1. This appeal is against an order passed by the Commissioner of Service Tax in adjudication of show-cause notice dated 16.11.2005 issued by the Additional Director-General of Central Excise Intelligence, Chennai Zonal Unit covering the period July 2003 to November 2004. In the impugned order, the Commissioner demanded service tax of over Rs. 1.68 crores together with education cess of Rs. 62,080/- for the aforesaid period from the appellants under the proviso to Section 73 (1) of the Finance Act 1994, also demanded interest on the service tax amount under Section 75 of the Act and imposed penalties under Sections 76 & 78 of the Act.
2. The appellants have raised a jurisdictional objection. It is submitted that the SCN was issued by the Addl. Director-General of Central Excise Intelligence without jurisdiction. This submission is based on (a) that "Central Excise Officer" was substituted for "Asst.
Commissioner of Central Excise or Dy. Commissioner of Central Excise" in Section 73 of the Finance Act 1994 only w.e.f. 13.5.2005 (under the Finance Act, 2005) and (b) that, during the period of dispute (July'03 to Nov'04), only the Asst. Commissioner or Dy. Commissioner of Central Excise had jurisdiction to issue SCN.3. After hearing both sides, we have overruled the objection raised by the appellants inasmuch as, on the date on which the SCN was issued, the Central Excise Officer duly authorized for the purpose had jurisdiction to issue the SCN and the Addl. Director-General of Central Excise Intelligence, specified as "Commissioner of Central Excise' in the Table annexed to Notification No. 38/2001-CE (NT) dt. 26.6.2001 as amended by Notification No. 37/2004-CE dt. 5.11.2004 read with Section 2(b) of the Central Excise Act, was empowered to issue such notice.
4. The demand of service tax is on "Overriding Commission" (ORC, for short) received by the appellants in Indian currency from Malaysian Airlines during the period of dispute under an Agreement dated 2.11.2000. M/s. Malaysian Airlines System Berhad (Malaysian Airlines, for short) had appointed the appellants as "General Sales Agent" (GSA, for short) for India. The duties of GSA were as laid down under Article 5 of the Agreement. The services rendered, in discharge of such duties, by the appellants to Malaysian Airlines fell in the category of "Business Auxiliary Service", which had become exigible to service tax w.e.f. 1.7.2003. The appellants had not paid such tax on ORC received from Malaysian Airlines in terms of Article 9 of the Agreement during the period of dispute. From the documents recovered by officers of DGCEI from the appellants, it appeared that Malaysian Airlines had been making ORC payments to the appellants in India by issuing credit notes in their favour separately for domestic and international passenger traffic sales to promote and market the airlines passenger traffic sales in India. The ORC was worked out on a monthly basis and credit notes issued accordingly. The credit notes mentioned the amounts in terms of Indian rupee and such amounts were credited to the appellants' bank account. The correspondence between the appellants and Malaysian Airlines and between the airlines' offices in India and Malaysia, recovered by the investigating agency, indicated that both the parties were aware of leviability of service tax on ORC in the category of "Business Auxiliary Service" w.e.f. 1.7.2003. They were found to be even aware of the legal position that, where ORC payment was in convertible foreign exchange, exemption from payment of service tax on such amount was available under Notification No. 21/2003-ST dt.
20.11.2003. The appellants were also found to have had the apprehension that the question whether the funds received by them into their current account in India from Malaysian Airlines would represent 'convertible foreign exchange' would have to be tested in courts. In his statement dt. 10.2.2005 recorded by DGCEI, Shri S. Krishnan, Accounts Manager of the appellants, admitted the above facts. He stated that it was the duty of the appellants as GSA of Malaysian Airlines to facilitate and promote expansion of the airlines' services in India as also to achieve their sales target in the time frame fixed by them. He submitted that ORC was being paid to the appellants by Malaysian Airlines for the tickets sold by IATA agencies for the services provided to IATA for and on behalf of the airlines. He submitted that the ORC was @ 6% on ticket fare. Shri Krishnan also informed that all the branches of the appellants (including the one at Chennai) had registered themselves with the respective Commissionerates as 'air travel agents' and that they had been paying service tax on air travel agents' service.
