m/s.dhruvi pharma pvt ltd. - Central Excise, Ahmedabad

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OIO No. 42/STC/AHD/ADC(JSN)/2012-13

BRIEF FACTS OF THE CASE

M/s Dhruvi Pharma Pvt. Limited located at 302, Iscon Mall, Above Star India

Bazaar, Jodhpur Char Rasta, Satellite, Ahmedabad- 380015 (hereinafter referred to as

‘the assessee/said assessee’) are engaged in providing taxable services such as “Storage and Warehousing Service”, “Goods Transport Agency”, “Business Auxiliary Service” and

“Man Power Recruitment Service” and are registered with the Service Tax Department with Registration No. AABCD3983HST001.

2. During the course of audit by the CERA, it was noticed that the assessee had shown gross receipt on account of Commission Income in their Profit & Loss Account but they had neither filed proper ST-3 returns nor had paid Service Tax for the year

2004-05, which resulted in short payment of service tax. It was noticed that the said assessee had received commission income of Rs. 60,32,846 as per the Balance Sheet for the year 2004-05. The Commission Income is in nature of Business Auxiliary Service w.e.f. 01.07.2003, however, the said assessee had not obtained registration under

“Business Auxiliary Service” { BAS for short} in the year 2004-05.

3. Thereafter Department issued letter F.No. STC/CERA/AR-13/HM.69/2007-08 dated 19.03.2008 and letter SD-02/R-8/4-10/HM 69/Dhruvi/08-09 dated 15.09.2008,

25.07.2009, 19.08.2009 and 24.08.2009 requesting them to submit the copies of

Balance Sheet and Income Tax Returns for the financial years 2005-06, 2006-07, 2007-

08 and 2008-09. The said assessee vide their letter dated 3.09.2009 submitted the copies of Balance Sheet and Profit & Loss A/c for the years 2004-05 to 2007-08, and the provisional P&L A/c for the year 2008-09.

4. Summons was issued to the assessee on 15.09.2009, for appearance on

17.09.2009. Shri Rupesh Shah, Director of the assessee appeared on 17.09.2009 and interalia stated that they were the authorized stockiest of Cipla Limited at Ahmedabad,

Surat, Gondal and Jaipur; that they had stockiest agreement issued by the company; that they purchased the goods from the Company and sold the same to various

Hospitals, Nursing homes, Doctors and Medical Shops; that the trade discount earned by them in their trading business was not liable to service tax at all since they were undertaking trading activity only. He further stated that the commission income of Rs.

60,32,846/- includes commission earned on storage and warehousing services of Rs.

45,43,053/- and stockiest margin ( i.e. trade discount) on trading of pharmaceutical products of Rs. 14,89,793/- and that service tax on storage and warehousing services had already been paid and the relevant ST-3 returns along with Service Tax challans had also been filed.

5. On being asked regarding sale amount, he stated that whereas, stockiest margin

(i .

e . trade discount) earned on sale of Rs.1,37,61,737/- was not liable to service tax ; that they had shown purchase in their Profit & Loss account of Rs.1

, 38,93,393/ - as cost of sales , which means that, trade discount which were their profit margin was shown separately in Profit & Loss account as Commission Income . Further he stated that t he y have paid sales tax and also filed sales tax return with sales tax department. Copy of the sales tax return can be provided on being asked; that since Profit & Loss Accoun t was prepared in connection with Income Tax Act, stockiest margin (i.e. trade discount) was clubbed with commission income; that later their auditor M/s. Hemanshu Shah &

Co were issued certificate to certify the break-up of commission income as actual commission and stockiest margin for all the relevant years. On being asked regarding profit and loss account for the year 2005-06 to 200708, he stated that similarly in

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OIO No. 42/STC/AHD/ADC(JSN)/2012-13 subsequent years also Le. 2005-06, 2006-07 and 2007-08 stockiest margin were clubbed with commiss i on income in Profit & Loss account ; that they were also providing other services . like Manpower services, Marketing franchisee services and

GTA services; that Commission earned on account of all these services were also clubbed and shown as "Commission Income" in Profit & Loss account; that he had given below year wise bifurcation of commission earned from various services along with stockiest margin.

YEAR 2005-06

Sr.No.

Particulars

Amount(Rs.)

1 Commission on account of Storage and Warehousing services 5092638

2 Commission on account of marketing franchisee services 3070737

3 Stockiest ,margin (Le. trade discount) on trading business

Total

6301094

1,44,64,469

YEAR 2006-07

Sr.No.

Particulars

Amount(Rs.)

1 Commission on account of Storage and Warehousing services 10847133

2 Commission on account of marketing franchisee services 5394159

3 Professional services

4 Stockiest ,margin (i.e.. trade discount) on trading business

Total

1500000

15142341

3,28,83,633

YEAR 2007-08

Sr. No. Particulars Amount(Rs.)

1 'Commission on account of manpower recruitment

2 services

8109169

10263950

3 Professional services 1500000

4 Stockiest margin (i.e. trade discount) on trading business 12694233

Total 3,25,67,352

6. He also stated that they had filed ST-3 Returns regularly and paying service thereon.; that they had already filed sales tax I VAT return for the year 2005-06, 2006-

07 and 2007-08 with the sales tax. department; that Copy of sales tax I VAT return can be provided on being asked. On being specifically asked regarding commission earned/received, he stated that they had also confirmed that they have received the commission amount as shown in profit and loss account for the year 2004-2005 to

2008-2009 above; that there is nothing on account of commission earned but not received. Regarding Stockiest margin, he clarified vide their letter dated. 18.09.2009 that" stock margin is nothing but dealer margin or trade discount., They are authorized distributor for Cipla Ltd., at Ahmedabad, Surat, Rajkot, Indore and Jaipur. They are purchasing various products of the company at dealer price which they call as PTS (

Price to stockiest) and all the same product as PTR (Price to retailer) Dealer margin and price of pharmaceutical product is fixed as it come under essential commodity and hence, regulated by govt. body and PPA (national pharmaceutical pricing authority) in

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OIO No. 42/STC/AHD/ADC(JSN)/2012-13 normal circumstances dealer margin is in built in the rate and is the difference between

PTR (Price to retailer) and PTS ( Price to stockiest). However, there are some customer like corporate hospital , govt. institution, nursing home etc. which purchases various product of the company in bulk quantity and hence company provide additional discount or special price to these customers. Special price offer is lower than PTR (i.e. their selling price) and many times lower than PTS (i.e .their purchase rate) also they sell the product at special price to the hospital, nursing home, and doctors. He has given example that one product as Tazact injection whose MRP is Rs.723 PTR is RS.556 and PTC is Rs. 500. They have offered this product to hospital at special price at Rs. 300 so they sale this product at Rs. 300 and get difference of Rs. 200. (PTS) less special rate

0 from the company and also get dealer margin of 7% on special rate from the company as stockiest margin. So difference between PTS (i.e. price to stockiest) and special price is reimbursed by the company as a credit note and for the dealer margin

(stockiest margin) they raised claim on company on monthly basis by oversight this amount was classified in the balance sheet as a commission income instead of reducing from purchase value (Le. cost of sale)" Further statement of Shri Rupesh H.Shah,

Director of M/s Dhruvi Pharma Pvt.Ltd., Ahmedabad was recorded on 01.10.2009 under Section 14 of the Central Excise Act, 1944 read with Section 83 of Finance Act,

1994.0n being asked regarding service· provided "Storage and warehousing services", he stated that M/s Dhruvi Phama Pvt. Ltd. , are engaged in the rendering the services of receiving storing and distributing goods as agents for Cipla Ltd.: that since the activity carried out by them do not get covered by the definition of "Clearing and Forwarding"; that they have not applied for the registration under the said category; that they had applied and obtained registration certificate under the category of storage and warehousing and paid service tax since August 2002; that they had also filed ST-3 return from the year 2002-03 regularly; that he produced a copy of agreement with

M/s Cipla Ltd. On being asked regarding professional services provided, he stated that they had been rendering accounting services for Cipla Ltd., from 1 st April 2006; that for this service they had applied and obtained registration under the category of "Business

Auxiliary Services"; that they had also paying service tax and' filing ST-3 Returns since

April 2006 to till date regularly; that they were not providing professional services to any other party. On being asked regarding Marketing Franchisee Services provided, he stated that they had been rendering services of promotion of the MIs Cipla Ltd.'s product of omnicare division in the state of Gujarat since April 2005; that for this services, they had applied and obtained registration under the category of " Business auxiliary Services": that they had been paying service tax and filing ST-3 Returns regularly from April 2005 till date; that he produced a copy of Agreement with M/s

Cipla Ltd .Regarding professional income, Shri Rupesh Shah clarified vide their letter dated 05. 10.2009 that" he is a Chartered Accountant by profession and later on started a company in the name and style of M/s Dhruvi Pharma Pvt.Ltd., All the initial business pertaining to accounting and internal audit were later on transferred to that new company and as he, ceased to act a Chartered Accountant as much as he stopped their professional practice the business taken up by their new company started paying service tax under category of Business Auxiliary services and ST -3 returns were filed from time to time.

7. Regarding liasoning charges, Shri Rupesh Shah clarified vide their letter dated

12.10.2009 that they had paid service tax on liasoning charges under the category of “Business

Auxiliary Service”. Regarding Misc. Income shown in their Profit & Loss Account he clarified that

Misc. Income comprises of interest on Income Tax Refund, Misc. balance written back; profit on sale of motor car etc., All these income are outside the purview of service tax.

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Thus it appeared that :

 The said assesee had filed ST-3 Returns under Storage and warehousing services for the period 2004-05 to 2008-09. The total value shown Rs. 2,18,15,033/- for the period 2004-05 to 2008-09 as a Storage and warehousing income, and service tax amounting to Rs 22,81 ,426/- had been paid thereon. The said value and said service tax was to be considered as· Clearing and Forwarding Agents services. The said assessee had not obtained service tax registration under the category of Clearing and Forwarding Agents.



The said assessee was also engaged in providing Man Power Recruitment

Service to the various clients. The said assessee has filed ST-3 Returns for the



Man power recruitment services during the year 2008-09. The said assessee has received income Rs.86,37,540/- during the year 2008-09 and paid the Service tax Rs.10,67,604/- thereon. The said income was shown in head: direct income in the Balance Sheet/Profit and loss account for the year 2068-09.

The said assessee had also engaged in the providing service of "Goods Transport

Agency services". The said assessee had filed ST-3 Returns for the year 2005-06, and has received income Rs.2,30,694/- against providing the Goods Transport

Agency services and also service tax paid Rs.24,557/- thereon. As per ST-3

Returns filed by the said assessee, they had received income of Rs.4,26,412/- against providing the Goods Transport Agency services and service tax paid Rs

.52192/thereon. Also taxable value RS.3055/- shown in ST-3 for the year 2007-

08 as a Goods transport agency service and service tax Rs.375/- has been paid thereon.



The above all taxable value was shown as a commission income in the Balance

Sheet/Profit and loss account for the year 2004-05 to 2007-08' and direct income shown in Balance Sheet/Profit and loss account for the year 2008-09.



