2015 (12) TMI 222 - AT - Service Tax

Demand of service tax - Management consultancy service - activity of running, operating and managing the entire hotel business - Bar of limitation - Penalty u/s 76 & 77 - Difference of opinion - As both Members have a difference of opinion, therefore, Registry is directed to place the file before the Hon ble President to refer the matter to the Third Member for deciding the following issues - a) Whether in the facts and circumstances of the case, the activity of running, operating and managing the entire hotel business of M/s. Taj Lands End Ltd., Bandra under a License Agreement , from the date of agreements up to completion of final purchase of the hotel, would be covered under Management Consultancy Service and service tax would be payable on the quantum of Gross Operation Profits earned/retained by the Appellants or not. b) Whether in the facts and circumstances of the case the demand is barred by limitation or not. c) Whether in the facts and circumstances of the case penalties under Section 76 & 77 of the Finance Act, 1994 are imposable on the appellant or not.

Summary

Issues Involved:
1. Classification under 'Management Consultancy Service'
2. Bar of limitation
3. Imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994

Issue-wise Detailed Analysis:

1. Classification under 'Management Consultancy Service':

The primary issue is whether the activities undertaken by the appellant (IHCL) fall under the category of 'Management Consultancy Service' as per the Finance Act, 1994. The appellant argued that their activities were part of the acquisition process of the 'Regent Hotel' and not a consultancy service. They contended that they were managing the hotel as their own business, issuing invoices in their name, and paying a license fee to LHL based on gross operating profits (GOP). The appellant's counsel cited various clauses from the agreements and relevant case laws to support their claim that the activities were not advisory but operational, thus not falling under 'Management Consultancy Service.'

On the other hand, the respondent argued that the appellant was managing the hotel on behalf of LHL and retained a share of the profits without bearing the losses, which aligns with the definition of 'Management Consultancy Service.' The respondent emphasized that the nature of the agreement and the services provided, such as formulating strategies and managing the hotel, clearly indicate consultancy services.

The judgment by one member concluded that the appellant's activities were part of the acquisition process and not consultancy services, citing the Basti Sugar Mills case as a precedent. However, the dissenting member held that the services rendered by the appellant, including operational and strategic management, fell within the scope of 'Management Consultancy Service' as defined in the Finance Act, 1994. The dissenting member also noted that the appellant was paying service tax for similar activities under other agreements, indicating inconsistency in their stance.

2. Bar of Limitation:

The appellant argued that the demand for service tax was barred by limitation, as the show-cause notice was issued after an extended period. They claimed that the acquisition of the hotel was publicly known and reported in various media, and there was no suppression of facts. The appellant also contended that the investigation started in March 2005, and all required details were provided by December 2005, but the show-cause notice was issued only in 2008.

The respondent countered that the appellant did not disclose the nature of their activities to the department, and the extended period for issuing the show-cause notice was justified due to the suppression of facts. The respondent highlighted that the appellant was aware of the service tax liability for similar activities under other agreements but did not declare the same for the agreement with LHL.

The judgment by one member sided with the appellant, stating that the show-cause notice was barred by limitation as the department was aware of the activities during the investigation. However, the dissenting member held that the extended period was justified due to the appellant's non-disclosure and suppression of facts, referencing the Mehta & Co. and Neminath Fabrics cases to support the invocation of the extended period.

3. Imposition of Penalties under Sections 76, 77, and 78:

The appellant argued against the imposition of penalties, citing a bona fide belief that service tax was not payable and the absence of mens rea. They referred to various case laws to support their claim that penalties should not be imposed in cases of interpretative issues and bona fide belief.

The respondent maintained that penalties were justified due to the appellant's failure to comply with service tax procedures and deliberate suppression of facts. The respondent emphasized that penalties under Sections 76 and 77 do not require mens rea, and the appellant's actions warranted penalties under these sections.

The judgment by one member agreed with the appellant, stating that penalties were not imposable due to the bona fide belief and interpretative nature of the issue. However, the dissenting member upheld the imposition of penalties under Sections 76 and 77, noting that these sections do not require mens rea. The dissenting member set aside the penalty under Section 78, considering the classification dispute.

Conclusion:

The judgment resulted in a difference of opinion between the members, leading to the matter being referred to a third member for a final decision on the following issues:
a) Whether the activities fall under 'Management Consultancy Service.'
b) Whether the demand is barred by limitation.
c) Whether penalties under Sections 76 and 77 are imposable.