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-380015ii. 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

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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

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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 oriii) guarantees for collection or payment of such goods or services oriv) 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

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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.

It appeared that the explanation inserted under Section 65(105) of Chapter V of the Finance Act, 1994 by the Finance Act, 2005 w.e.f. 16.06.2005 lays down a deeming provision wherein a particular service is deemed to be taxable service even if it is provided from outside India provided that such service is received by a person in India. Thus, it was clarified that services provided from outside India to a recipient in India is a taxable service provided in India.

7.7 In view of the Explanation to section 65(105), the sub clause (iv) of Rule 2(1)(d)(iv) was further substituted by the Service Tax (Fifth Amendment) Rules, 2005 with effect from 16.06.2005, which read as under:

'In relation to any taxable 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 provider does not have any office in India, the person who receives such service and has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India'

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Thus, under Explanation to section 65(105) read with Rule 2(I)(d)(iv), any service provided from abroad and received by a person in India are taxed treating the recipient of such service as a deemed service provider ..

7.8 It appeared that in the Budget, 2006-07, it was decided to make an explicit provision to tax import of service by deeming such services as taxable services provided in India by the recipient. Accordingly, the Explanation to Section 65(105) was omitted and in its place, a separate section 66A was inserted, which reads as under.(1) Where any service specified in clause 1(105) of section 65 is :-

(a) 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

(b) received by a person (hereinafter referred to as the recipient) 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, for the purposes of this section, be the taxable service and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly, all the provisions of this chapter shall apply .............

In view of the provisions under section 66A, the sub-clause (iv) of Rule 2(I)(d)(iv) ibid was further substituted by the Service Tax (Second Amendment) Rules, 2006 with effect from 19.04.2006 to make it consistent with provisions under Section 66A, which reads as under.

(In relation to any taxable service provided or to be provided by a person from a country other than India and received by any person in India under Section 66A, the recipient of such service. '

Consequently, the Taxation of Services (provided from Outside India and Received in India) Rules, 2006 was also notified w.e.f. 19.04.06 vide Notification No.ll /2006-Service Tax dated 19.04.2006.

7.9 Explanation to Section 65 (105) mentioned at para 7.6 supra was inserted by the Finance Act, 2005, w.e.f. 16.6.05. From a plain reading of this amended provision, it was unambiguously clear that it was clarificatory in nature. Accordingly, Rule 2 (l)(d)(iv) of service tax Rules, 1994 was amended vide Notfn. 23/2005 dtd. 7.6.05. These amended provisions appeared to have been inserted to clarify doubts that may have risen due to the amended Rule 2(I)(d)(iv) as it existed on 16.8.02. Further, the inserted Explanation to sec. 65(105) w.e.f. 16.6.05 begins with the words -'For removal of doubts’, which makes it amply clear that the amendments brought about w.e.f. 16.6.05 only clarify the provisions under Section 65(105) read with Rule 2(1)(d)(iv) as applicable since 16.8.02 and in no way alter, override, or rescind the legislative intent behind its enactment. Since it was an explanation and intended to clarify the legal position, it would bear a retrospective application, i.e., from 16.8.2002. It was a settled law that explanation to a section was not a substantive provision by itself. It was intended to explain the meaning of the words contained in the section or clarify certain

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ambiguities or clear the doubts, if any. It becomes a part and parcel of the enactment. Further, the expression 'taxable service' occurring in clause (iv) of rule 2(1)(d) applies to all taxable services enumerated in section 65(105) of the Finance Act (FA), 1994 and by virtue of this, the said rule would appear to be applicable to all taxable services notified before or from the date when the operation of the rule 2(1)(d)(iv) of the STR, 1994 was made effective, i.e., from 16.8.2002. Furthermore, this clarification has now acquired a legislative dimension with the introduction of section 66A.

7.10 To sum up, w.e.f. 16.08.02, service tax appear to be leviable on any service provided by a person, who is a non-resident or is from outside India, and does not have any office in India, and in such cases, the person receiving taxable services in India was liable to pay service tax in terms of section 68(2) read with rule 2( 1)(d)(iv) of the Service Tax Rules, 1994. Subsequently, for removal of doubts, "Explanation" to Section 65(105) was inserted w.e.f. 16.06.05 so as to clarify that services provided by a person having its business outside India and received by a person having its business located in India shall be deemed to be taxable service. Further, w.e.f. 19.04.06, section 66A read with the 'Taxation of Services (provided from Outside India and Received in India) Rules, 2006 provide for levy of service tax on services provided from outside India and received in India.

7.11 (i) Rule 2(1)(d)(iv) was notified in the Official Gazette by Notification 12/2002 dtd. 1.8.02. This Rule was inserted in exercise of powers under section 94 of the Finance Act, 1994, under which it is provided that-

“(1) The Central Government may, by notification in the Official Gazette, make rules for carrying out the provisions of this Chapter

(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely

(3) The power to make rules conferred by this section shall on the first occasion of the exercise thereof include the power to give retrospective effect to the rules or any of them from a date not earlier than the date on which the provisions of this chapter come into force

"

(ii) Section 68(1) of the Finance Act, 1994, impose liability to pay service tax on every person providing taxable service to any person.

(iii) As per Section 68(2) of the Finance Act, 1994, it is provided that -'notwithstanding anything contained in sub-section (1), in respect of any taxable service 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 66 and all the provisions of this chapter shall apply to such person as if he was the person liable for paying the service tax in relation to such service. '

(iv) In the context of the wordings of section 68(2) of the F.A.1994, the provisions of Rule 2(1)(d)(iv) appear to become relevant. By virtue of the clause (iv) of Rule 2(1)(d) the person receiving the service from abroad was made liable to pay service tax in respect of any taxable service. This clause appears to be clearly relatable to the

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provisions of Section 68(2) of the F.A. 1994, which contemplates applicability of such provision under the said Rules, as is clear from the word "prescribed", which means 'prescribed under rules.'

(v) From the above it appears that a statutory effect has been created by an omnibus provision made by incorporating clause (iv) in Rule 2(1)(d) of the Service Tax Rules, under which every service receiver in India became liable to pay Service Tax in relation to any taxable service provided by non-resident, who did not have office in India. This statutory effect has to be read harmoniously as if complementing the provisions of Section 68(2) as it existed prior to issue of Notification 36/2004 - ST, dtd. 31.12.04, rather than negating its existence or challenging its vires since the date ofits incorporation, i.e., 1.8.2002.

7.12 In view of the above, as per Rule 2(1)(d)(iv) of the Service Tax Rules, 1994, the liability for payment of service tax appeared to be of the following person :-

(i) During the period from 16.08.2002 to 15.06.2005, if services are received from a non-resident or from a person, who is from outside India and also does not have any office in India, then the person who has received the services in India will be liable to pay service tax.

(ii) during the period from 16.06.2005 to 18.04.2006, if services are received from 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 provider does not have any office in India, then the person, who has received the services and has his place of business / fixed establishment / usual place of residence in India will be liable to pay service tax.