Thus, it was noticed that there was a difference in value as reported in Profit &

'Loss Account and value shown in ST-3 returns (BAS, SWS, Man power recruitment services, and GTA) and thereby there was a short payment of

Service Tax total amounting to Rs.49,50,242/- i.e. Rs.1 ,94,807/- for the period

2004-05,Rs.6,60,1 02/- for the period 2005-06, Rs.18,91,334/- for the period

2006-07 , Rs.16, 19,872/- for the period 2007-08 and Rs.5,84,127/-for the period

2008-09 under the category, of Business Auxiliary Services.

8. Now therefore, M/s Dhruvi Pharma Pvt. Ltd., 302, Iscon Mall, Star India Bazar,

Jodhpur Char Rasta, Satellite, Ahmedabad was issued a Show Cause Notice No.

STC/89/O&A/SCN/ADC/DPL/R-8/Div.II/2009 dated 22.10.2009 by the Additional

Commissioner, Service Tax, Ahmedabad 380 015 as to why:-

(i) the total value of Rs.3,91,05,406/- (difference between total taxable value received and taxable value (BAS+ SWS+ GTA+ Man power Recruitment· service) shown in their

ST-3 Returns) shown in their Profit & Loss Account as "Commission Income", for the

Financial Years 2004-05 to 2007 -08 and provisional profit and loss account for the year

2008-09 should not be considered as taxable value under section 67 of the Finance Act,

1994 towards rendering of taxable services as Business Auxiliary services (As per

Annexure "A" attached to the SCN).

(ii) Service Tax amounting to Rs. 49,50,242/- short paid by them should not be demanded and recovered from them under Section 73 (1) of the Finance Act, 1994.

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(iii) Interest as applicable rate should not be charged and recovered from. them, under

Section 75 of the Finance Act, 1994.

(iv) Penalty should not be imposed upon them under Section 76 of the Finance Act

1994, for the failure to the make the payment of Service Tax in prescribed time limit.

(v) Penalty should not be imposed upon them under section 77 of the Finance Act, 1994 for the failure to file prescribed service tax return properly.

(vi) Penalty should not be imposed upon them under Section 78 of the Finance Act,

1994 for suppressing the value of taxable services provided by them before the department with intent to evade payment of Service Tax.

DEFENCE REPLY

9. under :

The assessee filed their 1 st reply dated 7.10.2010, wherein they submitted as

 That it has been alleged in the show cause notice that for the year 2004-05 to

2008-09 there was a difference of Rs. 3,91,05,406/- between the taxable value received by them and as shown in the ST-3, and that it is alleged that they have paid service tax of Rs. 95,40,132/-, which was not in accordance to the fact; that they have actually paid service tax of Rs. 97,35,658/-, which can be confirmed by the copies of challans of Rs. 95,20,865/- and thro’ Cenvat Credit of Rs.

2,14,793/-; that for the services rendered in the month of March 2009, they have paid service tax of Rs. 5,07,860/- in the month of May 2009, hence the total service tax paid by them was Rs. 1,02,43,518/-.



That as regards their trading activity, they have not received any amount as

Commission; it is evident from the agreement with Cipla Ltd, that the same was regarding “Stockistship for Pharmaceuticals Products”; that it was apparent from the agreement itself that their appointment was strictly on a principal to principal basis; that the relationship between Cipla Ltd and their company was that of a Buyer and Seller and the same does not entitle them to represent Cipla

Ltd as representative or Agent.

 That they were providing following services to Cipla Limited (a) Storage and

Warehousing Services (C&F agent) (b) Marketing Franchisee Services and (c)

Professional services; that with respect to all the above services, they were paying service tax regularly and also service tax returns are filed with the

Department ; that as per the Stockist Agreement, Cipla Ltd is not their client, rather they were the supplier and their products were sold to our clients, who are Hospitals, Nursing Homes, Doctors & Retailers; that they were providing services to the customer and not to Cipla Ltd; that as it was an established fact that Cipla Ltd was not our client, there was no need to refer to (i) to (vii) subsections in the definition of BAS. Thus the entire concept of treating the stockiest margin which was their profit on trading business as liable to Service

Tax was incorrect and therefore the show cause notice needs to be dropped.



That the entire service tax demand was based on the contention that the difference between the total receipts as shown in P&L account under the nomenclature “Commission Income” and the same as shown in the Service Tax

Returns; that the service tax liability on the remaining amount is not taxable in as much as the said amount pertained to stockist margin on trading business which in fact was their profit and the said activity was not a taxable service in light of the provisions of the Finance Act, 1994 nor the said was covered under

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OIO No. 42/STC/AHD/ADC(JSN)/2012-13 the category of Business Auxiliary Service as defined under Section 65(19) of the

Finance Act, 1994; that as a proof they produced year wise certificate of their auditor i.e Chartered Accountant where the break up of amount received as commission and stockiest margin on trading business was certified.

2004-05

45,43,053

2005-06

81,63,375

2006-07 2007-08

1,62,41,292 1,83,73,119

Particulars

Commission

Income

Stockist

Margin on

Trading

Professional

Fees

TOTAL

14,89,793

-

60,32,846

63,01,094

-

1,44,64,469

1,51,42,341

15,00,000

3,28,83,633

1,26,94,233

15,00,000

3,25,67,352

 That regarding stockiest margin, they had already clarifies that stockist margin was nothing but dealer margin or discount; that they were the authorized distributor of Cipla Ltd; that they were purchasing various products at dealer price which is termed as ‘Price to Stockist’ (PTS) and sell the same at ‘Price to

Retailer’ (PTR) to Hospitals, Nursing Homes, Doctors & Retailers. Since pharmaceutical product falls under the category of essential commodities,

Dealer Margin and price of pharmaceutical product are regulated by a Govt. body i.e NPPA (national Pharmaceutical Pricing Authority); that in normal circumstances, dealer margin is in built in rate and is the difference between

PTR (Price to retailer) and PTS (Price to stockiest). However, there are some customers like corporate hospitals, govt. institutions, nursing homes etc. which purchases various products of the company in bulk quantity and hence Cipla Ltd provided additional discount or special price to these customers. Special price offered is lower than PTR ( i.e their selling price) and many times lower than PTS

(their purchase price).

 For example : Product names as Tazact Injection MRP of which is Rs. 723, PTR is

Rs. 556 and PTS is Rs. 500. Such product is offered at a special rate to the hospital at Rs. 300. Thus they get a difference of PTS and special offer rate (i.e

500-300 = 200) and also get dealer margin of 8% on special rate i.e Rs. 24 from

Cipla Ltd as stockiest margin. The difference between the PTS and special offer rate is reimbursed through credit note. For the 8% dealer margin they raise claim for Rs. 24 on Cipla Ltd and the same amount was classified by mistake as commission income in their Profit & Loss Account instead of reducing the same from their Purchase Value since it was their profit on trading business which means their Net Purchase Value was Rs. 276, sale value was Rs. 300 and profit of Rs. 24; that this profit was wrongly classified in their Profit & Loss Account along with Commission; that the entire demand was based on this profit or dealer margin and was raised only by way of purview of Financial Accounts; that the wrong account head had led to the demand of service tax; that the actual position has also been certified by Chartered Accountant through CA

Certificates, which are showing break-up of commission and dealer margin for each year.



That this is a pure trading activity and appropriate VAT/Sales Tax has been paid on the same and the copies of the VAT/Sales Tax Returns has been paid on the same; that Master Circular No. 96/7/2007-ST dated 23.08.2007 has clarified that

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OIO No. 42/STC/AHD/ADC(JSN)/2012-13 when VAT/Sales Tax is paid, then the activity is considered as sale of goods, as under :

“Service tax is not leviable on a transaction treated as sale of goods and subjected to levy of sales tax / VAT. Whether a given transaction between the service station and the customer is a sale or not, is to be determined taking into account the real nature and material facts of the transaction.

Payment of VAT / sales tax on a transaction indicates that the said

transaction is treated as sale of goods”.

 Further, they submitted certain citations in favor of their contention that sale or purchase is not a taxable service such as South East Corporation [2007(8)STR

405(Tri-Bang)]; Chetan Traders [2009(13)STR 419(Tri-Delhi)]; Vallamattam

Communications [2008(12) STR 267(Tri-Bang)] and Karakkattu Communications

[2007(8)STR 164].

10. They submitted that the show cause notice alleges suppression of facts with an intention to evade payment of duty; that such allegation is totally baseless and extended period cannot be invoked; that they had received the letter dated 19.03.08 issued from F.No. STC/CERA/R13/HM.69/2007-08 and they made a detailed submission vide their letter dated 24.04.2008, which was acknowledged by the Department on the same day; that they had received another letter dated 16.07.08 issued from F.No.

SD03/AR-XIII/HM69(10)/2008-09, for which the reply was send by them vide letter dated 20.08.2008; that after the abovementioned submissions which were duly acknowledged by the department, again a letter dated 15.09.2008 was issued by the

Department which was not received by them; that they were a gain issued a letter dated

25.07.2009 from F.No. SD-02/R-8/4-10/HM-69/Dhruvi/09-10 as a reminder to letter

15.09.2007; that on 2.10.2009 they again sent a detailed clarificatory letter to the department which was acknowledged on 5.10.2009. In the said letter the copies of Sales Tax/VAT returns was enclosed; that they were not liable to service tax as they were doing simple trading activity; that their bonafide belief can be established from the fact that were paying service tax correctly and filing returns regularly.

11. Further they placed reliance upon the the judgements of Sands Hotel P Ltd

[2009(16)STR 329 (Tri-Mumbai] and Diamond Auto Industries [2008(229)ELT 618(Tri-Del)] to pl;ead that mere contravention was not enough unless there was also intention to evade payment of duty.

12. The assessee also submitted that penalty under Section 76 and Section 78 cannot be imposed simultaneously; that this had been made clear in the Budget of 2008; that in view of the above it was requested by them to drop the show cause notice as there was n short payment or non-payment of service tax.

13. The assessee filed another reply dated 13.08.2012 wherein in addition to the above they submitted in Para 1 that in case of some customers like corporate hospital, Govt. institutions, nursing homes etc. purchasing in bulk, a concessional price by way of additional discount or special price is offered, which is lower than the PTR ( i.e our selling price) and many times even lower than our PTS (our purchase price). In such transactions the consignments are received by them from M/s Cipla Ltd at PTS…..Since at the time of receipt of such consignments

from M/s Cipla Ltd. by them, it was not known that these products may end up being sold to

bulk customers, such products are sold by M/s Cipla Ltd to them on PTS.; that in Para 4 they added that the trading activity of purchase of goods from M/s Cipla Ltd and its sale to their customers, were pure business transactions undertaken by an independent seller and purchaser; that such sale of goods in which they have acquired ownership interest on account of purchase of the same to their customers were neither on behalf of M/s Cipla Ltd for a

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OIO No. 42/STC/AHD/ADC(JSN)/2012-13 consideration and nor they were acting on behalf of their customers while effecting such sales; that they have neither stood guarantee for such payments to their suppliers on behalf of their customers nor have they collected any such payments on behalf of Cipla Ltd; they submitted that the transactions of purchase and sale between them and M/s Cipla Ltd and the transactions between them and their customers were two independent transactions and not dependent on each other. They have cited the following decisions in their favour (1) Kamal

Auto Finance Ltd [2012(26)STR 46 (Tri-Del)] (2) Behr India Ltd {2012(25)STR 64(Tri-Mum)}; (3)

Uttam Toyota { STO 2011 CESTAT 73 (4) Fusion Hospitality {2011(22) STR 642 (Tri-Bang)} (5)

AIA Engineering Ltd { 2010(19) STR 257 (Tri-Ahd)] (6) TATA Motors Insurance Services Ltd

2009(9)STR 176 (Tri-Bang)} (7) EURO RSCG Advertising Ltd {2007(7)STR 277 (Tri-Bang)} and (8)

P Gautam & Co (2011(24) STR 447 (Tri-Ahd)}.

