TMI Blog2022 (2) TMI 955X X X X Extracts X X X X X X X X Extracts X X X X ..... d upon completion of the projects, a working report with utilization certificates and invoices were furnished by the appellant to the concerned Departments, which thereafter released the sanctioned amount to be paid to the vendors through the appellant. All the conditions of rule 5(2) of the Valuation Rules are satisfied, the appellant acted as a pure agent as a result of which the amount collected by the appellant from the State Government for payment to the vendors cannot be subjected to service tax - the amount received by the appellant from the State Government for payment to vendors is not a consideration for any service said to be rendered by the appellant to the State Government and, therefore, no service tax could be levied. This is for the reason that the amount which the appellant has received is not a consideration for provision of any service. The appellant was appointed merely as a Nodal Agency to supervise and monitor the overall execution of the projects. Infact, the amount paid by the State Government Department to the appellant are reimbursements which cannot be subjected to levy of service tax and in any view of the matter the appellant was acting as a pure agent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Commissioner against that part of the order dated 16.01.2017 by which the penalty against the appellant has been dropped for the reason that benefit of waiver of penalty was available to the appellant under section 80 of the Finance Act. 4. The appellant, which is a wholly owned undertaking of the Government of Rajasthan [the State Government ] , acts as a nodal agency in the implementation of various Information Technology related projects of the Department of Information Technology and Communication[Department of IT&C]in the State Government. 5. The process involved in execution of the projects has been explained by the appellant in the following manner: 6. The various public benefit schemes, for whose implementation the appellant had been appointed as a nodal agency, are predominantly oriented towards technological advancement of Departments. In the general scheme of events, as can be seen from the aforesaid chart, the concerned Department of the State Government, along with the Department of IT&C, prepare a report for a project. This report is given sanctity by the Apex Committee of the State Government, subsequent to which a project estimate is assigned. Considering the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant under section 80 of the Finance Act. This part of the order has been assailed by the Revenue in the third appeal. 12. Shri B.L. Narasimhan, learned counsel appearing for the appellant made the following submissions: i. The amount received from the State Government for payment to vendors is not towards any consideration and, therefore, not taxable. In terms of section 67(1) of the Finance Act, the value of any taxable service is the gross amount charged by the service provider from the service recipient 'for such service'. The phrase 'for such service' is required to be understood to mean that the consideration should necessarily have a direct nexus with the service. Thus, only such amount can be subjected to service tax which represents a consideration for provision of service. Any other amount, which is not a consideration for provision of service, cannot be subjected to service tax. In support of this contention reliance has been placed on the judgment of the Delhi High Court in Intercontinental Consultants & Technocrats Pvt. Ltd. vs. Union of India [2013 (29) S.T.R. 9 (Del) ], which has been affirmed by the Supreme Court in Union of India and another vs. Intercontine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opped on account of being revenue neutral; xi. Cum-tax computation should be extended; xii. The extended period of limitation could not have been invoked in the facts and circumstance of the case; and xiii. No penalty could have been imposed. 13. Dr. Neha Garg, learned authorized representative appearing for the department, however, supported the impugned order and made the following submissions: i. The appellant did not act as a pure agent since it did not fulfill all the conditions of rule 5(2) of the Valuation Rules; ii. The appellant is liable to pay service tax on the amount received as reimbursements for payment to vendors; iii. The services rendered to the State Government are taxable; iv. Service tax is leviable on liquidated damages; v. No documentary evidence has been provided by the appellant that may suggest that any amount has been returned to the State Government; vi. Revenue neutrality cannot be a ground for dropping the demand; vii. The invocation of the extended period of limitation is justified in the facts and circumstances of the case; and viii. Penalty cannot be waived as both the show cause notice and the order were issued after section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s amount. 