2021 (5) TMI 159 - HC - Service Tax

Validity of confirming demand of service tax - discount received from the manufacturers by way of credit notes - principal to principal relationship or not - Adjudicating authority did not follow the decisions of Tribunal since the revenue appeal is pending before the Apex Court - HELD THAT - A perusal of definition of service would indicate that there must be (i) service provider, (ii) service recipient and (iii) consideration for providing a service. The aforesaid definition also clearly exempts the activity of transfer of title in goods by way of sale - A mere reading of the dealership agreement entered into between the assessee on the one hand and the manufacturers on the other would indicate that the petitioner purchases the goods from the manufacturers by way of sale - Even though the document may be styled as a dealership agreement and the petitioner may have to be conform to certain business standards, if read as a whole, one can come to the safe conclusion that the relationship between the parties was one of seller and buyer on principal to principal basis. Analysis of the documents referred to in the adjudication order to be done - HELD THAT - The adjudicating authority has not read the document as a whole but instead gave undue emphasis to certain individual clauses occurring in the agreement - the finding of the authority that the relationship between the parties is not on principal to principal basis is clearly unreasonable. All the decisions were actually brought to the notice of the adjudicating authority. The adjudicating authority has chosen to disregard them on the ground that the revenue has filed appeal before the Supreme Court questioning some of the decisions. It is admitted that no interim order has been granted by the Supreme Court. It is well settled that merely because a matter is pending before the higher forum, such pendency will not take away the precedential value of the appealed decision. The adjudicating authority ought to have followed the Tribunal decisions which clearly support the stand of the petitioner. The aforesaid Tribunal decisions were binding on the authority. Petition allowed.

Issues Involved:
1. Maintainability of the writ petition.
2. Nature of the relationship between the petitioner and the manufacturers.
3. Applicability of Section 66E(e) of the Finance Act, 1994.
4. Adjudicating authority's reliance on certain clauses in the dealership agreement.
5. Precedential value of Tribunal decisions.

Detailed Analysis:

1. Maintainability of the Writ Petition:
The respondent argued that the writ petition is not maintainable as the petitioner has an alternative remedy of appeal. However, the petitioner cited a recent Division Bench judgment of the Madras High Court, which established that the Writ Court can interfere if there is "perversity" or "unreasonableness" in the authority's action. The petitioner contended that the case falls within these parameters, justifying the bypass of the appeal remedy.

2. Nature of the Relationship Between the Petitioner and the Manufacturers:
The petitioner claimed that their relationship with the manufacturers is on a principal-to-principal basis, meaning they purchase chassis from the manufacturers and resell them independently. The respondent, however, contested this, asserting that the relationship is not purely principal-to-principal. The adjudicating authority's findings were based on certain clauses in the dealership agreement, which indicated operational targets and performance goals, suggesting a service element.

3. Applicability of Section 66E(e) of the Finance Act, 1994:
The respondent argued that the petitioner's activities fall under Section 66E(e) of the Finance Act, which pertains to "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act." The petitioner countered this by referring to the Advance Ruling given by the Authority, which stated that volume discounts given at the discretion of the Media Owner do not constitute declared services under Section 66E(e). The court inclined towards this reasoning, concluding that the petitioner's case does not fall under Section 66E(e).

4. Adjudicating Authority's Reliance on Certain Clauses in the Dealership Agreement:
The court noted that the adjudicating authority emphasized certain clauses in the dealership agreement, which required the petitioner to maintain specific business standards. However, the petitioner argued that these clauses do not imply a service element, as no separate consideration is paid by the manufacturers for maintaining these standards. The court agreed, stating that the agreement should be read as a whole and not based on isolated clauses. The relationship was deemed to be one of seller and buyer on a principal-to-principal basis.

5. Precedential Value of Tribunal Decisions:
The petitioner cited several Tribunal decisions supporting their stance that trade discounts do not constitute commission and are not subject to service tax. The adjudicating authority disregarded these decisions, noting that appeals were pending before the Supreme Court. The court clarified that pending appeals do not diminish the precedential value of the Tribunal decisions. The adjudicating authority's failure to follow binding Tribunal decisions rendered the impugned order invalid and without jurisdiction.

Conclusion:
The court concluded that the adjudicating authority's findings were unreasonable and not based on a holistic reading of the dealership agreement. The impugned order was quashed, and the writ petition was allowed. No costs were awarded, and the connected miscellaneous petition was closed.

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