(iii) With effect from 19.04.2006, if services are received from 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, then the person, who has received the services in India will be liable to pay service tax subject to the provisions of Taxation of Services (Provided from Outside India) and Received in India Rules, 2006

7.13 In view of the legal position as discussed above, it appeared that the services provided by various Foreign Service Providers like M/s Pharmaland (1982) Co. Ltd., Thailand, Lanka Medical Imports Ltd., Hemas, Unifarma, Abacus Pharma, EBG, Kaleidoscope Holding, Vimpex Ltd., Hesperus, Salmawit Pharma etc. towards Marketing & Sales Promotion from the period 31.3.2003 onwards were taxable services under the category of Business Auxiliary Service as discussed in para 7.2 to 7.12 above and the service tax was required to be paid on the same. However, in view of the fact that these services providers do not have permanent address or establishment in India, and in view of the provisions under Rule 2(1) (d) (iv) of the Service Tax Rules, 1994, & Explanation to clause (105) of section 65 of the Finance Act, 1994 as discussed at para 7.4 to 7.12 supra., the liability to pay the service tax appeared to lie on CHL

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7.14 CHL have been discharging their service tax liability towards payments made on account of Sales Commission paid to their agents abroad, under the category of Business Auxiliary Service since 16.6.2005 as per

i) the statement of Shri. Karthik Hasmukh Shukla, General Manager - Finance, dtd. 12.2.07

ii) as stated by them in their letter dtd. 23.6.2007, 4.10.07, 11.1.08 & 3.5.08 mentioned at para 5 above, and

iii) as per various worksheets submitted along with their letters (Para 5 Supra), which reflect various details like Document No. and date, name of the party situated abroad to whom payment has been made, Nature of service provided, amount in foreign currency remitted, category of service, service tax liability & service tax paid etc

However, they were not discharging their service tax liability on Marketing and Sales Promotion Expenses incurred by them on Foreign Service providers, which fall under the category of Business Auxiliary Service. On having pointed out by the officers of DGCEI they have paid service tax of Rs.78,33,289/-, Education Cess of Rs.1,56,666/- along with interest of Rs.4,74,340/- totaling to Rs.84,64,295/- under T.R.6/GAR 7 Challans.53/06-07, 55/06-07, 56/06-07, 57/06-07 all dated 14.11.2006; 73/06-07 & 74/06-07 dtd. 8.1.2007; 75/06-07 dtd. 11.1.07; 96/06-07 dtd. 16.3.07; 98/06-07 dtd. 29.3.07; 68/06-07 dtd. 5.1.07 & 77&97/06-07 dtd. 5.2.07 and16.3.07 as detailed in Annexure Al to the show cause notice. The ST was paid on the value of Rs. 70533149/- calculated on the basis of worksheets submitted by CHL themselves and covers the period from 16.6.05 to 31.12.06.

7.15 From the above it appeared that CHL had discharged their service tax liability on BAS only since 16.6.05, for the reasons cited by them in their letters dated 23.6.07, 4.10.07, 11.1.08 and 3.5.08 mentioned at para 5 above. However, in view of the legal provisions discussed in paras 7.2 to 7.12 supra, it appeared that their liability to pay ST arise's from 1.7.2003 in respect of Marketing and sales promotion expenses incurred by them on Foreign Service providers and from 9.7.2004 in terms of notification no.8/2004-ST dated 09.07.2004 in respect of Sales Commission paid to their agents abroad, both falling within the definition of Business Auxiliary Services. As can be seen from the worksheets submitted by CHL, from 9.7.2004 to 15.6.2005 they have made payments to the tune of Rs. 1,91,95,289/- on account of Sales Commission to their agents abroad. However, they had not discharged their service tax liability on this amount, which works out to Rs .19,57,919/- (ST Rs. 19,19,529/- + Edu. Cess Rs. 38,391/-). Similarly, during the period 1.7.2003 to 15.6.2005, they had incurred an expenditure of Rs 2,60,02,649/- in respect of Marketing and sales promotion expenses on Foreign Service providers, on which the service tax liability works out to Rs.25,46,976/- (ST Rs. 25,04,543/- Edu. Cess 42,433/-), which has not been paid by them. (Details as per Ann B to the show cause notice).

8. From the information provided by CHL vide their letter dated 11.1.08, it was seen that they had incurred expenditure in foreign currency on account of various other services received by them namely,

a) Professional & Consultancy Fees - Scientific & Technical Consultancy service b) Advertisement

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c)Analytical & Testing Charges - Technical Testing & Analysis

Vide their above cited letter and the enclosed self authenticated worksheet, CHL had submitted the details of expenditure in foreign currency on account of the abovementioned services received by them

9 SCIENTIFIC AND TECHNICAL CONSULTANCY (w.e.f. 16.7.2001)

9.1 In terms of Section 65(92) of F.A. 1994, (Scientific & Technical Consultancy' means any advice, consultancy or scientific or technical assistance, rendered in any manner, either directly or indirectly, by a scientist or a technocrat, or any science or technology institution or organization, to a client, in one or more disciplines of science or technology. '

9.2 As per clause 105(za) of Section 65 of F.A.1994, Taxable service' means - any service provided or to be provided to a client, by a scientist or a technocrat, or any science or technology institution or organization, in relation to scientific or technical consultancy. '

9.3 In view of the legal position as discussed above, it appeared that the payments made in respect of Scientific & technical consultancy (Professional & Consultancy fees) to various foreign parties during the period 31.1.03 to 15.06.05 , was taxable service under the said category and the service tax was required to be paid on the same. However, in view of the fact that these Foreign parties did not have permanent address or establishment in India, & in view of the provisions under Rule 2( l)(d)(iv) of the Service Tax Rules, 1994, & Explanation to clause 105 of Section 65 of the Finance Act,1994 as discussed at para 7.2 to 7.12 supra the liability to pay the service tax appeared to lie on CHL.

9.4 CHL have been discharging their service tax liability towards payments made on account of Scientific & Technical consultancy to foreign parties abroad, viz. Lee Simon, USA, Richard DiMarchi, USA, Jean Marc Cheron, Paris, Robert Henry, Sanfrancisco, etc. under the category of Scientific & Technical consultancy Services from 16.6.2005 onwards, as seen from the worksheet and challans enclosed by them in their letters dtd. 23.6.2007, 26.9.2007 & 4.10.2007 mentioned at para 5 supra. However, scrutiny of the worksheets revealed that they had not discharged their service tax liability on account of Scientific & Technical consultancy Services for the period 1.4.03 to 15.6.05, in respect of such expenses. From 1.4.2003 to 15.6.2005 they had made payments to the tune of Rs. 1,44,18,870/- on account of Scientific & Technical consultancy paid to foreign parties abroad. However, they had not discharged their service tax liability on this amount, which works out to Rs.10,86,624/- (ST Rs. 10,83,589/- Edu. Cess Rs. 3,035/- .(Details as per Ann B to the show cause notice)