17. The submission of the learned counsel for the appellant is that no service tax can be levied on the amount received for onward payment to the vendors and in this connection, reliance has been placed on section 67 of the Finance Act which deals with valuation of taxable services. The relevant portion of this section is reproduced below: "67. Valuation of taxable services for charging service tax (1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall,- (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;" (emphasis supplied) 18. It would be seen from the aforesaid section that the value of any taxable service is the gross amount which has been charged by the service provider from the service recipient for such service. What, therefore, flows is that the consideration should necessarily have a direct nexus with the service. In other words, only that amount can be subjected to service tax which represents consideration for provision of service. Any other amount, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered as the gross amount charged by the service provider "for such service" provided by him. Paragraph 18 of the judgment of the High Court is reproduced below: "18. Section 66 levies service tax at a particular rate on the value of taxable services. Section 67(1) makes the provisions of the section subject to the provisions of Chapter V, which includes Section 66. This is a clear mandate that the value of taxable services for charging service tax has to be in consonance with Section 66 which levies a tax only on the taxable service and nothing else. There is thus inbuilt mechanism to ensure that only the taxable service shall be evaluated under the provisions of 67. Clause (i) of sub- section (1) of Section 67 provides that the value of the taxable service shall be the gross amount charged by the service provider "for such service". Reading Section 66 and Section 67(1)(i) together and harmoniously, it seems clear to us that in the valuation of the taxable service, nothing more and nothing less than the consideration paid as quid pro quo for the service can be brought to charge." 20. The Supreme Court, in the appeal filed by the Union of India, noticed the various reimbursable c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning which is to be attached to Section 67 (unamended i.e. prior to 1-5-2006) or after its amendment, with effect from 1-5-2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasised that Rule 5 of the Rules went much beyond the mandate of Section 67. We, therefore, find that the High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable service shall be the gross amount charged by the service provider "for such service" and the valuation of tax service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service." 21. Reliance can also be placed on the decision of the Supreme Court in Bhayana Builders wherein it was held that the consideration should be for taxable services provided or to be provided and there should be a nexus between the consideration and the services provided. The relevant observations are as follows: "12. On a reading of the above definition, it is clear that both prior and after amendment, the value on which service tax is payable has to satisfy the following ingredients : a. Service tax is payable on the gross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e vendors performed their obligations stipulated in the contracts for execution of the projects and upon completion of the projects, a working report with utilization certificates and invoices were furnished by the appellant to the concerned Departments, which thereafter released the sanctioned amount to be paid to the vendors through the appellant. 23. It would, therefore, be seen that two independent activities were performed for which consideration was received. When the appellant supervised the project, the appellant received consideration towards the service charges for supervising the project. The vendors, on the other hand, received the project cost for the activity of execution of the project. The services rendered by the appellant were limited to the supervision and monitoring of the execution of the projects, in lieu of which it recovered service charges and service tax has been paid by the appellant on the consideration received for the service. In respect to the amount paid to the vendors towards the project cost, the appellant has not provided any service and, therefore, no service tax can be levied for the reason that in terms of section 67 of the Finance Act, the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... designed taking into consideration the strengths and limitation of DoL. The project focuses on computerization and automation of processes and services offered by DoL to citizens. c) ***** d) ***** ******* 3. Roles & Responsibilities of RISL a) To coordinate with all the stakeholders of the project viz. DoL, DoIT&C, NIC and Implementing Agency b) Review and approve the overall LDMS solution design, implementation approach and other technical reports as submitted by the implementing agency. c) To provide necessary technical support during requirement gathering, sharing of sample reports and other requisite IT infrastructure with DoL and implementing agency. d) To conduct periodic reviews and monitor the overall implementation progress of the LDMS project by the implementing agency. e) Provide feedback to the implementing agency on changes to be in the solution to improve usability of the application software. f) Report problems/bugs in solution to the implementing agency for immediate action/rectification. g) Provide the Data Centre/requisite infrastructure at RSDC for hosting the developed website and LDMS application software in consultation with DoIT&C, GoR. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for payments to the implementing agency including RISL service charges." 28. The appellant had submitted a statement of estimate of expenditure to the State Government regarding computerization and the same is reproduced below: "S.No. Details of Work/Description Amount (INR) 1. Operationalization expenses for the execution of Pilot project of DoL Govt. of Rajasthan by RISL 10,00,000.00 2. RISL approved Service Charges for Turnkey Projects including taxes on S. No. 1 1,12,360.00 Total (Rupees Eleven Lacs Twelve Thousand Three Hundred Sixty Only) 11,12,360.00 You are requested to kindly release the aforementioned amount at the earliest." 