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BRIEF FACTS OF THE CASE
M/s German Remedies Ltd., now known as M/s Cadila Healthcare Ltd., Zydus Tower, Satellite Cross Road, Ahmedabad-15, hereinafter referred to as CHL, are a pharmaceutical company, interalia, engaged in the manufacture of active pharmaceutical ingredients, formulations and other healthcare products. M/s German Remedies Ltd., hereinafter referred to as GRL, having office at “A” Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai-400018, also engaged in manufacture of pharmaceutical products, was merged with Cadila Healthcare Ltd w.e.f. 1.4.02 vide Bombay High Court’s Order of Scheme of Amalgamation dated 8.8.03 and now form a division of CHL.
2. Information was received that the Pharma companies, who wish to market their products globally, had to obtain approval from the International Regulatory Authorities of the respective countries like FDA of USA, TGA of Australia etc. to obtain these approvals / certifications they had to satisfy stringent norms. These authorities send their teams to the Indian Pharma Manufacturers for certification of Goods Manufacturing Process (GMP), which include testing of raw materials, process of manufacture, feasibilities etc. to confirm observance of the safety norms and then only, the approval for the same is given. These services appeared to fall under the category of, 'Technical Inspection & Certification' and 'Technical Testing & Analysis'. It further appeared that the commission paid by the pharma companies to the overseas agents for marketing of the products was chargeable to service tax in the category of 'Business Auxiliary Service'. Similarly, marketing, promotional and related services also appeared to be chargeable to service tax under the category of 'Business Auxiliary Service' and other related services. Information suggested that Pharma Companies were not paying Service Tax on the above stated Services. Therefore, investigations in the case were initiated by Directorate General of Central Excise Intelligence, Pune Regional Unit, Pune.
3. In reply to the Summons dtd. 27.9.2006, issued by Senior Intelligence Officer (SIO), DGCEI, Pune Regional Unit, under Sec 14 of the Central Excise Act 1944 (CEA 1944) as made applicable to the service tax matters vide Sec. 83 of the Finance Act 1994, M/s German Remedies Ltd., vide their letter dated 1.12.2006, confirmed the status of their merger with CHL w.e.f. 1.4.2002 in terms of Bombay High Court’s Order of Scheme of Amalgamation dated 8.8.2003, and now form a Division of CHL. Accordingly, investigations were taken up against CHL as a whole.
4. In his statement dated 12th February, 2007 recorded before the SIO DGCEI, PRU, under Sec. 14 of the Central Excise Act, 1944 (in short, 'CEA, 1944') as made applicable to the service tax matters vide Section 83 of the Finance Act, 1994, Shri. Karthik Hasmukh Shukla, General Manager - Finance, M/ s. German Remedies Division, Mumbai, interalia, stated that he joined GRL, now a Division of CHL, as General Manager Finance in the month of August, 2001; that his responsibilities include finance and accounting matters of German Remedies Division; that he reports to Chief Finance Officer of CHL at Ahmedabad. He further stated that CHL has got plants / Offices at the following addresses-
i. Corporate Office- Zydus Tower, Satellite Cross Road, Ahmedabad-380015
ii. Moraiya Unit (Formulation) - Plot No. 417 / 419, village Moraiya, Sarkhej Bavla Road, NH 8A, Ahmedabad - 382210
iii. Goa Unit (Formulation) – Kundaim Industrial Estate, Ponda, Goa.
iv. Baddi Unit (Formulation), Village Saraj Mujara, P.O.Baddi Dist. Solan, Himalchal Pradesh.
v. Buld Drugs- Plot No.291, GIDC, Ankleshwar, Gujarat.
vi. Bulk Drugs - MIDC, Patalganga, Distt. Raigad, Maharashtra
vii. Bulk Drugs - village Dabhasa, Tal. Padara, Distt. Vadodara
viii. Nutraceutical products - Plot No. 5504, GIDC Vatva, Ahmedabad
He further stated that on merger with CHL all the assets and liabilities of GRL vest with CHL; that CHL corporate office at Ahmedabad was responsible for service tax compliance of all the Divisions including German Remedies Division, Mumbai; that any investigation regarding tax compliance may be made with CHL, Ahmedabad, instead of GRL, Mumbai. He further stated that regarding payment made towards obtaining FDA approvals from other countries like USA or countries from Europe etc & GMP approvals, the corporate office of CHL will examine and revert back; that as regards commission paid to foreign agents they have been paying service tax since 16.6.2005 and would examine their liability, if any, for the earlier period; that as regards marketing, promotional and related expenses, after pointing out by the officers of DGCEI, they made payment of Rs. 2883162/- on 14.11.2006 towards Service tax, Education Cess and interest for the period from 16.6.2005 to October 2006; that they had worked out their service tax liability on their own after having received the summons; that as regards expenses incurred on other related services i.e. Advertising expenses they would revert back; that their Company was regularly paying service tax, wherever applicable and had submitted service tax returns; that he would submit the details of payment towards service tax and details of services availed.
