TaxTMI 
TaxTMI 
TaxTMI 
2015 (12) TMI 1105
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....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 to delivering all consignments to the airport or other designated point of dispat....
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....irline 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 or like taxes) then DHL shall pay to the company such sum as represents the excess within 30 days of DHL agreeing the company's computation of local costs. 4.3 For the avoidance of doubt, all the inte....
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.... 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 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, in order to fund the netwo....
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....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 service' provided by the appellants to DHL International. It was alleged that no service tax has been paid on the services provided in respect of Unbilled transactions. 1.8 In order to Levy service tax it was necessary to arrive at the correct assessable value. In this case there w....
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....ed 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 were taking credit of the service tax paid on such services. It was also alleged in the notice that they had adjusted investment rebate required to be given by DHLI against the network fee payable by appellants to the DHLI. As a result of this while paying service tax, appellants had ....
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....de 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 service and the said definition has been amended from 16.05.2008. The Commissioner reached a conclusion that the circular would not apply after the amendment in the definition of courier service. Thus he held that the said circular will not have any application after the amendment. As a result the Commis....
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....ued 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 accompany such documents, goods or articles.' They have claimed that it is in the nature of Business support service as an outsourced job and thus the classification of the service should be Business Support Service. All services are in the nature of outsourced jobs. When a customer books a courier he is essentially outsourcing the delivery of his documents. When a company gives a works contract, it is o....
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....ices 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 of a person, either directly or indirectly, to carry or accompany such documents, goods or articles' from DHLI office to consignor's premises or from consignee's premises to DHLI premises. Since this is a more specific classification available it has to be preferred over a more general classification. Thus it is a clear case of courier service provided by the appellants to DHLI. 2.2 The learned counsel for the appellant explained the process of courier business in detail. He a....
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....ertaken 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 cost plus markupie Rs. 1000 less Rs. 330) 670 Service Tax paid under reverse charge They have claimed that they have paid tax on the entire Network fee received by them (Rs 670 in the example cited by them) and on entire revenue (Rs 1000 in the example cited by them) 2.2.1 In short the arrangement between DHL operations BV (DHLI) and DHL worldwide express (India) Private Ltd (appellants) is of a kind of where DHLI conducts all the activities happening outside India in respect of all the consignmen....
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....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 pickup or delivery is done from the premises of DHLI and corresponding delivery/pickup is done from the client. In the process of pickup/delivery of these unbilled consignments the appellant is compensated by 110% of the costs incurred by the company. It was alleged that the appellant was providing a Courier service to DHLI in so much as the appellant was either picking up consignments from the premises of DHLI and delivering it to the clients or picking up the consignments form the clients and delivering them to the premises of DHLI. In either case it was a ser....
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....d 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 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 to our arguments that there is no separate consideration, it is submitted that through the appellant is not receiving any foreign exchange, the balancing payment in order to prevent outflow of foreign exchange, can be considered as receipt of foreign exchange for the purpose of compliance with the export rules." In other words they have claimed that they have adjusted the not only the payments to be made by DHLI for billed and unbilled transactions against the Network fee, but also cost and incentive....
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....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 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 to DHLI. It has been admitted that the network fee is only in respect of the Billed shipments as a compensation for funding the network costs. In fact the appellants receive services of the DHLI only for billed shipments. For Unbilled shipments no services are provided by DHLI to appellants. In respect of the Unbilled shipments it is the appellants who provide services to the DHLI. However since a single consolidated account is maintained the amounts payable by appellant to DHLI and those payable by DHLI to appellant get adjusted against each other. While doing so they are maintaining ....
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.... 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 cannot alter the assessable value for the purpose of service tax. Moreover clause 4 the network agreement does not talk about adjusting such incentives against the network fee. 2.3.7 In terms of the Network agreement the only deduction allowed from the revenue generated by using the Network is the local costs (trading costs in the above format) and a 10% mark-up on the same. In the instant case the investment rebate and the Customs clearance costs/Finance cost are not part of the local costs therefore the mark-up of 10% is not being given to the appellants. Had it been the local costs the appellants would have got the 10% mark-up on the same. This is what the Schedule A to the Network agreement also confirms. It clarifies that 'D) Reimbursible Costs shall mean the following costs, which will be reimbursed without ....