10. ADVERTISEMENT (w.e.f. 01.11.1996)

10.1 In terms of Section 65(3) of F.A. 1994, 'Advertising Agency' means any person engaged in providing any service connected with the making, preparation, display or exhibition of advertisement and includes an advertising consultant.' Accordingly, in terms of Section 65(2) of F.A.1994, the term 'Advertising' has been defined as ' Advertisement includes any notice, circular, label, wrapper, document,

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hoarding or any other audio or visual representation made by means of light, sound, smoke or gas'

10.2 As per clause 105(e) of Section 65 of F.A.1994, 'Taxable service' means - any service provided or to be provided to a client, by an advertising agency in relation to advertisement, in any manner

10.3 In view of the legal position as discussed above, it appeared that the expenses paid to various foreign parties for Advertising their products abroad was taxable service under the said category and the service tax was required to be paid on the same. However, in view of the fact that these Foreign parties did not have permanent address or establishment in India, & in view of the provisions under Rule 2(1)(d)(iv) of the Service Tax Rules, 1994, & Explanation to clause 105 of section 65 of the Finance Act, 1994 as discussed at para 7.2 to 7.12 supra the liability to pay the service tax appeared to lie on CHL

10.4 CHL have been discharging their service tax liability towards payment made on account of Advertising Expenses paid to foreign parties abroad viz. Barret Webb Ltd., Hesperus – Sri Lanka, Barney Solutions, London, Nirvan Production, Ukraine, etc under the category of Advertising Services from 16.6.05 onwards as seen from the worksheet and challans enclosed by them in their letters dated 23.6.07, 26.9.07 and 4.10.07, and as confirmed by them in their letter dated 3.5.08 mentioned at para 5 supra. However, they had not discharged their service tax liability on account of Advertising Services for the period 1.4.03 to 15.6.05, in respect of such expenses. On the basis of information provided in the worksheets prepared and submitted by CHL vide their letters mentioned in para 5 supra, it was seen that from 1.4.2003 to 15.6.2005 they had made payments to the tune of Rs. 3,03,074/- on account of Advertising Expenses paid to foreign parties abroad. However, they had not discharged their service tax liability on this amount, which works out to Rs.30100/- (ST Rs.29568/- + Edu. Cess Rs.532/) (Details as per Ann B)

11 TECHNICAL TESTING AND ANALYSIS (w.e.f. 01.07.2003)

In terms of clause (106) of Section 65 of the Finance Act, 1994

"Technical testing and analysis means any service in relation to physical, chemical, biological or any other scientific testing or analysis of goods or material or any immovable property but does not include any testing or analysis service provided in relation to human beings or animals. " Explanation (inserted on 01.05.2006) - For the removal of doubts, it is hereby declared that for the purposes of this clause, "technical testing and analysis" includes testing and analysis undertaken for the purpose of clinical testing of drugs and formulations; but does not include testing or analysis for the purpose of determination of the nature of diseased condition, identification of a disease, prevention of any disease or disorder in human beings or animals;"

11.2 The taxable service is defined in sub-clause (zzh) of clause (1 05) of Section 65 of the Finance Act, 1994 as 'service provided or to be provided to any person, by a technical testing and analysis agency in relation to technical testing and analysis'

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11.3 In terms of clause 107 of Section 65 of the Finance Act, 1994 -

"technical testing and analysis agency" means any agency or person engaged in providing service in relation to technical testing and analysis.

11.4 The exemption provided to a technical testing and analysis agency vide Notification 11/2007-S.T. dated 1.3.2007 reads as under-

In exercise of powers conferred by sub-section (1) of section 93 of the Finance Act, 1994, the Central Government, on being satisfied that it is necessary in the public interest to do so, hereby exempts the taxable service, specified in sub-clause (zzh) of clause (105) of section 65 of the Finance Act, 1994, provided or to be provided by a Clinical Research Organization approved to conduct clinical trials by the Drugs Controller General of India, in relation to testing and analysis of newly developed drugs, including vaccines and herbal remedies, on human participants so as to ascertain the safety and efficacy of such drugs on human participants, from the whole of the service tax leviable thereon under section 66 of the said Finance Act, 1994

11.5 Vide their letter dated 23.6.08, (para 5 supra), CHL, interalia, clarified that -'So far as Analytical & Testing charges are concerned, the same were paid towards analytical and testing of drug; that the drugs were tested using human receptor proteins; that the service pertains to period prior to 18.4.06, and hence service tax was not applicable on import of such service. They further clarified that during the material period they mainly availed services from M/s MDS Pharma Services, Minneapolis and that they had not entered into any agreement with the aforesaid party.

11.6 In view of the legal position as discussed above, it appeared that CHL's contention that, since expenses paid towards analytical and testing were in respect of drugs which were tested using human receptor proteins, and that the service pertains to period prior to 18.4.06, and hence service tax was not applicable on import of such service, does not hold good, interalia, because of the following reasons -

a) Although the explanation to section 65(106) of Finance Act, 1994, for the removal of doubts, was inserted on 1.5.2006, since it is clarificatory in nature it bears retrospective effect. From the wordings of the aforesaid section and the explanation provided thereunder, it appears that while tests carried on drugs and formulations (for ensuring their potency, or efficacy, or side effects, or any other purpose) will be covered under the definition and hence taxable, pathological tests carried out on human beings and animals for the purposes like diagnosing or identifying the disease as well as for preventing diseases and disorders will not be covered under the definition. In the instant case, what is tested is the drugs/formulations manufactured by CHL.

b) CHL cannot seek any benefit of Notification 11 / 2007 discussed at para 11.5 supra because the said notification is effective from 1.3.07, which is later to the date of receipt of such services by CHL i.e. during 10.9.04 to 15.6.05. Moreover, CHL have not clarified as to whether

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MDS Pharma Services, Minneapolis, is a Clinical Research Organization having approval of Drugs Controller General of India, as stipulated in the aforesaid Notification.

c) in view of the fact that MDS Pharma Services, Minneapolis, does not have permanent address or establishment in India, & in view of the provisions under Rule 2(I)(d)(iv) of the Service Tax Rules, 1994, & Explanation to clause (105) of section 65 of the Finance Act, 1994 as discussed at para 7.2 to 7.12 supra the liability to pay the service tax appears to lie on CHL.

11.7 In view of the legal position as discussed above, it appeared that the expenses paid towards Analytical & Testing charges to various foreign parties for testing their drugs & formulations was taxable service under the category as discussed in para 11 above and the service tax was required to be paid on the same.

11.8 As seen from the worksheets submitted along with their letters (Para 5 Supra), it appeared that CHL had not discharged their service tax liability towards payment made on account of Analytical & Testing charges paid to foreign parties abroad, under the category of Technical Testing & Analysis Services. Information in these worksheets reveal that from 10.9.04 to 15.6.2005 they have made payments to the tune of Rs. 1205815/- on account of Analytical & Testing charges paid to foreign parties situated abroad. However, they had not discharged their service tax liability on this amount, which works out to Rs.122993/-(ST Rs.120582/- + Edu. Cess Rs.2412/-) (Details as per Ann B to the show cause notice).

