No Service Tax on Statutory Auction Fees, Demurrage: CESTAT Sets Aside ₹2.62 Crore Demand against Tobacco Board [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal [CESTAT] Hyderabad Bench has made a significant ruling in favor of the Tobacco Board by quashing a service tax demand of ₹2.62 crore.

The appellant, Tobacco Board is a statutory body that regulates the production and auctioning of Virginia Tobacco.For the period between 2006 and 2010 a demand for service tax on auction fees (2% each from buyers and sellers), demurrage charges for delayed lifting of stocks and rental income from warehousing was raised by the Department.

This demand was confirmed by the Commissioner of Central Excise and re-quantified at ₹2,62,22,286.The Tobacco Board appealed against this decision in the Tribunal.

The Tribunal held that fees collected by a regulatory body for performing its statutory functions cannot be said to be consideration for taxable services.

The Appellant submitted that it is a State within the meaning of Article 12 of the Constitution, engaged in sovereign rather than business activities. Further, the auction fee is a statutory levy under Section 14A of the Tobacco Board Act, 1975, and thus not within the definition of consideration under the Finance Act, 1994.

As far as demurrage and rentals the appellant submitted that unmanufactured tobacco is agricultural produce, which is specifically excluded from storage and warehousing services.

The Bench, which comprising Mr. A.K. Jyotishi [Technical Member] and Angad Prasad[Judicial Member] observed that The auction fee is a statutory levy and is collected by a public authority in the public interest and not as a service to individuals and since unmanufactured tobacco is an agricultural product the service tax is exempted.

However, Demands for demurrage are not “consideration” for service but are intended for the smooth flow of business.Therefore the Tribunal dismissed the demand and penalties and allowed the appeals.

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