ORDER
A.K. Srivastava, Member (T)
1. This appeal has been filed by M/s RPG Enterprises Ltd. Mumbai against the Order-in-Appeal dated 29.9.2005 by which the Commissioner of Central Excise (Appeals), Mumbai, Zone I, confirmed the Order-in-Original dated 23.2.05 passed by the Deputy Commissioner of Central Excise, Division K III, Mumbai IV. The Deputy Commissioner, vide his order dated 23.2.05, confirmed the demand notice issued to the appellants amounting to Rs. 4,89,65,321/- under Section 73(1)(a) of the Finance Act, 1994: Me imposed a penalty of Rs. 500/- under Section 75A of the said Act for failure to obtain registration under Service Tax; Me also levied interest @ 18% p.a. from 16.10.98 to 16.8.01, @24% upto 16.8.02 and 15% p.a. w.e.f. 17.8.02 for the period by which the credit of the said Service Tax is delayed as provided under Section 75 of the Act ibid; The appellants were also directed to pay in addition to paying Service Tax. and interest as above, a penalty of Rs. 200/- for every day during which such failure continues so however that the penalty under this clause shall not exceed the amount of Service Tax not paid as provided under Section 76 of the Act, ibid; He also imposed a penalty of Rs. 1000/- under Section 77 of the Act ibid for failure to file return in Form ST-3; He also imposed a penalty of Rs. 4,89,65,321/- under Section 78 of the Act ibid.
2. Heard both the sides and perused the records.
3. The issue involved in this case is whether the services rendered by the appellants would amount to the services rendered by a management consultant.
4. The appellants have contended as under:
(i) For tax to be levied, two conditions are to be simultaneously fulfilled – service should relate to management; Service provider should be a management consultant. It is the contention of the appellants that the latter condition is not satisfied in their case;
(ii) They would not qualify as a management consultant in common parlance for the following reasons:
(a) They deal with and can deal only with the licensee company and nobody else, unlike any management consultant, who deals with all type of clients;
(b) They exactly recover/share only their cost with the licensee companies. No management consultant does ever operate like that;
(c) All license companies meet together, discuss a problem and find a solution. No management consultant calls his clients together, discusses their problem jointly and finds a solution;
(d) Management consultant is always an outsider to ensure impartialities and objectivities – He is an expert – An in-house/group organization like the appellants cannot achieve these criteria;
(e) Logo “RPG” belongs to the appellants, which is used by the licensee companies – No management consultant allows his logo to be used by his clients;
(iii) Even if the service is a specified service, the service provider should fall in the specified category. The definition of particular service provider should be read in the light of the common parlance and not out of context. They relied on the following case laws in this connection:
(a) Zee Telefilms Ltd v. Commissioner 2006 (4) STR 349 (Tri-Mumbai);
(b) BCCI v. Commissioner (2007) 7 STR 384;
(c) Gujarat Chemical Port v. Commissioner 2007 -TIOL-1898;
(iv) (A) The statutory definition also should be read contextually and not out of context. The definition of ‘Management Consultant’ should be not read out of context, destroying the common parlance understanding.
They relied upon the following case laws in support:
(a) Hotel and Catering Industry Training Board v. Automobile Proprietary Limited 1968 (3) All. E.R. 399;
(b) I.L.M Cadija Umma and Anr. v. S. Don Manis Appu A.I.R. 1939 Privy Council 63;
(c) Hariprasad Shivshankar Shukla v. A.D. Divelkar AIR 1957 SC 121;
(B) They maintained that the essential attribute of a management consultant, in the ordinary parlance, is that it is an outside entity, objectively and impartially advising his clients, having gained expertise and experience in advising in diverse fields. Secondly, he is a person working for a profit. They stated that they are a part of RPG group and not an outsider. They advise their group companies only and that too by joint discussions. Also costs and expenses are shared between the licensees and there is never an attempt made to earn profit. Such an entity, according to them, can never be described as a management consultant in ordinary parlance at all.