14. The case for posted for hearing on 19.02.2010 & 13.04.2011. For both the dates, the assessee requested for postponements vide their letters dated 7.1.2010 &

12.04.2011. Thereafter, due to change in the adjudicating authority, PH was granted in

25.07.2012 & again on request of the assessee, the PH date was fixed on 13.08.2012.

The assessee was represented by Shri Gunjan Shah (CA) and Shri Rupesh Shah , Director on 13.08.2012 wherein they filed another written submission dated 13.08.2012. They reiterated these submissions and prayed to drop the proceedings. The assessee filed another submission dated 13.09.2012 wherein they submitted copies of the debit notes raised for stockiest margin along with year wise statement.

DISCUSSIONS AND FINDINGS

15. I have carefully gone through the contents of the Show Cause Notices and defence replies, relevant documents of the case, and written submissions of the said assessee along with all the relevant documents submitted during or before personal hearing.

16. I find that the core issue to be decided in this case is whether service tax is to be paid “Commission Income” as shown in the Profit & Loss Account of the assessee, under the category of “Business Auxiliary Service”. I find that the difference between the total taxable value received, as shown in their P&L A/c and the taxable value of

Business Auxiliary Services , Storage and Warehousing Services, Goods Transport

Agency and Manpower Recruitment Services, as shown in their ST-3 returns, is shown as “Commission Income” by the assessee.

17. On perusal of the records, I find that the assessee has argued that the

“Commission Income” is nothing but the dealer’s Margin or discount accruing to them on account of sale of the products of M/s Cipla Ltd as their authorized distributor.

17.1 I find that an authorized distributor is a person or business, who is certified and trained, to sell and service specific products. To decide the issue, I would like to refer to the definition of Business Auxiliary Service as defined under clause 65 (19) of the

Finance Act, 1994 under which the show cause notices proposes to classify the said

“Commission Income” and is as under :

[(19) “business auxiliary service” means any service in relation to, —

(i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or

(ii) promotion or marketing of service provided by the client; or

[* * * * ]

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(iii) any customer care service provided on behalf of the client; or

(iv) procurement of goods or services, which are inputs for the client; or

[Explanation. — For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, “inputs” means all goods or services intended for use by the client;]

[(v) production or processing of goods for, or on behalf of, the client;]

(vi) provision of service on behalf of the client; or

(vii) a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision, and includes services as a commission agent, [but does not include any activity that amounts to manufacture of excisable goods].

[Explanation. — For the removal of doubts, it is hereby declared that for the purposes of this clause, —

(a) ”commission agent” means any person who acts on behalf of another

person and causes sale or purchase of goods, or provision or receipt of

services, for a consideration, and includes any person who, while acting on behalf of another person —

(i) deals with goods or services or documents of title to such goods or services; or

(ii)

(iii) collects payment of sale price of such goods or services; or guarantees for collection or payment for such goods or services; or

(iv) undertakes any activities relating to such sale or purchase of such goods or services;

[(b) “excisable goods” has the meaning assigned to it in clause (d) of section 2 of the Central Excise Act, 1944 (1 of 1944);

(c) “manufacture” has the meaning assigned to it in clause (f) of section 2 of the Central Excise Act, 1944 (1 of 1944)]

17.2 In this connection, I refer to the submission of the assessee in Para 5 of their letter dated 7.01.2010, wherein they have stated the following :

“..As per the stockist agreement, Cipla Ltd., is not our client, rather is the supplier and their products we have sold to our clients, who are Hospitals,

Nursing Homes, Doctors & Retailers. We are providing services to the customer

and not to Cipla Ltd…..”

17.3 Again at Para 1 of their letter dated 13.08.2012, they have stated ..

“..However, in case of some customers like corporate hospital, Govt. institutions, nursing homes etc. purchasing in bulk, a concessional price by way of additional discount or special price is offered, which is lower than the PTR ( i.e our selling price) and many times even lower than our PTS (our purchase price). In such

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OIO No. 42/STC/AHD/ADC(JSN)/2012-13 transactions the consignments are received by us from M/s Cipla Ltd at

PTS…..Since at the time of receipt of such consignments from M/s Cipla Ltd. by

us, it is not known that these products may end up being sold to bulk customers,

such products are sold by M/s Cipla Ltd to us on PTS.”

17.4 Thus I find from both the submissions above which has some contradictions as well, that the assessee is wholly dependent on M/s Cipla for every transaction carried out. The destination of the goods whether to be stocked up at their own godowns or transported to the retailers place or at the Hospitals or at the Govt’s institutions, is decided by M/s Cipla Limited. Also it is M/s Cipla Limited who decides the final prices of the goods. Thus I find that the assessee is providing essential services like receiving the goods, stocking, transport, delivery of the said products for and on behalf of M/s

Cipla Ltd. The customers are decided by M/s Cipla Ltd and not by the assessee .

Further, I find that the assessee is stating that M/s Cipla Ltd is not their client.

However, as discussed above, I find that the assessee is wholly dependent on M/s Cipla

Ltd for their business activities. In other words, they carry forward the business on behalf of M/s Cipla Ltd, in the sense they are the authorized distributors of M/s Cipla

Ltd.

17.5 Therefore, as they perform their activities for and on behalf of M/s Cipla Ltd, they are the ‘client’ of the assessee. The assessee is promoting and marketing the services like receiving, stocking, transport, delivery of the pharmaceutical products on behalf of M/s Cipla Ltd and such services would definitely taxable services falling under the category of ‘Business Auxiliary Service” under clause (ii) of clause 65 (19) of the

Finance Act, 1994. I find that the assessee has further argued that the ‘Stockist Margin’ received by the assessee, during such activity as described above, was nothing but dealer margin or discount, and not a commission. In this context, the case of AERO

WORLD TRAVELS Versus COMMISSIONER OF CENTRAL EXCISE, JALANDHAR reported at

2006 (3) S.T.R. 591 (Tri. - Del.) may be refereed where it was discussed whether

margins received by a Air Travel Agent can be treated as agency commission or not.

The Hon’ble Tribunal held that “The appellant is right in his contention that his margin from the sale of ticket alone can constitute his agency commission and a tax is to be levied on that commission …..The transaction to be discerned from the record is that the appellant’s relationship with the airline was that of an agent and the margin in the

transaction constituted agency commission.”

18. Further, the assessee has claimed that the stockiest margin was actually their profit ,and this profit was wrongly classified in their Profit & Loss Account along with

Commission instead of reducing the same from their Purchase Value and that that this wrong account head had led to the demand of service tax. On this point, I fail to understand as to how the assessee who is doing the said business since the last 8 years and more, and bringing out audited Balance Sheets every year, can now claim that they had wrongly taken the profit to be their commission instead of reducing the same from their purchase value ! I fail to understand as to how the assessee will account for now, by reducing their Purchase value i.e PTS, by the dealer’s margin in their Balance Sheets.

Therefore, I find that the argument of the assessee on this count is baseless. In any case, I come to the conclusion that , in light of the decision given by the Hon’ble

Tribunal in the case M/s Aero World Travels (supra), that Margins received by a company also constitutes “Commission” and therefore service tax is to be levied on such amounts received.

12


19. The assessee has further argued that service tax cannot be levied on ‘sale of goods’, citing the cases of South East Corporation ,Chetan Traders, Vallamattam

Communications and Karakkattu Communications [2007(8)STR 164 . In this connection,

I find that the hon’ble Apex Court in the case of M/s Idea Mobile Communication

Limited [2011(23)STR 433(SC)] has held that both sale tax and service tax are exigible to each other . In para 12, the Hon’ble Court has held as under :

12. …..The Kerala High Court in the facts and circumstances of the case observed at paras 36 and 47 as under :-

“36. With this perspective in mind, if we analyse the transaction that takes place, it appears to us that there is no difficulty in correctly understanding its facts. The transaction of selling the SIM. card to the subscriber is also a part of the “service” rendered by the service provider to the subscriber, Hence, while the

State Legislature is competent to impose tax on “sale” by a legislation relatable to entry 54 of List II of Seventh Schedule, the tax on the aspect of “services” rendered not being relatable to any entry in the State List, would be within the legislative competence of Parliament under Article 248 read with entry 97 of List

I of the Seventh Schedule to the Constitution. We are, therefore, unable to accept the contention of Mr. Ravindranatha Menon that there is any possibility of constitutional invalidity arising due to legislative incompetence by taking the view that “sale” of SIM card is simultaneously exigible to sales tax as well as service tax. Once the “aspect theory”‘ is kept in focus, it would be clear that the same transaction could be exigible to different taxes in its different aspects.

Thus, we see no reason to read down the legislation as suggested by Mr. Menon. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

47. Conclusions :

(a) The transaction of sale of SIM Card is without doubt exigible to sales tax under the KGST Act. The activation charges paid are in the nature of deferred payment of consideration for the original sale, or in the nature of value addition, and, therefore, also amount to parts of the sale and become exigible to sales tax under the KGST Act.

(b) Both the selling of the SIM Card and the process of activation are

“services” provided by the mobile cellular telephone companies to the subscriber, and squarely fall within the definition of “taxable service” as defined in section 65(72)(b) of the Finance Act. They are also exigible to service tax on the value of “taxable service” as defined in Section 67 of the Finance

Act.”

(emphasis added)

19.1 In view of the above decision of the Hon’ble Apex Court, the cases cited by the assessee have become redundant. Thus, even if the assessee has paid sales tax, however the services provided by them and Commission obtained for such services, squarely fall within the definition of “Business Auxiliary Services”.

13


20. Further, I find that they cited the following case laws(1) Kamal Auto Finance Ltd

[2012(26)STR 46 (Tri-Del)] (2) Behr India Ltd {2012(25)STR 64(Tri-Mum)}; (3) Uttam

Toyota { STO 2011 CESTAT 73 (4) Fusion Hospitality {2011(22) STR 642 (Tri-Bang)} (5)

AIA Engineering Ltd { 2010(19) STR 257 (Tri-Ahd)] (6) TATA Motors Insurance Services

Ltd 2009(9)STR 176 (Tri-Bang)} (7) EURO RSCG Advertising Ltd {2007(7)STR 277 (Tri-

Bang)} and (8) P Gautam & Co (2011(24) STR 447 (Tri-Ahd)}. in their favor thereby contending that since the transactions between M/s Cipla Ltd and themselves, and that of between them and their customers, were two independent transactions and not dependent on each other, and that in such sale of goods they have acquired ownership interest on account of purchase of the same, such trading activity was not covered under “Business Auxiliary Service”.

21. I find that in Kamal Auto Finance Ltd (supra), the facts of the case was that they were acting as independent businessman, doing business with principal, selling their products to their own clients without interference of their principal. However, I find that the facts of this case are different. In the instant case, all the transactions are controlled by M/s Cipla. Thus I find that the case of M/s Kamal Auto Finance is not relevant here. In the same manner, the case of M/s Behr India Limited, is also not relevant , as the activities of the assessee are cannot be said to be on his own behalf.