29. The appellant, thereafter, issued a notice inviting tender on 21.10.2012 and the relevant portion is reproduced below: "Notice Inviting Tender-NIT Tender Reference No: F4.2(63)/RISL/Tech/2012/7668 Dated: 21/12/2012 RajCOMP Info Service Limited (RISL), on behalf of Department of Labour (DoL.), Govt. of Rajasthan (GoR), invites electronic bids/proposals (e-Bids) from the eligible bidders for the selection of a System Integrator (SI)/Service Provider for the Pilot implementation of Labor Department Management System (LDMS) proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion paid by the service recipient (State Government) to the vendors. In this connection reference has been made to rule 5(2) of the Valuation Rules. The relevant portion of rule 5 is reproduce below: "Inclusion in or exclusion from value of certain expenditure or costs. 5.(1) Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service. Explanation.-For the removal of doubts, it is hereby clarified that for the value of the telecommunication service shall be the gross amount paid by the person to whom telecommunication service is actually provided. (2) Subject to the provisions of sub-rule (1), the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely:- (i) the service provider acts as a pure agent of the recipient of service when he makes payment to third party f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt made the payment to the vendors for goods and services procured for the State Government. (ii) The recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service. The services/ goods provided by the vendors were used by the State Government and its Departments for the projects being implemented by it. (iii) The recipient of service is liable to make payment to the third party; Departments of the State Government was liable to fund the projects, which is clear from the MOUs. (iv) The recipient of service authorises the service provider to make payment on this behalf; The appellant was authorised to pay the vendors on behalf of the State Government, which is evident from the MOUs, reports for estimation of project cost and utilization certificates. (v) The recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party; The State Government authorised the appellant to appoint vendors for execution of the projects. Payments were subject to verification of utilization certificates, along with correspon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agent of the client. Amounts paid to the third party by the service provider as a pure agent of his client can be treated as reimbursable expenditure and not includible in the taxable value." 40. In National Informatics Centre Service, a similar dispute arose before the Tribunal relating to the amount paid by the Government to the appellant therein for execution of projects. Several ministries of the Government of India had appointed the appellant for implementation of projects relating to computerization/networking. The appellant identified the vendors and negotiated with them. The payments made to the vendors were settled by the appellant in terms of the approvals given by the ministries. The appellant discharged service tax on the amount received by it towards 'administrative charges'. In connection with the taxability of the amount received by the appellant, including the amount paid to the vendors, the Tribunal observed that no service tax can be demanded on the amount received and/or the amount spent out of the amount received for the purpose of the project. The relevant portion of the decision of the Tribunal is reproduced below: "22. Having considered the rival cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el for the appellant for setting aside the demand of service tax. 43. The second demand which has been confirmed relates to the amount collected by the appellant from vendors on account of breach of agreement. This amount, which is called liquidated damages, has been held to be susceptible to service tax under section 66E(e) of the Finance Act by the Commissioner as an amount received for tolerating an act. According to the appellant, the liquidated damages recovered on account of breach or non-performance of a contract is not a consideration in lieu of any service. It is infact, in the nature of a deterrent so that such a breach is not repeated. 44. To examine this issue it would be useful to refer to the definition of "service" as defined under section 65B(44) of the Finance Act. "Service" has been defined to mean any activity carried out by a person for another for consideration, and includes a declared service. "Declared services" have been defined in section 66E of the Finance Act and sub-section(e) of section 66E of the Finance Act, which is involved in this appeal, is as follows: "66E. Declared services The following shall constitute declared services, n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that "consideration" includes any amount that is payable for the taxable services provided or to be provided. The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards toleration of the defaulting party. The expectation of the appellant is that the other party complies with the terms of the contract and a penalty is imposed only if there is non- compliance. 29. The situation would have been different if the party purchasing coal had an option to purchase coal from 'A' or from 'B' and if in such a situation 'A' and 'B' enter into an agreement that 'A' would not supply coal to the appellant provided 'B' paid some amount to it, then in such a case, it can be said that the activity may result in a deemed service contemplated under section 66E (e). 30. The activities, therefore, that are contemplate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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