By TIOL News Service

MUMBAI, JUNE 25, 2014: THE appellants are Public Sector undertakings and engaged in marketing of petroleum products.

They purchase Compressed Natural Gas (CNG) from Mahanagar Gas Limited (MGL) and, thereafter, sell the same to their dealers. When the gas is supplied to the vehicles, the product has to be maintained at a particular pressure. Since the gas reaches these sale outlets through pipeline, it is not in the compressed form and, therefore, the gas has to be compressed before it is actually sold. In the various retail outlets of the appellants, space is provided by appellants to MGL to install their machinery, equipment etc. for compression and MGL sells the gas to the appellants on payment of excise duty. Since compression of gas takes place at the retail outlets, these retail outlets are registered as premises for the purpose of excise duty in the name of MGL, who actually undertake the activity of compression and excise duty is discharged by MGL on the compressed gas sold at the retail outlets. There are agreements between MGL and the appellants for the distribution and sale of the gas.

The revenue is of the view that the services rendered by the appellants to M/s MGL are in relation to the marketing of the goods by M/s MGL and, therefore, it constitutes Business Auxiliary Services.

Accordingly, demand notices have been issued and confirmed by the Commissioner of Service Tax, Mumbai.

Against these orders, the appellants are before the CESTAT and submit as under -

+ The transaction involved in the present case is one of sale and not of service; the appellants purchased CNG from MGL and sold the same to their dealers (invoices showing payment of VAT/ST produced).

+ To constitute Business Auxiliary Service the service has to be rendered to another person for promotion/marketing of their products to a third party. In the present case, the goods are bought by the appellant themselves and, therefore, promotion or marketing of the goods to third party does not arise at all and hence demands under BAS are not sustainable.

+ Service tax demand has been confirmed on trade margins realized by the appellants on the sale of CNG. In fact the goods are sold on RSP fixed by MGL and the appellant has been allowed a margin ranging from Rs.0.90 to Rs.1.20 per kg. which is reflected as commission/trade margin in the invoice. Since invoices show commission, the department has wrongly presumed that the appellant has rendered a service. In fact, the so-called "commission" is nothing but trade margin available to the appellant for sale of the CNG. Therefore, the question of demanding service tax on this trade margin is not sustainable. Reliance is placed on the decision in Bhagyanagar Gas Ltd. = 2013-TIOL-241-CESTAT-BANG.

The Revenue representative submitted that the ST demand has been correctly raised under BAS since from the agreement it is clear that the appellants are required to provide certain services such as earmarking specified area; making available utilities such as water, power etc., operating the equipment with the support of competent staff, etc.; that these enable the supplier MGL to sell their goods and, therefore, it would amount to marketing or promotion of the goods of the client. It is also informed that MGL is also selling CNG through private parties who are paying service tax on the profit margin retained by them and, therefore, the demand is proper.

The Bench adverted to section 65(19) r/w section 65(105(zzb) of the FA, 1994 and observed -

++ In these cases, appellants themselves are buying goods from M/s MGL. Therefore, the question of rendering the service to the client for marketing of the goods does not arise.

++ MGL is discharging VAT/ST liability while selling the CNG to appellants. Moreover, the appellants are selling this CNG on payment of VAT/ST to the buyers. There is no commission component that has been received by the appellants from M/s MGL. All transactions are done on principal to principal basis.

++ Although RSP is fixed it does not mean that the profit margin shall be constituted as commission for rendering the services.

++ If the appellant is receiving goods from MGL at Rs.100/- per kg. including VAT and these goods are sold by the appellant to customers on RSP fixed at Rs.102/- per kg., that does not mean that the appellant are receiving commission of Rs.2/- from MGL. In fact, the appellant are also paying VAT on Rs.2/- also. It is also a fact that the appellants are not receiving any commission from M/s MGL.

++ The case law in the case of Bhagyanagar Gas Ltd. (supra) also supports the cases in hand, wherein this Tribunal held that mere mention in the agreement of the trade margin as commission on which VAT/ST has been paid would not evidence the fact of rendering service.

++ The contention of the AR that the private parties are paying service tax under the category of Business Auxiliary Service on the same activity, therefore, the appellants are required to pay service tax is not acceptable as in the case of private parties, the invoices on the customers were raised by M/s MGL directly and the private parties are receiving commission and there is no transaction on principal to principal basis.

Holding that the orders do not survive on merits, the same were set aside and the appeals were allowed with consequential relief.

(See 2014-TIOL-1114-CESTAT-MUM)