The case of M/s Uttam Toyota is redundant in view of the Apex Court’s Judgment in the case of M/s Idea Mobile Communication Limited [2011(23)STR 433(SC)]. The cases of

Fusion Hospitality & TATA Motors Insurance Services Ltd have not yet attained finality and the facts of that case does not appear to be relevant to this case. In the case of M/s

AIA Engineering Limited, I find that the case pertains to whether service tax can be charged on the profit, which was already included in the value of the final products cleared on payment of excise duty. I find that the facts of the instant case are different and therefore not relevant. In EURO RSCG Advertising Ltd the facts of the case are entirely different and therefore not applicable. Further, I find that the Department has gone on appeal ( vide TA No. 783 of 2012) in the Hon’ble High Court of Gujarat in a similar case of P Gautam & Co, and the decision is pending.

22. In view of the above discussions, I come to the conclusion that the value of Rs.

3,91,01,406/- shown in their Profit & Loss Account as “Commission Income” for the financial years 2004-05 to 2008-09 is a taxable value under Section 67 of the Finance

Act, 1994 towards rendering of taxable services as Business Auxiliary Services. Further, I confirm the demand of Service Tax amount of Rs. 49,50,242/- under Section 73 of the

Finance Act, 1994.

23. As discussed above, the demand has been held to be sustainable on merits.

Thus I find that it was the duty of the said service provider/assessee to declare such activities, and receipt towards the same in their ST-3 returns filed by them from time to time. With regard to the issue that extended period of limitation & suppression of facts, I note that the assessee has quoted some cases but shelter in those cases is not available to them as they are an assessee under service tax since long and are well aware of the Rules & Regulations as laid down under Service Tax Rules, 1994. The assessee had not mentioned the details of “Commission Income” in their ST-3 returns and was noticed only when the details were sought by the audit. I find that they were well aware of the facts regarding such transactions and the commissions garnered thereof had not been disclosed before the department and therefore the contention of the assessee that they have not suppressed the facts is not acceptable in this case.

Thus, the suppression with an intent to evade payment, on part of the assessee, is proved beyond doubt and proviso to Section 73(1) of the Finance Act, 1994 has rightly

14

OIO No. 42/STC/AHD/ADC(JSN)/2012-13 been applied in the instant case and therefore, by their such act of omission and commission, the assessee have rendered themselves liable for penalty.

24. Hon’ble High Court of Gujarat in the case of CCE, Surat – I Vs Neminath Fabrics

Pvt. Ltd., reported at 2010 (256) ELT 369 (Guj), while deciding the similar issue in

Central Excise, has held that proviso can not be read to mean that because there is knowledge, suppression which stands established disappears – concept of knowledge, by no stretch of imagination, can be read into provisions – suppression not obliterated, merely because department acquired knowledge of irregularities. The relevant para is reproduced below ;

“20. Thus, what has been prescribed under the statute is that upon the reasons stipulated under the proviso being satisfied, the period of limitation for service of show cause notice under sub-section (1) of Section 11A, stands extended to five years from the relevant date. The period cannot by reason of any decision of a

Court or even by subordinate legislation be either curtailed or enhanced. In the present case as well as in the decisions on which reliance has been placed by the learned advocate for the respondent, the Tribunal has introduced a novel concept of date of knowledge and has imported into the proviso a new period of limitation of six months from the date of knowledge. The reasoning appears to be that once knowledge has been acquired by the department there is no suppression and as such the ordinary statutory period of limitation prescribed under sub-section (1) of Section 11A would be applicable. However such reasoning appears to be fallacious inasmuch as once the suppression is admitted, merely because the department acquires knowledge of the irregularities the suppression would not be obliterated.”

25. In view of the above, I find that extended period for recovery of service tax on

“Commission Income” on rendering of taxable services as Business Auxiliary Services, under the proviso to section 73(1) of the Finance Act, 1994 was rightly invoked and the

SCN is sustainable on limitation. Therefore, the service tax amount of Rs. 49,50,242/- is recoverable from the said assessee along with Interest as provided in proviso to Section

73(1) of the Finance Act, 1994 read with Section 75 of the Act ibid.

26. Since the said assessee had not discharged service tax liability on the amount of taxable value on the services mentioned in the foregoing paras and as demanded under the show cause notice and therefore, they have contravened the provisions of Section

67 and 68 of the Finance Act, 1994 and thereby rendered themselves liable to penal action under Sections 76 & 78 of Finance Act 1994. Further, I find that they have failed to obtain Service Tax Registration in time, in the category of “Business

Auxiliary Service” but also in the category of “Clearing & Forwarding Agents”also and failed to file the prescribed service tax returns and therefore have contravened the provisions of Section 69 & 70 of the Finance Act, 1994 . They have thereby rendered themselves liable to penal action under Section 77 of Finance Act

1994.

27. As regards the issue of imposition of penalty under Section 76 of the Finance

Act, 1994, I observe that penalty under Section 76 and 78 of the Finance Act, 1994 are mutually exclusive w.e.f. 10.05.2008 and once penalty under Section 78 is imposed, no

15

OIO No. 42/STC/AHD/ADC(JSN)/2012-13 penalty under Section 76 can be imposed in terms of the proviso inserted in Section 78 w.e.f 10.5.2008 in this regard. Therefore, no penalty under Section 76 is imposable for the period from 10.5.2008 onwards. In the case before me, the demand of service tax is for the period from 2004-05 to 2008-09, therefore, I hold that penalty under Section 76 of the said Act is imposable on the said service provider. I find that as the said assessee has not paid service tax within the stipulated time period as prescribed under Section

68 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994, I hold them liable to penalty under Section 76 of the Finance Act, 1994. My conclusion is also based on various decisions of Hon’ble High Courts & Tribunals as mentioned below ;

 CCE & ST Vs First Flight Couriers Ltd reported at 2007(8) STR 225 (Kar.)

 UOI Vs Aakar Advertising, reported at 2008 (11) STR.5 (Raj.)

 UOI Vs Shiv Ratan Advertisers reported at 2008 (12) STR 690 (Raj.)

 Shiv Network Vs CCE, Daman reported at 2009 (14) STR 680 (Tri-Ahmd)

 CCE, Vapi Vs Ajay Sales Agencies reported at 2009 (13) STR 40 (Tri–Ahmd)

 Siddhi Motors Vs CCE, Rajkot reported at 2009 (15) STR 422 (Tri-Ahmd)

27.1 I further observe that the Hon’ble CESTAT in the case of M/s Gujarat Industrial

Security Force Society Vs CST, Ahmedabad, vide order No. A/1110/WZB/AHD/2010 dated 05.08.2010, has held that no lenient view can be taken under section 76 of the

Finance Act, 1994. The relevant paras are reproduced below;

“2. After hearing both the sides, I find that in this case, the assessee was registered more than 6 years back and no explanation has been given by them for delayed filing of return and delayed payment of service tax. Under these circumstances, I am not finding fault in stand taken by the lower authority that penalty is imposable under section 76 and once it is held that penalty is imposable under section 76, the amount fixed as per the provision of section 76 is required to be imposed. Under these circumstances, even though the Ld.

Advocate submitted that the appellant is a non profit organization, no lenient view can be taken in view of the provisions of law.

3. Accordingly, the appeal is rejected.”

27.2 Hon’ble High Court of Gujarat in the case of CCE & Cus. Vs Port Officer, reported at 2010 (19) STR 641 (Guj) has now settled the issue of penalty under Section 76. The relevant para is reproduced below ;

“10 . A plain reading of Section 76 of the Act indicates that a person who is liable to pay service tax and who has failed to pay such tax is under an obligat i on to pay , in addition to the tax so payable and interest on such tax , a penalty for such fai l ure . The quantum of penalty has been specified in the provision by laying down the minimum and the maximum limits with a further cap i n so far as the maximum limit is concerned . The provision stipulates that the person , who has failed to pay serv i ce tax , shall pay , in add i tion to the tax and interest, a penalty which shall not be less than one hundred rupees per day but which may extend to two hundred rupees fo r everyday during which the failure continues, subject to the maximum penalty not exceeding t he amount of service tax which was not paid . So far as Section 76 of the Act is concerned , it is not possible to read any further discretion , further than the discretion provided by the legislature when legislature has prescribed the minimum and the maximum lim i ts . The discretion vested in the authority is to

16

OIO No. 42/STC/AHD/ADC(JSN)/2012-13 levy minimum penalty commencing from one hundred rupees per day on defa u lt , which is extendable to two hundred rupees per day, subject to a cap of not exceeding the amount of service tax payable . From this discretion it is not possible to read a further discretion being vested in the authority so as to entitle the authority to levy a penalty below the stipulated l i mit of one hundred rupees per day . The moment one reads such further disc r etion in the provision it wou l d amount to re-writing the provision which, as per settled canon of interpretation , is not permissible . It is not as if the provision is couched in a manner so as to lead to absurdity if it i s read in a plain manner .

Nor is it possible to state that the provision does not further the object of the

Statute or violates the legislative intent when r ead as it stands. Hence , Section

76 of the Act as it stands does not give any discretion to the authority to reduce the penalty below the minimum prescribed .”

27.3 The Hon’ble High Court of Gujarat has further confirmed the above view in the case of CCE Vs S J Mehta & Co., reported at 2011 (21) STR 105 (Guj.) and CCE Vs

Bhavani Enterprises reported at 2011 (21) STR 107 (Guj.).

28. As regards imposition of penalty under Section 78, I find that as the said assessee had suppressed the facts with intention to evade payment of service tax, penalty under Section 78 of the Finance Act, 1994 is mandatorily imposable as has been held by the Apex court in the case of Dharmendra Textile Mills Ltd-2008 (231) ELT 3 (SC) and Rajasthan Spinning & Weaving Mills Ltd-2009 (238) ELT 3 (SC). Therefore, I hold that penalty is imposable on the said assessee under Section 78 of the Finance Act,

1994. I, therefore, hold that they have rendered themselves liable to penalty under

Section 78 of the Finance Act, 1994. My above view gets support from below mentioned case laws;

 Shiv Network Vs CCE, Daman reported in 2009 (14) STR 680 (Tri.Ahmd.)

 CCE, Vapi Vs Ajay Sales Agencies reported in 2009 (13) STR 40 (Tri. Ahmd.)

 Order No. A/754/WZB/AHD/2010 dt. 09.06.2010 / 23.06.2010 in the case of M/s

Bajrang Security Services Vs CST, Ahmedabad.

 Order No. A/1937/WZB/AHD/2010 dated 08.10.2010 / 20.12.2010 in the case of

M/s Dhaval Corporation Vs CST, Ahmedabad.

28.1 I further observe that recently hon’ble High Court of Punjab & Haryana, in the case of CCE Vs Haryana Industrial Security Services reported at 2011 (21) STR 210

(P&H), has also upheld the penalty equal to service tax imposed under Section 78 of the

Finance Act, 1994. Hon’ble Karnataka High Court has also taken similar view in the case of CCE, Mangalore Vs K Vijaya C Rai reported at 2011 (21) STR 224 (Kar.)

