By TIOL News Service

MUMBAI, FEB 25, 2016: M/S Bhaven Desai contracted with M/s ABN Amro Bank to carry out activities relating to credit/debit cards and other products offered by the bank. As the 'direct sales team' of the bank operating in many cities, they were entrusted with the task of tele-calling, identifying potential customers, sourcing applications and forwarding the same to the bank for which it is claimed that Rs.40,000/- per month was paid as remuneration besides being reimbursed for certain expenses incurred by them.

According to the department, M/s Baven Desai renders taxable service of 'Business Auxiliary service' to M/s ABN Amro Bank and the 'reimbursable expenses' cannot be excluded from computation of taxable value.

During investigation of the designated bank account in which M/s ABN Amro Bank had been depositing payments in accordance with the contract, M/s Baven Desai was found to be in receipt of Rs.2,12,79,930/-. Admittedly, they could furnish expense vouchers amounting to Rs.1,49,47,365.58 and service tax liability on the remaining Rs.52,96,730/-, being Rs.5,46,266/-, was paid on 27th June 2006 along with interest of Rs.1,40,470/-. They claimed to have discharged service tax on the fixed monthly remuneration which, according to them, is the consideration for service rendered.

The original authority confirmed demand of tax of Rs.18,46,791/- and interest thereon besides imposing penalties. Incidentally, the appellant assessee had already paid Rs.13,61,914/- towards tax and Rs.1,41,356/- as interest during the pendency of investigation and adjudication.

The Commissioner (A) extended the benefit of 'cum-tax' valuation and also dropped the penalty imposed u/s 76 of FA, 1994. He, however, held the assessee liable to service tax of Rs.18,20,271/- as provider of 'business auxiliary service' for the period between April 2004 and October 2004 along with interest besides upholding penalty u/s 78 of FA, 1994. On the claim of "reimbursable expenses", the lower appellate authority held that 'gross amount charged' in section 67 of FA, 1994 precluded acceptance of claim for abatement of reimbursements in computation of the total costs involved in providing the taxable service. The plea for non-inclusion of expenses of personnel and administration as well as infrastructure costs from taxable value was also not found to be acceptable. The further claim made that the activity is taxable as provider of 'support services of business or commerce' from 1st May 2006, for exclusion of Rs.25,07,600/- representing personal loans and for extension of benefit of exemption notification no. 13/2003-ST dated 20th June 2003 and notification no. 14/2004-ST dated 10th September 2004 were not accepted by the Commissioner (A).

The appellant, 'channel associates' of M/s ABN Amro Bank, are in appeal before the CESTAT. The Revenue is also before the CESTAT against the dropped penalty and the grant of cum-tax benefits.

It is submitted that the adjudication proceeding was vitiated by lack of jurisdiction as their services are rendered at different places in the country; that the adjudicating authority arrogated the notice issued by the Joint Commissioner without corrigendum of the show cause notice; that the demand is barred by limitation; that the service rendered by them is taxable as 'support service of business or commerce' and that expenses incurred on account of their principal should not be taxed under FA, 1994. Reliance is also placed on the decisions in Wings Group of Companies - 2008-TIOL-2166-CESTAT-BANG & SR Kalyanakrishnan - 2007-TIOL-1914-CESTAT-BANG to contend that the activities contracted are taxable as Business Support Services from May 2006 and not BAS.

The AR justified the charges leveled and confirmed against the appellant assessee and also reiterated the grounds of appeal made against the unfavourable portion of the order of the lower appellate authority.

The Bench observed that the jurisdiction issue has been discussed at length by the lower authorities and no fresh material had been furnished by the appellant so as to overrule the stand taken in the order.

As for the merits of the case, the CESTAT, observed thus -

++ Perusal of the respective descriptions of the two services in section 65(19) of Finance Act 1994, liable to tax under section 65(105)(zzb), and section 65 (104c) of Finance Act, 1994 liable to tax under section 65(105)(zzzq), makes it abundantly clear that legislation has deliberately acknowledged the dichotomy in the practices of outsourcing by business entities. From the viewpoint of the recipient, 'business auxiliary service' is the outsourcing in relation to externality of the business entity while 'support services of business or commerce' is the outsourcing of the internal activities of the business entity. We do not need to concern ourselves with 'support services of business or commerce' as that was rendered taxable only from 1st May 2006 long after the period in dispute in the present appeal.

++ We notice that the assessee was in the business of making potential customers of M/s ABN Amro aware of the various financial products offered by the bank. This included calling up individuals, obtaining application forms and furnishing them to the bank. M/s Baven Desai, admittedly, goes beyond a restricted range of activities and is in effect a 'front office' of M/s ABN Amro Bank. Hence, the decisions cited on behalf of the assessee do not support its claim of exclusion from taxability as provider of 'business auxiliary service' for which a consideration is received.

On the valuation issue, the Bench observed -

++ Though section 67 of Finance Act, 1994 mandates tax payment on 'gross amount charged by service provider', tax cannot be determined on the total receipts owing to the qualification 'for such service rendered by him' therein. Therefore, the routine application of tax rate on the entire payment received from a recipient of service is not envisaged or authorized by law. Tax collection is sanctified only to the extent of identifying the value of the service rendered. The claim of an assessee that a specific amount is the value of the service rendered is questionable only when Revenue can establish that there are elements in the receipts which require inclusion in the charge for the service rendered. Such an exercise is not perceptible in the proceedings before the lower authorities.

++ No effort appears to have been taken to ascertain if these expenses are attributable to services rendered and if the services to which these can be attributed are taxable. The chargeability of certain amounts received being attributable to a particular taxable service cannot be presumed to confer authority to tax other amounts received from the same entity for services unknown. That would not be a tax on services but a tax on receipts which is not the legislative intent or objective of taxing services.

++ To ascertain the quid pro quo for the consideration, facts and circumstances of the transaction must be comprehended. The client M/s ABN Amro Bank, offers financial products for a customer base spread across the country. The provenance of such products should visibly be linked to the financial institution; that is, and has been, the peculiarity of the banking sector since it first came into being. M/s Baven Desai, notwithstanding its credibility within its circle, cannot pretend to provide institutional credibility to its client in relation to the financial products of the latter.

++ We notice that the bulk of the expenses have been incurred on salaries, telephones, office space and advertisements, all of which may be considered to be essential to bringing the banking institution to the doorstep of the customer and is, thereby, inextricably enmeshed with the financial product offered by the bank. The costs claimed to be reimbursibles are, therefore, not attributable to the 'business auxiliary service' rendered by the assessee but to the cost of the product itself. Not surprisingly, the bank reimburses these expenses. Therefore, these fall outside the scope of inclusion within the meaning of 'gross amount charged' in section 67 of Finance Act, 1994 in the context of the identified taxable service.

++ The assessee's claim of reimbursable expenses having been evidenced except for Rs.52,96,730/- and the tax having been paid on the un-evidenced portion of receipts, further demand of tax envisaged in the show cause notice fails to survive. There is no justification for having continued with the adjudication after the tax liability had been discharged.

Holding that the departmental appeal is devoid of merit, the same was dismissed.

The appeal of assessee was allowed by setting aside the demand of tax on the reimbursed expenses and also the penalty imposed u/s 78 of FA, 1994.

(See 2016-TIOL-508-CESTAT-MUM)