However, he admitted, the appellants had not paid any service tax on ORC received from Malaysian Airlines. He also admitted that the appellants had not received any inward remittances in any foreign currency from Malaysian Airlines. In his further statement dt.
29.9.2005, Shri Krishnan stated that, consequent on initiation of action by DGCEI, the appellants had since obtained registration with the department in the category of "Business Auxiliary Service" and that, from April'05 onwards, they had been paying service tax on ORC received from Malaysian Airlines. Shri Krishnan also furnished particulars of payments of ORCs received by the appellants from the airlines during the period of dispute. Statements were also recorded by the investigating agency from Shri T.V. Dorairaj, Executive Director of the appellants and Shri S. Ravi Ganapathy, Accounts Manager (India), Malaysian Airlines. It was on the basis of the results of these investigations that the subject SCN was issued to the appellants treating the GSA's services to the airlines as "Business Auxiliary Services" under Section 65(19) of the Finance Act 1994 and demanding service tax on the ORC received by them in Indian currency from the airlines during the period of dispute. The SCN was contested on numerous grounds, but none was accepted by the adjudicating authority.
Hence the impugned order.
5. In the present appeal, the appellants have challenged the demand of service tax both on merits and on limitation.
6. The appellants have claimed that what they had done during the said period was an export of service and, therefore, they had no liability to pay service tax thereon by virtue of the Board's Circular No.56/5/2003 dt. 25.4.2003. According to the appellants, as the service in question had been rendered by them for a foreign client under an Agreement executed abroad and as the commission was calculated on the basis of the actual-flown-revenue, the transaction involved 'export of service' and the same was not taxable. For the period from 20.11.2003 to Nov'04, they have claimed the benefit of Notification No. 21/2003-ST dt. 20.11.2003, which exempted taxable services, in respect of which payment was received in India in convertible foreign exchange, from payment of service tax. In this connection, the appellants have claimed that, in the light of the apex court's judgment in J.P. Boda and Co.
Pvt. Ltd. v. CBDT , the commission received by them in Indian currency from their foreign client should be deemed to be a receipt in convertible foreign exchange. The appellants have also relied on the Tribunal's decision in PSA Sical Terminals Ltd. v.Commissioner in support of their contention that the receipt of ORC in Indian currency from Malaysian Airlines should be deemed to be an earning in foreign exchange.
7. It has also been contended that none of the ingredients under Section 73(1)(a) of the Finance Act 1994 for invoking the extended period of limitation had been established by the department for demanding service tax for the period July 2003 to November 2004 from the appellants by way of SCN dt. 16.11.2005. In this connection, the appellants' counsel has relied on the Supreme Court's judgment in Collector v. EMM Ltd. and a few other decisions of the apex court.
8. Ld. SDR has reiterated the findings of the Commissioner. She has particularly pointed out that the entire service in question had been rendered in India only and there was no export of service. Therefore, the Board's circular cited by the appellants was not applicable. ORC was received in Indian currency by the appellants during the period of dispute and, therefore, the benefit of Notification No. 21/2003-ST relied on by the appellants would not be applicable to them. The Notification required to be given strict interpretation. The apex court's judgment in J.B. Boda case (supra) under the Income Tax Act was not applicable to the instant case. Ld. SDR, further, pointed out that, from Feb'05 onwards, the appellants had been paying service tax on ORC received in the same manner from their foreign client in respect of the same service without claiming the benefit of the above Notification and, therefore, their claim for the benefit of the Notification for the period of dispute is without bonafides. On the strength of the relevant facts alleged in the SCN and found by the adjudicating authority, ld.SDR has contested the appellants' plea of limitation also.
9.1. We have given careful consideration to the submissions. The appellants have no case that the service rendered by them to Malaysian Airlines during July'03 to Nov'04 was not a "Business Auxiliary Service" as defined under Section 65 of the Finance Act, 1994. Their case, however, is that it was an export of service which was not taxable for the period upto 19.11.2003 by virtue of the Board's circular dt. 25.4.2003 ibid.