29. I also find that penalty under Section 76 ibid is provided for failure to pay service tax whereas penalty under Section 78 ibid is for suppressing value of taxable service. In the instant case, service tax liable to be paid in terms of Section 68 read with

Rule 6 of the Service tax Rules, 1994, have not been found paid as well as service tax has not been paid / short paid by suppressing value of taxable service by reason of wilful mis-statement and suppression of facts. Of course these two offences may arise in the course of same transaction, or from the same action of the person concerned.

But the incidents of imposition of penalty are distinct and separate and even if the offences are committed in the course of same transaction or arises out of the same act

17

OIO No. 42/STC/AHD/ADC(JSN)/2012-13 the penalty is imposable for ingredients of both offences, this aspect was also considered by the Hon’ble High Court of Kerala in the case of Assistant Commissioner,

C.Ex. Vs Krishna Poduval – 2006 (1) STR 185 (Ker). I also find that the Hon’ble Mumbai

Tribunal in the case of Golden Horn Container Services Pvt. Ltd. v/s Commr. of C. Ex.,

Raipur reported at 2009 (16) S.T.R. 422 (Tri.-Mumbai), has held that Section 76 provides for a penalty who commits default simpliciter in payment of the tax whereas section 78 is a more stringent penal provision, which provides harsher penalty who commits default with mens rea. Since in this case also, the assessee., has committed default with mens rea, the decision of the tribunal is squarely applicable.

30. Further, as regards imposition of simultaneous penalty, I place my reliance on the judgment of Hon’ble High Court of Kerala in the case of Assistant Commissioner of

Central Excise v. Krishna Poduval (supra) which is aptly applicable to the present case. I find that the imposition of penalty under sections 76 and 78 of the Act is for non payment of service tax and suppression of value of taxable service respectively which are two distinct and separate offences attracting separate penalties. I find that the said assessee have committed both the offences and therefore penalties under section 76 and 78 of the Finance Act, 1994 are imposable on the said service provider for the period upto 9.5.2008. Therefore, I am of the view that in the facts and circumstances of the case, it is justifiable, if the penalty is imposed under the provisions of Section 76 and 78 of the Finance Act, 1994, separately, following the decisions of Hon’ble Kerala

High Court and Mumbai tribunal (supra). My views are also further supported by various decisions of tribunals in the cases of ; a) Shiv Network v/s Commissioner of Central Excise & Customs, Daman reported at

2009 (14) S.T.R. 680 (Tri.-Ahmd.) b) Commissioner of Central Excise, Vapi v/s Ajay Sales Agencies reported at 2009

(13) S.T.R. 40 (Tri.-Ahmd.), and c) Mett Macdonald Ltd. v/s Commissioner of Central Excise, Jaipur reported at

2001 (134) E.L.T. 799 (Tri.-Del.). d) M S Shah & Co., Vs CST, Ahmedabad – Order No. A/1328/ WZB/ Ahd/ 2010 dated 30.06.2010 / 26.08.2010. e) Bajarang Security Services Vs CST, Ahmedabad – Order No. A/745/

WZB/Ahd/2010 dated 09.06.2010 / 23.06.2010. f) CESTAT, Principal Bench, New Delhi in the case of Bajaj Travels Ltd., Vs CCE,

Chandigarh – 2009 (16) STR 183 (Tri.Del.)

31. I further find that the assessee have failed to declare the correct taxable value in their ST-3 returns for the period covered under the impugned show cause notice.

Further, they have also failed to obtain the Service Tax registration in time. Hence they are liable for penalty under Section 77, for not filing ST-3 returns correctly for the period in dispute & not obtaining Service Tax Registration in time. Hence imposition of mandatory penalty under Section 77 is also justified.

32. In light of the aforesaid discussions and findings, I hold that the differential service tax amount of Rs. 49,50,242/- alongwith interest is liable to be confirmed under

Section 73(1) of the Finance Act,1994 read with Section 75 of the Act ibid and they are also liable to penalty under the provisions of Section 76, 77 and 78 of the Finance Act,

1994.

18


33. Accordingly, I pass the following order:-

ORDER i.

I consider the amount of Rs. 3,91,05,406/- shown in their Profit & Loss Account for the financial years 2004-05 to 2007-08, and Provisional Profit & Loss Account for the year 2008-09, as “Commission Income” to be taxable value under

Section 67 of the Finance Act, 1994 , towards rendering of taxable services as falling under the category of “Business Auxiliary Services”, as defined under

Section 65(19) of the Finance Act, 1994. ii.

I confirm the demand of Service Tax amounting to Rs. 49,50,242/- (Rupees

Forty None Lacs Fifty Thousand Two Hundred and Forty Two only) on the value shown in (i) above on “Business Auxiliary Service” and order to recover the same from them under Section 73(1) of Finance Act, 1994. iii.

I direct the assessee to pay the interest as applicable on the amount of their service tax liability for the delay in making the payment under Section 75 of the

Finance Act, 1994 on the Service Tax demanded under para (ii) above. iv.

I impose a penalty of Rs. 200/- (Rupees two Hundreds Only) per day or at the rate of 2% of the service tax amount per month, whichever is higher, subject to maximum of the outstanding tax amount, from the date on which such tax was due till 09.05.2008 or the actual payment of outstanding tax amount, whichever is earlier, under the provisions of Section 76 of the Finance Act, 1994, as amended, for failure to pay Service Tax within the stipulated period as required under the provisions of Section 68 (1) of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994, as amended. v.

I impose a penalty of Rs. 10,000/- ( Rupees Ten Thousand only) under Section 77 of the Finance Act, 1994. vi.

I also impose a penalty of Rs. 49,50,242/- (Rupees Forty Nine Lacs Fifty

Thousand Two Hundred and Forty Two only) upon them under Section 78 of the Finance Act, 1994 for suppressing the value of taxable services provided by them before the Department with intent to evade payment of service tax. If the service tax amount is paid along with appropriate interest as applicable, within

30 days from the date of receipt of this order, then the amount of penalty under

Section 78 shall be reduced to 25% of the service tax amount, provided if such penalty is also paid within such period of 30 days.

[J S Negi)

Additional Commissioner

Service Tax : Ahmedabad

F.No. STC/89/O&A/SCN/ADC/DPL/R-8/Div.II/2009 Date : 19.02.2013

By R.P.A.D/Hand Delivery

19


To,

M/s Dhruvi Pharma Pvt. Limited.,

302, Ison Mall,Above Star India Bazar,

Jodhpur Char Rasta,Satellite,

Ahmedabad- 380015.

Copy to:-

1. The Commissioner, Service tax, Ahmedabad (Attn. Review Cell).

2. The Deputy Commissioner, Service Tax, Division-II, Ahmedabad

3. The Superintendent, Range-VIII, Division-II, Service Tax, Ahmedabad with an extra copy of OIO to be delivered to the assessee and send an acknowledgement to this office.

4. Guard File

20


DEFENCE REPLY

The assessee filed their 1 st reply dated 7.10.2010, wherein they submitted as under :



That it has been alleged in the show cause notice that for the year 2004-05 to 2008-09 there was a difference of Rs. 3,91,05,406/- between the taxable value received by them and as shown in the ST-3, and that it is alleged that they have paid service tax of Rs. 95,40,132/-, which was not in accordance to the fact; that they have actually paid service tax of Rs. 97,35,658/-, which can be confirmed by the copies of challans of Rs. 95,20,865/- and thro’ Cenvat Credit of Rs.

2,14,793/-; that for the services rendered in the month of March 2009, they have paid service tax of Rs. 5,07,860/- in the month of May 2009, hence the total service tax paid by them wa Rs.

1,02,43,518/-.



That as regards their trading activity, they have not received any amount as Commission; it is evident from the agreement with Cipla Ltd, that the same was regarding “Stockistship for

Pharmaceuticals Products”; that it was apparent from the agreement itself that their appointment was strictly on a principal to principal basis; that the relationship between Cipla Ltd and their company was that of a Buyer and Seller and the same does not entitle them to represent Cipla Ltd as representative or Agent.



That they were providing following services to Cipla Limited (a) Storage and Warehousing

Services (C&F agent) (b) Marketing Franchisee Services and (c) Professional services; that with respect to all the above services, they were paying service tax regularly and also service tax returns are filed with the Department ; that as per the Stockist Agreement, Cipla Ltd is not their client, rather they were the supplier and their products were sold to our clients, who are

Hospitals, Nursing Homes, Doctors & Retailers; that they were providing services to the customer and not to Cipla Ltd; that as it was an established fact that Cipla Ltd was not our client, there was no need to refer to (i) to (vii) subsections in the definition of BAS. Thus the entire concept of treating the stockiest margin which was their profit on trading business as liable to

Service Tax was incorrect and therefore the show cause notice needs to be dropped.



That the entire service tax demand was based on the contention that the difference between the total receipts as shown in P&L account under the nomenclature “Commission Income” and the same as shown in the Service Tax Returns; that the service tax liability on the remaining amount is not taxable in as much as the said amount pertained to stockist margin on trading business which in fact was their profit and the said activity was not a taxable service in light of the provisions of the Finance Act, 1994 nor the said was covered under the category of Business

Auxiliary Service as defined under Section 65(19) of the Finance Act, 1994; that as a proof they produced year wise certificate of their auditor i.e Chartered Accountant where the break up of amount received as commission and stockiest margin on trading business was certified.

Particulars

Commission

Income

Stockist Margin on Trading

2004-05

45,43,053

14,89,793

2005-06

81,63,375

63,01,094

2006-07

1,62,41,292

1,51,42,341

2007-08

1,83,73,119

1,26,94,233

Professional Fees -

TOTAL 60,32,846

21


-

1,44,64,469

15,00,000

3,28,83,633

15,00,000

3,25,67,352



That regarding stockiest margin, they had already clarifies that stockist margin was nothing but dealer margin or discount; that they were the authorized distributor of Cipla Ltd; that they were purchasing various products at dealer price which is termed as ‘Price to Stockist’ (PTS) and sell the same at ‘Price to Retailer’ (PTR) to Hospitals, Nursing Homes, Doctors & Retailers. Since pharmaceutical product falls under the category of essential commodities, Dealer Margin and price of pharmaceutical product are regulated by a Govt. body i.e NPPA (national

Pharmaceutical Pricing Authority); that in normal circumstances, dealer margin is in built in rate and is the difference between PTR (Price to retailer) and PTS (Price to stockiest). However, there are some customers like corporate hospitals, govt. institutions, nursing homes etc. which purchases various products of the company in bulk quantity and hence Cipla Ltd provided additional discount or special price to these customers. Special price offered is lower than PTR ( i.e their selling price) and many times lower than PTS (their purchase price).



For example : Product names as Tazact Injection MRP of which is Rs. 723, PTR is Rs. 556 and PTS is Rs. 500. Such product is offered at a special rate to the hospital at Rs. 300. Thus they get a difference of PTS and special offer rate (i.e 500-300 = 200) and also get dealer margin of 8% on special rate i.e Rs. 24 from Cipla Ltd as stockiest margin. The difference between the PTS and special offer rate is reimbursed through credit note. For the 8% dealer margin they raise claim for Rs. 24 on Cipla Ltd and the same amount was classified by mistake as commission income in their Profit & Loss Account instead of reducing the same from their Purchase Value since it was their profit on trading business which means their Net Purchase Value was Rs. 276, sale value was Rs. 300 and profit of Rs. 24; that this profit was wrongly classified in their Profit & Loss

Account along with Commission; that the entire demand was based on this profit or dealer margin and was raised only by way of purview of Financial Accounts; that the wrong account head had led to the demand of service tax; that the actual position has also been certified by

Chartered Accountant through CA Certificates, which are showing break-up of commission and dealer margin for each year.