12 From the detailed discussions in the above paras, it appeared that the services received by M/ s. CHL viz. Business Auxiliary Services, Scientific & Technical Consultancy Service, Advertising Agency service & Technical Testing & Analysis Service from various foreign service providers and paid for in Foreign currency as detailed in the foregoing paras were taxable services under the categories of the services as mentioned above and service tax appeared to be payable on the same in view of the provisions as contained in Section 65(105) of the Finance Act, 1994 and the same appeared to be liable to be paid by M/s. CHL as per the provisions of Rule 2(i)(d)(iv) of the Service Tax Rules, 1994.

13. In view of the above, it appeared that M/s. CHL had contravened the following provisions of the Finance Act, 1994 (in short, 'FA, 1994') and the Service Tax Rules, 1994 (in short, 'STR, 1994') with intent to evade payment of service tax in respect of the services as discussed hereinabove.

(i) Section 67 of the FA, 1994 in as much as they failed to determine the value of taxable services.

(ii) Section 68 of the FA, 1994 read with Rule 6 of the STR, 1994 in as much as they failed to pay service tax in the manner and at the rate as provided under the said provisions.

(iii) Section 69 of the FA, 1994 read with Rule 4 of STR, 1994 in as much as they failed to apply for in form ST-1 to the jurisdictional Superintendent of Central Excise for registration

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under the said provisions.

(iv) Rule 5 of STR, 1994 in as much as they failed to furnish to the jurisdictional Superintendent of Central Excise a list of all accounts maintained by them in relation to the service tax payable.

(v) Section 70 of the FA, 1994 read with Rule 7 of STR, 1994 in as much as they failed to furnish to the jurisdictional Superintendent of Central Excise returns in form ST-3 mentioning the particulars of services, the value of taxable services determinable and other particulars in the manner as provided therein and incorporating the required information in such returns

14. It further appeared that M/s CHL, having full knowledge of the fact that services received by them were liable to Service Tax, had neither paid due service tax nor filed any service tax return as prescribed and by the due dates. M/s CHL appeared to have suppressed these facts and contravened the various provisions of F.A., 1994, and Rules made thereunder as mentioned above with an intention to evade payment of service tax and as such, proviso to Sub Section (1) of Section 73 of the F.A., 1994, for invoking extended period of limitation appeared to be invokable in this case. M/s. CHL also appeared to be liable to pay interest as per Section 75 of the F.A., 1994 and also appeared to be liable to penalty under Section 76, 77 & 78 of the F.A.1994

15. Therefore, a show cause notice bearing F.No.DGCEI/MZU/I&IS’C’/30-23/2007 dated 01.09.2008 was issued to M/s. Cadila Healthcare Ltd., 'Zydus Tower', Satellite Cross Road, Ahmedabad - 380015, to show cause to the Commissioner, Service Tax, Ahmedabad, as to why:- The impugned services provided and/or received by them, details of which have been provided in the Annexure A to the show cause notice should not be classified under the (a) Business Auxiliary services as defined under Sec.65(19) of the FA, 1994, para 7 supra (b) 'Scientific & Technical Consultancy services' as defined under Sec. 65(92) of the FA, 1994, para 9 supra (c) "Advertising services as defined under Sec. 65(2) of the FA, 1994, para 10 supra and (d) Technical Testing and Analysis services as defined under Sec.65(106) of the FA, 1994, para 11 supra and amount of Rs.1,37,34,568/-.as detailed in Annexure-A to the show cause notice, should not be demanded and recovered from them and the amount of Rs.79,89,955/- already paid vide TR-06 challans as detailed in the Annexure- A 1 should not be adjusted and appropriated towards ST so demanded.

They were also called upon to show cause to the above authority, within the stipulated period as above, as to why-

(i) Penalty should not be imposed upon them under Section 76, 77 and Section 78 of Chapter V of the Finance Act, 1994 for contravening the provisions of Section 68 read with Rule 6 of the Service Tax Rules, 1994, Section 69 read with said Rule 4 and Section 70 of Chapter V of the Finance Act, 1994 read with Rule 7 of the Service Tax Rules, 1994, and for non / short payment of Service Tax by way of suppression of facts with intent to evade payment of Service Tax, respectively.

(ii) Interest on the amount of Service Tax including Cess

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determined to be payable by the said M/s CHL should not be paid by them under section 75 of the Chapter V of the Finance Act, 1994, and an amount of Rs. 474340/ - already paid vide TR- 06 Challan, as detailed in the Annexure- AI, as interest, should not be adjusted and appropriated against the interest payable on the amount of ST so determined.

DEFENCE REPLY & PERSONAL HEARING:

16. CHL vide letter dated 25.11.2008 submitted reply to the show cause notice. They submitted that the period covered under the subject notice is from April 2003 to December'2006 and the total service tax demanded is Rs. 1,37,34,568/-, as per Annexure-A to the SCN. They further submitted that Explanation to Section 65(105) was inserted w.e.f.16.06.2005, and accordingly the rule 2(1)(d)(iv) was suitably amended in Service Tax Rules, 1994. In view of this they started to pay service tax under reverse charge method from 16.06.2005 and thereafter they had regularly paid service tax on availment of taxable service from foreign service provider. First payment of service tax under reverse charge method was made in the month of July'05. Out of total service tax demand of Rs. 1,37,34,568/-, Rs. 79,89,955/- has already been paid on their own for the services availed during the period from 16.06.2005 to December'06 as shown in Annexure-A-1 to the SCN. Out of total service tax demand of Rs. 1,37,34,568/- , Rs. 57,44,612/- pertained to provision of services by foreign service provider, in foreign country during the period from 01.04.2003 to 15.06.2005 as shown in Annexure-B to the SCN.

16.1 They submitted that there was no dispute on payment of service tax under reverse charge method during the period from 16.06.2005 to December-06. There was also no dispute about rendering of service in foreign country, by foreignservice provider during the period from 16.08.2002 to 15.06.2005. There was also no dispute that services in question were rendered out side India by foreign service provider. The only dispute involved in the subject notice is that whether for services rendered abroad by non-resident to Indian company during the period from 16.08.2002 to 15.06.2005, service tax is payable or not by availer of service. Therefore, the dispute involved in this SCN is an interpretation of statute, as to whether service tax is payable with effect from 16.08.2002 when clause (iv) was inserted in Rule 2(1)(d) of Service Tax Rules, 1994 or from 16.06.2005 when an explanation to Section 65(105) of the Finance Act, 1994 was inserted or from 18.04.2006 when Section 66A was inserted, for taxable services availed abroad by Indian company.

16.3 They reproduced the text of clause (iv) of Rule 2(1)(d) of Service tax Rules, 1994, as it existed at the relevant time.

(i) When clause (iv) was inserted first time with effect from 16.08.2002 : - "In relation to any taxable service provided by a person who is a non-resident or is from outside India, does not have any office in India, the person receiving taxable service in India."