(v) (a) Principle of mortality – No person can render service to itself – A mutual concern, while deals only with its members, though may be a separate legal entity, is rendering service to itself, when it services its members and hence is not liable to service tax;
(b) That the service provider and service receiver are separate legal entities is irrelevant, if mutuality exists – This is laid down by the Hon’ble Supreme Court in the case of Young Men’s Indian Association, Madras and Ors. reported in 1970 (26) STC 241;
(c) For the mutuality principle to apply, there must be complete identity between the contributors and the participators. In the present case, those who share expenses and receive the service are identical and, therefore, the mutuality principle will apply. They cited the Supreme Court’s judgment in the case of Chelmsford Club v. CIT, Delhi in support. They stated that the principle of mutuality applies to service tax law and referred to the decisions of the Calcutta High Court in the case of Dalhousie Institute and Satuday Club Ltd reported in 2000 (180) ELT 437 (Cal).
(vi) The recovery of expenses is not a service. For this averment, they relied upon the following case laws:
(a) Dunlop Rubber Co Ltd (1983) ITR 493 (Cal);
(b) CIT v. Industrial Engineering Project (P) Ltd .
(vii) They referred to the Supreme Court judgments in the case of Hindustan Steel Ltd. v. State of Orissa reported in 1970 (25) STC 211 and Hindustan Steel Ltd v. State of Orissa reported in 1970 (26) STC 302, in which it was held that the Sales Tax is not payable, when building material is given at cost by M/s Hindustan Steel to its contractor. They argued that similarly, in the present case also, since only the expenses are recovered year after year, no service tax is leviable on them;
(viii) Without prejudice to the above submissions, they requested to extend them the benefit of cum – service tax relying upon the Larger Bench decision of the Tribunal in the case of Sri Chakra Tyres as affirmed by the Supreme Court as and the Supreme Court judgment in the case of CCE v. Maruti Udyog Ltd reported in 2002 (49) ELT RLT 1 (SC);
(ix) Extended period limitation of five years is inapplicable as the activities were undertaken in an transparent manner and in the usual course. Regular books of account were maintained. The issue is purely legal and interpretational in nature. Also, in view of the solicitors opinion in 1989, which was not disputed by the Auditors or the Registrar of Companies, they bona-fidely believed that theirs is not a service company. They relied on the following case laws in this connection:
(a) MRC Ltd v. CCE reported in 2007 (5) STR 308 (Tri-Mumbai);
(b) Secretary, Town Hall Committee v. Commissioner reported in 2007 (8) STR 170 (Tri-Bang);
(c) Padmini Products v. CCE ;
(d) Tamil Nadu Housing Board v. Collector .
5. In the light of the above submissions, the appellants prayed for setting aside the impugned order passed by the Commissioner (Appeals) and allowing the appeal, with consequential relief.
6. The learned Joint C.D.R. took us through the various portions of the orders passed by the lower authorities below to high-light that the appellants are nothing but Management Consultant only and they are rendering management consultancy services to their dedicated clients and are liable to service tax. According to him, the demands have been rightly confirmed and the penalties correctly imposed.
6.1 He stated that the contention of the appellants that they run on ‘No profit, No loss’ basis and only recover cost from the licensees and hence service tax is not payable is irrelevant and out of context. In indirect taxes like Central Excise, Customs, Service Tax, leviability/chargeability is unconnected with Profit or Loss. So long as the taxable service is provided and received and the taxable value is collected and paid, the Service Tax is collectable. The appellants are recovering the amount and showing the same under the head “income’ in their balance sheet. Also, admittedly they recover all the expenses right from the printing and stationery to the postage and communication expenses, staff salaries etc from the licences companies and do not have to spend anything from their own pocket.
6.2 He further stated that the contention of the appellants that the logo ‘RPG’ belongs to them, which is used by the licences companies and that no management consultant allows his logo to be used by his clients is irrelevant. When the service provided is covered by the definition of the taxable service – “any service provided to a client, by management consultant in connection with the management of any organization in any manner” and the same is fully applicable to the appellants, the use of the logo or group meetings is irrelevant and inconsequential.
6.3 He argued that the plea of the appellants that there is no client-consultant relationship is incorrect as the two companies M/s RPG, the appellants and M/s CEAT Ltd. and others have entered into legal agreements. These are separate, independent legal entities and registered companies. The advice is always from M/s RPG to M/s CEAT Ltd and others. Money is paid by M/s CEAT Ltd etc to M/s RPG for the service provided. There is, therefore, perfect client-consultant relationship.