9.2. The plea of export of service cannot be accepted on the facts of this case. The services rendered by the appellants to Malaysian Airlines were rendered in terms of Article 5 (DUTIES OF GENERAL SALES AGENT) of the AGREEMENT dated 2.11.2000 and all such duties were performed within India. Article 5 of the Agreement is reproduced below: THE DUTIES of the GENERAL SALES AGENT as GENERAL SALES AGENT OF MAS shall comprise of: (i) Facilitating and promoting the expansion of MAS services in the area operated by the GENERAL SALES AGENT in terms of, including but not limited to, acquiring traffic rights, overflight clearance, lobbying and networking with the appropriate governmental bodies or agencies including the airport, customs, immigration and civil aviation authorities for any rights, waiver or exemptions relating to MAS services and operation in the area where the GENERAL SALES AGENT is appointed. Such efforts shall be on a continuous endeavour basis on the part of the GENERAL SALES AGENT. (ii) Achievement of sales target in any given time frame assigned by MAS. Any repetitive failure to meet the sales target shall be cause for termination.
(iii) To provide sales and marketing reports, business plans and other relevant reports as and when directed by MAS. (iv) Efforts in the area to obtain traffic for the services of MAS, such efforts to include: (a) Provision of and efficient operation of suitable Enquiry, Sales Reservations and Ticketing Offices readily identifiable as MAS offices (in accordance with MAS requirements) adequately equipped for the sales of transportation for passengers at no expense to MAS. Such offices shall be located at a prime and prominent location in a commercial or business district. The basic lay out and design of the Enquiry, Sales Reservations and Ticketing Offices shall adhere to the standard lay out and design of such offices as determined by MAS Property Department. The office, staff and equipment shall be dedicated to MAS. Under no circumstances shall the office be used to represent any other organization besides MAS. (b) Sales promotion including the development of specific markets for transportation by personal and regular contact with actual and prospective passengers and with commercial houses and Sales Agents.
(d) Prominent display of MAS advertising publicity and display material in windows and interiors of all the GENERAL SALES AGENT'S offices in the area and such advertising publicity and display material are to be based on MAS standards.
(e) To notify the GENERAL SALES AGENT'S reservations and ticketing staff and to Sales Agents in the area, instructions, special advices and sales points sent to the GENERAL SALES AGENT by MAS. (v) Hiring adequate and suitably qualified personnel for various positions in the areas of reservations, ticketing, sales, accounts, administration and so forth. Unless otherwise stated, MAS approval must be obtained prior to hiring of staff. The number of staff hired aimed at providing efficient customer service and coverage of sales territory must be agreed upon by MAS. (vi) To open sales offices to service the market within the territory within a stipulated time frame as may be directed by MAS to the GENERAL SALES AGENT from time to time.
(vii) Issue in accordance with this Agreement hereof Passenger Tickets, Miscellaneous Charges Orders or any other appropriate documents in connection with all sales made on behalf of MAS. (viii) Advice to passengers concerning passport, health, currency, immigration and other regulations in force in countries to and through which they are to travel and ensuring that such regulations are observed by all such passengers.
(ix) The GENERAL SALES AGENT will not appoint any Sales Agent who is not duly approved by IATA and/or unrecognized by the local travel and trade authorities or associations. Approval from MAS must be obtained prior to appointing a sales agent.
(x) Supervision of Sales Agents appointed by the GENERAL SALES AGENT in the area and distribution to such agents of publicity matters as provided by MAS and ensuring that display facilities are being provided to them.
(xi) To ensure all Sales Agent deliver to MAS the Form of Undertaking as attached in Annex 2 within 14 days of their appointment.
(xiii) To assist and facilitate MAS and its staff in all manner for any functions such as business events, seminars, familiarization trips and duty travel including, but not limited to, in getting the best deal and rate for hotel accommodation, halel catering, transportation and governmental networking.
(xiv) To make payments for and on behalf of MAS, including, but not limited to, aircraft fuel, overflight charges, ground handling charges and other airport related charges as approved by MAS. (xv) To provide additional or other services as may be indicated, specified, detailed or outlined by MAS in any Service Level Agreement that will be appended or annexed to this Agreement or as may be reflected in MAS manuals.