(ii) When said clause got amended with effect from 16.06.2005 upon insertion of Explanation to Section 65(105) of the F.A. 1994 : - "In relation to any taxable service provided or to be provided by a person, who has established a business or has a fix establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country

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other than India, and such service provider does not have any office in India, the person who receives such service and has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India".

(iii) When said clause got amended with effect from 19.04.2006 upon insertion of Section 66A of the F.A. 1994 : - " In relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under Section 66A of the Act, the recipient of such service".

16.4 The demand of Rs. 57,44,612/- pertained to provision of services by foreign service provider, in foreign country during the period from 01.04.2003 to 15.06.2005 as shown in Annexure-B of the SCN. During this period the relevant provision under Service Tax Rules, 1994, was rule 2(1) (d)(iv). It is un-disputed fact that foreign service provider has rendered service out side India

16.5 They submitted that Section 64 of Chapter V of the Finance Act, 1944 excludes the applicability of service tax to the State of Jammu & Kashmir and therefore the service rendered within the state of Jammu & Kashmir does not attract service tax. They referred to Service Tax Circular No. 36/4/2001 dated 08.10.2001 issued by Central Board of Excise & Customs. It was submitted that in the instant case it is un-disputed fact that services in question were rendered out side India, by foreign service provider, therefore, question of levy of service tax does not arise during the material period. Further this circular was valid till 09.05.2007. The Central Board of Excise & Customs, New Delhi vide Circular No. 93/04/2007-ST dated 10.05.2007, has withdrawn above circular. This means that during the period from 08.10.2001 to 09.05.2007 the Board circular No. 36/4/2001 dated 08.10.2001 was operative and in force and all departmental officers are bound to follow this circular during this period.

16.6 They further invited attention to the Service Tax - Frequently asked question and their answers issued by Directorate of Publicity Relations, Customs & Central Excise, New Delhi, reported at 2003( 158) ELT page T 23 (october'03), in which at question and answer No. 38, the authority has clarified as under. (0.38) Would the service provided abroad liable for payment of service

Tax? Ans. No, the services rendered abroad shall not attract

service tax as the levy covers only the services provided within India.

The above instruction issued by the Department magnify that from beginning the intention of legislature was amply clear that they did not want to levy service tax on services rendered abroad. In addition to above circulars and instruction, attention was also invited to Central Board of Excise & Customs, New Delhi, Circular No. 56/5/2003-S.T. dated 25.04.2003, in which the Board has categorically clarified that "Service Tax is destination based consumption tax and it is not applicable on export of services". This also reflects correct legal position that service tax is applicable on the event of rendering service within India, as this levy is destination based consumption tax. It is settled law that circular issued by CBEC are binding on officers of Revenue Department and they cannot repudiate a circular on the ground that it is inconsistent with a statutory

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provision. In support of this they relied upon the following decisions of H'ble Supreme Court.

M/s. Ranadey Micronutrients reported as 1996(87) ELT page 19 (S.C.),

CCE Vis Dhiren Chemical Industries reported as 2002 (139) ELT page 3 (S.C.),

Mis. Ranbaxy Laboratories Ltd reported as 2003(158) ELT page A131 (S.C.),

16.7 They further stated that the issue relates to levy of service tax under Section 66 of Finance Act, 1994, which provides for levy of service tax on the taxable services referred to in various sub- clauses of Clause (105) of Section 65 of the Act. Section 68 which provides for payment of the service tax by every person providing taxable service to any person shall pay service tax at the rate specified in Section 66 in such manner and within such period as may be prescribed. Sub-section (2) of Section 68 provides that notwithstanding any thing contained in sub-section (i), in .respect of any taxable service notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person i.e. by other person in such manner as may be prescribed. It is pertinent to emphasis here that by virtue of Section 66A inserted by the Finance Act, 2006, if any service specified is to be treated as taxable service and the recipient thereof is liable to pay service tax thereon. Section 66A came into force in April'2006, whereas the dispute in the present notice relates to the period prior to that. The noticee has nonetheless been held liable to pay service tax by virtue of the amendment, brought in rule 2(1)(d) of the Service Tax Rules. By said amendment which came into force from 16.08.2002, the following clause was inserted after sub- clause (iii) of clause (d) -

" in relation to any taxable service provided by a person who is a non- resident or is from outside India does not have any office in India, the person receiving taxable service in India"

They submitted that it is relevant to mention that Rule 2 is the definition clause, clause (d) defines the term 'person liable to pay service tax' among other things. 1t is well- settled law that definition clause of a statute is not to be read as a substantive provision of the relevant statute. It can be used as an aid or key to the interpretation of the substantive provisions of the statute. Sub-section (2) of Section 68 of the Act, prescribes the person liable to pay service tax other than those providing taxable service. But this could be done by a substantive rule and not by amendment of the definition clause. If the amendment carried out in Rule 2(1)(d) was enough, there was no need of inserting section 66A in the Finance Act in 2006. While inserting Section 66A, the legislature was fully aware of existing legal position. They submitted that recipients were made liable to pay service tax earlier by Notification 36/2004 dated 31.12.04 with effect from 01.01.2005 and later an explanation was inserted at the end of sub-clause (105) of Section 65 by Finance Act, 2005 w.e.f.16.06.2005, which reads as under:

Explanation- For the 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 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

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case may be , usual place of residence, in India, such service shall be deemed to be taxable service for the purpose of the clause"

16.8 After insertion of above Explanation, clause (iv) of Rule 2(1)(d) was suitably amended w.e.f. 16.6.05. Thereafter on 18.4.06 section 66A was inserted and aforesaid explanation was deleted. From the above legal provisions, it can be concluded that up to 17.04.2006, there was no substantive provisions in the statute which create liability on recipient of service in India for payment of service tax under reverse charge method. The liability of payment of service tax on recipient of service in India has been created only by virtue of insertion of Section 66A in Finance Act, 2006 w.e.f.18.04.2006. Therefore, service tax was not payable by recipient of service in India for the services provided by non-resident in foreign country up to 17.04.2006. They relied on the following decisions:

i) CCE, Ludhiana VIs MIs Bhandari Hosiery Exports Ltd, reported as 2008(11)S.T.R. 151 (Tri. - Del.),

ii) CCE, Raipur VIs MIs Jindal Steel It Power Ltd, reported as 2008(11) S.T.R. 14 (Tri.- Del.),

iii) In the case of MIs Prabhat K. Tyagi V Is CCE (Appeals - I), Banglore, reported as 2008(10)S.T.R. 240 (Tri.- Bang.),

iv) Foster Wheeler Energy Ltd V Is CCE & Customs, Vadodara - II, reported as 2007(7)S.T.R. 443 (Tri.-Ahmd.),

v) M/s Modern Petrofils, Honorable Commissioner (Appeals) reported as 2007(7)S.T.R. 490 (Commr. Appl.)

