By TIOL News Service

MUMBAI, MAY 01, 2015: THE Commissioner(A) upheld the confirmation of service tax demand on the amount received towards cost of the packing materials as consideration for the services rendered by the appellant to M/s. Rajarambapu Patil Sahakari Sakhar Karkhana Ltd. (RBPSSKL), to whom they are providing the services as a sole selling agent and on the incentive received discharged service tax liability under 'Business Auxiliary Service'.

However, the lower appellate authority remanded the matter for re-computation of the tax liability by treating the consideration received as cum-tax and for the consequent revision in the penalties imposed.

Aggrieved, the appellant is before the CESTAT.

It is submitted that the appellant is working as a sole selling agent for RBPSSKL for the country liquor manufactured by the latter; that as per the agreement, the appellant receives incentives for sale of such liquor after crossing certain threshold limits @ Rs.5 per box on which they have discharged service tax liability; that the appellant is also procuring the raw materials for RBPSSKL on which VAT liability is discharged by them at the time of purchase of the raw materials and when it is subsequently sold to M/s. RBPSSKL; that on account of trading transaction undertaken, the appellant earns some profit.

The appellant further submitted that the case of the department is that, on the trading profit made, the appellant is liable to discharge service tax liability which has been quantified at Rs.8,26,701/-. It is their contention that the profit made in respect of the purchase and sale transactions of the raw materials is not a consideration received for the services rendered as a sole selling agent and, therefore, there cannot be any service tax liability on such profits.

Inasmuch as the demand is required to be set aside.

The AR submitted that as per the agreement entered into between the appellant and RBPSSKL, the appellant was required to procure raw materials and submit the same to the latter and the difference in the procurement and sale price is a consideration for the services rendered as a sole selling agent as both these transactions are undertaken as part of the same agreement and, therefore, the impugned order is sustainable in law.

The Bench observed -

++ The charge against the appellant is that the profit generated from the sale of packaging and raw materials was the earning of the service provider and, therefore, since the appellant is providing the services of sole selling agent, it forms part of the consideration for the services rendered. This charge is quite absurd.

++ Section 66 read with Section 67 of the Finance Act, 1994, as they stood at the relevant time, provided for charge of service tax on the gross amount charged for the services rendered in respect of a taxable service. It did not provide for charging of service tax on the gross profit involved in a sale and purchase transaction.

++ In the present case, it is seen that the appellant is undertaking two functions - one as a sole selling agent promoting the sale of the country liquor manufactured for which he receives incentives @ Rs.5/- per box on which service tax liability is discharged. The second transaction which the appellant undertakes is procuring raw materials and packing materials for the country liquor manufacturer on which he has discharged VAT liability; thereafter, he has sold these packing materials and raw materials to the country liquor manufacturer on a profit, again discharging VAT liability on the sale price.

++ The profit earned is in respect of a trading transaction in respect of packing materials and raw materials and has nothing to do with the activity of sole selling agent. In fact, these two transactions could have been performed by two separate entities.

++ Merely because one entity has performed both transactions, the distinct and different nature of the transactions does not get obliterated. Therefore, the profit earned in purchase/sale transactions cannot be subject to service tax in respect of a service rendered as a sole selling agent for the goods manufactured by the liquor manufacturer.

Holding that the demands are clearly unsustainable in law, the same were set aside and the appeal was allowed with consequential relief.

(See 2015-TIOL-777-CESTAT-MUM)