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....ded 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 incurred by the service provider in the course of the provision of service to the service recipient. It has been claimed that there is no provision to deal with the costs incurred by the service recipient could be added. They have claimed that rule 7 of the Valuation rules provides that the value of taxable service provided by a service provider outside India to a service recipient in India will be actual consideration charged for it. Their argument seems to be that irrespective of the assessable value determined under the law the actual amount remitted is the Assessable Value. This is a misplaced notion. The law is very clear in this regard. The Value for the purpose of Service tax is to be thegross amount charged for the service. SO if one receives a service from a person and also provides a service to the same person, the service tax is payable on both the t....
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....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 NA Revenue billed to local customers Cat A 500 Cat B 500 Cat C 0 Cat D 0 Total 1000 Service tax paid Mark up Cat A 7.5 Cat B 7.5 Cat C 7.5 Cat D 7.5 Total 30 Network fee payable to DHLI (Revenue billed less local cost plus market price Rs. 1000 less Rs. 330) 670 Service tax paid under reverse charge 2.6 The situation becomes clearer when each situation is examined separately in isolation. 2.6.1 CATEGORY A Service tax liability if only activity listed in category (A) is carried out and no other activities are happening. It can be seen that the franchisee in India receives consignments in India and receives payment of entire courier charges. It carries it and delivers the same to DHL office in India. DHL carries it form it's office in India to the consignee's premises abroad. The entire courier charges received by the appellant from the client i....
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.... Assessable value Mark up 7.5 Network fee payable to DHLI (Revenue billed less local cost plus mark up ie Rs. 500 less Rs. 82.5) 417.5 Assessable Value for the purpose of Service tax under reverse charge The total billing will be Rs. 500/-. The expenses will be Rs. 75 and DHLI would pay a markup of Rs. 7.5/- to the appellant. The Network fee would work out to Revenue billed (Rs 500/-) less local cost plus markup (Rs 82.5) ie Rs. 500 less Rs. 82.5 or Rs. 417.5/-. 2.6.3 CATEGORY C If only activity listed in column (C) is carried out and no other activities are happening. The consignments are booked by DHLI or its franchisees abroad. It can be seen that the franchisee in India collects the consignments in India from the consigner. Appellant carries it and delivers the same to DHLI office in India. DHLI carried it from it's office in India to the consignee's premises abroad (through franchisees abroad). The entire courier charges, for carrying the consignment, from the consignor in India to the consignee abroad, are received from the client by DHLI (or its franchisee abroad). The DHLI engages the appellants ....
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....10% of the costs. In accounting terms CATEGORY D will be as follows Dr Cr Local Expenses 75 NA Revenue billed to local customers Mark up 7.5 Network fee payable to DHLI (Nil, as revenue of appellant is Nil and expenditure exceeds revenue) 0 Revenue received by appellant from the customer, i.e DHLI 82.5 Value for the purpose of Service tax 2.7 If we total up these statements (in para 2.6.1, 2.6.1, 2.6.3 and 2.6.4 above) it becomes same as the statement given as an example by the appellants in their appeal memo, but only more elaborate and with gross figures. Statements after consolidation of statements made in Categories A to D Dr Cr Local Expenses Cat A 75 Cat B 75 Cat C 75 Cat D 75 300 NA Revenue billed to local customers Cat A 500 Cat B 500 1000 Assessable value of Billed consignments Mark up Cat A 7.5 Cat B 7.5 Cat C 7.5 Cat D 7.5 30 Network fee payable to DHLI (Nil as revenue of appellant is Nil and expenditure exceeds revenue) CAT A Rs. 417.5 CAT B Rs. 417.5 835 Assessable Value for the purpose of paying service tax on reverse charge basis Amo....
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....ompensation for funding the network costs. In fact the appellants receive services of the DHLI only for billed shipments. For Unbilled shipments no services are provided by DHLI to appellants. In respect of the Unbilled shipments the appellants provide services to the DHLI. While doing so they are maintaining a consolidated account of amounts to be paid and only net transaction are made on monthly basis. From above it is apparent that as a result of the setting off of amounts payable against receivables there has been a undervaluation of not only assessable value in respect of courier service provided by the appellants but also of the courier service received by the appellants. 2.9 The appellants in their appeal in para 4 have explained this as follows 'The local DHL entities earn their revenue from the courier business generated from billed shipments within the territory. The local DHL companies recoup their costs as well as an arm's length margin (cots plus 10%) from the billed shipments contracted by them However as part of the global DHL network, the local DHL entities also handle shipments of other DHL companies in other countries, for which they neither bill/charge....