That this is a pure trading activity and appropriate VAT/Sales Tax has been paid on the same and the copies of the VAT/Sales Tax Returns has been paid on the same; that Master Circular No.

96/7/2007-ST dated 23.08.2007 has clarified that when VAT/Sales Tax is paid, then the activity is considered as sale of goods, as under :



“ Service tax is not leviable on a transaction treated as sale of goods and subjected to levy of sales tax / VAT. Whether a given transaction between the service station and the customer is a sale or not, is to be determined taking into account the real nature and material facts of the transaction. Payment of VAT / sales tax on a transaction indicates that the said transaction is treated as sale of goods ”.

Further, they submitted certain citations in favor of their contention that sale or purchase is not a taxable service such as South East Corporation [2007(8)STR 405(Tri-Bang)]; Chetan Traders

22


[2009(13)STR 419(Tri-Delhi)]; Vallamattam Communications [2008(12) STR 267(Tri-Bang)] and

Karakkattu Communications [2007(8)STR 164].

Further they submitted that the show cause notice alleges suppression of facts with an intention toi evade payment of duty; that such allegation is totally baseless and extended period cannot be invoked; that they had received the letter dated 19.03.08 issued from F.No. STC/CERA/R13/HM.69/2007-08 and they made a detailed submission vide their letter dated 24.04.2008, which was acknowledged by the

Department on the same day; that they had received another letter dated 16.07.08 issued from F.No.

SD03/AR-XIII/HM69(10)/2008-09, for which the reply was send by them vide letter dated 20.08.2008; that after the abovementioned submissions which were duly acknowledged by the department, again a letter dated 15.09.2008 was issued by the Department which was not received by them; that they were again issued a letter dated 25.07.2009 from F.No. SD-02/R-8/4-10/HM-69/Dhruvi/09-10 as a reminder to letter 15.09.2007; that on 2.10.2009 they again sent a detailed clarificatory letter to the department which was acknowledged on 5.10.2009. In the said letter the copies of Sales Tax/VAT returns was enclosed; that they were not liable to service tax as they were doing simple trading activity; that their bonafide belief can be established from the fact that were paying service tax correctly and filing returns regularly.

Further they placed reliance upon the the judgements of Sands Hotel P Ltd [2009(16)STR 329 (Tri-

Mumbai] and Diamond Auto Industries [2008(229)ELT 618(Tri-Del)] to pl;ead that mere contravention was not enough unless there was also intention to evade payment of duty.

The assessee also submitted that penalty under Section 76 and Section 78 cannot be imposed simultaneously; that this had been made clear in the Budget of 2008; that in view of the above it was requested by them to drop the show cause notice as there was n short payment or non-payment of service tax.

The assessee filed another reply dated 13.08.2012 wherein in addition to the above they submitted in

Para 1 that in case of some customers like corporate hospital, Govt. institutions, nursing homes etc. purchasing in bulk, a concessional price by way of additional discount or special price is offered, which is lower than the PTR ( i.e our selling price) and many times even lower than our PTS (our purchase price).

In such transactions the consignments are received by them from M/s Cipla Ltd at PTS…..Since at the

time of receipt of such consignments from M/s Cipla Ltd. by them, it was not known that these products

may end up being sold to bulk customers, such products are sold by M/s Cipla Ltd to them on PTS.; that in

Para 4 they added that the trading activity of purchase of goods from M/s Cipla Ltd and its sale to their customers, were pure business transactions undertaken by an independent seller and purchaser; that such sale of goods in which they have acquired ownership interest on account of purchase of the same to their customers were neither on behalf of M/s Cipla Ltd for a consideration and nor they were acting on behalf of their customers while effecting such sales; that they have neither stood guarantee for such payments to their suppliers on behalf of their customers nor have they collected any such payments on behalf of Cipla Ltd; they submitted that the transactions of purchase and sale between them and M/s

Cipla Ltd and the transactions between them and their customers were two independent transactions

23

OIO No. 42/STC/AHD/ADC(JSN)/2012-13 and not dependent on each other. They have cited the following decisions in their favour (1) Kamal

Auto Finance Ltd [2012(26)STR 46 (Tri-Del)] (2) Behr India Ltd {2012(25)STR 64(Tri-Mum)}; (3) Uttam

Toyota { STO 2011 CESTAT 73 (4) Fusion Hospitality {2011(22) STR 642 (Tri-Bang)} (5) AIA Engineering

Ltd { 2010(19) STR 257 (Tri-Ahd)] (6) TATA Motors Insurance Services Ltd 2009(9)STR 176 (Tri-Bang)}

(7) EURO RSCG Advertising Ltd {2007(7)STR 277 (Tri-Bang)} and (8) P Gautam & Co (2011(24) STR 447

(Tri-Ahd)}.

The case for posted for hearing on 19.02.2010 & 13.04.2011. For both the dates, the assessee requested for postponements vide their letters dated 7.1.2010 & 12.04.2011. Thereafter, due to change in the adjudicating authority, PH was granted in 25.07.2012 & again on request of the assessee, the PH date was fixed on 13.08.2012. The assessee was represented by Shri Gunjan Shah (CA) and Shri Rupesh Shah ,

Director on 13.08.2012 wherein they filed another written submission dated 13.08.2012. They reiterated these submissions and prayed to drop the proceedings. The assessee filed another submission dated 13.09.2012 wherein they submitted copies of the debit notes raised for stockiest margin along with year wise statement.

DISCUSSIONS AND FINDINGS

I have carefully gone through the contents of the Show Cause Notices and defence replies, relevant documents of the case, and written submissions of the said assessee along with all the relevant documents submitted during or before personal hearing.

I find that the core issue to be decided in this case is whether service tax is to be paid “Commission

Income” as shown in the Profit & Loss Account of the assessee, under the category of “Business Auxiliary

Service”. I find that the difference between the total taxable value received, as shown in their P&L A/c and the taxable value of Business Auxiliary Services , Storage and Warehousing Services, Goods

Transport Agency and Manpower Recruitment Services, as shown in their ST-3 returns, is shown as

“Commission Income” by the assessee.

On perusal of the records, I find that the assessee has argued that the “Commission Income” is nothing but the dealer’s Margin or discount accruing to them on account of sale of the products of M/s Cipla Ltd as their authorized distributor.

I find that an authorized distributor is a person or business, who is certified and trained, to sell and service specific products. To decide the issue, I would like to refer to the definition of

Business Auxiliary Service as defined under clause 65 (19) of the Finance Act, 1994 under which the show cause notices proposes to classify the said “Commission

Income” and is as under :

24


[(19) “business auxiliary service” means any service in relation to, —

(i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or

(ii) promotion or marketing of service provided by the client; or

[* * * * ]

(iii) any customer care service provided on behalf of the client; or

(iv) procurement of goods or services, which are inputs for the client; or

[ Explanation. — For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, “inputs” means all goods or services intended for use by the client;]

[(v) production or processing of goods for, or on behalf of, the client;]

(vi) provision of service on behalf of the client; or

(vii) a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision, and includes services as a commission agent, [but does not include any activity that amounts to manufacture of excisable goods].

[ Explanation. — For the removal of doubts, it is hereby declared that for the purposes of this clause, —

(a) ”commission agent ” means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services , for a consideration, and includes any person who, while acting on behalf of another person —

(i) deals with goods or services or documents of title to such goods or services; or

(ii) collects payment of sale price of such goods or services; or

(iii) guarantees for collection or payment for such goods or services; or

(iv) undertakes any activities relating to such sale or purchase of such goods or services;

[(b) “excisable goods” has the meaning assigned to it in clause (d) of section 2 of the

Central Excise Act, 1944 (1 of 1944);

(c) “manufacture” has the meaning assigned to it in clause (f) of section 2 of the Central

Excise Act, 1944 (1 of 1944)]

In this connection, I refer to the submission of the assessee in Para 5 of their letter dated 7.01.2010, wherein they have stated the following :

25


“..As per the stockist agreement, Cipla Ltd., is not our client, rather is the supplier and their products we have sold to our clients, who are Hospitals, Nursing Homes, Doctors & Retailers. We

are providing services to the customer and not to Cipla Ltd…..”

Again at Para 1 of their letter dated 13.08.2012, they have stated ..

“..However, in case of some customers like corporate hospital, Govt. institutions, nursing homes etc. purchasing in bulk, a concessional price by way of additional discount or special price is offered, which is lower than the PTR ( i.e our selling price) and many times even lower than our

PTS (our purchase price). In such transactions the consignments are received by us from M/s

Cipla Ltd at PTS…..Since at the time of receipt of such consignments from M/s Cipla Ltd. by us, it is not known that these products may end up being sold to bulk customers, such products are

sold by M/s Cipla Ltd to us on PTS.”

Thus I find from both the submissions above which has some contradictions as well, that the assessee is wholly dependent on M/s Cipla for every transaction carried out. The destination of the goods whether to be stocked up at their own godowns or transported to the retailers place or at the Hospitals or at the

Govt’s institutions, is decided by M/s Cipla Limited. Also it is M/s Cipla Limited who decides the final prices of the goods. Thus I find that the assessee is providing essential services like receiving the goods, stocking, transport, delivery of the said products for and on behalf of M/s Cipla Ltd. The customers are decided by M/s Cipla Ltd and not by the assessee . Further, I find that the assessee is stating that M/s

Cipla Ltd is not their client. However, as discussed above, I find that the assessee is wholly dependent on

M/s Cipla Ltd for their business activities. In other words, they carry forward the business on behalf of

M/s Cipla Ltd, in the sense they are the authorized distributors of M/s Cipla Ltd.

Therefore, as they perform their activities for and on behalf of M/s Cipla Ltd, they are the

‘client’ of the assessee. The assessee is promoting and marketing the services like receiving, stocking, transport, delivery of the pharmaceutical products on behalf of M/s Cipla Ltd and such services would definitely taxable services falling under the category of ‘Business Auxiliary

Service” under clause (ii) of clause 65 (19) of the Finance Act, 1994. I find that the assessee has further argued that the ‘Stockist Margin’ received by the assessee, during such activity as described above, was nothing but dealer margin or discount, and not a commission. In this context, the case of AERO WORLD TRAVELS Versus COMMISSIONER OF CENTRAL EXCISE,

JALANDHAR reported at 2006 (3) S.T.R. 591 (Tri. - Del.) may be refereed where it was discussed whether margins received by a Air Travel Agent can be treated as agency commission or not.

The Hon’ble Tribunal held that “The appellant is right in his contention that his margin from the sale of ticket alone can constitute his agency commission and a tax is to be levied on that commission …..The transaction to be discerned from the record is that the appellant’s relationship with the airline was that of an agent and the margin in the transaction constituted

agency commission.”

Further, the assessee has claimed that the stockiest margin was actually their profit ,and this profit was wrongly classified in their Profit & Loss Account along with Commission instead of reducing the same

26

OIO No. 42/STC/AHD/ADC(JSN)/2012-13 from their Purchase Value and that that this wrong account head had led to the demand of service tax.