vi) VMT Spinning Co. Ltd V Is CCE, Chandigarh, reported as 2008(11)S.T.R. 64 (Tri. - Del.),

vii) M/s Bharat Forge Ltd V Is CCE, Pune-III, reported as 2008(9)S.T.R. 67 (Tri.- Mumbai),

viii) M/s Welspun Gujarat Stahl Rohren Ltd VIs CCE, Vadodara-II, reported as 2007(5)S.T.R. 38 (Tri.- Mumbai),

ix) M/s Lohia Starlinger V Is CCE, Kanpur, reported as 2008(10)S.T.R. 483 (Tri.- Del.),

x) M/s S.K.M Egg Products Exports (India) Ltd V Is CCE, Salem, reported as 2008(10)S.T.R. 123 (Tri.- Chennai),

xi) M/s CITIBANK N A V Is CCE, Chennai, reported as 2008-TIOL-1728-CESTAT-MAD,

16.9 They submitted that ratio of all the above judgments is squarely applicable in their case. In their case service tax is demanded for the period from 16.08.2002 to 15.05.2006, i.e. prior to insertion of Section 66A of Finance Act, 1994 w.e.f.18.04.2006. Services in question are provided by foreign service provider in foreign country.

16.10 They further submitted that the Department has not brought on record any of the concrete evidence establishing breach of any the provisions of Finance Act, 1994 and Service Tax Rules, 1994. Therefore, penalty and interest proposed in the subject Show Cause Notice are unwarranted. They requested for a personal hearing in the subject matter.

17. A personal hearing was fixed for 14.11.2008 which was adjourned to 13.1.2009 on the request of CHL. A personal hearing was held on 13.1.2009 which was attended by Shri Gopal Chosla, Deputy General Manager, Excise of CHL. He submitted a written brief. He did not dispute the liability except on the issue of services being provided from outside

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India not being taxable prior to 16.6.2005. In the said written brief dated 10.1.2009 they interalia reiterated the contentions already made by them and relied on various judgments including that of M/s Hindustan Zinc Ltd v/s CCE Jaipur reported at 2008(11) STR (Tri-LB) DEL. In their further written submission dated 3.2.2009 they relied on the judgment of CCE, Chandigarh v/s Malwa Cotton Spinning Mills Ltd reported at 2009-TIOL-CESTAT-DEL and Rubamin Laboratories Ltd v/s CCE, Vadodara reported at 2009-TIOL-CESTAT-DEL. In their further written submission dated 16.2.2009 they relied on the judgment of M/s Lohia Starlinger v/s CCE Kanpur reported at 2009-TIOL-266-CESTAT-DEL. In their further written submission dated 24.6.2009 they relied on the judgment of CCE, Chennai v/s EID Parrty reported at 2009-TIOL-927-CESTAT-MAD. In their further written submission dated 27.8.2009 they relied on the judgment of M/s Unitech Ltd v/s Commissioner of Central Excise, Delhi reported at 2009(15) STR 385(Del).

17.1 A personal hearing was again held on 8.2.2012 which was attended by Shri Gopal Chosla, General Manager of CHL. He explained the case details and also gave written submission dated 3.2.2012. He requested that in view of Board’s clarification dated 26.9.2011, the notice should be dropped. He further submitted that they were not contesting the payment of Rs. 79,89,955/- at this stage. The remaining amount of Rs. 57,44,612/- is not payable in view of above quoted Board’s Instruction dated 26.9.2011.

17.2 In their said letter dated 03.02.2012 given during the course of personal hearing they submitted that this submission was in addition to what have been submitted in their defence reply dated 25.11.2008, and written submissions dated 10.01.2009, 03.02.2009, 16.02.2009, 24.06.2009, 18.07.2009, 17.08.2009, and 27.08.2009. They submitted that the period covered under the subject notice is from April'03 to December'06. The short issue involved in the subject notice is whether recipient of service in India is liable to pay service tax on the services rendered in foreign country by the foreign service provider to CHL during the period from April'03 to 15.06.2005. The total proposed service tax demand in the subject notice is Rs. 1,37,34,568/- for the period from April'03 to December'06 as per Annexure-A to SCN.

17.3 Out of total proposed demand of service tax of Rs. 1,37,34,568/- , amount of Rs. 57,44,612/- pertains to the period from April'03 to 15.06.2003 [ refer Annexure-B to SCN] and balance amount of Rs. 79,89,955/- pertains to the period from 16.06.2005 to December'06 [ refer Annexure-A-1]. After insertion of Explanation to Section 65(105) of Finance Act, 1994 and simultaneous amendment in rule 2(1)(d)(iv) of Service Tax Rules, 1994, w.e.f.16.06.2005, they started to pay service tax on availment of services from foreign service provider. Thus out of total proposed demand of service tax of Rs. 1,37,34,568/-, service tax amount of Rs. 79,89,955/- has already been paid along with interest on their own vide TR-6 challans as per details given in Annexure-A1 to SCN pertains to the period from 16.06.2005 to December'06 and only dispute remained to be settled was for balance amount of Rs. 57,44,612/- pertaining to the period April'03 to 15.06.2005.

17.4 The issue involved in the subject notice had reached up to Hon'ble Supreme Court of India in various cases. The Hon'ble Supreme Court of India has held that only after enactment of Section 66A w.e.f. 18.04.2006, taxable services received from abroad by a person belonging to India are taxed in the hands of the Indian residents. They relied on the following judgments:

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Commissioner V/s Bhandari Hosiery Ltd reported as 2012(25)STR J 28 (SC). Commissioner V/s Unitech Ltd reported as 2011(24)STR J 135 (SC). •Commissioner V/s Bhandari Hosiery Ltd reported as 2010(20)STR J 99 (SC). Commissioner VIs Indian Nationalship owners Association reported as 2010(17)STR J 57(SC).

17.5 They referred to circular No. 276/8/2009-CX.8A dated 26.09.2011 wherein at para 2 it is clarified that" In view of the aforementioned judgments of the Hon'ble Supreme Court, the service tax liability on any taxable service provided by a non resident or a person located outside India, to a· recipient in India, would arise w.e.f. 18.04.2006 , i.e. the date of the enactment of Section 66A of the Finance Act, 1994." [emphasis place]. Further in para 3 of the sa1d circular the Board has clarified that "appropriate action may please be taken accordingly in the pending disputes" [ emphasis place]. Copy of the Board circular was attached.

Discussion & Findings:

18. I have carefully gone through the subject Show Cause Notice, the case records available with the office, the defence replies filed by CHL and the submissions made by them during the course of personal hearing.

19. I find that the issue to be decided in this case is whether CHL are liable to pay service tax under Rule 2(1)(d)(iv) of Service Tax Rules, 1994 on the amount paid by them to the service providers not having office in India for “Business Auxiliary Services”, “Scientific & Technical Consultancy Services”, “Advertising Services” and “Technical Testing & Analysis Services” received from such service providers during the period from 1.4.2003 to 31.12.2006.

