2025 (1) TMI 314 - HC - Service Tax

Levy of service tax - expenses incurred by the petitioner as a pure agent for its customers - mandatory requirements of pre-consultation hearing / pre-notice consultation before the issuance of the Show Cause Notice complied with or not - violation of principles of natural justice - HELD THAT - Since the reply of the petitioner is in adequate and is bereft of factual details to explicate that the petitioner had indeed incurred expenses as pure agent on behalf of the customers / clients, the decision of the 2nd respondent in the Impugned Order-in-Original 16-21/2021 vide DIN No.20211059TK0000555CB8 dated 26.10.2021 will not warrant any interference. However, the fact remains that the petitioner is providing Clearing and Forwarding Services and that of a Goods Transport Agent (GTA) / Goods Transport Operator (GTO). Therefore, to balance the interest of the petitioner and the respondents and considering the fact that the disputes pertains to the period starting from April 2008 ending with 2017 i.e., 30.06.2017, this Court is inclined to quash the Impugned Order and remits the case back to the respondents to pass a fresh order on merits. However, the petitioner shall deposit a sum of Rs. 50,00,000/- to secure the interest of the revenue. Conclusion - The Impugned Order is quashed and the case remanded back, allowing the petitioner to address procedural and time-bar issues comprehensively. Petition disposed off by way of remand.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the expenses incurred by the petitioner as a "pure agent" for its customers are subject to service tax under the Finance Act, 1994.
Whether the procedural requirements, such as pre-consultation hearing before the issuance of Show Cause Notices, were adhered to.
Whether part of the demand is time-barred and thus unsustainable.
Whether the petitioner is entitled to the exclusion of certain expenses from the value of taxable services under Rule 5(2) of the Service Tax (Determination of Value) Rules, 2006.
Whether the Impugned Order is liable to be quashed and remitted for fresh consideration.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of Expenses as a Pure Agent

Relevant Legal Framework and Precedents: The Finance Act, 1994, and the Service Tax (Determination of Value) Rules, 2006, particularly Rule 5(2), which outlines conditions under which expenses incurred as a pure agent are excluded from taxable value. The Supreme Court's decision in Union of India and another Vs. Intercontinental Consultants and Technocrats Private Limited was cited, affirming that certain reimbursements are not taxable.
Court's Interpretation and Reasoning: The court found that the petitioner failed to provide adequate factual evidence to substantiate claims of acting as a pure agent. The decision of the second respondent in the Impugned Order was deemed not to warrant interference due to insufficient factual details from the petitioner.
Key Evidence and Findings: The petitioner's reply to the Show Cause Notices lacked specific factual details demonstrating the incurrence of expenses as a pure agent.
Application of Law to Facts: The court emphasized the necessity of fulfilling all conditions under Rule 5(2) to qualify for exclusion from taxable value.
Treatment of Competing Arguments: The petitioner's reliance on the Supreme Court's precedent was acknowledged, but the lack of factual substantiation weakened their position.
Conclusions: The court concluded that the petitioner must provide detailed evidence to support claims of being a pure agent, necessitating a remand for fresh consideration.

Issue 2: Procedural Requirements and Time-Barred Claims

Relevant Legal Framework and Precedents: The requirement for pre-consultation hearings is outlined in procedural guidelines, and the time-bar issue references the Supreme Court's decisions in Nizam Sugar Factory and Hyderabad Polymers Private Limited.
Court's Interpretation and Reasoning: The court acknowledged the petitioner's argument regarding procedural lapses but found it necessary to remand the case for a comprehensive review.
Key Evidence and Findings: The petitioner cited procedural lapses and time-barred claims but failed to substantiate these adequately.
Application of Law to Facts: The court recognized the potential merit in the petitioner's procedural arguments but required further factual substantiation.
Treatment of Competing Arguments: The respondents argued that procedural infractions did not occur and that the petitioner's claims lacked merit.
Conclusions: The court decided to quash the Impugned Order and remand the case, allowing the petitioner to address procedural and time-bar issues comprehensively.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "Since the reply of the petitioner is inadequate and is bereft of factual details to explicate that the petitioner had indeed incurred expenses as pure agent on behalf of the customers/clients, the decision of the 2nd respondent in the Impugned Order-in-Original...will not warrant any interference."
Core Principles Established: The necessity of detailed factual evidence to substantiate claims under Rule 5(2) and the importance of procedural compliance in tax assessments.
Final Determinations on Each Issue: The court quashed the Impugned Order and remitted the case for fresh adjudication, requiring the petitioner to deposit Rs. 50,00,000 as security for revenue interests. The petitioner was directed to file a consolidated reply with evidence supporting claims as a pure agent.

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