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....off its foreign exchange remittance payable against its receivables, the same can be construed as foreign exchange received. 4.20 As provided in the preceding submissions, the following two transactions are i) where services are provided by the appellants to DHLI; and ii) where services are provided by DHLI to appellant 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 to our arguments that there is no separate consideration, it is submitted that though the appellant is not receiving any foreign exchange, the balancing payment in order to prevent outflow of foreign exchange, can be considered as receipt of foreign exchange for the purpose of compliance with the export rules." There is an obvious admission by the appellant that they are setting off the consideration and a net amount is paid to DHLI. This is the net amount of what is payable from appellant to the DHLI for services provided by DHLI to appellant and the cost plus compensation that the DHLI is supposed to pay the appellants for the 'Unbilled co....
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.... 1 of section 67. He argued that at the material time the Valuation Rules prescribed the method of ascertainment only in cases where 'consideration not wholly or partly consisting of money' in terms of Rule 3 of the said rules. It was argued that this method only applied to cases covered under clause (ii) of subsection 1 of section 67 and not to cases covered under clause (iii) of subsection 1 of section 67. No method has been prescribed to cover cases specified under clause (i) of subsection 1 of section 67. It was argued that since no method has been prescribed no tax can be charged. For this reliance was placed on i) Govind Saran Ganga Ram vs CST (1985 (Supp) SCC 205) ii) L & T vs State of Bihar (2004) 134 STC 354 (Pat) iii) Voltas vs State of Jharkhand (2007) 5 VST 492 (Jhar) 2.11.1 The commissioner has in the OIO has not taken support of the Service Tax Valuation rules to arrive at the Value for the purpose of the Service Tax. It is seen that the appellants have taken a position that the consideration for the unbilled consignments cannot be ascertained and therefore the assessable value cannot be ascertained and therefore the assessable value cannot be ascertained....
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....in respect of retail functions and sales costs. It is obvious when certain costs are attributable solely to billed shipments there will be other costs attributable to unbilled shipments which need to be included in totality. If one has to be excluded then another needs to be fully included. This claim has not been made before the lower authority and cannot be entertained at this stage. 2.11.2 Best Judgment method in this regard it is pertinent to point out that the Section 72 of the Act permits an office to adopt the best judgement method under certain circumstances. These circumstances being a) the assessee falls to furnish return under section 70; b) having made a return, fails to assess the tax in accordance with the provisions of the Act or rules made thereunder The appellants have claimed that the circumstances prescribed in the said section do not exist in the instant case to enable the Commissioner to adopt the best judgment method. They claimed that they have indeed filed the returns and have assessed their liability correctly. The appellants have filed the returns but have, according to the Order, failed to assess the tax in accordance with the provisions of the Act ....
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....ce that certain activities, illustrations of which are given below, are denied the benefit of export of services and the refund of service tax under rule 5 of the Cenvat Credit Rules, 2004 [notification No. 5/2006-CE (NT) dated 14.03.2006] on the ground that these activities do not satisfy the condition 'used outside India',- (i) Call centres engaged by foreign companies who attend to calls from customers or prospective customers from all around the world including from India; (ii) Medical transcription where the case history of a patient as dictated by the doctor abroad is typed out in India and forwarded back to him; (iii) Indian agents who undertake marketing in India of goods of a foreign seller. In this case, the agent undertakes all activities within India and receives commission for his services from foreign seller in convertible foreign exchange; (iv) Foreign financial institution desiring transfer of remittances to India, engaging an Indian organisation to dispatch such remittances to the receiver in India. For this, the foreign financial institution pays commission to the Indian organisation in foreign exchange for the entire activity being undertaken in I....
