- Bookmark
- Share
- CaseIQ
Texyard International v. Commissioner of Central Excise, Trichy
Factual and Procedural Background
The appellants are manufacturers and exporters of textile made ups who engaged overseas commission agents to procure export orders, paying commission for these services. Show cause notices were issued demanding service tax under the reverse charge mechanism on these imported services classified as Business Auxiliary Services. The adjudicating authority confirmed the service tax demands and interest but waived penalties under Sections 76, 77, and 78. Both the assessees and the Revenue filed appeals before the Commissioner (Appeals). The appellants contested the service tax demand, while the Revenue appealed against the waiver of penalties. The Commissioner (Appeals) rejected both the assessees’ and Revenue’s appeals. The appeals were taken up together due to the common nature of the issues involved.
Legal Issues Presented
- Whether the appellant-assessees are eligible for exemption from service tax under Business Auxiliary Service pursuant to Notification No. 14/2004-S.T., dated 10-9-2004, for commission paid to overseas agents.
- Whether the appellant-assessees are liable to pay penalties under Sections 76, 77, and 78, as contended by the Revenue.
Arguments of the Parties
Appellant's Arguments
- The appellants are manufacturer-exporters whose entire production depends on confirmed overseas orders procured through overseas commission agents.
- The commission paid to overseas agents is an input service directly connected to textile processing and export activities.
- Notification No. 14/2004-S.T. exempts taxable services related to Business Auxiliary Services in industries including textile processing, which should apply to them.
- The Foreign Trade Policy (FTP) for 2004-09 exempts service tax on exported goods and services rendered abroad, reinforcing the exemption claim.
- The appellants are eligible for refund of service tax paid under Notification No. 41/2007-S.T. as amended by Notification No. 17/2008-S.T., since they can avail credit under reverse charge.
- The demand is barred by limitation as there was no suppression of facts or deliberate evasion; the issue is one of interpretation.
- Lower authorities correctly waived penalties under Sections 76, 77, and 78, supported by precedents such as Commissioner v. Advantage Media Consultant and Needle Industries (I) Pvt. Ltd. v. CCE, Salem.
Revenue's Arguments
- The service tax demand was rightly confirmed as the appellants are not covered under the exemption Notification No. 14/2004-S.T.
- The appellants are not eligible for waiver of penalty under Section 80 of the Finance Act, 1994, and the lower appellate authority erred in waiving penalties.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner v. Advantage Media Consultant (Tri.-Kolkata), affirmed by Hon. Supreme Court | Waiver of penalty under circumstances involving bona fide belief and absence of suppression | Relied upon by appellants to support waiver of penalty; court noted it as part of appellant’s submissions. |
| Needle Industries (I) Pvt. Ltd. v. CCE, Salem (Tri.-Chennai) | Waiver of penalty principles in cases lacking deliberate evasion | Relied upon by appellants to support penalty waiver; recognized by court as part of appellant’s argument. |
| UOI v. Indian National Shipowners Association (Supreme Court) | Clarification on service tax liability and bona fide belief impacting limitation and suppression | Referenced by appellants to argue absence of suppression and limitation applicability; court considered this context. |
| CCE v. Coca Cola India (Pvt.) Ltd. (Supreme Court) | Revenue neutrality principle when Modvat/Cenvat credit is available | Applied to affirm that any service tax payable under reverse charge is revenue-neutral due to credit/refund mechanisms. |
Court's Reasoning and Analysis
The court examined the nature of the appellants’ business and the services for which commission was paid. It was undisputed that the appellants are textile manufacturer-exporters who engaged overseas commission agents to procure export orders. The commission agency service falls within Business Auxiliary Services. The court scrutinized Notification No. 14/2004-S.T., which exempts taxable services related to Business Auxiliary Services when connected to agriculture, printing, textile processing, or education. The court interpreted "textile processing" in a broad sense to include activities of the textile industry as a whole, encompassing the appellants’ operations.
The commission paid to overseas agents was found to be an activity incidental or auxiliary to textile processing and production, thus falling within the exemption. The court also considered the Foreign Trade Policy provisions exempting services rendered abroad from service tax and noted the appellants’ bona fide belief in this exemption, supported by relevant Supreme Court decisions. The court acknowledged that the appellants could claim Cenvat credit or refund of any service tax paid, making any tax liability revenue-neutral.
Consequently, the service tax demand under reverse charge was set aside. Since the tax demand was negated, the court held that imposing penalties was unwarranted, leading to rejection of the Revenue’s appeal on penalties.
