By TIOL News Service

AHMEDABAD, SEPT 05, 2014: APPELLANT is engaged in manufacture of fertilizers falling under Chapter 28/29 of Central Excise Tariff Act. They are also Service Tax payers and are also availing CENVAT.

The appellant had quoted in the tenders floated by Ministry of Chemicals & Fertilizers (MOCF) for receiving, bagging, standardization and distribution of imported urea in various states/ union territories during the year 2007-2008. Based upon the tender filed by the appellant, Govt. of India through MOCF awarded the contract to the appellant.

Department was of the view that the appellant is required to pay the Service Tax on the amount received by them from MOCF against handling charges of High Sea Sales imported urea on an understanding that the amount received by the appellant were reimbursement for providing taxable services by handling imported urea which involves handling of vessels, unloading, loading, unpacking and repacking of the cargo which tantamount to handling and distribution of urea.

SCN issued demanding ST for the period 2007-2008 to 2009-2010 (upto May 2010) and January 2012.

Adjudicating authority held that the activity of tendering for handling of imported fertilizers would amount to services rendered by the appellant would fall under the category of Cargo Handling Service or Business Auxiliary Service.

In the matter of the Stay application, the CESTAT had prima facie observed that the appellant has made out a case for unconditional waiver and accordingly waived the pre-deposit and granted a stay in the matter. We had reported this order as - 2014-TIOL-1228-CESTAT-AHM. The Bench had also accepted the oral prayer made by both sides for early hearing of the appeal as the amount involved was substantial.

The appeal was heard recently and after considering the marathon submissions made by both sides, the Tribunal held in favour of the appellant. Jotted below are the observations made by the Bench.

Tribunal's observations -

++ Urea is imported by Govt. of India and is being distributed at subsidized price to the farmers in order to further the policy of Govt. of India and also to meet the provisions of Food Control Act and Essential Commodities Act read with the fertilizer policy of Govt. of India. Govt. of India floats tender for unloading, bagging, standardization and distribution of this imported urea for which bid is made by various fertilizer marketing companies. It is undisputed that the Bill of Lading of goods imported are endorsed in the name of the appellant and the appellant herein files Bill of Entry as an importer and discharges the Customs duty as is assessed.

++ Random example of tender document evidences the following -

+ Govt. of India invited tenders for the distribution of imported bulk urea for the period 2007-2008 from the port of Mundra. Undoubtedly the said tender document indicates that Govt. of India is desirous of handling and distribution of imported bulk urea. Though, the wordings of the said tender indicate that Govt. of India wants to appoint a handling and distribution agent, it is found that actually entire transaction is of sale and purchase of urea from the documents like Letter Of Credit.

+ From the LOC which has been opened by the appellant, it is seen that they have paid an amount to Govt. of India for the purchase of 27,500 MTs of imported urea by MV KEE LUNG. The transaction of imported urea from MV KEE LUNG is a sale transaction for the appellant as is evident from the invoice raised by the Govt. of India, Ministry of Chemicals & Fertilizers.

+ From the invoice No.1 dt.11.08.2009, it is evident that Govt. of India has sold the prilled urea to the appellant at the total cost minus the freight and handing charges and collected the net amount by way of LOC. This entire transaction talks about the sale of prilled urea by Govt. of India to the appellant.

++ Subsequent to such transaction, the appellant unloaded the urea and after bagging and standardizing the same, cleared the said urea to various dealers for the purpose of distribution of the said urea.

++ It is seen from the reconciliation statement which is produced by the appellant in respect of the imports made by MV KEELUG, there is a shortage of 123 MTs after accounting for entire clearances made by them to various dealers in Gujarat and Maharashtra. This quantity of 123 MTs of imported urea has been accounted by the appellant as handling loss for which there is nothing on record to indicate that the Govt. of India has reimbursed them.

++ This would indicate that the transaction of unloading imported urea, bagging and distribution of the same by the appellant is nothing but sale and purchase transaction.If the argument of AR has to be accepted that the appellant was a handling agent, then the loss 123 MTs of imported urea as imported by MV KEE LUNG would be to the account of Govt. of India.

++ The adjudicating authority as well as the show cause notice has not brought on record any evidence to indicate that the losses that take place during the handling of imported urea is to the account of Govt. of India. If the losses are borne by the appellant, while unloading, bagging and distribution of imported urea, then we are unable to understand as how these activities and transactions can be considered as services rendered by the appellant to Govt. of India.

++ Another document which needs to be considered is the invoice raised by the appellant for the clearance of urea from their premises from which it can be seen that the appellant had cleared urea which is imported and bagged by them to the fertilizer dealer as their own product and has charged VAT which is applicable only when there are sale transactions. This document also proves that the appellant has been clearing the imported urea as own product and paying the Sales Tax on the said transaction. It is common knowledge that when there is a sale, there has to be purchase, as no sale can be effected unless there is a manufacturing activity or purchasing activity. In the case in hand, the appellant has been able to convince us that the imported goods i.e. prilled urea has been purchased by them from Govt. of India and after bagging and standardising and giving their own name to the said urea, sold the same in the market, would amount to nothing but a transaction of sale and purchase of urea.

++ On this factual matrix it has to be held that the activity of the appellant of unloading the fertilizers from the ship, standardizing, bagging and subsequently distributing the same cannot be construed as an activity of Cargo Handling services or Business Auxiliary Service.

++ Further, the activity performed by the appellant is nothing but a sovereign function of Govt. of India. If the appellant is performing a sovereign function, which has to be done by Govt. of India, it is not service rendered by the appellant to Govt. of India, is the law which has been laid down by the Tribunal in the case of C.S.S. Software Enterprises Ltd. -2008-TIOL-336-CESTAT-BANG, Bajrang Infotech Systems Pvt. Ltd. & CMC Ltd. The ratio in those cases can be extended to the case in hand and it has to be held that the appellant is not providing any services to the Govt. of India.

Activity analogous to a Ration shop

++ In yet another angle of entire issue, we find that the Counsel was correct in putting before us the correct and apt example of authorized ration shop, engaged in public distribution system of food grains. In the case of ration shop, the authorized ration shops purchases the food grains from the Govt. of India and stores in his godown. Subsequently, the said food grains are distributed to various ration card holders at a price predetermined by the Government. The authorized ration shops pays in advance to the Govt. of India for the food grains which is allotted for public distribution system. The authorized ration shops also engaged in a similar activity Govt. of India which though not identical can be equated to the activity undertaken by this appellant. In our considered view, the said activity cannot be considered as services as the authorized ration shop owners purchases the food grain before distributing the same to the ration card holders.

++ Though the tender documents indicates about the appointment of a handling agent, the invoices issued by Govt. of India for sale of imported prilled urea to the appellant and subsequent clearances made by the appellant to the consumers of fertilizers would also indicate that appointment of handling agent is misnomer, as entire transaction is of purchase and sale of imported urea.

++ Apex Court decision in the case of Bharat Sanchar Nigam Ltd -2006-TIOL-15-SC-CT-LB not applicable as the issue involved in this case is totally different.

Limitation: The extended period invoked by the Revenue in one of the show cause notice is also incorrect as the entire activity has been conducted by the appellant is on behalf of the Govt. of India and it cannot be said that one arm i.e. Revenue Department is not aware of an activity of another arm i.e. MOCF of Govt. of India.

Held: Order is unsustainable on merits as well as on limitation.

Appeal allowed.

(See 2014-TIOL-1686-CESTAT-AHM)