6.4 He made the following additional submissions:
(i) The contention that the appellants deal only with the licencee/Group companies and nobody else, unlike any management consultant, who deals with all types of client and, therefore, they are not management consultants is not correct because of following reasons:
(a) There is nothing in the Memorandum of Association of M/s RPG Enterprises, which restricts that only the Group companies can become licencees and only such companies can become Service Receivers. The MOA of M/s RPG reveals that anyone can become licencee of the appellant company. M/s RPG have entered into Non-Exclusive Licensing Agreements, which shows that all are welcome to it;
(b) The definition of Management Consultant does not stipulate any condition on the number of clients. Even one exclusive client to a management consultant firm would attract Service Tax;
(c) The very contention of the Group companies is without basis. Nowhere, the appellants have shown that the Service Receivers are subsidiary companies of M/s RPG or are controlled by M/s RPG. The fact is that all the companies are independent companies individually registered under the Companies Act. Commonality of a stray director or a promoter is of no relevance in the present context;
(d) The agreement entered into by the appellants and Service Receivers are purely commercial contracts and there is no dispute on that.
(ii) As regards, the principle of Mutuality and the case laws cited by the appellants in this regard, the learned Jt. C.D.R. maintained that they are not applicable to the facts of the present case and are distinguishable.
(iii) He stressed that the extended period is invokable, as the appellants never brought to the notice of the Department any of the activities undertaken by them and never corresponded to obtain any clarification or opinion from the Department. Bona-fide belief is not blind belief. There is no basis or foundation established of Bona-fide belief. He relied upon the following judgments in support.
(a) 2005 (191) ELT 1051 Winner Systems v. CCE & Cus, Pune in which it has been held that blind belief cannot be a substitute for bonafide belief;
(b) Air Cell Divilink India Ltd v. CCE, Jaipur – wherein it has been held that there was nothing on record to suggest if the appellants ever approached the office of Service Tax authorities to ascertain the details of their liability to pay Service Tax;
(c) 2006 (198) ELT 275 Interscape v. CCE, Mumbai I. It has been held by the Tribunal – that a bona-fide belief is not blind belief. A belief can be said to be bona-fide only when it is formed after all the reasonable considerations are taken into account;
(d) Hon’ble Supreme Court in BPL India v. Commissioner of Central Excise has held that the appellant having manufactured the goods and removed the same without any intimation to the Department, their intention to evade duty is proved.
He prayed for sustaining the order passed by the Commissioner (Appeals) and rejecting the appeal.
7. We have considered the rival submissions carefully. In order to understand the role of M/s RPG Enterprises Ltd, the appellants herein and the nature of services being rendered by them, it is essential to have a look at the very nature of the activities undertaken by M/s RPG so, as to determine whether their activities will fall under the ‘management consultant’ as defined in Section 65(37) of the Finance Act. 1994, which defines ‘management consultant’, as under:
Any person who is engaged in providing any service, either directly or indirectly, in connection with ‘ the management of any organization in any manner and includes any person who renders any advice, consultancy or technical assistance relating to conceptualizing, devising, development, modification, rectification or upgradation of any working system of any organization.’
8. Coming to the nature of the activities of the company, the following factual position emerges, as per their Memorandum of Association:
(a) M/s. RPG Enterprises Limited is a Company incorporated under the Companies Act, 1956 and is, therefore, a legal entity in its own right having its registered office, manpower and activities, which are different from the ones to whom, it is providing services. Service Providers (M/s RPG) and Service Receivers (M/s CEAT Ltd. etc) are separate and independent legal entities and the registered companies.
(b) The objectives of the company include to form, operate and run an organization for providing to the said licensees infrastructure and administrative set up for promoting, supervising and monitoring such industrial, commercial and trade practices as are conducive to the attainment of excellence in quality of their products and services (with the continuous striving for upgradation of their standards) inculcating virtues of social responsibilities and thereby enhancing the value of business to society.
