2009 (8) TMI 958 - Commissioner - Service Tax

Issues Involved
1. Liability for Service Tax on profit earned from selling packing materials.
2. Classification of services provided under "Business Auxiliary Service" (BAS).
3. Consideration of sale incentives as taxable income.
4. Application of cum-tax price principle.
5. Suppression of facts and imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994.

Detailed Analysis

1. Liability for Service Tax on Profit Earned from Selling Packing Materials
The primary issue is whether the profit earned by the appellant from selling packing materials, essence, and flavors to M/s. RBPSSK should be considered as the value of services rendered and thus subject to Service Tax under BAS. The adjudicating authority concluded that since the appellant did not receive any monetary consideration for services such as marketing, customer identification, and collection of sale proceeds, the profit from the sale of packing materials should be treated as consideration for these services. The appellant argued that selling packing materials is an independent transaction and should not be subject to Service Tax, relying on the Supreme Court decision in Snow White Industrial Corporation v. CCE.

2. Classification of Services Provided under "Business Auxiliary Service" (BAS)
The appellant did not dispute that their activities fall under BAS but contended that the profit from selling packing materials should not be taxed under BAS. The agreement between the appellant and M/s. RBPSSK indicated that the appellant would supply packing materials and also handle marketing, order procurement, and collection of payments. The adjudicating authority found that these services were not separately billed, and the profit from the sale of packing materials was essentially a consideration for these services, thus falling under BAS.

3. Consideration of Sale Incentives as Taxable Income
The appellant received sale incentives for lifting more than the agreed number of country liquor cases. The adjudicating authority held that these incentives should be considered as part of the taxable income for the services provided. The appellant argued that the incentives received for sales transactions in May and July 2004 should be exempt as they occurred before the introduction of Service Tax on BAS. This argument was accepted, and the tax exemption on Rs. 94,300/- was allowed.

4. Application of Cum-Tax Price Principle
The appellant contended that the cum-tax price principle should be applied, which would reduce the taxable amount. This plea was accepted, and the jurisdictional officer was instructed to work out the revised tax due from the appellant based on this principle.

5. Suppression of Facts and Imposition of Penalties under Sections 76, 77, and 78 of the Finance Act, 1994
The appellant argued that there was no deliberate failure to obtain registration or pay the correct tax, citing the Supreme Court decision in Padmini Products v. CCE. However, the adjudicating authority found that the appellant and M/s. RBPSSK had conspired to defraud the government by reducing the value of taxable services under the guise of selling packing materials. This constituted mens rea, justifying penalties under Section 78 for deliberate evasion. The penalty under Section 76 was set aside, as simultaneous penalties under Sections 76 and 78 are not permissible. The penalty under Section 77 was retained, and the case was remanded to the original authority to reassess the demand and impose the penalty accordingly, considering the reduced tax liability due to the application of the cum-tax price principle and the exemption of Rs. 94,300/-.

Conclusion
The appeal was partially allowed, with the adjudicating authority's decision largely upheld but with specific adjustments. The case was remanded for reassessment of the tax demand and penalties, considering the accepted arguments regarding the cum-tax price principle and the exemption for incentives received before the introduction of Service Tax on BAS.

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