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2020 (3) TMI 17 - AT - Service TaxClassification of service - Business Auxiliary Services or not - amount of subsidy received by the Appellant - demand of interest under section 75 of Finance Act for belated payment of service tax - extended period of limitation - HELD THAT - The case of the Appellant is that these handsets are sold at a price fixed by Tata Tele Services, which price is lower than the purchase price of the handsets and Tata Tele Services reimburses the differential amount by way of subsidy. The show cause notice dated 19 October, 2011 proceeds on the footing that the Appellant has been appointed as a distributor of Tata Tele Services for selling/marketing their CDMA handsets with connections. This premise is not in accordance with the terms of the agreement. The agreement provides that Tata Tele Services intends to appoint a distributor to market the service of Tata Tele Services - There is no agreement between the Appellant and Tata Tele Services for selling mobile handsets at a lower rate. The mobile handsets are independently purchased by the Appellant and VAT is discharged on the sale of mobile handsets to the customers. However, while selling the handsets the Appellant sells them at a price lower than the purchase price and Tata Tele Services pays the differential amount as subsidy to the Appellant. In the present case, the SCN, even after reproducing the seven clauses of section 65(19), does not specify which particular clause was attracted and it only mentions that the assessee is an authorized distributor appointed by M/s TTSL for selling CDMA handsets along with connection to the customers. The expenditure incurred by the distributor is reimbursed by M/s TTSL in the guise of subsidy and the same appears to be covered under the definition of Business Auxiliary Service and chargeable to Service Tax since, the amount received by the assessee was in respect of providing Business Auxiliary Service to M/s TTSL. The submission made by learned Counsel for the Appellant deserves to be accepted. The Appellant did receive a fixed commission for marketing the services of Tata Tele Services for the works enumerated in schedule A of the Agreement. This schedule does not refer to buying and selling of handsets at lower prices and neither does the Agreement provide for payment of any subsidy, much less for promotion or marketing of Tata Tele Services. The subsidy, on the other hand, is paid to the Appellant by Tata Tele Services to compensate for the loss incurred by the Appellant on the sale of mobile handsets at a lower price and cannot be said to have any relation to the service of promotion or marketing. Thus, in the absence of any services provided by the Appellant to Tata Tele Services, service tax could not have been levied on the amount of subsidy received by the Appellant. In the present case, the Appellant is engaged in the marketing of telecommunication services of Tata Tele Services for which it is receiving a consideration and the Appellant is discharging service tax on the said amount of consideration. The amount of subsidy that the Appellant is receiving on account of sale of handsets at a lower price does not have any nexus with the promotion or marketing of the services provided by Tata Tele Services. It needs to be noted that Tata Tele Services is reimbursing only that amount to the Appellant which the Appellant would have otherwise received from the customer buying the handsets. No service is being provided. The amount of subsidy is merely a compensation and this amounts the Appellant would have received from the customer. In fact, it can be said that the arrangement between the Appellant and Tata Tele Service for selling the handset at a lower price only aids the business of the Appellant because it will be able to sell more handsets. Extended period of limitation - HELD THAT - As it is not possible to sustain the demand, the contention of learned Counsel for the Appellant that the extended period of limitation under the proviso to section 73(1) of the Act could not have been invoked is not required to be examined. Appeal allowed - decided in favor of appellant.
Issues Involved:
1. Whether the subsidy received by the Appellant from Tata Tele Services on the sale of mobile handsets is taxable under "Business Auxiliary Services" (BAS). 2. Whether the extended period of limitation could be invoked. Issue-Wise Detailed Analysis: 1. Taxability of Subsidy under BAS: The primary issue was whether the subsidy received by the Appellant from Tata Tele Services for selling mobile handsets at a lower price could be considered as a taxable service under BAS. The Appellant, a distributor for Tata Tele Services, argued that it engaged in two separate businesses: marketing telecom services for which it received a commission and paid service tax, and selling mobile handsets independently, for which it paid VAT. The subsidy was received to compensate for selling handsets at a price lower than the purchase price, and not for marketing or promoting Tata Tele Services’ products. The show cause notice alleged that the subsidy was taxable under BAS as it was received for promoting or marketing Tata Tele Services' products. However, the Tribunal found that the show cause notice did not specify which clause of section 65(19) of the Finance Act, 1994, was applicable. The Tribunal referred to previous decisions (Swapnil Asnodkar and United Telecoms Ltd.) which emphasized the necessity of specifying the exact clause under BAS for the demand to be enforceable. The Tribunal also noted that the distributorship agreement did not mention any subsidy for promoting Tata Tele Services’ products. The subsidy was merely a reimbursement for the loss incurred on selling handsets at a lower price, and not a consideration for any service provided. This was supported by the decision in Nahar Industrial Enterprises Ltd., where a subsidy received for maintaining buffer stock was not considered a taxable service. Furthermore, the Tribunal referenced the Supreme Court’s ruling in Bhayana Builders Pvt. Ltd., which clarified that the amount charged must have a nexus with the taxable service provided. Since the subsidy was a compensation for loss and not a consideration for a service, it could not be taxed under BAS. 2. Extended Period of Limitation: The show cause notice invoked the extended period of limitation on the grounds that the Appellant had suppressed material facts with the intention to evade tax. However, since the Tribunal found that the demand itself was unsustainable, it did not need to examine the validity of invoking the extended period of limitation. Conclusion: The Tribunal concluded that the subsidy received by the Appellant was not taxable under BAS as it was not a consideration for any service provided to Tata Tele Services. The demand was set aside, and the appeal was allowed.
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