With a view to assisting the said licensees in upgrading their efficiency and availing of the benefit of mutual experience to develop a suitable organization for the following:
i) To identify business opportunities in India and /or abroad and extend professional expertise in technology assessment and business evaluation;
ii) To develop and provide a pool of general economic and industrial intelligence information in diverse areas including finance, taxation, legal, insurance, risk management , data processing, information, systems, marketing, drafting, leasing agency and public relations;
iii) To develop a cadre of managers and make available management expertise;
iv) To develop a suitable infrastructure for protection of property including intellectual rights of the said licensees.
v) The following paragraphs of Memorandum of Association explain the objectives of the Company as follows:
(32) To act as financial consultants, management consultants, and provide advice, services, consultancy in various fields, general administrative, secretarial, commercial, financial, legal, direct and indirect taxation and other levies, statistical, economic, labour, industrial, public relations, scientific, technical, accountancy, quality control and data processing for the said licensees.
33. To acquire from or sell to any person, firm or body corporate or unincorporated, whether in India or elsewhere, technical and managerial information, knowhow, processes, engineering, manufacturing, operating and commercial data, plants, layouts and blueprints useful for the design, erection and operation of any plant or process of manufacture and to acquire and grant or license other rights and benefits in the foregoing matters and things and to render all kinds of management and consultancy services to the said licencees.
34. To undertake on behalf of any of the Licencee Companies any project or projects, enter into any Strategic Alliance(s)r Joint Venture Agreement(s) Shareholders’ Agreement(s), Technology Agreements), jointly or severally with others or inter se between them, which would enable the Licensee Companies to avail of business opportunities in India and / or abroad and expend such sums, as may be required, to the account of the respective Licencee Companies.
35. To undertake reconstruction, amalgamation, mergers, demergers, divestments, etc. on behalf of any of the Licencee Companies and expend such sums, as may be required, to the account of the respective Licencee Companies.
Thus on plain reading of the objectives, it is seen that they are engaged in providing services to the licencees to develop a suitable organization for identifying business opportunities in India and abroad, to identify professional expertise, technological industrial and engineering information in diverse areas including financial, taxation, etc., to develop cadre of the managers and making available management expertise, to develop suitable infrastructure for protection of Intellectual Property Rights. Paragraphs 32 and 33 of the Memorandum of Association of M/s RPG Enterprises Ltd are very clear as to what are the activities carried out by them. M/s RPG have, as per their objectives, to act as management consultants in finance and other fields providing advisory services, consultancy in various fields, etc. All these activities would, without doubt, come under the ‘Management Consultancy Services’.
9. It is not disputed by the appellants that they have received an amount of Rs. 8.22 crores from M/s CEAT Ltd., and other sums from other companies towards the contribution in terms of the agreements between M/s RPG and M/s CEAT Ltd & others. It is also not disputed by the appellants that they have provided assistance and services to M/s CEAT Ltd., and others. The appellants’ dispute is on the question as to whether rendering of the services by them to the licencees is in the nature of the management consultancy services.
10. (a) M/s RPG Enterprises Ltd., have rendered management consultancy services to M/s CEAT Ltd., and others and have received licence fees from various limited companies for giving consultancy advice. This is an admitted fact and is also reported in their balance-sheet as income;
(b) In the proceedings before the Income Tax Officer. M’s CEAT Ltd., have admitted to have made a payment of Rs. 8,22,40,000/- to the appellants as per the agreement with them. The company was asked by the Income Tax authorities to explain the nature of these expenses. M/s CEAT Ltd have admitted that this is the payment of the consultancy services received from M/s RPG in terms of the agreement entered into by M/s RPG and M/s CEAT Ltd. The license fee is paid to avail the benefits of the objectives laid down in the agreement. The extracts from M/s CEAT Ltd’s Income Tax assessment order are reproduced below:
5.1.2 RPG Enterprises has specialized Departments headed by qualified and experienced personnel dealing in the areas of Strategic Planning, Corporate Finance, Management Information Systems, Forex Management Service, Human Resource Development, Project Development, etc. In respect of these areas, we are explaining hereunder the specific services received by CEAT from RPG Enterprises Ltd. during 1999-2000:
1- Corporate Finance:
It has helped CEAT in improving its credit rating with Financial Institutions and Bank and other lending agencies which in turn has helped in getting most competitive rates from its lenders. This has resulted in bringing down the interest cost for the company.