20. I find that vide instruction F.No. 275/7/2010-CX8A, dated 30.6.2010 the Board (CBEC) had clarified that service tax on a taxable service received in India, when provided by a non-resident/person located outside India, would be applicable on reverse charge basis w.e.f 1.1.2005 and the ratio of judgment in M/s Indian National Shipowners Association case would not apply to such cases. However, it has now been clarified by the Board vide instruction F.No. 276/8/2009-CX8A dated 26.9.2011 that the appeals filed by the department before the Hon’ble Supreme Court, for defending the levy of service tax on such services w.e.f. 1.1.2005, have been dismissed recently subsequent to the issuance of above said instruction dated 30.6.2010. In view of the same the service tax liability on any taxable service provided by a non resident or a person located outside India, to a recipient in India, would arise w.e.f. 18.4.2006, i.e. the date of enactment of section 66A of the Finance Act, 1994. The Board has accepted this position and rescinded the above referred instruction dated 30.6.2010.

21. I find that total demand is of Rs.1,37,34,568/- for the entire period from 1.4.2003 to 31.12.2006, as detailed in Annexure-A to the show cause notice. Out of the said amount of service tax, Rs. 57,44,612/- is the demand for the period from 1.4.2003 to 15.6.2005 as detailed in Annexure-B to the show cause notice and the remaining amount i.e. Rs. 79,89,955/- is the demand for the period from 16.6.2005 to 31.12.2006 as detailed in Annexure-A-1 to the show cause notice. I find that the period

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from 1.4.2003 to 15.6.2005 is prior to the cut-off date of 18.4.2006 and there is no dispute with regard to the non sustainability of the demand of service tax, Rs. 57,44,612/- pertaining to the said period. Consequently, the proposals for interest and penalty on the said demand also do not survive. Now, I come to the demand of Rs. 79,89,955/- for the period from 16.6.2005 to 31.12.2006. As discussed in para 20 above, the liability to pay service tax arises only w.e.f 18.4.2006. Thus, there arises no liability to pay service tax for the period from 16.6.2005 to 17.4.2006. I find from Annexure-A-1 to the show cause notice that service tax of Rs. 32,16,513/- (Rs. 3,57,314/- + Rs. 15,49,161/- + Rs. 12,67,238/- + Rs. 42,800/-) pertains to the period from 16.6.2005 to 17.4.2006 and there is no liability to pay the said amount of service tax. Consequently, the proposals for interest and penalty on the said demand also do not survive. The remaining amount of service tax of Rs. 47,73,442/- (Rs. 79,89,955/- - Rs. 32,16,513/-) pertaining to the period from 18.4.2006 to 31.12.2006 is recoverable from CHL under proviso to Section 73(1) of the Finance Act, 1994. However, I find that the entire amount of service tax of Rs. 79,89,955/- pertaining to the period from 16.6.2005 to 31.12.2006 along with interest has been paid by CHL during the course of investigation which is proposed to be adjusted and appropriated in the show cause notice towards the service tax demanded therein. I also find that CHL has not contested the payment of the said amount of service tax of Rs. 79,89,955/- and the amount of interest of Rs.4,74,340/-. As discussed above, the service tax recoverable from CHL under authority of law is Rs. 47,73,442/- whereas, the remaining amount of Rs. 32,16,513/- paid by CHL as service tax can only be treated as excess payment. Similar is the case with the amount of interest in excess of the amount recoverable on Rs. 47,73,442/-. Therefore, the amount of service tax of Rs. 47,73,442/- out of the amount of Rs. 79,89,955/- paid by CHL shall be adjusted against the confirmed demand of service tax of Rs. 47,73,442/- for the period from 18.4.2006 to 31.12.2006. Also, the amount of interest on the above recoverable amount of service tax of Rs. 47,73,442/- out of interest amount of Rs. 4,74,340/- already paid by CHL shall be adjusted against the recovery of interest.

21.1 In view of the above discussion, I hold that the services as detailed in Annexure-A-1 to the show cause notice received by CHL are appropriately classifiable under the taxable category of “Business Auxiliary services” as defined in Section 65(105)(zzb) of the Finance Act, 1994 read with Section 65(19) of the Finance Act, 1994. Accordingly, I find that service tax of Rs. 47,73,442/- on the amount of Rs 3,89,98,707/- paid by CHL to the service providers not having office in India for the services received during the period 18.4.2006 to 31.12.2006 is recoverable from them under Section 73(1) of the Finance Act, 1994 along with interest under Section 75 ibid. I do not find it necessary to discuss the classification of the services under the category of “Scientific & Technical Consultancy Services”, “Advertising Services” and “Technical Testing & Analysis Services” as the demand detailed in Annexure- B to the show cause notice is found unsustainable being pertaining to the period prior to the cut-off date of 18.4.2006 as discussed by me in the above para.

21.2 I observe that Circulars and instructions issued by the Board are binding on the departmental officers as has been held by the Hon’ble Supreme Court in the case of Ranadey Micronutrients Vs 1996(87)ELT19(SC) and Paper Products Ltd Vs CCE 1996(112)ELT 765(SC).

22. I observe that so far as ‘suppression of facts’ is concerned, the phrase implies that withholding of information is suppression of facts. P. Ramanatha

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Aiyar’s Concise Law Dictionary [1997 Edition Reprint 2003 – page 822] defines the phrase lucidly and accurately as – Where there is an obligation to speak, a failure to speak will constitute the “suppression of fact” but where there is no obligation to speak, silence cannot be termed “suppression”. It is manifestly clear from this that intention to evade payment of duty is implied in the suppression of facts. Since the said assessee was liable to self assess the liability to pay service tax, they had an obligation to furnish the correct and complete information and the value of services whether taxable or otherwise.

22.1 It is needless to recapitulate that the present show cause notice has arisen out of the investigation conducted by the Pune Regional unit of the Directorate General of Central Excise Intellegence. Had they not taken up investigations in the case, the evasion of service tax would have remained unnoticed. Therefore, this is a case of improper assessment amounting to deliberate non-declaration and suppression of vital information with a willful intention to evade payment of service tax. Accordingly, the invoking of extended period under proviso to Section 73(1) of the Act in the case before me is fully justified.

22.2 I find that in the present system of self-assessment, documents like invoices and other transaction details are not supplied to the Department. Moreover, CHL did not furnish the required details of payments made to the service providers not having office in India for receipt of “Business Auxiliary Services” during the period from 16.6.2005 to 31.12.2006 either in the ST-3 returns or in any other way to the Department. The information in this regard was provided by them to the investigating agency vide their various letters between date 1.2.2006 to 23.6.2008 as discussed in para 5 and para 7.14 of the show cause notice. Since, they even did not consult the Department in case of any doubt, the intention will have to be believed as that of evasion. Once the details are not submitted to the Department, mis-declaration or suppression is rightly invoked. I, therefore, conclude that the element of suppression with intent to evade payment of service tax is conspicuous by the peculiar facts and circumstances of the case as discussed above and, therefore, the extended period of limitation under Section 73(1) of the Finance Act, 1994 is rightly invokable for recovery of service tax demanded in the impugned show cause notice. In view of the above discussion and findings, the ratio of cases relied upon by CHL can not be applied in the case before me.