5. Further information was called for from M/s CHL. Accordingly, CHL, vide their letters dated 1.12.2006,31.1.2007,23.6.2007, 26.9.2007,4.10.2007, 11.1.2008, 18-1-2008, 3.5.08 & 23.6.08 submitted details of various services received by them from Foreign Service Providers and expenditure incurred by them on this account. They submitted worksheets showing names of various Foreign Service providers from whom they had received various services; payments made to them for these services; their Service Tax liability & the interest liability; and various T.R.6 challans evidencing Service Tax & Interest payments.
6. In response to Summons dtd. 23.5.2007, issued by SIO, DGCEI, Pune Regional Unit, under Sec 14 of the Central Excise Act 1944 (CEA 1944), vide their letter dtd. 23.6.2007, CHL replied that they had not availed any services related to GMP approvals and not made any payments in this regards to any foreign parties for their GRL plants; that they had availed GMP related services at their Ankleshwar plant from foreign party and service tax of Rs. 171871/- + Rs. 3437/- Edu. Cess along with interest of Rs. 12301/- has been paid by them on 20.3.2006. In their aforesaid letter they further gave details of service tax payment, wherever applicable, towards technical know how fees, staff training in foreign country, royalty, legal & professional fees etc. enclosing the requisite TR6 Challans evidencing service tax payments. They further explained that seminar expenses were towards registration fees for attending seminar by the employees of the company; that other expenses were towards rent, tender fees, trademark fees, overseas freight, sample & materials purchase charges, purchase of books & periodicals, subscription and membership fees, purchase of space during India-Pakistan Cricket series etc. on which service tax was not applicable and hence not paid. In their letter they also made a submission that, as regards taxability of payments towards commission paid prior to 16.6.2005, the Finance Act, 2005, has inserted an Explanation below section 65(105) of the Act and that Rule 2(I)(d)(iv) of Service Tax Rules, 1994 amended w.e.f. 16.6.2005 vide notification No. 23/2005-Service Tax dtd. 7.6.2005; that service tax has been paid by them on commission paid to foreign commission agent for marketing of goods from 16.6.2005 under the category of 'Business Auxiliary Service'. In their letter dated 4.10.2007 CHL reiterated their above contention that -
· During the period from 16.8.2002 to 15.6.2005 no service tax was payable on taxable services provided by a non-resident or from outside India who does not have any office in India if the service is not received in India (i.e. service performed outside India) and that accordingly they have not paid service tax on such service during this period.
· During the period from 16.6.2005 to 17.4.2006 in view of the explanation to section 65[105] of F.A. 1994, service tax was payable on every Indian entity irrespective of place of rendering of service and that on all such services they have paid service tax.
· During the period from 18.4.2006 onwards, in view of Section 66A read with Taxation of services rules, 2006 service tax is payable only on such services as are provided from outside India and received in India and that on all such services they are regularly paying service tax
7. BUSINESS AUXILIARY SERVICE
7.1 On scrutiny of the Worksheets submitted by CHL vide their letter dtd. 31.1.2007,26.9.2007,4.10.2007, 11.1.2008 & 18.1.2008, it was seen that CHL had paid certain amounts to various foreign parties situated abroad. Some of these payments, as mentioned by CHL in these worksheets were, interalia, in the nature of marketing expenses / sales promotion expenses, for example payments made to M/s Pharmaland (1982) Co. Ltd., Thailand, Lanka Medical Imports Ltd., Hemas, Unifarma, Abacus Pharma, EBG, Kaleidoscope Holding, Vimpex Ltd., Hesperus, Salmawit Pharma etc. Vide ,their letter dated 3.5.08 Annexure-C-8) CHL confirmed that they had received services in the nature of 'Marketing and Promotion' of their goods from abroad from Vimpex Ltd., Cambodia, M/s Pharmaland (1982) Co. Ltd., Thailand, Lanka Medical Imports Ltd., etc and that they had not paid service tax for this service during the period 1.7.03 to 15.06.05. Scrutiny of the abovementioned worksheets also revealed that CHL had been paying sales commission to their selling agents situated abroad viz. Dr. O.A.Bakr, Inter Chern, Colombia, Farmatrade, Argentina, Se1ectchemic, Brazil, Gudia Pvt. Ltd., Pakistan, Millies International, Sri Lanka etc. Shri. Karthik Hasmukh Shukla, General Manager - Finance, GRL, now a Division of CHL, in his statement dtd. 12.2.07, interalia, stated that "as regards commission paid to foreign agents they have been paying service tax since 16.6.2005 and would examine their liability, if any, for the earlier period." Vide their abovementioned letter dated 3.5.08 CHL confirmed that they had paid Overseas Sales Commission to Dr. O.A.Bakr, Millies International, Sri Lanka etc. for sale of their products. Alongwith the aforesaid letter they submitted sample copies of 'Agency Agreement' in respect of Dr. O.A.Bakr, Sudan & Millies International, Sri Lanka. In the said letter they also submitted that they had entered into agreements with other foreign parties and the language of all these agreements is similar. Vide the aforesaid letter they also confirmed that they had not paid service tax on the overseas sales commission paid for the period 9.7.04 to 15.6.05.