The appellants received passenger sales commission from the airlines on the passenger ticket sales made by them from their own office in India at the rates specified in the Agreement vide Article 9(i) of the Agreement. On this sales commission, the appellants paid service tax.
They also received passenger overriding commission (ORC) from the airlines vide Article 9(ii) of the Agreement @ 6% on net-flown-revenue on international sector and @ 2.5% on net-flown-revenue on sector within Malaysia, between Malaysia and Singapore or between Malaysia and Brunei. The present demand of service tax is on this commission.
Admittedly, like passenger sales commission, Overriding Commission was also paid by the airlines to the appellants as a percentage of the fares collected from passengers at the time of sale of the airlines' flight tickets to them in India. The appellants received this commission in Indian currency into their (ABN Amro) bank account from "QA22" account (in the same bank) of the airlines. This "QA22" account was operated by the Chennai office of Malaysian Airlines. These facts were admitted by the airlines' functionaries in India as also by the appellants' officials in their statements, and confirmed by the Authorised Signatory of ABN Amro Bank in a letter to the Department. On such facts, it can only be held that the services provided by the appellants were received by their client in India, for which remuneration in Indian currency was paid by the latter.
9.3. Ld. counsel has relied on the definition of "export" under Section 2(1) of the Foreign Exchange Management Act. This definition reads thus: "Export with its grammatical variations and cognate expressions, means - (i) the taking out of India to a place outside India any goods (ii) provision of services from India to any person outside India." Relying on this definition, ld. counsel argued that the services rendered by the appellants to Malaysian Airlines with their Registered Office at Kuala Lumpur (Malaysia) should be held to have been exported out of India. We have already noted that Malaysian Airlines were receiving services from, and paying remuneration (ORC) to, the appellants through their office in India. We also find that the Agreement dated 2.11.2000 authorised the airlines' offices in India to issue instructions/directions to the appellants concerning the services to be provided by the appellants to the airlines and the appellants were bound to comply with such instructions/directions vide Article 12 of the Agreement, reproduced below: The GENERAL SALES AGENT shall at all times observe and comply with all directions and instructions given to it by MAS whether such directions and instructions to come from either the MAS office in the same territory of the GENERAL SALES AGENT, the MAS regional office or from the Head Office of MAS in Kuala Lumpur, Malaysia concerning the services to be provided under the terms hereof and shall ensure that all its staff concerned shall be at all times familiar with all such directions and instructions as amended from time to time. In the absence of specific instructions concerning a particular aspect of the services to be provided the GENERAL SALES AGENT shall consult MAS for further direction(s).
The Agreement even made it obligatory for the appellants to ensure that their Enquiry/Sales/Reservations/Ticketing offices in India were of such layout and design as determined by Malaysian Airlines so as to be "readily identifiable as offices of Malaysian Airlines" vide Article 5(iv) of the Agreement. In this scenario, it cannot be gainsaid that the appellants were providing services to Malaysian Airlines in India.
Since no 'export of service' was involved in the transaction between the appellants and Malaysian Airlines, the Board's circular dt.
25.4.2007 is not applicable to the case.
9.4. For the period from 20.11.2003, counsel relied on Notification No.21/2003-ST. This Notification reads as under: In exercise of the powers conferred by Section 93 of the Finance Act, 1994 (32 of 1994), the Central Government, being satisfied that it is necessary in the pubic interest so to do, hereby exempts the taxable services specified in Sub-section (105) of Section 65 of the said Act, provided to any person in respect of which payment is received in India in convertible foreign exchange from the whole of the service tax leviable thereon under Section 66 of the said Act.
Provided that nothing contained in his notification shall apply when the payment received in India in convertible foreign exchange for taxable services rendered is repatriated from, or sent outside, India.
For the benefit of the above Notification, ld. counsel argued that the payments of ORC received by the appellants from Malaysian Airlines should be deemed to be receipts in convertible foreign exchange in terms of the apex court's decision in J.B. Boda case (supra). The question considered by the apex court in the said case was whether the reinsurance brokerage determined in foreign exchange and retained by the assessee would amount to income received in convertible foreign exchange in India for purposes of Section 80-O of the Income Tax Act.
