Service Tax liability of Demerged Undertakings cannot be fastened on assessee upon merger

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The Hon’ble CESTAT, New Delhi, in Jayaswal Neco Industries Ltd. vs. Commissioner of Customs, Central Excise and Service Tax – Raipur [Service Tax Appeal No. 50893 of 2015 (dated, October 07, 2020)] held that, the assessee could not be held to be liable for discharging service tax liability of the Demerged Undertakings as it the service recipient and not service provider therefore, the confirmation of demand by the Commissioner is bad in law.

Facts:-

The Jayaswal Neco Industries Ltd. (“Appellant”), a manufacturer of excisable goods, is engaged in providing services of goods transport agency and business auxiliary service. During the relevant period from October 2007 to June, 2009, the Appellant had taken on lease the manufacturing plants of M/s Abhijeet Infrastructure Ltd. (“Abhijeet Ltd.”) and Corporate Ispat Alloys Ltd. (“Corporate Ltd.”). These plants were mentioned in the Central Excise registration of the Appellant. At these manufacturing plants, the Appellant manufactured DRI, Pig Iron and billets, which were sold to Abhijeet Ltd. and Corporate Ltd., who further sold these goods to independent buyers at the same price as they were sister concerns of the Appellant.

The Appellant claims to have shared the profits with Abhijeet Ltd. and Corporate Ltd. by way of fixed discounts and incentives in the form of additional discounts, paid on a monthly basis by way of debit notes issued by the, based on the quantity of goods sold by Abhijeet Ltd. and Corporate Ltd. met a certain sales target mutually agreed upon by the Appellant and the two concerns, which were recorded in the books of account of the Appellant. The Appellant settled the account of Abhijeet Ltd. and Corporate Ltd. after adjusting the aforesaid discounts/incentives.

It transpires that the plants of Abhijeet Ltd. and Corporate Ltd. were demerged from the legal entities of Abhijeet Ltd. and Corporate Ltd. and were merged into the Appellant w.e.f. April 1, 2008, in terms of an order dated November 13, 2009, passed by the Bombay High Court. The Appellant contends that Abhijeet Ltd. and Corporate Ltd. continued to exist and operate as separate legal entities and only their manufacturing unit plants based in Siltara were merged with the Appellant. During the course of audit of the books of account of the Appellant, for the period September 2006 to December 2008, it was noticed that Abhijeet Ltd. and Corporate Ltd. had received commission on account of sale of DRI and Pig Iron from the Appellant but had not paid service tax on such commission.

Accordingly, a Show Cause Notice (“SCN”), dated April 17, 2013 was issued to the Appellant proposing service tax on commission / discounts paid to Abhijeet Ltd. and Corporate Ltd., alleging that they acted as commission agents of the Appellant and received commission from the Appellant, which was taxable under “business auxiliary service”. The reason for demanding tax from the Appellant was that Abhijeet Ltd. and Corporate Ltd. had merged with the Appellant and, therefore, the Appellant was liable to pay the service tax that was payable by the Abhijeet Ltd. and Corporate Ltd. The Appellant filed a reply to the aforesaid SCN.  The Commissioner, on being unsatisfied with the reply, by the order dated December 23, 2014, confirmed the demand on service tax under Section 73 of the Finance Act, 1994 (“Finance Act”), read with Sections 68 and 70 of the Finance Act with interest and penalties under Sections 77 and 78 of the Finance Act.

Issue:-

Whether the Appellant could be held to be liable for discharge service tax liability of the “Demerged Undertakings”?

Held:-

The Hon’ble CESTAT, New Delhi, in Service Tax Appeal No. 50893 of 2015 (dated, October 07, 2020 held as under:

  • Observed that, the Appellant is a service recipient and according to Section 68 of the Finance Act, every person providing taxable service is required to pay service tax. The SCN, therefore, could have been served only upon the person chargeable to service tax and not to the Appellant, which is a service recipient and not “a person” liable to pay service tax under Section 68 of the Finance Act.
  • Stated that, it is clear from the Scheme of Arrangement that only the “Demerged Undertakings” comprising the Sponge Iron Plants and Power Plants of Abhijeet Ltd. and Corporate Ltd. that alone were merged with Appellant, while the body corporate of Abhijeet Ltd. and Corporate Ltd. did not merge with the Appellant and they continued to execute their business transactions. Even if it is assumed that business auxiliary service was provided, then too only Abhijeet Ltd. and Corporate Ltd. were liable to pay service tax and not the Power Plants and Sponge Iron Plants, which constituted “the Demerged Undertakings” and which alone stood merged with the Appellant. Thus, the understanding of the Scheme of Arrangement by the Revenue is clearly erroneous.
  • Held that, the Appellant cannot be made liable to discharge service tax liability of ‘Demerged Undertakings’ which stood merged in it and the liabilities of Abhijeet Ltd. and Corporate Ltd. could not have been fastened upon Appellant. The SCN could have been issued to Abhijeet Ltd. and Corporate Ltd. and not to the Appellant, which is a service recipient and not “a person” liable to pay service tax under Section 68 of the Finance Act. Hence, the confirmation of demand by the Commissioner, for this reason is bad in law.

Relevant provision:

Section 68 of the Finance Act:

“68. Payment of service tax

(1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66B in such manner and within such period as may be prescribed.

(2) Notwithstanding anything contained in sub-section (1), in respect of such taxable services as may be notified  by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66B and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.

 Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this Chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider.”

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