A case of missed opportunities for Revenue, says Tribunal while setting aside Service tax demand of Rs 60 lakhs – Appellant is not an advertising agency but only receives commission on sales
By TIOL News Service
NEW DELHI, JAN 27, 2009: M/s Kandhari Beverages Pvt. Ltd. are manufacturers of Coca Cola and selling the same through a network of their dealers. They have entered into an agreement in May 1999 with M/s. Harmeet Kandhari Associates reportedly to ensure collection of sale proceeds from the dealers in Punjab, Haryana and Himachal Pradesh and for the said purpose, the latter was entitled to receive 2% of the sale proceeds realised by the manufacturer as commission.
They have also entered into agreement with M/s. HK Associates on 1.4.03 on similar lines in respect of dealers in Punjab and Haryana and the rate of commission was enhanced to 3% of the sale proceeds received by the manufacturer. M/s. HK Associates have received about Rs.9 crores during the period from May 1999 to September 2004.
An audit of M/s Kandhari Beverages Pvt. Ltd. was conducted and it was noticed that the amount of commission paid to M/s. H.K. Associates was recorded under the head 'advertisement and sale promotion expenses'. Initial statements of officials of the M/s Kandhari Beverages Pvt. Ltd. indicated that the said payments were towards advertisement undertaken by M/s. H.K. Associates on behalf of KBPL.
Armed with this input, two demand notices were issued in the October months of the year 2004 and 2005 proposing recovery of Service Tax under the category “Advertising Agency” and also imposition of penalties.
The demands were confirmed but penalties were not imposed by the adjudicating authority as proposed in the notices. So, Revenue is also in appeal before the Tribunal only to find that the assessee too is in appeal.
Incidentally, both the appeals were heard together.
This is what the appellant argued while seeking setting aside of the demand –
- The agreements were for the purpose of collecting promptly the sale proceeds from various dealers to whom KBPL sold the goods. The agreement specifically envisages that advertisement expenses are to be borne by KBPL. The payments made by KBPL were no doubt entered in their balance sheets under the head 'advertisement and sale promotion services' but the balance sheets contained 'notes' indicating that amounts paid to M/s. H.K. Associates are only commission on sales. These notes were specifically appended in the balance sheets, as per the requirement of the company law, as M/s. H.K. Associates, a partnership concern, has partners related to the Director of KBPL.
- Even though M/s. H.K. Associates are not required to incur any expenses on advertisement, they have on their own undertaken advertisement, in the form of wall painting through various advertising agencies/parties. For example, they have incurred a sum of Rs. 12,49,084/-during the year 1999-2000, out of nearly Rs.1.2 crores received as sales commission from KBPL. Similarly in other years about 10-26% of amounts received from KBPL have been spent towards advertisement expenses. M/s H.K. Associates incurred expenses on advertisement voluntarily for enhancing the sale by KBPL, as such increase in sale would result in increased payment of commission to M/s. H.K. Associates.
- The agreement and the balance sheet are contemporaneous documents. The initial statements of individuals which are contrary to these documents should be ignored.
- M/s. H.K. Associates have also received the above amount as commission and accounted the same as commission in their books of accounts and balance sheets. Merely because a portion of the sum was spent on advertisement by H.K. Associates, the entire amount of about Rs.9 crores received from KBPL cannot be treated as representing payment for rendering advertisement service. M/s. H.K. Associates have not rendered any service as advertising agency.
- The service of advertisement has actually been rendered only by the firms/ persons who undertake the painting /advertisement.
Revenue wanted to thrust their claim of logic and reasonableness and argued thus -
- The claim of the parties that 2-3% of sale proceeds were received merely for the purpose of collecting cheques from the dealers is not logical or reasonable.
- The amount paid to M/s. H.K. Associates have been recorded in the balance sheet of KBPL only under the advertisement and sale promotion expenses. Under these circumstances, no other meaning should be given to such transactions/expenses. The claim that it represents sale commission as per 'Notes' given in the balance sheets does not merit acceptance.
- Further, the Director of KBPL and the partner of the M/s. H.K. Associates are closely related. Therefore, the inference of the Commissioner that the agreement was ante-dated and the same is a colourable device adopted to evade service tax should be accepted.
