The Hyderabad bench of the Customs, Excise And Service Tax Appellate Tribunal ( CESTAT ) has held that they are providing ‘Mining Services’ and not ‘Business Support Services’ and there is sufficient ground for invoking the extended period for raising the demand. It was viewed that the agreement is not that of partnership and is in the nature of service agreement, where the appellants are service provider and are liable to pay Service Tax.
M/s SLP Contractors (the Appellant) is a proprietary concern. On certain investigation, the department felt that the appellants have undertaken quarrying of black granite in the mines belonging to M/s Golden Granites (GG), as part of an agreement between them and received a share of sale proceeds as consideration for their services. After examining the clauses of the agreement between the appellant and M/s GG, it was alleged that the appellant has been rendering services under the category of ‘Mining Services’ on which they have not discharged Service Tax liability. The department examined various clauses of the agreement and considered that this is not a Joint Venture agreement and it is rather an agreement where the appellants are providing services to M/s GG.
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The Adjudicating Authority examined the allegation in the light of the agreement between the appellant and M/s GG and held that the so called Joint Venture is not a partnership firm. On the issue of limitation, the Adjudicating Authority has distinguished the case laws relied upon by the appellant and held that acquiring knowledge by the department does not take away the privilege of invoking extended period of five years provided by the law makers in the Act itself. According to the Adjudicating Authority, even after introduction of ‘Mining Service’, the appellants never came forward to disclose their service and instead they misinterpreted the provisions and did not come forward to obtain the Service Tax registration. Therefore, in the facts of the case, the extended period of limitation was rightly invoked.
Advocate for the appellant has mainly contested that the Adjudicating Authority has not appreciated the terms and conditions of the agreement dt.17.10.2001 read with codicil dt.28.01.2002 for coming to the conclusion that the said agreement is not in the nature of partnership agreement and that relation between the appellant and M/s GG is in the nature of service provider and service recipient for which the consideration is being received in the form of a share in the sale proceeds.
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He further contended that the reliance placed by them on the Board’s Circular No.109/3/2009-ST dt.23.02.2009 has been ignored by the Adjudicating Authority at Para 15.7 of the OIO, whereas, the same clarification is appropriately applicable in their case also. As per the Advocate, the above Circular had considered various agreements between the theatre owners and distributors to clarify that there would not be any Service Tax liability as they are two contracting parties acting on principal to principal basis and one does not provide service to another. Further, he has submitted that the Adjudicating Authority has not properly understood the provisions under Income Tax law to come to the conclusion that the payment of Service Tax independently by both the appellant and M/s GG would not negate there being a partnership firm.
According to the proviso to Section 28(v) of the Income Tax Act read with Section 155(1), 155(1A) & 155(2) of the Income Tax Act, if the partners paid the Income Tax, the firm need not pay the same and if the firm has paid the Income Tax then the partners need not pay the Income Tax and making both to pay for the same income is not what the statute provides. The appellants have also contended that they are providing comprehensive ‘Business Support Service’, as they are not merely doing the quarrying but also sourcing customers, assessing quarry, converting granite into saleable condition, etc., therefore, the classification of their activities under the category of ‘Mining Service’ is also not correct.
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On the other hand, AR has reiterated the observations made by the Adjudicating Authority for confirming the demand and highlights certain clauses in the said agreement dt.17.10.2001. He further relies on the provisions under the Partnership Act, 1932 in support that the claim of the appellant that the agreement is that of partnership is not correct as it is not fulfilling certain conditions under the Partnership Act.
The agreement dt.17.10.2001 has been termed as ‘Raising Contract cum Sale Agreement’ entered between M/s GG, RL Puram and SLP Contractors, Proprietor Smt. Sidda Lakshmi Padamavathi. The agreement, inter alia, provides for both the parties to undertake prospecting operations during the tenure of the prospecting license held by M/s GG and also to undertake quarrying operations in the quarry lease hold area. While the present appellant was required to pay the Government the prospecting fee and advance rent out of their own fund and undertake prospecting operations, they were entitled for certain revenue share in consideration of the services supplied and undertaken by them.