Clause 19 of section 65 of the Finance Act, 1994, introduced w.e.f. 1.3.2003, defines Business Auxiliary Service as –
(i) Promotion or marketing or sale of goods produced or provided by or
belonging to the client or
(ii) Promotion or marketing of service provided by the client or
(iii) Any customer care service provided on behalf of the client; or
(iv) Procurement of goods or services, which are inputs for the client (w.e.f
10.09.04)
(v) Production or processing of goods for on behalf of the client : (w.e.f.
10.09.04) or
(vi) Provision of service on behalf of the client (w.e.f. 10.09.04) or
(vii) A Service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision, and includes services as a commission agent, but does not include any information technology service and any activity that amounts to ({ manufacture" within the meaning of clause (f) of section 2 of the Central Excise Act, 1944
Explanation (inserted on 16.06.2005): For removal of doubts, it is hereby declared that for the purpose of this clause,
a) "Commission Agent" means any person who acts on behalf of another person and causes sale or purchase of goods or provision or receipt of services for a consideration and includes any person who, while acting on behalf of another person-
i) deals with goods or services or documents of title to such goods or services or
ii) collects payment of sale price of such goods or services or
iii) guarantees for collection or payment of such goods or services or
iv) undertakes any activities relating to such sale or purchase of such goods or services …………..
While Service Tax on commission agents for sale or purchase of goods was exempt vide notification no. 13/ 2003 -ST dated 20.06.03, the said notification as amended by notification no.8/2004-ST dated 09.07.2004 to provides for exemption to commission agents only in relation to sale or purchase of agricultural produce. Thus, w.e.f. 09.07.2004, the commission agents providing services in relation to sale or purchase of goods other than agricultural produce are liable to pay service tax.
7.3 The 'Taxable service' is defined in sub-clause (zzb) of clause (105) of section 65 of the Finance Act, 1994 [F.A.1994], as 'Taxable service' means any service provided to a client by any person in relation to Business Auxiliary Service
7.4 In terms of Section 68(1) of {F.A.1994}, every person providing taxable service to any person is required to pay service tax. However, in terms of section 68(2) of {F.A.1994}, the Central Government is empowered to notify any taxable service in respect of which the person liable to pay service tax can be specified and such person could be other than the person, rendering the service. Thus, it is in exercise of power under Section 68(2) that the Central Government shifts the liability of payment of service tax from the service provider to another person viz. the recipient.
Accordingly, Rule 2(1)(d)(iv) was inserted in the Service Tax Rules, 1994 w.e.f. 16.08.02, which provided that, 'person liable to pay service tax' means'-
'In relation to any taxable service provided by a person, who is non-resident or is from outside India, does not have any office in India, the person receiving taxable service in India'.
7.5 Thus, with effect from 16.08.02, it may be seen that the person receiving any taxable service, as defmed in Section 65 (105), which is provided by a person who is a non-resident or is from outside India, shall be liable to pay service tax.
7.6 The following Explanation to clause (105) of section 65 of the Finance Act, 1994 was inserted w.e.f.16.06.2005.
Explanation - 'For removal of doubts, it is hereby declared that where any Service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India, and such service is received or to be received by a person who has his place of business, fixed establishment, permanent address or as the case may be, usual place of residence, in India such service shall be deemed to be taxable servicefor the purposes of this clause.