The Tribunal after a careful consideration of the submissions made observed –
- The learned DR submits that the payment of commission at the rate of 2%/3% for the purpose of a simple assignment of collecting the cheques as claimed by them is very much the higher side. It was also pointed out by the learned DR that out of amounts paid to M/s. H.K. Associates, substantial amounts have been paid to the partners as salary and commission. However, these cannot lead to a conclusion that the payment is for a different purposes. To make such an allegation or to come to such a conclusion, investigation should have been conducted. We find that none of the dealers have been contacted by the investigating officers to find out whether the services as envisaged in the agreement were rendered by M/s. H.K. Associates or not and also whether any other services were rendered by them. This appears to be a case of missed opportunities.
- The issue to be decided is whether M/s. H.K. Associates have rendered the services of advertising agency to KBPL. It is not disputed that actual work of painting on the walls/advertisements were undertaken by various parties to whom M/s. H.K. Associates have paid the amount as mentioned earlier. No evidence have been relied upon to hold that M/s. H.K. Associates have conceived, designed, prepared the advertisements in question.
- The amounts paid to M/s. H.K. Associates have been accounted under the category of advertisement and sales promotion expenses by KBPL. A portion of the sum so received was spent on advertisement by H.K. Associates. These facts alone can not lead to an inference that M/s. H.K. Associates have rendered the services as advertising agency and the entire amount of about Rs.9 crores received from KBPL has to be treated as representing payment for rendering advertising services.
- We have also perused the notes given in the balance sheets of KBPL. For example, in the balance sheet for the year 1999-2000, a sum of Rs.4,88,23,638/- is accounted as advertisement and sales promotion expenses. In the schedule Q to the balance sheet relating to the head "other expenses", there is a 'note' which clarifies as under:-
"Commission on sales amounting to Rs.1,19,77,790.27 paid to M/s. Harmeet Kandhari & Associates, belonging to a relative of the directors of the company, has been clubbed with the Advertisement & Sales Promotion expenses."
- Similar clarifications appear in the balance sheets for the other years as well. Whether commission of sales could be treated as advertisement and sales promotion expenses is a debatable point. However, this is not an issue to be decided by us. It suffices to say that the terms of the agreement produced and the entries in the balance sheets of manufacturing company and those of M/s. H.K. Associates support the claim by the learned advocate for the parties. The balance sheet of M/s. H.K. Associates also mentions these amounts only as commission on sales.
So, the appeal of M/s H.K.Associates was allowed with consequential relief. As for the Revenue appeals seeking enhancement/imposition of penalties, there was no question of looking into the same as the alleged service tax demand itself was set aside. Consequently, Revenue appeals were rejected.
Advertise:
In paragraph 24 of the Instructions concerning Budget 2005-06 issued by TRU under letter F.No.B1/6/2005-TRU, dated : July 27, 2005 it is mentioned -
“24.4 Services provided by commission agents are specifically included within the scope of business auxiliary service. However, the term commission agent was not defined in the Finance Act, 1994. Definition of commission agent has been provided in Explanation (a) in section 65 (19) of the Finance Act.”
Following is the Explanation –
Explanation. — For the removal of doubts, it is hereby declared that for the purposes of this clause, —
“commission agent”(a) means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person —
(i) deals with goods or services or documents of title to such goods or services; or
(ii) collects payment of sale price of such goods or services; or
(iii) guarantees for collection or payment for such goods or services; or
(iv) undertakes any activities relating to such sale or purchase of such goods or services;
Incidentally, notification 13/2003-ST dated 20.06.2003 (w.e.f 01.07.03) that exempts the Business Auxiliary Services provided by a commission agent carried the following definition viz. “commission agent” means a person who causes sale or purchase of goods, on behalf of another person for a consideration which is based on the quantum of such sale or purchase. However, this definition was omitted by notification 19/2005-ST, dated 07.06.2005 (w.e.f 16.06.2005) when the Finance Act, 2005 saw the light of the day.
(See 2009-TIOL-163-CESTAT-DEL in 'Service Tax')
