & Ors. Versus M/s. Ranchi Club Ltd. [2019 (10) TMI 160 - SUPREME COURT (LB)] where it was held that 'from 2005 onwards, the Finance Act of 1994 does not purport to levy service tax on members’ clubs in the incorporated form.' From the ratio of the above decision, it is clear that the demand for the period prior to 1.7.2012 on IPG/IFPN is unsustainable as there was no evidence that these bodies are mere association of persons and not imported neither have rendered any services to the appellant and the condition of relationship of service recipient with the service provider is absent - the FOREX payments made to IPG/IFPN are exempt from payment of service Tax for the period Prior to 1.7.2012 (Positive Tax Regime) - services provided by a club or association to its own members remain outside the ambit of service tax, notwithstanding the amendments introduced in the statute. Payment in FOREX to British Safety Council for participating in the sword of honour contest held abroad - HELD THAT:- The payments made by the appellant in foreign currency to the British Safety Council, U.K. for participation in the ‘Sword of Honour’ contest were payments for entry/participation fee and for adjudication conducted by the BSC abroad. There is no evidence on record that the appellant paid such fees as a member for member-only reciprocal benefits nor is there any evidence of continuous technical consultancy or online services supplied into India by BSC. For the period prior to 01.07.2012 the doctrine of mutuality protects genuine member-to-club reciprocal transactions; conversely, purely commercial supplies are taxable only if they fall within the specific entries in Section 65(105). On the basis of present material, the transaction is an overseas contest/award adjudication performed outside India and does not fall within any taxable entry for the pre-01.07.2012 period - the demand on this score is unsustainable and is set aside. Service tax on Intertek pre-shipment inspection charges - HELD THAT:- The record does not disclose any notification or bilateral arrangement conferring statutory authority on Intertek (U.K.) to act as an instrumentality of the Uzbek Government. The engagement between the appellant and Intertek (U.K.) emanates from a commercial contract under which the appellant obtained certification for its import consignments in order to facilitate acceptance of goods in the importing country. The inspection and certification were performed by a private agency for consideration; hence, the activity bears the essential character of a technical inspection and certification service as understood in Section 65(108). It cannot, therefore, be treated as the discharge of a sovereign or statutory function - the activity, by its very nature, is commercial and not sovereign. Consequently, the payments made to Intertek Testing Services (U.K.) attract service tax under the category of Technical Inspection and Certification Service on a reverse-charge basis for the period in dispute. Extended period of limitation - levy of penalty u/s 77 and 78 of the Finance Act - HELD THAT:- The alleged short-payment/non-payment came to light only pursuant to departmental audit and investigation; the appellant did not voluntarily disclose the disputed transactions nor did it place the relevant facts before the Department at any earlier point; or request for advance clarification was placed on record by the appellant; and the appellant has not pleaded a bona fide legal doubt on the taxability of the transactions - the invocation of the extended period of limitation by the LAA is legally tenable on the facts of this case. Further, the imposition of penalty is also sustainable. The appellant will be liable to pay tax for the extended period together with interest; penalty is confirmed under Section 78 of Finance Act, 1994. Waiver of penalty - HELD THAT:- The issue involved in the present case namely, the taxability of services rendered by clubs and associations to their members was a matter of protracted litigation across the country, and the legal position remained unsettled for several years. Even after the insertion of the statutory Explanation post 01.07.2012, the exact scope and effect of such amendment continued to generate divergent views among different judicial fora. A clear and authoritative exposition of the law emerged only with the judgment of the Hon’ble Supreme Court in State of West Bengal v. Calcutta Club Ltd., [2019 (10) TMI 160 - SUPREME COURT (LB)], wherein the doctrine of mutuality was reaffirmed and the levy itself was held to be unsustainable - Considering that the period in dispute is from 2005 to 2014, i.e., much prior to the final settlement of the controversy by the Apex Court, we are satisfied that the Appellant had a reasonable cause within the meaning of Section 80 of the Finance Act, 1994 for the non-payment of tax. The imposition of penalty in such circumstances would be wholly unjustified. The impugned orders confirming demand of service tax are set aside in respect of payments to IPG/IFPN and participation fees in respect of BSC for the period prior to 01.07.2012 and after 01.07.2012 in respect of IPG/IFPN. In respect of Intertek Testing the demand is confirmed along with interest - Invocation of extended limitation and imposition of penalty are upheld but penalty waived in terms of provisions of Section 80 of the Finance Act, 1994 - Appeal allowed in part. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether annual membership / subscription / participation fees paid in foreign currency to overseas bodies described as IPG and IFPN during 2005-2014 are exigible to service tax under the Finance Act, 1994, including under the reverse-charge mechanism, and whether the doctrine of mutuality and/or performance/consumption of services abroad excludes taxability. (2) Whether participation fees paid in foreign currency to an overseas body described as the British Safety Council for entry into the 'Sword of Honour' contest during 2007-2009 are exigible to service tax under the Finance Act, 1994, including on the basis of 'club or association' service or other taxable entries. (3) Whether pre-shipment inspection charges paid to Intertek Testing Services (U.K.) Ltd. for inspection and certification relating to export consignments during 2005-2009 are exigible to service tax under the category of 'technical inspection and certification service' on reverse-charge basis. (4) Whether the Department validly invoked the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994, and whether penalties under Sections 76/77/78 are legally sustainable on the facts. (5) Whether, notwithstanding the legal sustainability of the demands and penalties, Section 80 of the Finance Act, 1994 can be invoked to waive penalties having regard to reasonable cause and the then-prevailing legal controversy. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Taxability of membership / subscription / participation fees paid to IPG/IFPN Legal framework (as discussed) (a) Section 66A of the Finance Act, 1994 (taxability of services received from abroad on reverse-charge basis), read with Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 (recipient in India liable to pay service tax on imported services). (b) Section 65(105)(zzze) defining taxable service as 'any service provided to its members, by any club or association in relation to provision of services, facilities or advantages for a subscription or any other amount'. (c) Sections 65(25a) / 65(25aa) defining 'club or association'. (d) Section 65(105)(zzi) and Section 65(108) (technical inspection and certification) noted generally, but not applied to IPG/IFPN. (e) Post-01.07.2012 regime: Sections 65B(37) ('person') and 65B(44) ('service') and the deeming fiction treating club/association and members as distinct persons, and the negative list scheme. (f) Judicial precedents: Saturday Club Ltd. v. Assistant Commissioner of Service Tax (Calcutta High Court); Sports Club of Gujarat Ltd. v. Union of India (Gujarat High Court); and State of West Bengal v. Calcutta Club Ltd. (Supreme Court, Larger Bench), with detailed reliance on paras 80-84 of Calcutta Club and its affirmation of the doctrine of mutuality. Interpretation and reasoning (i) On facts, the payments to IPG/IFPN consist of annual membership renewals, participation fees and technical meeting charges for attending meetings and forums held abroad, where members share technical know-how and developments in packaging and paperboard manufacturing. The Department failed to place any material showing that IPG/IFPN were providing continuous or structured technical consultancy, data analysis, or specific services consumed in India. (ii) For the pre-01.07.2012 period, reliance was placed on Saturday Club and Sports Club of Gujarat, as affirmed in Calcutta Club. The Court accepted that in members' clubs/associations, the doctrine of mutuality applies; club and members are not distinct persons; and, therefore, no 'service' is rendered by a club to its members within the scope of Section 65(105)(zzze) during this period. (iii) The Tribunal examined the post-01.07.2012 statutory changes, including the expanded definition of 'person', the broad 'service' definition, and the Explanation deeming club and members as distinct persons. While the lower appellate authority had concluded that these amendments overrode mutuality, the Tribunal, applying Calcutta Club (which considered these very amendments), held that the doctrine of mutuality continues and that the Explanation did not alter the foundational mutuality principle for members' clubs, even in the negative-list era. (iv) The Tribunal further noted that several High Courts and Tribunal Benches have consistently applied Calcutta Club to hold that intra-club transactions are not exigible to service tax both before and after 01.07.2012. (v) On the alternative ground of place of provision/consumption, the Tribunal held that, on the materials available, the services (if any) were rendered and consumed outside India in the context of meetings and forums held abroad, and the Department had not demonstrated that any identifiable taxable service was imported or consumed in India. Conclusions (1) For the period prior to 01.07.2012, no service tax is leviable on payments made to IPG/IFPN, as the relationship is governed by mutuality and there is no taxable service by a distinct provider to a