On this point, I fail to understand as to how the assessee who is doing the said business since the last 8 years and more, and bringing out audited Balance Sheets every year, can now claim that they had wrongly taken the profit to be their commission instead of reducing the same from their purchase value

! I fail to understand as to how the assessee will account for now, by reducing their Purchase value i.e

PTS, by the dealer’s margin in their Balance Sheets. Therefore, I find that the argument of the assessee on this count is baseless. In any case, I come to the conclusion that , in light of the decision given by the

Hon’ble Tribunal in the case M/s Aero World Travels (supra), that Margins received by a company also constitutes “Commission” and therefore service tax is to be levied on such amounts received.

The assessee has further argued that service tax cannot be levied on ‘sale of goods’, citing the cases of

South East Corporation ,Chetan Traders, Vallamattam Communications and Karakkattu Communications

[2007(8)STR 164 . In this connection, I find that the hon’ble Apex Court in the case of M/s Idea Mobile

Communication Limited [2011(23)STR 433(SC)] has held that both sale tax and service tax are exigible to each other . In para 12, the Hon’ble Court has held as under :

12. …..

The Kerala High Court in the facts and circumstances of the case observed at paras 36 and 47 as under :-

“36.

With this perspective in mind, if we analyse the transaction that takes place, it appears to us that there is no difficulty in correctly understanding its facts. The transaction of selling the SIM. card to the subscriber is also a part of the “service” rendered by the service provider to the subscriber, Hence, while the State Legislature is competent to impose tax on “sale” by a legislation relatable to entry 54 of List II of

Seventh Schedule, the tax on the aspect of “services” rendered not being relatable to any entry in the State List, would be within the legislative competence of Parliament under

Article 248 read with entry 97 of List I of the Seventh Schedule to the Constitution. We are, therefore, unable to accept the contention of Mr. Ravindranatha Menon that there is any possibility of constitutional invalidity arising due to legislative incompetence by taking the view that “sale” of SIM card is simultaneously exigible to sales tax as well as service tax. Once the “aspect theory”‘ is kept in focus, it would be clear that the same transaction could be exigible to different taxes in its different aspects. Thus, we see no reason to read down the legislation as suggested by Mr. Menon. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

47.

Conclusions :

(a) The transaction of sale of SIM Card is without doubt exigible to sales tax under the

KGST Act. The activation charges paid are in the nature of deferred payment of consideration for the original sale, or in the nature of value addition, and, therefore, also amount to parts of the sale and become exigible to sales tax under the KGST Act.

(b) Both the selling of the SIM Card and the process of activation are “services” provided by the mobile cellular telephone companies to the subscriber, and squarely fall within the definition of “taxable service” as defined in section 65(72)(b) of the

Finance Act. They are also exigible to service tax on the value of “taxable service” as defined in Section 67 of the Finance Act.”

(emphasis added)

27


In view of the above decision of the Hon’ble Apex Court, the cases cited by the assessee have become redundant. Thus, even if the assessee has paid sales tax, however the services provided by them and

Commission obtained for such services, squarely fall within the definition of “Business Auxiliary

Services”.

Further, I find that they cited the following case laws(1) Kamal Auto Finance Ltd [2012(26)STR 46 (Tri-

Del)] (2) Behr India Ltd {2012(25)STR 64(Tri-Mum)}; (3) Uttam Toyota { STO 2011 CESTAT 73 (4) Fusion

Hospitality {2011(22) STR 642 (Tri-Bang)} (5) AIA Engineering Ltd { 2010(19) STR 257 (Tri-Ahd)] (6) TATA

Motors Insurance Services Ltd 2009(9)STR 176 (Tri-Bang)} (7) EURO RSCG Advertising Ltd {2007(7)STR

277 (Tri-Bang)} and (8) P Gautam & Co (2011(24) STR 447 (Tri-Ahd)}. in their favor thereby contending that since the transactions between M/s Cipla Ltd and themselves, and that of between them and their customers, were two independent transactions and not dependent on each other, and that in such sale of goods they have acquired ownership interest on account of purchase of the same, such trading activity was not covered under “Business Auxiliary Service”.

I find that in Kamal Auto Finance Ltd (supra), the facts of the case was that they were acting as independent businessman, doing business with principal, selling their products to their own clients without interference of their principal. However, I find that the facts of this case are different. In the instant case, all the transactions are controlled by M/s Cipla. Thus I find that the case of M/s Kamal Auto

Finance is not relevant here. In the same manner, the case of M/s Behr India Limited, is also not relevant

, as the activities of the assessee are cannot be said to be on his own behalf. The case of M/s Uttam

Toyota is redundant in view of the Apex Court’s Judgment in the case of M/s Idea Mobile

Communication Limited [2011(23)STR 433(SC)]. The cases of Fusion Hospitality & TATA Motors

Insurance Services Ltd have not yet attained finality and the facts of that case does not appear to be relevant to this case. In the case of M/s AIA Engineering Limited, I find that the case pertains to whether service tax can be charged on the profit, which was already included in the value of the final products cleared on payment of excise duty. I find that the facts of the instant case are different and therefore not relevant. In EURO RSCG Advertising Ltd the facts of the case are entirely different and therefore not applicable. Further, I find that the Department has gone on appeal ( vide TA No. 783 of 2012) in the

Hon’ble High Court of Gujarat in a similar case of P Gautam & Co, and the decision is pending.

In view of the above discussions, I come to the conclusion that the value of Rs. 3,91,01,406/- shown in their Profit & Loss Account as “Commission Income” for the financial years 2004-05 to 2008-09 is a taxable value under Section 67 of the Finance Act, 1994 towards rendering of taxable services as

Business Auxiliary Services. Further, I confirm the demand of Service Tax amount of Rs. 49,50,242/- under Section 73 of the Finance Act, 1994.

As discussed above, the demand has been held to be sustainable on merits. Thus I find that it was the duty of the said service provider/assessee to declare such activities, and receipt towards the same in their ST-3 returns filed by them from time to time. With regard to the issue that extended period of limitation & suppression of facts, I note that the assessee has quoted some cases but shelter in those cases is not available to them as they are

28

OIO No. 42/STC/AHD/ADC(JSN)/2012-13 an assessee under service tax since long and are well aware of the Rules &

Regulations as laid down under Service Tax Rules, 1994. The assessee had not mentioned the details of “Commission Income” in their ST-3 returns and was noticed only when the details were sought by the audit. I find that they were well aware of the facts regarding such transactions and the commissions garnered thereof had not been disclosed before the department and therefore the contention of the assessee that they have not suppressed the facts is not acceptable in this case. Thus, the suppression with an intent to evade payment, on part of the assessee, is proved beyond doubt and proviso to Section 73(1) of the Finance Act, 1994 has rightly been applied in the instant case and therefore, by their such act of omission and commission, the assessee have rendered themselves liable for penalty.

10.1 Hon’ble High Court of Gujarat in the case of CCE, Surat – I Vs Neminath Fabrics

Pvt. Ltd., reported at 2010 (256) ELT 369 (Guj) , while deciding the similar issue in

Central Excise, has held that proviso can not be read to mean that because there is knowledge, suppression which stands established disappears

– concept of knowledge, by no stretch of imagination, can be read into provisions

– suppression not obliterated, merely because department acquired knowledge of irregularities. The relevant para is reproduced below ;

“20. Thus, what has been prescribed under the statute is that upon the reasons stipulated under the proviso being satisfied, the period of limitation for service of show cause notice under sub-section (1) of Section 11A, stands extended to five years from the relevant date. The period cannot by reason of any decision of a

Court or even by subordinate legislation be either curtailed or enhanced. In the present case as well as in the decisions on which reliance has been placed by the learned advocate for the respondent, the Tribunal has introduced a novel concept of date of knowledge and has imported into the proviso a new period of limitation of six months from the date of knowledge. The reasoning appears to be that once knowledge has been acquired by the department there is no suppression and as such the ordinary statutory period of limitation prescribed under sub-section (1) of Section 11A would be applicable. However such reasoning appears to be fallacious inasmuch as once the suppression is admitted, merely because the department acquires knowledge of the irregularities the suppression would not be obli terated.”

11. In view of the above, I find that extended period for recovery of service tax on

“Commission Income” on rendering of taxable services as Business Auxiliary Services, under the proviso to section 73(1) of the Finance Act, 1994 was rightly invoked and the

29


SCN is sustainable on limitation. Therefore, the service tax amount of Rs. 49,50,242/- is recoverable from the said assessee along with Interest as provided in proviso to Section

73(1) of the Finance Act, 1994 read with Section 75 of the Act ibid.

Since the said assessee had not discharged service tax liability on the amount of taxable value on the services mentioned in the foregoing paras and as demanded under the show cause notice and therefore, they have contravened the provisions of Section 67 and 68 of the

Finance Act, 1994 and thereby rendered themselves liable to penal action under Sections 76 &

78 of Finance Act 1994. Further, I find that they have failed to obtain Service Tax

Registration in time, in the category of “Business Auxiliary Service” but also in the category of “Clearing & Forwarding Agents”also and failed to file the prescribed service tax returns and therefore have contravened the provisions of Section 69 & 70 of the

Finance Act, 1994 . They have thereby rendered themselves liable to penal action under

Section 77 of Finance Act 1994.

As regards the issue of imposition of penalty under Section 76 of the Finance Act, 1994, I observe that penalty under Section 76 and 78 of the Finance Act, 1994 are mutually exclusive w.e.f. 10.05.2008 and once penalty under Section 78 is imposed, no penalty under Section 76 can be imposed in terms of the proviso inserted in Section 78 w.e.f 10.5.2008 in this regard.

Therefore, no penalty under Section 76 is imposable for the period from 10.5.2008 onwards. In the case before me, the demand of service tax is for the period from 2004-05 to 2008-09, therefore, I hold that penalty under Section 76 of the said Act is imposable on the said service provider. I find that as the said assessee has not paid service tax within the stipulated time period as prescribed under Section 68 of the Finance Act, 1994 read with Rule 6 of the Service

Tax Rules, 1994, I hold them liable to penalty under Section 76 of the Finance Act, 1994. My conclusion is also based on various decisions of Hon’ble High Courts & Tribunals as mentioned below ;

 CCE & ST Vs First Flight Couriers Ltd reported at 2007(8) STR 225 (Kar.)

 UOI Vs Aakar Advertising, reported at 2008 (11) STR.5 (Raj.)

 UOI Vs Shiv Ratan Advertisers reported at 2008 (12) STR 690 (Raj.)

 Shiv Network Vs CCE, Daman reported at 2009 (14) STR 680 (Tri-Ahmd)

 CCE, Vapi Vs Ajay Sales Agencies reported at 2009 (13) STR 40 (Tri–Ahmd)

 Siddhi Motors Vs CCE, Rajkot reported at 2009 (15) STR 422 (Tri-Ahmd)

I further observe that the Hon’ble CESTAT in the case of M/s Gujarat Industrial Security Force

Society Vs CST, Ahmedabad, vide order No. A/1110/WZB/AHD/2010 dated 05.08.2010, has held that no lenient view can be taken under section 76 of the Finance Act, 1994. The relevant paras are reproduced below;

“2. After hearing both the sides, I find that in this case, the assessee was registered more than 6 years back and no explanation has been given by them for delayed filing of

30

OIO No. 42/STC/AHD/ADC(JSN)/2012-13 return and delayed payment of service tax. Under these circumstances, I am not finding fault in stand taken by the lower authority that penalty is imposable under section 76 and once it is held that penalty is imposable under section 76, the amount fixed as per the provision of section 76 is required to be imposed. Under these circumstances, even though the Ld. Advocate submitted that the appellant is a non profit organization, no lenient view can be taken in view of the provisions of law.