Holding and Implications
The appeals filed by the appellant-assessees are allowed, and the service tax demand under reverse charge on commission paid to overseas agents is set aside. The Revenue’s appeal against waiver of penalties is rejected, as penalties cannot be imposed when the tax demand itself is negated.
This decision directly affects the parties by relieving the appellants of the service tax liability and penalties in the instant cases. No new precedent has been established beyond the application of existing exemption notifications and principles relating to Business Auxiliary Services, limitation, and penalty waiver.
[Order per : R. Periasami, Member (T)]. - Both the assessee’s appeals and Revenue’s appeal are taken up together as the issue involved is common in nature.
2. The appellant-assessees are manufacturer of textile made ups and exporting the same. They availed the services of overseas commission agents for procurement of orders and paid commission. Show cause notices were issued to the assessees demanding service tax on the import of services under Business Auxiliary Services under reverse charge mechanism. The adjudicating authority confirmed the demands and interest and dropped penalties proposed under Sections 76, 77 & 78. Against this order, both assessee and Revenue filed appeals before Commissioner (Appeals). The appellant-assessee contended the service tax demand and the Revenue filed appeal against waiver of penalty. Commissioner (Appeals) rejected both assessees’ appeals and the Revenue’s appeal.
3. In respect of appellants, M/s. Texyard International (Appeal No. ST/220/2012), M/s. Sree Angalamman Exports (Appeal No. ST/230/2012) & M/s. Atlas Export Enterprises (Appeal No. ST/230/2012), the issues are identical wherein they filed appeals against the service tax demand. In the case of M/s. Kangaroo Impex, Revenue filed Appeal No. ST/235/2012 against waiver of penalty.
4. Heard both sides. Ld. advocate submits that all the three appellants are manufacturer-exporters and all their products are exported outside India. In order to procure orders, they have engaged overseas commission agents. Only after securing the confirmed orders from overseas buyers, they procure yarn, dyes/chemicals and other raw materials for the manufacture of textile made ups. The entire activity is predominantly known as textile processing. Since their entire activity is dependent upon export orders, without securing the confirmed overseas orders, they cannot undertake manufacture of Textile made ups as quantity, design and specification of export goods is to be met as per overseas buyers requirement. He further submits that overseas commission agent service have direct nexus with the manufacturing and textile processing of finished goods and the commission paid to the overseas buyers is an input service as they are engaged in the textile processing. During the material period, the Notification No. 14/2004-S.T., dated 10-9-2004 exempts taxable service provided to a client in relation to Business Auxiliary Service, Agriculture, Printing, Textile Processing Industry. The lower appellate authority had denied the exemption. As they are the textile manufacturer and exporters, the exemption under the above notification is not applicable to them. He further submits that as per Foreign Trade Policy Notifications for the Policy Period 2004-09, para 2.483 provides that all goods and services exported from India, the services received/rendered abroad shall be exempted from service tax. He submits that FTP policy at para 2.483 read with exemption Notification No. 14/2004, the government has consciously exempted service tax on Business Auxiliary Service during the relevant period on the impugned service availed. He further submits that the appellants are also eligible to get the refund under Notification No. 41/2007-S.T. as amended by Notification No. 17/2008-S.T. on the service tax paid on such service as they are eligible to avail the credit on the service tax paid under reverse charge. He also submits that the demand is also hit by limitation as there is no suppression of facts as it is only question of interpretation and they are regular exporters as well as the foreign exchange remittances are duly accounted in Profit & Loss Account. Therefore, extended period cannot be invoked. As regards Revenue’s appeal against waiver of penalty under Sections 76, 77 & 78, ld. advocate submits that both the lower authorities have rightly waived penalty. He relied on the following decisions :-
(1) Commissioner v. Advantage Media Consultant - (Tri.-Kolkata) [affirmed by Hon. Supreme Court in (S.C.)]
(2) Needle Industries (I) Pvt. Ltd. v. CCE, Salem - (Tri.-Chennai).
5. On the other hand, ld. AR reiterated the findings of the adjudicating authority wherein the demand was rightly confirmed. She submits that assessees are not covered under Exemption Notification No. 14/2004-S.T. On the Revenue’s appeal, she reiterated the grounds of appeal and submits that they are not eligible for waiver of penalty under Section 80 of Finance Act, 1994 and the lower appellate authority has erred in waiving penalties.
