TaxTMI 
TaxTMI 
2015 (12) TMI 1105
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....ion leg. In other words the collection and delivery of the consignments to individual clients is done by the network entities whereas movement of consignments from one country to another is handled by DHL International. The appellant is one such network entity operating in the territory of India. 1.1 They had entered into various contracts form time to time. Certain terms of the contract are as follows 2. THE COMPANY's OBLIGATIONS: 2.1 In consideration of DHL allowing the Company to access the Network the company undertakes and agrees with DHL as follows: a) To use its best endeavors to promote and expand the Network in the Territory. b) To provide efficient and reliable services in the territory and to this and receive consignments arriving in the territory check them against the manifest and deliver them to the parties of individual consignees against receipt. c) In the case of transportation from the territory to destinations abroad through the Network, to collect consignments from the premises of individual consignors and to manifest the consignments in accordance with the documentation and procedures stipulated by DHL prior t....
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.... with the provision of the services; c) to bear all costs and risks in relation to each consignment from the time it is delivered by the company into the custody of an airline chosen by DHL until the time it is delivered to the ultimate consignee; d) as evidence of the company's access to the network to process the inclusion of the name, address and telephone number of the company in the network's worldwide express directory and details of the stations operated by the company in the territory. 4. COMPENSATION 4.1 The company shall pay to DHL each month, from Company's revenue in the territory, such sum (the network fee) as represents the difference between (a) its bills delivered to Customers in the territory for the service (net or Value added tax or any similar sales turnover or like taxes) and (b) 107% of Local costs. The network fee has been established taking into account the responsibilities and activities which the company will provide in the territory as provided in this agreement. 4.2 In the event that 107% of Local costs exceeds the company's bills delivered (net of value added tax or any similar sales turnover ....
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....s collected by the company in the territory to their ultimate destinations outside the territory supplying (if required and reused by the company) a signed receipt from each consignee.' In this regard DHLI was required 'to bear all costs and risks in relation to each consignment from the time it is delivered by the company into the custody of an airline chosen by DHL until the time it is delivered to the ultimate consignee'. Thus it is seen that obligation of DHLI was only with regards to the consignments collected by the appellants in India. While the obligation of the Appellant was with respect to not only consignments collected by it in India but also in respect of consignments not booked by it but by other franchisee's of DHLI located abroad. 1.5 The arrangement between them has been explained in simple terms in their additional submissions to the Commissioner dated 26 th Nov 2013 (Exhibit 5 of this appeal). They have explained the contract as in para 2 of the letter as follows: 2. Network Agreement 2.1 DHL India has entered into a contract ('Network Agreement') with DHLI on principal to principal basis. 2.2 As per the Network Agree....
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....dia. In short the billed transactions are those where the appellants receive the consideration from the retail clients directly and the unbilled transactions are where they receive no consideration from the retail client. The costs incurred by them in this regard are reimbursed along with a margin of 10% as consideration by DHLI. 1.7 The appellants are paying service tax on the amount received from the retail clients in respect of billed consignments. The show cause notice alleges that in addition to the services provided to the retail clients, the appellants are also providing services to DHL International in respect of unbilled consignments, which are booked with network entities outside India and are to be collected from clients or delivered to clients in India, in terms of the agreement between DHLI and the appellants. It was alleged that the activity of collecting the consignments from the DHLI hub in India and delivering to clients in India is 'Courier service' provided by the appellants to DHLI International. Similarly it was alleged that the activity of collecting the consignments from the retail clients and delivering the same to DHLI hub in India is 'Courier servic....