Explanation (i) to Section 80-O of the Income Tax Act defined the term "convertible foreign exchange" as meaning "foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for purposes of the law for the time being in force for regulating payments and dealings in foreign exchange". After noting that the assessee had made remittance in US dollars all the reinsurance premium abroad after deducting their brokerage (expressed in foreign exchange) after obtaining permission from RBI, the apex court, having regard to the above Explanation (i), held that such brokerage, determined in foreign exchange, could be considered to be income received in convertible foreign exchange in India and, accordingly, deduction under Section 80-O of the Income Tax Act could be claimed by the assessee in computing their total income. This decision of the apex court on the facts of J.B. Boda case falling under the Income Tax Act cannot be made applicable to the present case wherein the question under consideration is whether ORC received by the appellants from Malaysian Airlines during the period of dispute was a "payment received in India in convertible foreign exchange" within the meaning of this expression used in Notification No. 21/2003-ST dt. 20.11.2003 issued under Section 93 of the Finance Act, 1994. In the case of PSA Sical Terminals (supra) relied on by ld. counsel, the Tribunal was interpreting the term "free foreign exchange" and it was held that the clarification given by RBI to the said expression was binding on the Customs authorities. This decision also would not advance the appellants' case. The appellants received the commission from the airlines by way of credit notes, which expressed the amounts in Indian rupee. These credit notes were produced at ABN Amro Bank. The bank credited the amounts in Indian rupee into the appellants' account out of 'QA22' account of Malaysian Airlines, a fact confirmed by the bankers themselves. Such receipts, by the appellants from the airlines, of amounts, no part of which was received by the appellants from the airlines by way of inward remittance in convertible foreign exchange, would not come within the scope of the above expression used in Notification No. 21/2003-ST ibid. It is settled law that the provisions of an exemption Notification require to be strictly construed.
10. We have also considered the plea of limitation raised by the appellants. The SCN demanding service tax from the appellants for the period July'03 to Nov'04 was issued under Section 73 (1) of the Finance Act, 1994 on 16.11.2005. The notice invoked the extended period of limitation for demanding tax for the said period. The appellants' case is that the requirements under Section 73(1) for invoking the extended period of 5 years for demanding tax from them were not fulfilled in this case. The provision prior to its amendment effective from 10.9.2004 reads as under: (a) The Assistant Commissioner of Central Excise or, as the case may be, the Deputy Commissioner of Central Excise has reason to believe that by reason of omission or failure on the part of the assessee, to make a return under Section 70 for any prescribed period or to disclose wholly or truly all material facts required for verification of the assessment under Section 71, the value of taxable service has escaped assessment or has been under-assessed or service tax has not been paid or has been short paid or any sum has erroneously been refunded, or he may, in cases falling under Clause (a), at any time within five years, and in cases falling under Clause (b), at any time within one year, from the relevant date, serve notice on the person chargeable with the service tax which has escaped assessment or has been under-assessed or has not been paid or has been short-paid, or to whom any sum has been erroneously refunded, requiring him to show cause why he should not pay the amount specified in the notice.
73. Recovery of service tax not levied or paid or short-levied or short-paid or erroneously refunded.
(1) Where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, the Central Excise Officer may, within one year from the relevant date, serve notice on the person chargeable with the service tax which has not been levied or paid or which has been short-levied or short-paid or the person to whom such tax refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in the notice: Provided that where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of - (e) contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax.
by the person chargeable with the service tax or his agent, the provisions of this sub-section shall have effect, as if, for the words "one year", the words "five years" had been substituted.