recipient. (2) For the period after 01.07.2012, in light of the binding ratio of Calcutta Club and subsequent consistent application by courts and Tribunals, services by such clubs/associations to their own members remain outside the service tax net; the deeming Explanation does not displace the doctrine of mutuality. (3) On the facts, the Department also failed to prove that any taxable imported service was received or consumed in India. Accordingly, all demands in respect of IPG/IFPN for the entire disputed period are set aside. Issue (2): Taxability of participation fees paid to British Safety Council (Sword of Honour contest) Legal framework (as discussed) (a) Sections 65(25a), 65(25aa) and 65(105)(zzze) (club or association service). (b) Sections 66A and Rule 2(1)(d)(iv) (reverse charge on imported services). (c) Doctrine of mutuality and case law discussed under Issue (1). Interpretation and reasoning (i) The lower appellate authority treated the participation fee in the Sword of Honour contest as consideration for advantages (prestige and potential commercial benefits) provided by a club/association and therefore taxable as club or association service. (ii) The Tribunal examined available evidence: application forms, remittance advices and information from the British Safety Council's website. It found that the Sword of Honour is an award scheme available to organisations achieving a five-star rating in a separately conducted audit, with adjudication and award process carried out abroad. (iii) The payments in dispute were found to be entry/participation fees for overseas contest/adjudication, not shown to be consideration for member-only reciprocal benefits or continuous consultancy/technical services. There was no evidence that the appellant was receiving any specific services in India, nor evidence that it had actually received the award during the contested period. (iv) For the pre-01.07.2012 period, the Tribunal held that, assuming arguendo a club/association relationship, mutuality would apply as per the authorities discussed under Issue (1). Alternatively, even treating the transaction as ordinary commercial activity, it did not fit into the specific taxable entries under Section 65(105) for that period, nor was any imported service demonstrably received in India. Conclusions (1) The participation fee paid to British Safety Council for the Sword of Honour contest represents consideration for an award/adjudication process conducted abroad and not for any taxable service received or consumed in India under the pre-01.07.2012 regime. (2) The Department failed to establish that the activity fell within a specific taxable category or that an imported service was received in India. Accordingly, the demand of service tax on participation fees paid to British Safety Council is unsustainable and is set aside. Issue (3): Taxability of pre-shipment inspection charges paid to Intertek (U.K.) Legal framework (as discussed) (a) Section 65(105)(zzi) defining taxable service as 'any service provided or to be provided to any person, by a technical inspection and certification agency, in relation to technical inspection and certification'. (b) Section 65(108) defining 'technical inspection and certification' as inspection or examination of goods, processes, etc., to certify conformity with specified standards. (c) Section 66A and Rule 2(1)(d)(iv) (liability of Indian recipient on services received from abroad). (d) CBEC Master Circular No. 96/7/2007 dated 23.08.2007, as referred to: exemption only for services rendered by a sovereign/public authority. Interpretation and reasoning (i) The lower appellate authority held that Intertek is a private entity and not a sovereign or public authority of the Government of Uzbekistan; therefore the Board's circular on sovereign/public authority services is inapplicable. It upheld the classification of Intertek's activities as taxable 'technical inspection and certification service'. (ii) The appellant argued that pre-shipment inspection was required by the Government of Uzbekistan; Intertek acted as a designated agency of that Government; there was no privity of contract between the appellant and Intertek; and the function was sovereign in nature, exempt under the cited circular. (iii) The Tribunal found that the record did not disclose any notification, bilateral arrangement, or instrument conferring statutory or sovereign status on Intertek (U.K.), nor evidence that Intertek was a public authority of Uzbekistan. Intertek appeared as a contracted private party carrying out commercial inspection and certification for consideration. (iv) The Tribunal held that the engagement between the appellant and Intertek emanated from a commercial arrangement under which Intertek inspected and certified goods to facilitate acceptance by the importing country. Such activity squarely falls within the definition of 'technical inspection and certification' in Section 65(108). (v) It was further held that even when a foreign government requires such certificates for import compliance, the service rendered by a private agency to an Indian exporter/importer for consideration retains its commercial character and is taxable in India under reverse