2. Management Information System (MIS):
RPG Enterprises issues guidelines in the beginning of the financial year for the preparation of annual budget and Three Year Rolling Strategic Plan which are being discussed at the Management Board (Group Business Heads) Meetings of the RPG Enterprises where the parameters and the measurement tools for the performance evaluation against the budget are also finalised. Based on these parameters, the monthly performance being reported by the Companies including; CEAT Ltd. to RPG Enterprises Ltd. are being reviewed and discussed at the Business Review Board Meeting of RPG Enterprises.
During 1996-97, from the monthly MIS Reports, if was pointed out by RPG Enterprised that the inventory managements at CEAT need refinement and improvement. Based on this, an expert Task Force team was set up to look into the Logistic of inventory management at CEAT’s at all India levels. Based on the study conducted by Task Force and on implementation of their suggestions, the company could effectively bring down the inventory levels and also streamline the movement of stock between the different geographical locations which helped CEAT Ltd. to satisfy the requirement of each region with a minimum level of inventory. This also resulted into considerable savings to the Company.
3. Strategic Planning
Business Evaluation and Planning for long term business strategies. Assisting licensee companies in developing rolling strategic plan. Conducting meets on “KIPs” i.e. Knowledge, Information and Practices, Management of Working Capital, Bench for Global Competitiveness etc.
4. Forex Management:
During 1999-2000, RPG Enterprises conducted a detailed study of the Foreign Risk Management of the various companies including CEAT Ltd. It was observed that the Forex Risk Management required precise guidelines for management of the exposure on Forex. In order to help the companies a Forex Management Manual was brought out by RPG Enterprises and was circulated to all the companies including CEAT Ltd. In addition to this, there are regular Forex. Advisory Circulars being sent to the companies giving the advices on the positions to be taken on Forex Exposure on imports and exports by the Companies.
5. Human Resources Department:
Recruitment and Training of Personnel, Job evaluation-Conducting Career Development Programmes, Seminars and Workshops by inviting experts in the field, sharing of ideas and Best practices and Promoting participative style of management. Retaining skills within licensee companies by providing opportunity, flexibility and transferability in jobs.
RPG Enterprises have also highly specialized Human Resource Department with experienced and qualified personnel for the purpose. One of the functions of the Human Resource Department is TO recruit best talent in the country for the licensee companies including CEAT and also training and developing management skills of the personnel as may be required from time to time. Further, it also conducts regular training programme imparting skills for providing leadership, conflict resolutions and presentation skills.
(c) It has also been admitted that by the receiver of the service, namely M/s CEAT Ltd., that:
5.1.4 As these are on going and continuous improvement endeavors, it would be very difficult to measure their benefits and quantify the financial gains for a particular company over a particular period. However, the fact remains that RPG Enterprises renders very valuable services to its licensee companies which in long terms ultimately results in increased efficiency, growth, new market development, improvement in productivity, and quality and also development of human resources for successful conduct of business and running of the organization.
(d) Now, coming to the definition of ‘Management Consultant’ as given in the Finance Act, 1994 as could be seen from the definition, management consultant means any person who is engaged in providing any service, either directly or indirectly, in connection with the management of any organization in any manner and includes any person who renders any advice, consultancy or technical assistance, relating to conceptualizing, devising, development. modification, rectification or upgradation of any working system of any organization and “Taxable Service” means any service provided to a client by a management consultant in connection with the management of any organization in any manner.
Here, M/s RPG have provided the licensee companies the services with a view to improve the structure of their organization to bring about better efficiency. M/s. CEAT Ltd have received advice, consultancy from M/s RPG in the field of organization efficiency, ‘Corporate Financing System’ and because of modification rectification of the system, their credit rating with banks, financial institutions and other lending agencies has improved and interest cost has come down. M/s CEAT Ltd have admitted that due to the technical assistance and advice of M/s RPG, their Management Information System (MIS) and Inventory Management System have improved and the same has resulted in considerable savings to M/s CEAT. Similarly, M/s CEAT have admitted that they have benefited by advice and technical assistance from M/s RPG relating to development, improvement/ modification of Strategic Planning System Forex Management and HRD and have benefited financially. M/s RPG send them Regular Forex Advisory Circulars also. This clearly shows that M/s RPG’s advice, consultancy and assistance are directly in connection with the management of the recipient companies in regard to devising, development, upgradation, modification etc of their working system. Therefore, the services rendered by M/’s RPG are in the nature of management consultancy.