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.... already suffered service tax. The notice also alleged that the compensation received by the appellant should also include the indirect compensation on account of investment rebate received from DHL International. The agreement between the appellants and the DHL International required DHL International to give 15% of the total investment made by the appellant as investment rebate. Thus the entire investment rebate received by the appellant was added to the amount received by the appellant from the DHL International for the year 2007-08. 1.9 The appellants were receiving services from DHL International in respect of billed consignments. In respect of billed consignments, either deliveries were being made abroad or collection of consignments form abroad was being done by DHLI, as a service provided t the appellants. The appellants were paying a certain fee to the DHLI for these services. According to appellants the 'network fee' paid by them to DHLI is the consideration for the said service and they paid service tax on the same. The service tax was being paid by the appellant under the reverse charge mechanism treating network fee as Assessable Value. It was noticed that they ....
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....ransport the documents, goods or articles on behalf of the courier agency and charges the courier agency for such services. A question has been raised whether under these circumstances the co-loaders are also liable to pay service tax. 16. In this context, it is clarified that co-loaders provide service to the courier agencies as such. They do not provide directly any service to the customer who gives the documents, goods or articles to the courier agency for their delivery to the consignee. What is chargeable to service tax is the service provided by courier agency to the customer. In this case, the courier agency being not a customer as such, the service provided by co-loader to the courier agency is not chargeable to service tax. It is significant to point out that the charges of the co-loaders to the courier agency for in-transit movement of goods, documents or articles are in any case ultimately recovered by the courier agency from the customer and these charges are included in the gross amount charged by the courier agencies from customers on which the service tax is computed.' The commissioner observed that the circular was based on the definition of courier ....
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.... x) They have filed returns and submitted all details during audit and hence extended period cannot be invoked. xi) No penalty can be imposed as there is no intention to evade. Default, if any, occurred because there was no bona fide doubt, lack of understanding and lack of proper law. xii) They are entitled to assessment on Cum-tax basis 2.1 The appellants have argued that they are engaged in the Business Support Service and not in Courier Service. They have argued that they are operating under a contract and doing an outsourced job on behalf of DHLI. It is pertinent to point out that they have not disputed the other aspects of the courier service. The courier service has been defined as follows "courier agency" means a (any person) engaged in the door-to-door transportation of time-sensitive documents, goods or articles utilizing the services of a person, either directly or indirectly, to carry or accompany such documents, goods or articles; Thus the activity being done by them is 'door-to-door transportation of time-sensitive documents, goods or articles utilizing the services of a person, either directly or indirectly, to carry or ac....
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....ined according to the terms of the sub-clauses (105) of section 65; (2) When for any reason, a taxable service is prima facie, classifiable under two or more sub-clauses of clause (105) of section 65, classification shall be effected as follows :- (a) the sub-clause which provides the most specific description shall be preferred to sub-clauses providing a more general description; (b) composite services consisting of a combination of different services which cannot be classified in the manner specified in clause (a), shall be classified as if they consisted of a service which gives them their essential character, in so far as this criterion is applicable; (c) when a service cannot be classified in the manner specified in clause (a) or clause (b), it shall be classified under the sub-clause which occurs first among the sub-clauses which equally merits consideration; [(3) The provisions of this section shall not apply with effect from such date as the Central Government may, by notification, appoint.] The activity being carried out by the appellants is 'transportation of time-sensitive documents, goods or articles utilising the services....
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....rline industry in the service tax authorities do no allocate cost of access by IATA agents to services of central reservation system and charge the tax on it. Thus he argued that since the tax can be levied only on a consideration received and 'no separate consideration attributable to the service' is received in this case, no service tax can be levied. He argued that the appellants generate revenue only form the billed consignments and no separate revenue is generated from activities undertaken for the Shipments under the Network Contracts. He argued that the order seeks to tax the costs incurred in generating revenue from the customers in India. He argued that the only consideration received by the appellants is from the billed consignments in India. He argued that service tax is paid on the entire amount of billed consignments and the notice seeks to recover tax again on the said amount. Their appeal gives following chart as an illustration of the same. Dr Cr Local Expenses 300 NA Revenue billed to local customer 1000 Service tax paid Mark up 30 Network fee payable to DHLI (Revenue billed less local cos....