We find from the records that there is copious evidence of the appellants' knowledge of their tax liability. In their letter dated 22.7.2004 addressed to Malaysian Airlines, Kuala Lumpur, the appellants had mentioned the legal opinion taken by them to the effect that the services rendered by them as GSA to the airlines were covered under "Business Auxiliary Services". In that letter, they even suggested that service tax on ORC could also be collected from the airlines and paid to the Government. This knowledge of tax liability is also evident from the statements of their functionaries in India. Their Accounts Manager, Sh. S. Krishnan even expressed willingness to pay up the tax for the period of dispute. The correspondence between the Chennai office of Malaysian Airlines and their Head Office at Kuala Lumpur over a period of time from July 2004 are also available on record, which indicate that the airlines authorities were aware of, and exercised about, their liability to take over the incidence of service tax on ORC from their GSA viz. the appellants. Such loud thinking in the airlines' circles was triggered by the appellants only as is evident from the statements of Sh. Krishnan. Thus it is evident that the appellants were aware of their service tax liability in respect of ORC received by them from Malaysian Airlines during the period of dispute. They had been receiving such payments through credit notes which mentioned the amounts in terms of Indian rupee and the money was realized in the same currency. However, the appellants did not choose to get themselves registered with the department for payment of service tax on ORC in the category of "Business Auxiliary Services". They did not file returns of this commission and did not pay service tax thereon. This conduct of the appellants invited action under Section 73(1)(a) of the Finance Act, 1994 inasmuch as the omission on the part of the appellants in filing return of ORC under Section 70 of the Finance Act, 1994 despite their knowledge of tax liability was evident to the Central Excise Officer authorised to take such action. We, therefore, hold that the extended period of limitation was rightly invoked against the appellants. None of the decisions cited by counsel in support of the plea of limitation is applicable to this case inasmuch as none of those was a service tax case. Most of the cited cases are Central Excise cases wherein the question whether the extended period of limitation under Section 11A of the Central Excise Act could be invoked for demanding duty from the assessees on the facts of the cases was considered by the apex court. There is vast difference between the extended limitation provisions of Section 11A ibid and those of Section 73(1) (prior to amendment) of the Finance Act, 1994. Under Section 11A, duty can be demanded for a period of five years where the non-levy/non-payment/short-levy/short-payment/erroneous refund of the duty is attributable to fraud, collusion, wilful mis-statement or suppression of facts on the part of the person chargeable with the duty. None of these stringent conditions found a place under Section 73(1)(a) (prior to amendment) of the Finance Act 1994. "Omission" or "failure" of the assessee in the matter of filing return etc. was enough reason under this provision of law for invoking the extended period of limitation for demanding service tax. Therefore any case law on applicability of the extended limitation provisions of Section 11A of the Central Excise Act cannot be applied to a service tax case under pre-10.9.2004 provisions of Section 73(1) of the Finance Act 1994.
The extended limitation provisions of Section 73 (1) of the Finance Act 1994 as amended w.e.f. 10.9.2004 [vide Finance (No. 2) Act, 2004] are similar to those of Section 11A(1) of the Central Excise Act. Under these provisions, the period of limitation for recovery of tax/duty is five years where such tax/duty has remained non-levied, non-paid, short-levied or short-paid or has been erroneously refunded by reason of fraud, collusion, wilful mis-statement or suppression of facts, or contravention of the relevant provisions of law with intent to evade payment of tax/duty. The question whether the demand of service tax for the period from 10.9.2004 is time-barred has to be determined with reference to the amended provisions of Section 73(1) ibid. We note that two of the ingredients required for invoking the extended period of limitation under these provisions were alleged in the show-cause notice against the appellants and the same have been established in the impugned order, which are (i) suppression of facts and (ii) contravention of Sections 68, 69 and 70 of the Finance Act 1994 by the appellants. The decisions cited by counsel, which are inapplicable to the present case for the period prior to 10.9.2004, are distinguishable on facts from the present case for the period from 10.9.2004.
11. In the result, the entire demand of service tax raised on the appellants by the Commissioner under Sub-section (1) of Section 73 of the Finance Act, 1994, along with interest under Section 75 of the Act, is upheld. However, we are of the view that it would be harsh to impose on the appellants the maximum penalty prescribed under Section 78 of the Act. The penalty imposed under this provision is reduced to Rs. 10,00,000/- (Rupees Ten lakhs only). However, the penalty imposed under Section 76 of the Act is sustained. The impugned order shall stand modified accordingly. The appeal is dismissed, but with reduction of penalty as above.