23. I now take up the issue of imposition of penalty under Section 76, 77 and 78 of the Act.

23.1 In view of the above, I hold that CHL have suppressed the facts with intention to evade payment of service tax. Thus penalty under Section 78 is mandatorily imposable as has been held by the Apex court in the case of Dharmendra Textile Mills Ltd-2008 (231) ELT 3 (SC) and Rajasthan Spinning & Weaving Mills Ltd-2009 (238) ELT 3 (SC). Therefore, penalty is imposable on CHL under Section 78 of the Finance Act, 1994. In view of the above discussion the ratio of the judgments relied upon by CHL can not be applied in this case.

23.2 In the case before me, the confirmed demand of service tax is for the period from 18.4.2006 to 31.12.2006. However, CHL has paid service tax on the said amount of service tax during the period from 14.11.2006 to 16.3.2007. As CHL has not paid service tax within the stipulated time period as prescribed under Section 68 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994, I hold them liable to penalty under Section 76 of the Finance Act, 1994.

23.3 As regards imposition of penalty under section 77 of the Finance Act, 1994, I observe that as discussed above the said assessee were liable to pay service tax under the category of “Business Auxiliary Services” as recipient of

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service, but they failed to obtain registration as required under section 69 of the Finance Act, 1994 read with Rule 4 of the Service Tax Rules, 1994. CHL had received the aforesaid service prior to obtaining the service tax registration in the said category. The said contravention has made CHL liable to penalty under Section 77 of the Finance Act, 1994.

23.4 As regards their contention for invoking Section 80 of the Finance Act, 1994 for waiver of penalty, I find that CHL have not produced any reasonable cause for the failure to pay service tax except that it was their bonafide belief that service tax was not payable by them and it was an interpretational issue. I have already discussed the issue of taxability under the category of “Business Auxiliary Services”. I also find that whatever payment of service tax has been made by CHL it has been after proceedings were initiated by DGCEI which does not establish the contention of bonafide belief raised by CHL. I observe that if CHL had any doubt with regard to taxability under reverse charge mechanism, then they should have approached the service tax authorities for clarification of doubt to ascertain the taxability of the service provided by them and their liability to pay service tax. Therefore, I consider it appropriate to hold CHL liable to penalty under Section 76, 77 and 78 of the Finance Act, 1994. In view of the above discussion and findings, the ratio of cases relied upon by CHL can not be applied in the case before me.

24. In view of the foregoing discussion, I pass the following order:

O R D E R

(i) I order to classify the services as detailed in Annexure-A-1 to the show cause notice received by CHL under the taxable category of “Business Auxiliary services” as defined in Section 65(105)(zzb) of the Finance Act, 1994 read with Section 65(19) of the Finance Act, 1994;

(ii) I confirm the demand of service tax ( inclusive of education cess ) of Rs. 47,73,442/- (Rupees Forty seven lakh seventy three thousand four hundred and forty two only ) (Rs. 79,89,955/- - Rs. 32,16,513/-) for the period from 18.4.2006 to 31.12.2006 as detailed in Annexure – A-1 to the show cause notice under the category of “Business Auxiliary services” under Section 73(2) of the Finance Act, 1994 and order to recover the same from CHL;

(iii) I drop the demand of service tax ( inclusive of education cess ) of Rs. 89,61,126/- [Rs. 57,44,612/- + Rs. 32,16,513/-] (Rupees Eighty nine lakh sixty one thousand one hundred and twenty six only ) for the period from 1.4.2003 to 17.4.2006 as detailed in Annexure-B and Annexure-A-1 to the show cause notice and as discussed in para 21 above;

(iv) I order appropriation of the amount of service tax ( inclusive of education cess ) of Rs. 47,73,442/- (Rupees Forty seven lakh seventy three thousand four hundred and forty two only ) out of the amount of service tax of Rs. 79,89,955/- already paid by CHL against the above confirmed demand under the category of “Business Auxiliary services”;

(v) I order to recover interest on the above confirmed demand of Rs. 47,73,442/- (Rupees Forty seven lakh seventy three thousand four hundred and forty two only ) at the prescribed rate from CHL under Section 75 of the Finance Act, 1994;

(vi) I order appropriation of the amount of interest on the above confirmed

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demand of Rs. 47,73,442/- (Rupees Forty seven lakh seventy three thousand four hundred and forty two only ) out of interest amount of Rs. 4,74,340/- (Rupees Four lakh seventy four thousand three hundred and forty only ) already paid by CHL under the category of “Business Auxiliary services”;

(vii) I impose penalty of Rs.200/- (Rupees Two hundred only) per day from 18.4.2006 for the period during which failure to pay the tax continued, or at the rate of 2% of such tax, per month, whichever is higher, starting with the first day after the due date till the date of actual payment of the outstanding amount of service tax upon CHL under Section 76 of the Finance Act, 1994, provided further that the amount of penalty payable in terms of this section shall not exceed the service tax of Rs. 47,73,442/- (Rupees Forty seven lakh seventy three thousand four hundred and forty two only ) payable by CHL;

(viii) I impose penalty of Rs. 47,73,442/- (Rupees Forty seven lakh seventy three thousand four hundred and forty two only ) on CHL under section 78 of the Finance Act, 1994. As CHL have paid the amount of service tax as well as the interest as confirmed and ordered to be recovered before issuance of the show cause notice, the amount of penalty liable to be paid by them under Section 78 of the Finance Act, 1994 shall be 25% of the said amount, provided the amount of penalty is also paid within the period of thirty days from the communication of this order, otherwise full penalty shall be paid as imposed in the above order;

(ix) I impose penalty of Rs. 1,000/- (Rupees One thousand only) under Section 77 of the Finance Act, 1994 on CHL for failure to comply with the provisions of Section 69 of the Finance Act, 1994 read with Rule 4 of the Service Tax Rules, 1994.

( A.K.Gupta )Commissioner,

Service Tax,Ahmedabad

BY SPEEDPOSTF. No.STC/4-49/O&A/2008 Date: 13-04-2012To M/s. Cadila Healthcare Ltd, “Zydus Tower”, Satellite Cross Roads, Ahmedabad – 380015.

Copy to:1. The Chief Commissioner, Central Excise & Service Tax, Ahmedabad Zone,

Ahmedabad.2. The Additional Director General, DGCEI, Mumbai Zonal Unit, 1st & 3rd Floor,

NTC House, 15 N.M. Marg, Ballard Estate, Mumbai-400001.3. The Joint Director, DGCEI, Regional Unit Pune, 6th Floor,Vora Kothari Building,

1025, Sadashiv Peth, Pune – 411 030 The Asst. Commissioner, Service Tax, Division-III, Ahmedabad.

4. The Superintendent of Service Tax, Range-XIV, Division-III, Ahmedabad.5. Guard File.

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