11. During the course of the arguments, it was contended that whatever services are being rendered by M/s RPG, are only rendered by a group company and that M/s RPG were acting more as a co-ordinator. In this connection, it is to be noted that the advice has been rendered by M/s RPG and as to how it has been rendered is only a process. The advisor/Consultant may devise any means and in their case by calling for a group meeting where a co-ordinator as well as Group Heads sit and discuss. So, their contention that it is only service to self is not acceptable for the reason that there is no denial that an advice has been rendered by a separate legal entity having its own objective, man power and expertise and there is a receiver of service, which is another legal entity. which has its own man power and who is requiring these services. The crux which is to be seen, is whether any advice has been rendered by one organization or person to another organization for improving the organization by conceptualizing, devising, development, upgradation of the receiving organization. The answer is a definite YES. The definition of ‘management consultant’ is also very clear and wide. It envisages providing any service in any manner and providing service in a group or calling several clients together is no impediment in getting covered under the definition of the Management Consultancy. The appellants’ representatives/experts do not carry out the function of simply overlooking or supervising the deliberations but, in fact, act as guides or path finders for the licensee companies. Therefore, it cannot be said that the appellants are functioning merely as platform providers to the licensee companies. They have, in fact, provided services for proper management of licencee companies’ affairs and, therefore, the charges recovered by them for these facilities cum service provided by them are leviable to service tax in the category of ‘Management Consultancy’ services.
12. M/s RPG are a commercial concern registered and governed by the Companies Act, having statutory Balance-sheet, etc. It is the contention of the appellants that the Principle of Mutuality will apply in this case. They have cited the following decisions:
(a) Chermsford Club v. CIT, Delhi ;
(b) Saturday Club Ltd v. A.C. Service Tax ;
(c) Dalhousie Institute v. A.C. Service Tax .
In Chelmsford Club v. CIT, Delhi, the Hon’ble Supreme Court has held in para 14 as under:
From the above extract of the judgment, it is crystal clear that the law recognises the principle of mutuality excluding the levy of income tax from the income of such business to which the above principle is applicable. In the above case, this Court quoted with approval the three conditions stipulated by the Judicial Committee in the case of English & Scottish Jt. Coop. Wholesale Society Ltd. v. CIT (Ag) (1948) AC 405, 419 : (1948) 2 All ER 395 (PC)) (AC at p. 419 the existence of which establishes the doctrine of mutuality. They are as follows
(1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated, as a mere entity for the convenience of the members and policyholders, in other words, as an instrument obedient to their mandate and (3) the impossibility that contributors should derive profits from contributions made by themselves to and which could only be expended or returned to themselves.
In Saturday Club Case, the Hon’ble High Court in para 17 has held as under:
So far as the merit is concerned, law is well-settled by now that in between the principal and agent when there is no transfer of property available question of imposition of service tax cannot be made available. It is true to say that there is a clear distinction between the ‘members’ club’ and ‘proprietary club’. No argument has been put forward by the respondents to indicate that the club is a ‘proprietary club’. Therefore, if the club space is allowed to be occupied by any member or his family members or by his guest for a function by constructing a ‘mandap’ the club cannot be called as ‘mandap keeper’ because the club is allowing his own member to do so who is, by virtue of his position, principal of the club. If any outside agency is called upon to do the needful it may raise a bill along with the service tax upon the club and the club as an agent of the members, is supposed to pay the same. The authority cannot impose service tax twice once upon the people carrying out the business of ‘mandap keeper’ as well as the members’ club for the purpose of using the space for constructing or using it as ‘mandap’. Therefore, apart from any other question possibility of double taxation cannot be ruled out. If I explain my first query as above it will be crystal clear that if a person being an owner of the house allows another to occupy the house for the purpose of carrying out any function in that house it will not be construed as transfer of property. But if such person calls upon a third party ‘mandap keeper’ to construct a ‘mandap’ in such house then in that case such ‘mandap keeper’ can be able to raise bill upon the user of the premises along with the service tax. Therefore, I cannot hold it good that members’ club is covered by the Finance Act, 1994 for imposition of service tax to use its space as ‘mandap’. So far as the other point is concerned whether the ratio of the judgments can be acceptable herein or not I like to say ‘yes it is applicable’. Income-tax is applicable if there is an income. Sales tax is applicable if there is a sale. Service tax is applicable if there is a service. All three will be applicable in a case of transaction between two parties. Therefore, principally there should be existence of two sides/entities for having transaction as against consideration. In a members’ club there is no question of two sides. ‘Members’ and ‘club’ both are same entity. One may be called as principal when the other may be called as agent, therefore, such transaction in between themselves cannot be recorded as income, sale or service as per applicability of the revenue tax of the country. Hence, I do not find it is prudent to say that members’ club is liable to pay service tax in allowing its members to use its space as ‘mandap’.