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....perty located in U.K. and hands it over to the owner of such property having his business and residence in India, it would have to be presumed that service has been used outside India. Similarly, if an Indian event manager (a Category II service [Rule 3(1)(ii)]) arranges a seminar for an Indian company in U.K. the service has to be treated to have been used outside India because the place of performance is U.K. even though the benefit of such a seminar may flow back to the employees serving the company in India. For the services that fall under Category III [Rule 3(1)(iii)], the relevant factor is the location of the service receiver and not the place of performance. In this context, the phrase 'used outside India' is to be interpreted to mean that the benefit of the service should accrue outside India. Thus, for Category III services [Rule 3(1)(iii)], it is possible that export of service may take place even when all the relevant activities take place in India so long as the benefits of these services accrue outside India. In all the illustrations mentioned in the opening paragraph, what is accruing outside India is the benefit in terms of promotion of business of a foreig....
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....bjections but there is no mention of any Network agreement being submitted by them. In fact in reply to this letter vide letter dated 28 th May 2008 they mentioned that the Network agreement has been taken by Service Tax Department by issue of Summons dated 24 th September 2007 and subsequent visit later. They informed that since the government withdrew the circular, whereby the services of co-loader were brought into service tax net, they have started paying the service tax on the Network Fee paid to DHLI from September 2007 onwards. However the appellants, in their reply, described the transaction flow as under in the said letter The transaction flow as per the agreement is as follows: - The customer in India gives the shipments to DHL India - DHL India despatches the shipments to the local regional airports or customs port for further transportation - The shipments collected by DHL India from customers located in India for delivery to consignees located outside India, are accumulated at various hubs as per pre-decided routing operated by DHL ops. - As the hubs, DHL Ops carried out the activities of sorting the shipments and ultimately delivering the same to final desti....
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..... The exemption the co-loader is also on the basis of the fact that the co-loader receives only part of the value of service, on which the service tax has already been paid. This can happen only in case of billed consignments. In respect of unbilled consignments the DHLI was not the co-loader but a service recipient has not been disclosed. Thereafter the audit in their letter dated 12 January 2009 the audit calls for the agreements to examine the aspect of taxability of Network fee received from 2003-04 to 2006-07. In reply to that too the same explanation as given to the earlier letter is given. However, a copy of the agreement was enclosed. The explanation given by them again fails to disclose 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 entire consideration received for all kinds of operations (i.e. both Billed and Unbilled) is being set off against the revenue generated for the purpose of calculating the network Fee. They have misrepresented the Network Fee as a co-loading fee. 2.13.3 The appellants have relied on following decisions in support of their claim on limitatio....
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....nnot be alleged. The said decision, the appellants claimed, has been approved by Hon High Court of Punjab and Haryana. In the instant case the appellants are well aware that they are netting the payable against receivables and costs. They have admitted it. There is no confusion in law that service tax is to be discharged on Gross amounts charged and not on net amount charged. Their argument seems to be that the services provided by appellants to DHLI in respect of Unbilled consignments are free of consideration is clearly mischievous and with intent to evade. 2.13.4 The appellants have argued that the penalty under section 78 is not leviable as no circumstances prescribed under the section exist. They claimed that i) they have filed returns regularly ii) They have disclosed all documents during audit iii) The notice seeks to levy tax on a consideration where no consideration exists iv) They are remitting the network fee to DHLI and paying service tax on the same. They relied on the following decisions i) Hindustan Steel vs State of Orissa 1978 (2) ELT J159 (SC) and Akbar Badrudin vs CC 1990 (47) ELT 161 (SC) . They argued that penalty can be imposed only in cases ....
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.... value of services received but also costs and incentives. 2.14.1 The appellants argued that Service tax demand under reverse charge, even if applicable, would be revenue neutral. The appellants have claimed the benefit of cum-tax price. They have claimed that if the consideration received form DHLI is indeed treated as consideration for services provided by them to DHLI then that amount may be treated as Cum tax amount. They relied on the decision of CCE vs Advance Media Consultants 2008 TIOL 548 CESTAT wherein it has been held that the service tax being an indirect tax the consideration needs to be considered as Cum Tax consideration. The said decision has been maintained by the Hon Apex Court 2009 (14) STR J49 (SC). The argument of the appellants have force. The amount received by them is an all inclusive cost plus consideration in which everything is included. Thus it has to be treated as Cum tax amount and the demand needs to be quantified accordingly. The appellants have also relied on the following decisions in this regard. i) Aurobindo Pharma v CCE 2007 (216) ELT 389 ii) Sundaram Fastners vs CCE 2009 (237) ELT 55 iii) PR rolling vs CCE 2010 (249) ELT 232 (maintained....