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....k fee, and paid by appellant to DHLI. The net difference between the billed amount and the cost plus consideration, if positive, is called network fee. If the same is negative it is not termed as network fee. 2.2.3 The appellants are paying serviced tax on all the billed transactions on gross value received from retail customer. Thus whenever the appellant is approached by a client to pick up or to deliver a consignment, and the client makes payment to the appellant, service tax is paid by the appellants. Notice has been issued for the activity which it undertakes in respect of unbilled transactions. In respect of unbilled transactions the appellant either i) pickup the consignment from consignor's premises and deliver it to DHLI or ii) pickup the consignment from DHLI and deliver it to a consignee, in India. For these activities no bills are raised to retail clients. For these activities whatever costs are incurred, the company is compensated 110% of costs by way of consideration from DHLI. 2.2.4 A notice was issued to the appellants for the courier service provided in respect of unbilled transactions. In respect of unbilled transactions either picku....
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.... any foreign country Consignments where payment received by appellant for collection of consignments from Consignor abroad and delivery to consignee in India Collection of consignments in India and delivery of consignments to DHLI office, within India, for onward delivery to consignee in any foreign country, at behest of DHL, on 110% of cost compensation model Delivery of consignments in India after collection of consignments from DHLI office in India, received from any foreign country, at behest of DHL, on 110% of cost compensation model 2 Consigner location India Abroad India Abroad 3 Consignee location Abroad India Abroad India 4 Payment received by the appellant From Retail client From Retail client From DHLI, as part of cost plus consideration From DHLI, as part of cost plus consideration 2.3.33 They have admitted in their appeal that they have engaged in the net transaction by setting off the receipts against payables. To bolster their claim that they have received the consideration (from DHLI) in Foreign Exchange they have stated in their appeal (para 4.21) that "4.21 In this connection, it ....
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....ever above table shows that the network fee is not the amount paid for the services provided by DHLI. It is in fact the account of monthly settlement of receivables against payables. 2.3.4 The arrangement between them has been explained in simple terms in their additional submissions to the Commissioner dated 26 th Nov 2013 (Exhibit 5 of this appeal). They have explained the contract as in para 2 of the letter as follows, 2 Network Agreement 2.1 DHL India has entered into a contract ('Network Agreement) with DHLI on principal to principal basis 2.2 As per the Network Agreement DHL India is granted access to the global DHL Network so as to enable it to carry on its courier business in India and generate revenue. 2.3 For such access, DHL India compensate DHLI in the form of monthly Network Fee, in order to fund the network costs. The network fee is computed as the difference between the revenues earned by DHL India from its customers and 110% of the local costs (direct and indirect costs, as defined in the network agreement). 2.4 DHL India is also responsible for delivering shipments billed by DHL entities outside India, to consignees l....
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....e company during the relevant period. This incentive is provided on an exceptional basis for a maximum period of three years starting from 31 st day of December 2007. It is a rebate meant to facilitated the upgrading of the infrastructure, without any proprietary rights attached to it' Investment rebate is by definition an incentive. It has nothing to do with the Network service provided by DHLI to appellant in respect of delivery of its consignment abroad. It is a subsidy, by way of rebate, given to the appellant for up gradation of its infrastructure. For the purpose of determining the value of service provided by Appellants to DHLI, or vice versa, the investment rebate has no role to play. The quantum of investment rebate does not depend on the service provided by the DHLI to appellant by on the value of the fixed asset purchased by the appellants. It is an amount given by DHLI to appellant as an incentive but they have decided to adjust it against the amounts payable by appellant to DHLI, resulting in understatement of the Network fee. Just because the appellants are maintaining a consolidated account, where all payables are adjusted against receivable, they are they can....