charge, if the recipient is in India. Conclusions (1) Intertek (U.K.) is not a sovereign or public authority; its pre-shipment inspection and certification service is commercial, not sovereign, in nature. (2) The services clearly fall within 'technical inspection and certification service' under Sections 65(105)(zzi) and 65(108). (3) As the recipient is located in India and the service is in relation to goods exported/imported by the recipient, service tax is payable under Section 66A on reverse-charge basis for the period in dispute. (4) The demand of service tax, along with interest, on payments made to Intertek Testing Services (U.K.) is confirmed. Issue (4): Validity of invoking extended period of limitation and imposition of penalties Legal framework (as discussed) (a) Proviso to Section 73(1) of the Finance Act, 1994: extended limitation of five years available where non-payment/short-payment arises by reason of fraud, collusion, wilful misstatement or suppression of facts with intent to evade payment of service tax. (b) Penalty provisions under Sections 76, 77, and 78 of the Finance Act, 1994. (c) Case law relied upon by the Department and the lower authority: S.K. Jalendra & Associates v. CCE, Jaipur and Shilpa Printing Press v. CCE, Mumbai (CESTAT) on reckoning limitation from date of knowledge and on circumstances justifying extended period. (d) Case law relied upon by the appellant: CCE, Tirunelveli v. Global Soft (CESTAT, Madras), holding that mere non-registration and non-payment by itself is insufficient to constitute suppression with intent. Interpretation and reasoning (i) The lower authority recorded that the non-payment was detected only through departmental audit and subsequent investigation; the appellant had not disclosed the transactions suo motu nor claimed any bona fide doubt contemporaneously. (ii) The Tribunal reiterated that 'suppression of facts' in the proviso to Section 73(1) connotes deliberate non-disclosure of material facts with intent to evade tax, and does not extend to mere omission or bona fide error. (iii) On the facts, the Tribunal noted that: (a) all relevant details surfaced only upon departmental audit/investigation; (b) the appellant had not voluntarily informed or placed facts before the Department earlier; (c) no material was produced to show any contemporaneous bona fide legal doubt or correspondence seeking clarification. (iv) On a preponderance of probabilities, the Tribunal inferred that the appellant kept the Department 'entirely in the dark'; the irregularity would not have surfaced but for departmental intervention; and this conduct amounted to deliberate suppression with intent to evade tax within the meaning of the proviso. (v) The Tribunal distinguished the appellant's reliance on Global Soft, holding that, in the present case, there was positive non-disclosure and the factual matrix was closer to that considered in S.K. Jalendra & Associates and Shilpa Printing Press, which supported invocation of the extended period. Conclusions (1) The conditions for invoking the extended period under the proviso to Section 73(1) are satisfied; the show cause notices covering the extended period are within limitation. (2) Penalties under the relevant provisions (including Section 78 in at least one appeal) are legally sustainable in principle, there being sufficient basis to conclude deliberate suppression. Issue (5): Invocation of Section 80 for waiver of penalty Legal framework (as discussed) (a) Section 80 of the Finance Act, 1994: empowers the authority not to impose penalty if the assessee proves that there was reasonable cause for the failure. (b) The long-standing and unresolved legal controversy regarding taxability of clubs/associations and the doctrine of mutuality, culminating only with the Supreme Court's decision in Calcutta Club. Interpretation and reasoning (i) The Tribunal recognized that the core issue in the case-taxability of services by clubs/associations to their members-was subject to prolonged and serious litigation across different fora, with conflicting views, both before and after the introduction of the negative list and the statutory Explanation. (ii) The law was finally settled by the decision in Calcutta Club, which reaffirmed mutuality and held that such levies were not sustainable. The period in dispute (2005-2014) pre-dates this authoritative settlement. (iii) In these circumstances, the Tribunal held that the appellant could reasonably have entertained doubts about the taxability of the impugned transactions, particularly those relating to club/association services and cross-border elements. (iv) Though the ingredients for extended limitation and penalty were met in law, the Tribunal concluded that, in equity and in light of Section 80, the appellant had shown 'reasonable cause' for non-payment such that the imposition of penalties would be unjust. Conclusions (1) Section 80 is invoked in favour of the appellant; all penalties, including those upheld in principle under Section 78, are waived. (2) The demands, to the extent sustained (pre-shipment inspection/technical inspection and certification by Intertek with applicable interest), remain payable, but without any penalty.