6.1 We have carefully considered the submissions of both sides and also examined the records. The assessees filed appeals contesting the service tax demanded under reverse charge on the commission paid to the overseas agents for export of finished goods. The Revenue filed appeal against setting aside of penalties by Commissioner (Appeals). The main issue in the present appeals is whether appellant-assessees are eligible to the benefit of exemption of service tax under Business Auxiliary Service under Notification No. 14/2004-S.T., dated 10-9-2004 and whether assessees are liable for penalty as contended by Revenue. Prima facie, we find that there is no dispute on the fact that the appellants are manufacturer-exporters and they manufacture textile made ups and export to overseas. They have engaged overseas agents and paid commission for procurement of export orders and the commission agency service is covered under the Business Auxiliary Service. The appellants claimed the exemption under Notification No. 14/2004-S.T., dated 10-9-2004 as applicable during the relevant period before appellate authority and he rejected their plea on the ground that the said exemption is applicable to the input services related to textile processing. The period involved in all these appeals relates to post 18-4-2006. It is relevant to reproduce the Notification No. 14/2004-S.T., dated 10-9-2004 as under :-
“Service tax exemption to specified services in relation to Business auxiliary service
In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts taxable service provided to a client by any person in relation to the business auxiliary service, insofar as it relates to, -
(a) procurement of goods or services, which are inputs for the client;
(b) production or processing of goods for, on behalf, of the client;
(c) provision of service on behalf of the client; or
(d) a service incidental or auxiliary to any activity specified in (a) to (c) above.
and provided in relation to agriculture, printing, textile processing or education, from the whole of service tax leviable thereon under section 66 of the said Finance Act.
6.2 The lower authorities denied the exemption merely on the ground that the said services are not used for textile processing. On careful reading of the above notification, it is evident that service tax was exempted during the relevant period for the services provided under Business Auxiliary Service if it relates to agriculture, printing, textile processing or education. The appellants are Textile manufacturer and exporters. The word “textile processing” referred in the notification is to be understood in a broader sense. The dictionary meaning of “textile processing” means sequence of operations or changes undergone and the definition of “textile” includes fabrics, fibre, yarn suitable for weaving into fabric. The exemption of service tax under BAS was allowed in relation to four industries namely agriculture, printing, textile processing and education. Therefore, the appellant being textile industry, it is covered under the category “textile processing” in the notification.
6.3 Commission paid to the overseas agents is in respect of service provided by that agent to the appellant to export its goods and thereby sales is promoted. That is an activity incidental or auxiliary to processing of textile goods and covered by Business Auxiliary Service and Clause (d) of the notification extracted above covers the case of the appellant bringing the export promotion activity abroad as incidental and auxiliary to the activity of production as is meant by Section 65(19) of Finance Act, 1994. Appellants are accordingly entitled to the benefit of exemption Notification No. 14/2004 and not liable to the payment of service tax under reverse charge.
7. It is also relevant to state that appellants being the exporter of textile made ups as per the Foreign Trade Policy are not expected to export the taxes. Appellants pleaded that there was no suppression of facts with deliberate intention to evade payment of service tax. As payment of service tax by the recipients was under dispute for a long period till that was settled by the decision of Apex Court in the case of UOI v. Indian National Shipowners Association - (S.C.) there was no deliberate intention to make suppression of facts. Appellants were under bona fide belief that as per the EXIM Policy at para 2.482 of the Policy Period 2009-10 issued by Notification No. 1/(RE/2008)/2004-2009 dated 11-4-2008 all goods and services exported from India, services received/rendered abroad wherever possible shall be exempted from service tax. Therefore, the demand is also hit by limitation and the extended period cannot be invoked.
8. It is further pertinent to mention that appellants are manufacturer-exporters. Service tax if any payable under reverse charge is permissible to be availed as Cenvat credit and that may be refundable under Notification No. 41/2007 unless otherwise deniable by law. The provision made in Central Excise Rules and Cenvat Credit Rules ensures that tax is not added to the cost of export so that Indian exporter can compete with overseas market. The Hon’ble Supreme Court in CCE v. Coca Cola India (Pvt.) Ltd. - dismissed Revenue’s appeal holding that when an assessee is eligible to Modvat credit, the situation becomes revenue-neutral. In the present case, service tax demanded entitles the appellants to the credit thereof and claim refund thereof under 41/2007 since it is stated by appellants that they have no other liability for which the exercise may become revenue-neutral.
9. Therefore, in view of the above discussions, the demand of service tax under reverse charge confirmed against the appellants is set aside. As regards Revenue’s appeal on imposition of penalty, since demand of tax itself is set aside, the question of imposing penalty does not arise. Revenue’s appeal is rejected accordingly and the Assessees’ appeals are allowed.
(Reasons of decision and operative part of the order pronounced in open Court on 31-12-2014)
Alert