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....s or Finance charges) from the Network fee. However it being reimbursable costs DHLI had to return it to the appellant. Instead of giving it separately it chose to deduct it form the Network fee, though the formula for network fee given in the clause 4 of the Network agreement did not provide for it. Thus they are calculating network fee as a means for setting off all receivables against payables, to arrive at monthly settlement. It sets off payables against receivable not only in respect of services given or taken but also in respect of incentives and reimbursable expenses and costs. 2.3.8 The appellants are paying service tax on the Network fee treating it as a value for the service received from DHLI. The Network fee is only the monthly adjustment of receivables against payables. It is net of the value of services received by appellant and services provided by appellant after adjustment of incentives and costs. Network fee is an adjusted amount. In this regard the appellants in their appeal have argued that 'service tax is to be paid on actual amount remitted'. They have claimed that the Rule 5 of the Valuation Rules provide for the reimbursement of expenditure or costs i....
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....r Local Expenses 300 NA Revenue billed to local customer 1000 Service tax paid Mark up 30 Network fee payable to DHLI (Revenue billed less local cost plus markupie Rs. 1000 less Rs. 330) 670 Service Tax paid under reverse charge This statement has been made on net basis considering the net totality of operation, adjusting payables against receivables. 2.5 To explain how the transaction actually take place in gross manner we can make a separate statement for each of the four different situation (Categories A, B, C and D) by breaking up the above figures (given as a example) in equal part for assigning to each category. For the sake of example let us divide the expenses equally in all four scenarios A, B C and D, and examine how the statement would look like for each of the transactions separately. Considering equal local expense (Rs 75 each) in all four categories and equal revenue (Rs 500 each) for both billed categories, there being no revenue for unbilled categories. Dr Cr Local Expenses Cat A 75 Cat B 75 Cat C 75 Cat D 75 Total 300 ....
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.... happening. The appellants get a booking form the client for picking up the consignment abroad and delivery to client in India. The courier charges are received by the appellant and they pay service tax on these charges. It can be seen that the DHLI organizes to receive the consignments abroad. It carries it to DHLI office in India and delivers the same to the appellants in India. The entire courier charges is received by the appellant form the client. The entire money received from the client is for the courier services of carrying the consignment from the consignor abroad to the consignee in India, and that becomes the Assessable Value for the purpose of Service Tax at the hands of the franchisee. The appellant receives the money from the client and pays the DHLI all of it, except the 110% of the appellant's costs, as network fee. The appellant pay the service tax on the entire amount received from the retail client. In accounting terms CATEGORY B will be. Dr Cr Local Expenses 75 NA Revenue billed to local customers 500 Assessable value Mark up 7.5 Network fee payable to DHLI (Revenue billed less local c....
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....If only activity listed in column (D) is carried out and no other activities are happening. It can be seen that the DHLI organizes to receive consignments abroad and delivers the same to the appellant at the DHLI office in India. The appellant carries it and delivers the same to consignee in India. The entire courier charges, for carrying the consignment, from the consignor abroad to the consignee in India, are received from the client by DHLI (or its franchisees abroad). The DHLI engages the appellant for picking up the consignment from the DHLI office in India s and delivering the same to the consignor's premise. The 110% of the appellant's costs, is paid by ZDHL to the appellant as consideration for this service as per the agreement. The money received by the appellant for picking up the consignment from the DHLI office in India s and delivering the same to the consignor's premise, i.e. 110% of the appellant's costs, becomes the Assessable Value for the purpose of Service tax at the hands of the franchisee. For accounting purposes the DHLI gets all the money from the client and pays the franchisee the 110% of the costs. In accounting terms CATEGORY D will be as f....
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....DHLI for unbilled transactions against the Network fee. The fact that the Network fee is solely for the billed operations has also been admitted by them. They have themselves described the arrangements as follows 2 Network Agreement 2.1 DHL India has entered into a contract (Network Agreement') with DHLI on principal to principal basis 2.2 As per the Network Agreement DHL India is granted access to the global DHL Network so as to enable it to carry on its courier business in India and generate revenue 2.3 For such access, DHL India compensates DHLI in the form of monthly Network Fee, inorder to fund the network costs. The network fee is computed as the difference between the revenues earned by DHL India from its customers and 110% of the local costs (direct and indirect costs, as defined in the network agreement). 2.4 DHL India is also responsible for delivering shipments billed by DHL, entities outside India, to consignee located in India (Unbilled shipments). 2.5 DHL India discharges service tax on gross revenue earned from its customers. DHL India also discharges service tax under reverse charge on the Network fees paid t....
