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The Customs, Excises, and Service Taxes Appellate Tribunal (CESTAT), while setting aside the penalties under Section 78 of Finance Act, 1994 held that the commission or agency fee remitted to entities for handling vessels outside India are exempt from taxation.
Facts of the case:
The appellant, M/s Bharat Petroleum Corporation Ltd. is among the leading oil and gas companies in India. The organization aims to provide only the purest oil in India by virtue of using its own highly developed refineries.
Interpretation of law:
The Income Tax Department under section 66A of Finance Act, 1994 confirmed the reimbursement to the chartering agents, payment to agents for handling port charges outside India, the reimbursement of deputation expenditure, sales promotion expenditure, expenditure on maintenance and repair, and expenditure on consulting engineers and training. The department proposed to impose service tax on the appellant company for the services rendered from abroad for two reasons.
Firstly, businesses in India should not be permitted to indulge in arbitrage owing to escapement from tax on services in which the provider is beyond jurisdiction. Secondly, the chain of value-added is not broken.
Therefore, the convenience of classification as ‘business auxiliary service’, to bring the activities within the residual grouping of rule 3(iii) of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, merely from ‘commission’ having been paid, does not pass muster in view of competing and more specific descriptions in section 65(105) of Finance Act, 1994.
The tribunal consisting of Technical Member, C.J. Mathew, and Judicial Member Dr.Suvendu Kumar Pati held that the revenue neutrality of CENVAT credit in the procurement of services from outside the country blunted the scope for alleging the existence of ingredients that permit the invoking of the extended period of limitation as well as a penalty under section 78 of Finance Act, 1994.
“In the field of maritime commerce, the activity of vessel handling in ports is entrusted to ‘steamer agents’ and of goods to ‘customs brokers’; undoubtedly, these are agents but if legislative intent was to tax them as providers of ‘business auxiliary service’, there would be no need to have these separate descriptions in the enumeration of ‘taxable service’ and it cannot be the case of the tax authorities that these varieties of agencies are peculiar to India. Logically, when such services are provided by agencies outside India these cannot be provided within India and it is for such reason that taxable services described in section 65 (105) (h) and section 65 (105) (i) of Finance Act, 1994 are within the ambit of section 66A of Finance Act, 1994 only to the extent of having been performed in India. Therefore, the commission or agency fee remitted to entities for the handling of vessels outside India are exempt from taxation,” the Tribunal said.
“But for the proceedings initiated in relation to the demands that we have, supra, set aside, the absence of these very ingredients, coupled the promptitude with which the liability had been discharged, the option of initiation of proceedings, would, therefore, close the option of initiating proceedings nearly for the imposition of penalty,” the tribunal said while quashing the impugned orders.