2011 (9) TMI 494 - AT - Service Tax

Clearing & Forwarding Agent or Distributor s Agreement - Parties involved IPCL, Appellant, Buyers - Transportation and unloading charges are paid by IPCL, Property in goods remained with IPCL, Insurance was also organized by IPCL ,Bill and money was raised by appellant on their account. On detailed analysis of agreement following observation were recorded - Agreement talks about appointment of Distributor, Could sell the product at price lower than indicated by company, Amount to be deposited subject to which goods will be released to the appellant for further sale, Product to be sold in original packing and original trade name, Unsold goods lying with the distributor title shall continue to vest in the hands of IPCL - Held That - All the above condition state that the appellant were appointed as Distributors and not C&F Agent.- Decided in favor of assessee.

Summary

Issues Involved:
1. Whether the service provided by the appellants can be held liable to service tax by treating them as Clearing & Forwarding (C&F) agents.
2. Whether the amount collected by the appellants should be treated as cum service tax.
3. Whether penalties imposed on the appellants are justified.

Issue-wise Detailed Analysis:

1. Liability to Service Tax as C&F Agents:

The core issue in this appeal was whether the appellants' services should be classified as Clearing & Forwarding (C&F) services and thus be liable for service tax. The appellants argued that they were distributors, not C&F agents, as per their agreement with IPCL. They highlighted several clauses in the agreement, such as Clause 8, which allowed them to sell products at prices lower than the recommended list prices, indicating a distributor's role rather than a C&F agent. They also pointed out that the invoices were raised in their name, and payments were made to IPCL after sales, further supporting their claim of being distributors.

Conversely, the Revenue argued that despite the agreement labeling the appellants as distributors, their activities aligned with those of C&F agents. The Revenue cited clauses from the agreement, such as Clause 16, which mentioned a service charge paid to the appellants, and Clause 20, which stated that the property and title of the unsold stock remained with IPCL, indicating a C&F relationship.

The Tribunal, after considering both sides, concluded that the appellants were indeed acting as C&F agents. They noted that the appellants' operations, such as the requirement to report sales and stock to IPCL and the fact that the property in goods remained with IPCL until sold, were indicative of a C&F relationship. Thus, the Tribunal upheld the levy of service tax on the appellants as C&F agents.

However, a separate judgment by the Judicial Member disagreed, emphasizing that the appellants had the liberty to sell goods independently and at lower prices, which is not characteristic of a C&F agent. The Judicial Member referenced the Larger Bench decision in the case of Larsen & Toubro Ltd. and concluded that the appellants should be considered distributors, not C&F agents.

The Third Member, upon reviewing the agreement and relevant clauses, sided with the Judicial Member, concluding that the appellants were distributors and not C&F agents. Thus, the demand for service tax was set aside.

2. Treatment of Amount Collected as Cum Service Tax:

The appellants contended that if their liability to service tax was upheld, the amount collected by them should be treated as inclusive of service tax. The Tribunal noted that this aspect had not been considered by the Commissioner and remanded the matter back to the Commissioner to rework the demand, treating the gross amount received as inclusive of service tax.

3. Justification of Penalties:

The appellants argued that their non-payment of service tax was due to a bona fide belief that they were not liable, supported by the immediate deposit of the amount with interest once the issue was raised. The Tribunal agreed, noting that the appellants had sufficient grounds to believe they were not liable for service tax, given the terminology used in the agreement and the year it was entered into. Consequently, the Tribunal set aside the penalties imposed on the appellants under various sections, extending the benefit of Section 80 of the Finance Act, 1994.

Conclusion:

The majority opinion held that the appellants were distributors, not C&F agents, and thus the demand for service tax was set aside. The Tribunal remanded the matter to the Commissioner to consider the appellants' submission regarding the gross amount being treated as inclusive of service tax. The penalties imposed on the appellants were also set aside due to their bona fide belief and immediate payment of the amount with interest.