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....(where cost plus mark-up cannot be recovered from revenue earned in India 210 Network fee (since the cost plus mark up is 1210,the revenue billed is in excess of the cost. Hence, no network is payable) -- In respect of the illustratin 2 they have stated that if such a scenario arises where when the revenue from the billed consignment is less than the 110% of the local expenses of the local expenses, they would be required to compensate for it. They have also admitted that in such a scenario they would be liable to pay service tax on such compensation. These are the cases of category C and D explained in the para 2.6.3, 2.6.4 and 2.7 above. where in absence of any revenue from retail client the liability will arise as a result of provision of service to DHLI. 2.10.1 It can be seen from the above illustration given by the appellants in their written submissions that the network fee is a fee to take care of expenses incurred by the DHLI on operations involving movement of the goods from/to foreign destinations to/from India. The appellants have in para 4.19 of the appeal the appellants have submitted as follows....
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....at the consideration received by them cannot be bifurcated in respect of the Billed and Unbilled Consignments. The appellants argued that at the material time there was no provision to deal with a situation where the consideration can not be determined. The appeal relies on the Section 67 which reads as under "SECTION [67. Valuation of taxable services for charging service tax.- (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall - (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner." It was argued that there is no method to determine the cons....
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....ion 1 of section 67. The notice as well commissioner has chosen to provide deduction of the duty paid value from the gross amount charged, which is clearly determined as the cost plus compensation received from the DHLI. Thus in the instant case the consideration being solely in money terms the assessable Value has to be determined in terms of Clause (i) of the sub section (1) of section 67. It is a fact that the all transactions (and therefore amount charged) are solely in money terms. All cases where consideration is in Money have to be assessed in under Clause (i) of sub section (1) of section 67. It is incorrect to say that the money received for the 'Billed' and 'Unbilled' transactions cannot be separately determined. It can be determined by the appellants if they so wish. It is regularly done by the industry by resorting to Cost and Works accountancy techniques. They have not chosen to determine themselves and therefore the Commissioner has determined by a basic method. The commissioner has taken the entire cost plus consideration received from the DHLI as Gross amount received and given a deduction of that portion of the consideration which pertained to billed transa....
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....he best judgement method the material on record can only be relied. For this the appellant have relied on the following decisions i) CIT vs Laxminarain Badridas 1979 (005) ITR 0170 PC ii) State of Orissa vs Maharaja B P Singh Deo 1969 (076) ITR 0690 SC The crux of both the decisions is that the best judgement is not an arbitrary power. It has to be exercised reasonably on the basis of material on record, and not local knowledge or repute in regard to asessee's circumstances. It is agreed that the best judgement is no an arbitrary power and has to be exercised in a reasonable manner. In para 12 of the SCN it is clearly stated that detailed bifurcation of the consideration for billed and unbilled transactions was called from the appellants but they failed to give the same. Under these circumstances the revenue adopted the alternate method of approximation by apportioning it on the weight basis. I do not find that this method is arbitrary in any manner. The option to give details of consideration was open to the appellants but they did not avail the same. 2.12 They have argued that the in terms of the circular 111/05/2009-ST dated 24 Feb 2009 the service pr....