We are of the opinion that the Principle of Mutuality and the above referred judgments are not applicable to the facts of the present case because of following reasons:
(a) M/s RPG have entered into Non-Exclusive Licensing Agreements with other companies e.g. M/s CEAT Ltd. Both the contracting parties viz M/s RPG and M/s CEAT Ltd etc are two independent legal entities and independent registered companies under the Companies Act.
(b) The relation between the two contracting companies is not of Principal and Agent, which was present in the cases of Chemslbrd Club, Dalhousie Institute, Saturday Club etc. Here the Licensing Contracts were entered into and the relationship is client-consultant relationship.
(c) It does not fulfil the three conditions enumerated in para 14 of the Chelmsford Club decision (extracted above) in as much as the identify of fund contributors and the recipients of the fund is not the same.
Unlike the club’s issue, where the Member constituting the club and the club were found to be same, here the contributors are the Licensees companies, who have totally independent existence from M/s RPG, who were the recipient of the amounts. Moreover, in case of M/s CEAT Ltd (one of the contributors), it has been shown that M/s CEAT Ltd, in their Balance-sheet, have shown the amount contributed (Rs. 8.4 crores) as expenses towards the receipt of services from M/s RPG. This expenditure by M/s CEAT Ltd has been deducted by them in their Income Tax Return. Secondly, the fund is not to be expended or returned to themselves.
(d) The Courts in the cases of clubs have held that in a Member’s club, there is no question of two sides. ‘Members’ and ‘club’ both are the same entity. One may be called as Principal and, therefore, such transaction in between themselves cannot be recorded as income, sale or service.
However, in the present case, as discussed above, there are clearly two contracting companies registered under the Companies Act, having their own Board of Directors, which are independent of each other. They are governed as per the terms of agreement, which do not reflect the nature of relationship as Principal and Agent.
(e) The three essential characteristics of Agency – Fiduciary Relationship, Vicarious liability of ‘Principal and Agents’ position to make the principal answerable to third person are missing in the present case.
(f) In the present case, no one is acting on behalf of the others. Rather, M/s RPG are giving Management Consultancy to M/s CEAT Ltd and other companies, as is evident from the terms and agreement discussed in the preceding paras.
13. The appellants have contended that the definition clause should be understood in the context of the phrase defined. In this connection, they relied on the case laws in the case of Zee Telefilms Ltd v. CCE, Mumbai reported in 2006 (4) STR 349 (Tri) and Hari Prasad Shivshankar Shukla v. A.D. Divelkar reported in AIR 1957 SC (121). The Tribunal in Zee Telefilms Ltd 2006 (4) STR 349 at para 3.1 (a) has held –
Therefore, the definition of ‘advertising agency’ cannot be read literally and out of context, if done so then every person some way connected with an advertisement will be advertising agency. That cannot be and is not the coverage of the Service Tax envisaged. In the present case, one cannot ignore term being defined i.e., ‘advertising agency’ and proceed to levy service tax on
(i) any commercial concern
(ii) providing service connected with making, preparation, display or exhibition of advertisements.
