2010 (12) TMI 654 - AT - Service Tax

Business Auxiliary Service and Storage and Warehousing - CBEC Circular No. 97/7/2007-ST - There is no dispute that the impugned activities are undertaken by the Corporation with the sole object of promoting sale of liquor manufactured by various distilleries in Kerala - If the stocks are not sold out within 180 days, the Corporation will be at liberty to transfer these stocks to a separate godown/move to a separate location in the godown for effecting discount sale - Held that - The supplies received in the warehouses of the Corporation belongs to the Corporation only. The activities undertaken by the Corporation to facilitate sale of liquor cannot be held to be services rendered to the distilleries. The Corporation took measures to expedite sale of goods belonging to it. The Corporation had rendered service to itself. These services cannot be taxed under Business Auxiliary Service of the Act. - Decided in favor of the assessee

Issues Involved:

1. Whether KSBC rendered taxable services under 'Business Auxiliary Service' and 'Storage and Warehousing' as per the Finance Act, 1994.
2. The nature of the relationship between KSBC and the suppliers (principal-agent vs. buyer-seller).
3. The applicability of Service Tax on the transactions between KSBC and the suppliers.
4. The validity of the Commissioner's reliance on the High Court's observations and the counter affidavit filed by KSBC.
5. The legal implications of the rate contracts between KSBC and the suppliers.
6. The applicability of penalties under sections 76, 77, and 78 of the Finance Act, 1994.

Issue-wise Detailed Analysis:

1. Taxable Services under 'Business Auxiliary Service' and 'Storage and Warehousing':

The Commissioner concluded that KSBC rendered taxable services to distilleries under 'Business Auxiliary Service' and 'Storage and Warehousing' based on the activities undertaken by KSBC to promote the sale of liquor manufactured by various distilleries in Kerala. However, the Tribunal found that these activities would only be taxable if the liquor received from the suppliers continued to be the property of the distilleries until its sale by KSBC. The Tribunal determined that the sale of liquor occurred when KSBC received the goods in its warehouses, making the goods the property of KSBC. Therefore, KSBC could not have rendered any taxable services to the distilleries.

2. Relationship between KSBC and the Suppliers:

The Tribunal examined whether the relationship between KSBC and the suppliers was that of principal-agent or buyer-seller. The Commissioner had relied on observations from the High Court and statements from KSBC's executives suggesting an agency relationship. However, the Tribunal found that the rate contracts and other documentary evidence established that KSBC received the property in the liquor on delivery from the distilleries, indicating a buyer-seller relationship. The Tribunal noted that the goods were treated as KSBC's property and dealt with as such.

3. Applicability of Service Tax:

The Tribunal held that since the sale took place on delivery of goods to KSBC, the activities undertaken by KSBC could not be considered services rendered to another party and thus were not subject to Service Tax. The Tribunal referenced the Supreme Court's judgment in the Maharashtra Distilleries case, which supported the view that the relationship between KSBC and the suppliers was that of buyer and seller.

4. Commissioner's Reliance on High Court's Observations and Counter Affidavit:

The Tribunal found that the Commissioner erroneously relied on the High Court's observations, which were made in the context of a dispute over the enhancement of EMD and collection of service charges, not the nature of the relationship between KSBC and the suppliers. The Tribunal also noted that the initial counter affidavit filed by KSBC, which suggested an agency relationship, was later contradicted by an additional counter affidavit. The Tribunal concluded that the initial affidavit was not a reliable basis for determining the nature of the transactions.

5. Legal Implications of Rate Contracts:

The Tribunal analyzed the rate contracts between KSBC and the suppliers, which stipulated terms for the supply, payment, and handling of liquor. The contracts indicated that KSBC purchased the goods from the suppliers and held them as its property. The Tribunal found that the conditions in the rate contracts, such as deferred payment and penalties for unsold goods, did not alter the fact that the sale occurred on delivery.

6. Applicability of Penalties:

The Tribunal found no basis for the penalties imposed under sections 76, 77, and 78 of the Finance Act, 1994, as the demand for Service Tax itself was not sustainable. The Tribunal noted that the longer period for demand could not be invoked as there was no suppression of facts by KSBC.

Conclusion:

The Tribunal vacated the impugned order and allowed the appeals filed by KSBC, concluding that the demand and penalties were not sustainable. The appeals filed by the Revenue seeking to impose additional penalties were rejected as devoid of merits.

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