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....ration of Minerals service, Convention service, Security Agency service, Storage and Warehousing service) where the place of performance of service can be established, it is provided that provision of such services would be 'export' if they are performed (or even partly performed) outside India. (iii) Category (III) [Rule 3(1)(iii)] : For the remaining services (that would not fall under category I or II), which would generally include knowledge or technique based services, which are not linked to an identifiable immovable property or whose location of performance cannot be readily identifiable (such as, Banking and Other Financial services, Business Auxiliary services and Telecom services), it has been specified that they would be 'export',- (a) If they are provided in relation to business or commerce to a recipient located outside India; and (b) If they are provided in relation to activities other than business or commerce to a recipient located outside India at the time when such services are provided. 3. It is an accepted legal principle that the law has to be read harmoniously so as to avoid contradictions within a legislatio....
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....rh - 2012-TIOL-1877 CESTAT DEL. In the said case the service under consideration was Business Auxiliary Service (BAS). BAS falls under clause (iii) of Sub-rule (1) of rule 3 of the Export of Services Rule, 2005 where the location of service receiver or provider is relevant. The appellant's case is of Courier service falling clause (ii) of Sub-Rule (1) of rule 3 of the Export of Services Rule, 2005, where the place of performance is the relevant criterion. In view of that the decision cited is not relevant to the case. Their claim that the recipient of service is located outside India or that the foreign exchange is received as a consideration is irrelevant. 2.13 Limitation 2.13.1 The appellants have claimed that they have declared all the necessary details. They claimed that they have disclosed the necessary details of the Network agreement and payments made to DHLI in the service tax returns. They have been filing the service tax returns regularly. They have been paying the service tax on the Network fee regularly and disclosed the same in the service tax returns. They claimed that the audit for the period FY 2002-03 to 2006-07 was completed. During the said audit they c....
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....aid form out of revenue collected by service provider. Since service provider pays tax on entire revenue collected, the co-loader was not levied service tax since his revenue is part of tax paid revenue. However the operations of DHLI are not of co-loader in respect of Unbilled consignments, as all unbilled operations there is no revenue collected by appellants and thus they cannot be hiring the DHLI as co-loaders. In fact for unbilled consignments the appellants are the service providers and the DHLI service recipients. There is no Network fee for the operations of DHLI in respect of Unbilled consignments. Thus Network fee does not represent a fee for co-loader as claimed by them. Network fee is net amount paid received by DHLI after netting gross amount it has to receive as co-loader with the amount payable to appellants as service charges for services received. Representing the Network fee as a fee for co-loading is a misrepresentation. It is seen that that what has been disclosed to audit is incorrect. They have not disclosed all the four kind of operations i.e. billed export and imports, and the Unbilled export and imports. Moreover the appellants have not disclosed that the e....
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....r netting payables against receivables as against the requirement of declaring the Gross amounts charged. II) Indian Hume Pipe Co ltd. vs. CCE 2004 (163) ELT 273 where tribunal observed sufficient documents have been given to indicate the fact that no tax on freight is being paid. In the instant case there has been an express misrepresentation of the fact that Network fee is not same as co-loading fee. It is in fact an amount arrived at by setting off the amount receivable by the appellant against the co-loading fee payable by the applicant. The assessable values in the service tax returns have been declared after netting payables against receivable as against the requirement of declaring the Gross amounts charged. III) Essar projects vs CCE 2011 (31) ELT 188 where the assessee has been filing the service tax returns and audit is being conducted in disputed period, suppression cannot be alleged. It is notice that the audit conducted in the instant case was for the period 2002-03 to 2006-07, which is before the disputed period. However in audit the appellants have clearly misrepresented facts regarding the adjustment of payables of co-loading against receivable for....
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....argeable on any taxable service with reference to its value, then such value shall - (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner." In the returns filed by the appellants they were required to give declare the 'Gross amount charged'. It is seen that they have not declared the 'Gross amount charged' but the net amount after adjusting payables against receivables. They have also admitted it in para 4.21 of the appeal. "4.21 In this Connection, it is submitted that instead of receiving consideration from DHLI and paying consideration to DHLI, a net amount is paid by the appellant to DHLI on monthly basis. Accordingly, without prejudice ....