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As per clause 3, there is a penal clause imposed on the raising contractor in case they fail to implement terms and conditions of the agreement or infringes any condition or defaults in properly working the prospecting license area or quarry lease area. Therefore, a general perusal of the terms and conditions of the agreement would indicate that it is not an agreement between the two partners rather it is exactly what it has been referred to as in the agreement i.e., ‘raising contract cum sale agreement’. It is a fact that both the parties to this contract have certain expertise and certain resources at their disposal but the utilization thereof and the remuneration for the said services has been clearly worked out in a fashion which would show that the raising contractor are not partners of M/s GG rather they are providing services of specified nature and in turn getting paid in terms of share in the sales proceeds.
CA for the appellant has vehemently argued that there is a codicil dt.28.01.2002 to this agreement, whereby, the parties to the said contract have agreed to covert the said agreement into an agreement of partnership and also made it clear that the partners have to offer their income from its deed separately in the individual annual income tax return that have to be filed by them. The Commissioner has dealt with applicability of CBEC Circular No.109/3/2009 dt.23.02.2009 as the appellant had contended that their arrangement is similar to the one mentioned in Para 2.3 of the Board Circular. Commissioner has held that in the facts of the case and the terms and conditions of the agreement, the analogy between the film distribution and their agreement is completely misplaced.
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AR for the Department has also pointed out that while the original agreement was registered before the sub-registrar, Cheemakurthy, whereas, the codicil has not been registered and even if for the sake of argument, if the original agreement is assumed to be a partnership agreement as claimed by the appellant then any subsequent change in the partnership agreement is also required to be registered, as prescribed in Section 60 of the Partnership Act, 1932. Therefore, according to the department, the codicil would not be a valid agreement to convert the original agreement into a partnership agreement and that the execution of codicil itself is not a legally recognized procedure to make changes with regard to the constitution of the firm.
The agreement dt.17.10.2001 is in the nature of service agreement between M/s GG and the appellant and not a partnership agreement, therefore, there would be liability to discharge Service Tax on the services provided by the appellant to M/s GG. that the scope of the work is quarrying and the fact that M/s GG holds a prospecting license for black granite granted by the Director of Mines and Geology, the entire activity is mining activity only and not ‘Business Support Service’ as contended by the appellant.
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The appellant tried to highlight some of the clauses in their agreement in support that the activities would more appropriately fall within the category of Business Support Service rather than under Mining service as alleged by the Department. Admittedly, they are also raising invoices, jointly fixing sale price, furnishing periodical statements and returns and constructing rest shed, sanitary conveniences, blaster sheds, etc. However, these activities themselves cannot convert the entire quarrying and mining activities into Business Support services. These services are incidental to their mining services and are intrinsically required to be performed in connection with their mining activities in terms and conditions for providing that mining service to M/s GG.
While the appellants and M/s GG have entered into an elaborate agreement clearly marking the nature of services to be performed, they have not taken enough care to find out the exact nature of services or taxability and merely because they have furnished certain information or copy of agreement to the department, it would not absolve them from the invocation of extended period in the given facts of the case.
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A two member bench of Mr. A.K. Jyotishi, Member (Technical) and Mr. Angad Prasad, Member (Judicial) found that the fact that they never disclosed codicil to Department or claimed their services as ‘Business Support services’ and not ‘Mining service’ also supports the view that appellants have not come out with clean hands before the Department.
It was observed by the Tribunal that the agreement is not that of partnership and is in the nature of service agreement, where the appellants are service provider and are therefore, liable to pay Service Tax. The Tribunal held that they are providing ‘Mining Services’ and not ‘Business Support Services’ and there is sufficient ground for invoking the extended period for raising the demand.
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