If the definition is read in isolation and in an all encompassing manner out of context, then any person/company employing cameraman connected with shooting of advertisement film will become an advertising agency. A caterer supplying tea and biscuits during the production of advertising film will also become a. person connected with preparation of advertisement and became an advertising agency. Similarly, a lawyer advising whether advertising film will be violating copyright law or other laws relating to obscenity etc. would be treated as advertising agent. Similarly a broadcaster (on radio or television) of an advertisement will become an advertising agency, or a cinema hall flashing an advertisement or newspaper/magazine publishing an advertisement will become an advertising agency. Such absurdities, from an interpretation have to be avoided, the term ‘service connected with’ used in the definition of ‘Advertising Agency’ is to be understood in context of and in a restrictive manner.
(b) Circular F. No. 341/43/96-TRU, dated 31-10-1996 by Board, issued simultaneously with the introduction of Service Tax on ‘advertising agency’ by Finance Act, 1996 explains the scope of advertising agency services as under:
8. …In this connection, it is relevant to note that taxable service is a service provided to a client by an advertising agency in relation to advertisement in any manner. Client is the advertiser….
Therefore, advertiser being a person who wants to advertise his goods or service alone can be treated as client. In the present case, the appellants have no contract or agreement with an advertiser. The appellants agreement is with foreign broadcasters/agencies. The appellants render service to such foreigners and get paid by them. They can never be said to be rendering a service to producer of goods or services.
The ratio of these decisions is not applicable to the instant case. Here, there is an agreement between the service provider M/s RPG and the service availer M/s CEAT Ltd and others for the Management Consultancy and Advice, Whereas M/s Zee Telefilms Ltd had no contract or agreement with an advertiser.
The reading of the definition of Management Consultancy Service, Terms of Agreement and Income Tax Return of M/s CEAT Ltd etc clearly revel that the Service Tax is recoverable from the appellants.
The Hon’ble Supreme Court in the case of Commissioner of Central Excise, Pune v. Dai Ichi Karkaria Ltd has held in para 21 that judgments relating to Income Tax or other statutes have no relevance while considering a provision in an excise statute. In the instant case, when the management consultant has been defined in the Finance Act, 1994, there is no scope to look for other statutes.
14. Since the Service Tax law provides for payment of service tax on the gross amount charged, the appellant’s plea that the gross amount recovered should be considered as inclusive of service tax is not tenable and is not accepted. The Explanation 2 added to Section 67 of the Finance Act, 1994 with effect from 10.9.2004 cannot be applied retrospectively. The demand in the present case relates to the period from 1998-99 to 2001-2002.
15. The Appellants contention that in view of the solicitor’s opinion in 1989, which was not disputed by the Auditors or the Registrar of Companies, they entertained a bona fide belief that they are not liable to service tax, does not appear to be convincing. Bona-fide belief is not blind belief. The ratio of the various case laws cited by the learned Jt C.D.R., as referred to in para 6.4 (iii) above for invoking extended period are rightly applicable to the facts and circumstances of the present case. The appellants suppressed the vital information from the Department with intent to evade payment of Service Tax. We uphold the order of the Commissioner (Appeals) confirming the demand of Service Tax together with interest.
16. Even a cursory glance through their Memorandum of Association will show that what they were rendering is nothing but the management consultancy service as defined in the Finance Act, 1994. Once the management consultancy service was brought in the statute book and the management consultants were included within the definition of the service provider, the appellants did not seek any in-house opinion. Nor they approached the Service Tax Department for clarification. The Departmental officers could gather about their activities from the Income Tax Assessment Order of M/s CEAT Ltd., one of the licensee companies of the appellants and thereafter swung into action. In the Memorandum of Association, the appellants have themselves said that they act as ‘Financial Consultants’, ‘Management Consultants’. If this is not proof enough of their being management consultant, we are afraid, what else can be.
17 The appellants have not been able to prove that there was reasonable cause for the failure referred to in Section 76, Section 77 and Section 78 of the Finance Act, 1994. Hence, the penalties have been rightly imposed on the appellants under the aforesaid Sections of the Finance Act, 1944.
18. The impugned order passed by the Commissioner (Appeals) is upheld and the appeal is rejected.
(Pronounced in Court on 04.4.2008.)