3. Accordingly, the appeal is rejected.”

Hon’ble High Court of Gujarat in the case of CCE & Cus. Vs Port Officer, reported at 2010 (19) STR 641

(Guj) has now settled the issue of penalty under Section 76. The relevant para is reproduced below ;

“10 . A plain reading of Section 76 of the Act indicates that a person who is liable to pay service tax and who has failed to pay such tax is under an obligat i on to pay , in addition to the tax so payable and interest on such tax , a penalty for such fai l ure . The quantum of penalty has been specified in the provision by laying down the minimum and the maximum limits with a further cap i n so far as the maximum limit is concerned . The provision stipulates that the person , who has failed to pay serv i ce tax , shall pay , in add i tion to the tax and interest, a penalty which shall not be less than one hundred rupees per day but which may extend to two hundred rupees fo r everyday during which the failure continues, subject to the maximum penalty not exceeding t he amount of service tax which was not paid . So far as Section 76 of the Act is concerned , it is not possible to read any further discretion , further than the discretion provided by the legislature when legislature has prescribed the minimum and the maximum lim i ts .

The discretion vested in the authority is to levy minimum penalty commencing from one hundred rupees per day on defa u lt , which is extendable to two hundred rupees per day, subject to a cap of not exceeding the amount of service tax payable . From this discretion it is not possible to read a further discretion being vested in the authority so as to entitle the authority to levy a penalty below the stipulated l i mit of one hundred rupees per day . The moment one reads such further disc r etion in the provision it wou l d amount to re-writing the provision which, as per settled canon of interpretation , is not permissible . It is not as if the provision is couched in a manner so as to lead to absurdity if it i s read in a plain manner . Nor is it possible to state that the provision does not further the object of the Statute or violates the legislative intent when r ead as it stands. Hence , Section 76 of the Act as it stands does not give any discretion to the authority to reduce the penalty below the minimum prescribed .”

The Hon’ble High Court of Gujarat has further confirmed the above view in the case of CCE Vs S

J Mehta & Co., reported at 2011 (21) STR 105 (Guj.) and CCE Vs Bhavani Enterprises reported at

2011 (21) STR 107 (Guj.).

As regards imposition of penalty under Section 78, I find that as the said assessee had suppressed the facts with intention to evade payment of service tax, penalty under Section 78 of the Finance Act, 1994 is mandatorily imposable as has been held by the Apex court in the

31

OIO No. 42/STC/AHD/ADC(JSN)/2012-13 case of Dharmendra Textile Mills Ltd-2008 (231) ELT 3 (SC) and Rajasthan Spinning & Weaving

Mills Ltd-2009 (238) ELT 3 (SC). Therefore, I hold that penalty is imposable on the said assessee under Section 78 of the Finance Act, 1994. I, therefore, hold that they have rendered themselves liable to penalty under Section 78 of the Finance Act, 1994. My above view gets support from below mentioned case laws;

 Shiv Network Vs CCE, Daman reported in 2009 (14) STR 680 (Tri.Ahmd.)

 CCE, Vapi Vs Ajay Sales Agencies reported in 2009 (13) STR 40 (Tri. Ahmd.)

 Order No. A/754/WZB/AHD/2010 dt. 09.06.2010 / 23.06.2010 in the case of M/s Bajrang

Security Services Vs CST, Ahmedabad.

 Order No. A/1937/WZB/AHD/2010 dated 08.10.2010 / 20.12.2010 in the case of M/s

Dhaval Corporation Vs CST, Ahmedabad.

I further observe that recently hon’ble High Court of Punjab & Haryana, in the case of CCE Vs

Haryana Industrial Security Services reported at 2011 (21) STR 210 (P&H), has also upheld the penalty equal to service tax imposed under Section 78 of the Finance Act, 1994. Hon’ble

Karnataka High Court has also taken similar view in the case of CCE, Mangalore Vs K Vijaya C Rai reported at 2011 (21) STR 224 (Kar.)

I also find that penalty under Section 76 ibid is provided for failure to pay service tax whereas penalty under Section 78 ibid is for suppressing value of taxable service. In the instant case, service tax liable to be paid in terms of Section 68 read with Rule 6 of the Service tax Rules,

1994, have not been found paid as well as service tax has not been paid / short paid by suppressing value of taxable service by reason of wilful mis-statement and suppression of facts.

Of course these two offences may arise in the course of same transaction, or from the same action of the person concerned. But the incidents of imposition of penalty are distinct and separate and even if the offences are committed in the course of same transaction or arises out of the same act the penalty is imposable for ingredients of both offences, this aspect was also considered by the Hon’ble High Court of Kerala in the case of Assistant Commissioner, C.Ex. Vs

Krishna Poduval – 2006 (1) STR 185 (Ker). I also find that the Hon’ble Mumbai Tribunal in the case of Golden Horn Container Services Pvt. Ltd. v/s Commr. of C. Ex., Raipur reported at 2009

(16) S.T.R. 422 (Tri.-Mumbai), has held that Section 76 provides for a penalty who commits default simpliciter in payment of the tax whereas section 78 is a more stringent penal provision, which provides harsher penalty who commits default with mens rea. Since in this case also, the assessee., has committed default with mens rea, the decision of the tribunal is squarely applicable.

Further, as regards imposition of simultaneous penalty, I place my reliance on the judgment of

Hon’ble High Court of Kerala in the case of Assistant Commissioner of Central Excise v. Krishna

Poduval (supra) which is aptly applicable to the present case. I find that the imposition of penalty under sections 76 and 78 of the Act is for non payment of service tax and suppression of value of taxable service respectively which are two distinct and separate offences attracting separate penalties. I find that the said assessee have committed both the offences and therefore penalties under section 76 and 78 of the Finance Act, 1994 are imposable on the said

32

OIO No. 42/STC/AHD/ADC(JSN)/2012-13 service provider for the period upto 9.5.2008. Therefore, I am of the view that in the facts and circumstances of the case, it is justifiable, if the penalty is imposed under the provisions of

Section 76 and 78 of the Finance Act, 1994, separately, following the decisions of Hon’ble

Kerala High Court and Mumbai tribunal (supra). My views are also further supported by various decisions of tribunals in the cases of ; g) Shiv Network v/s Commissioner of Central Excise & Customs, Daman reported at 2009

(14) S.T.R. 680 (Tri.-Ahmd.) h) Commissioner of Central Excise, Vapi v/s Ajay Sales Agencies reported at 2009 (13) S.T.R.

40 (Tri.-Ahmd.), and i) Mett Macdonald Ltd. v/s Commissioner of Central Excise, Jaipur reported at 2001 (134)

E.L.T. 799 (Tri.-Del.). j) M S Shah & Co., Vs CST, Ahmedabad – Order No. A/1328/ WZB/ Ahd/ 2010 dated

30.06.2010 / 26.08.2010. k) Bajarang Security Services Vs CST, Ahmedabad – Order No. A/745/ WZB/Ahd/2010 dated 09.06.2010 / 23.06.2010. l) CESTAT, Principal Bench, New Delhi in the case of Bajaj Travels Ltd., Vs CCE, Chandigarh

– 2009 (16) STR 183 (Tri.Del.)

I further find that the assessee have failed to declare the correct taxable value in their

ST-3 returns for the period covered under the impugned show cause notice. Further, they have also failed to obtain the Service Tax registration in time. Hence they are liable for penalty under Section 77, for not filing ST-3 returns correctly for the period in dispute

& not obtaining Service Tax Registration in time. Hence imposition of mandatory penalty under Section 77 is also justified.

In light of the aforesaid discussions and findings, I hold that the differential service tax amount of Rs. 49,50,242/- alongwith interest is liable to be confirmed under Section 73(1) of the

Finance Act,1994 read with Section 75 of the Act ibid and they are also liable to penalty under the provisions of Section 76, 77 and 78 of the Finance Act,1994.

24. Accordingly, I pass the following order:-

ORDER vii.

I consider the amount of Rs. 3,91,05,406/- shown in their Profit & Loss Account for the financial years 2004-05 to 2007-08, and Provisional Profit & Loss Account for the year

2008-09, as “Commission Income” to be taxable value under Section 67 of the Finance

33


Act, 1994 , towards rendering of taxable services as Business Auxiliary Services. as defined under Section 65(19) of the Finance Act, 1994. viii.

I confirm the demand of Service Tax amounting to Rs. 49,50,242/- (Rupees Forty None

Lacs Fifty Thousand Two Hundred and Forty Two only) on the value shown in (i) above on “Business Auxiliary Service” and order to recover the same from them under Section

73(1) of Finance Act, 1994. ix.

I direct the assessee to pay the interest as applicable on the amount of their service tax liability for the delay in making the payment under Section 75 of the Finance Act, 1994 on the Service Tax demanded under para (ii) above. x.

I impose a penalty of Rs. 200/- (Rupees two Hundreds Only) per day or at the rate of 2% of the service tax amount per month, whichever is higher, subject to maximum of the outstanding tax amount, from the date on which such tax was due till 09.05.2008 or the actual payment of outstanding tax amount, whichever is earlier, under the provisions of

Section 76 of the Finance Act, 1994, as amended, for failure to pay Service Tax within the stipulated period as required under the provisions of Section 68 (1) of the Finance

Act, 1994 read with Rule 6 of the Service Tax Rules, 1994, as amended. xi.

I impose a penalty of Rs. _____________ ( Rupees ______________) under Section 77 of the Finance Act, 1994. xii.

I also impose a penalty of Rs . 49,50,242/- (Rupees Forty Nine Lacs Fifty Thousand Two

Hundred and Forty Two only only) upon them under Section 78 of the Finance Act, 1994 for suppressing the value of taxable services provided by them before the Department with intent to evade payment of service tax. If the service tax amount is paid along with appropriate interest as applicable, within 30 days from the date of receipt of this order, then the amount of penalty under Section 78 shall be reduced to 25% of the service tax amount, provided if such penalty is also paid within such period of 30 days.

34


[J S Negi)

Additional Commissioner

Service Tax : Ahmedabad

F.No. STC/89/O&A/SCN/ADC/DPL/R-8/Div.II/2009 Date : .02.2013

By R.P.A.D/Hand Delivery

To,

M/s Dhruvi Pharma Pvt. Limited.,

302, Ison Mall,

Above Star India Bazar,

Jodhpur Char Rasta,

Satellite,

Ahmedabad- 380015.

Copy to:-

1. The Commissioner, Service tax, Ahmedabad ( Attn. Review Cell).

2. The Deputy Commissioner, Service Tax, Division-II, Ahmedabad

3. The Superintendent, Range-VIII, Division-II, Service Tax, Ahmedabad with an extra copy of

OIO to be delivered to the assessee and send an acknowledgement to this office.

4. Guard File

m/s.dhruvi pharma pvt ltd. - Central Excise, Ahmedabad

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