OFFICE OF THE

COMMISSIONER OF
SERVICE TAX
17-B, IAEA HOUSE, MAHATMA GANDHI MARG, I.P. ESTATE, NEW DELHI
110002

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Dated:

14.10.2011

Demand cum- Show Cause Notice No.- 71 /Audit/2011-12

M/s

HMA Udyog Private Limited, 40-41, Bhilwara Bhawan,

1st Floor, Community Centre, New Friends Colony, New Delhi110025 (hereinafter referred to as the assessee) are registered with the
Service Tax Commissionerate, Delhi vide Registration No. DL-II/ST/R17/BSS/HMA/56/2006 dated 21.08.2006 for Business Support Service and
STC No. AAACH 1710M ST002 dated 09.03.2009 for Business Support
Services and Business Exhibition Services (marked as RUD-I) falling
under Section 65(105)(zzzq) and Section 65(105)(zzo) respectively of the
Finance Act, 1994 as amended (hereinafter referred to as the Act). The
assessee is obliged to comply with the provisions of the Finance Act, 1994
as amended and Rules and Notifications issued there under. The audit of
the

assessee

was

conducted

by

the

officers

of

Service

Tax

Commissionerate, New Delhi from 29.03.2011 to 31.03.2011 for the

period 2006-07 to 2009- 2010 under Rule 5A of the Service Tax Rules,
1994 (hereinafter referred to as the Rules).

2.

Whereas, during the course of

audit it was observed that the

assessee has earned service income shown as other income in the

Schedule- 9 to profit & loss accounts of
C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

their Annual Reports for the

Page 1 of 30

period 2006-07 to 2009- 2010. Respective figures for the period 2010-11
have been obtained subsequently (collectively marked as RUD- II).
The assessee has discharged the service tax liability only on a part of this
service income mentioned as service charges under Business Support
Service. However, no service tax has been

paid on

the remaining

portion of the service income shown as Recovery from clients towards

advertisement, promotional and other related services /

Contribution

received from clients for expenses to be incurred on their behalf.

Similarly, Schedule 9 to profit & loss accounts of their Annual Reports for
the period 2010-11 revealed that no service tax has been paid on the
remaining portion of the service income shown as Contribution received
from clients for expenses to be incurred on their behalf. The total service
income

shown

as

Recovery

from

clients

towards

advertisement,

promotional and other related services and Service charges

is as

under:
(Amount in Rs. )
Year

Recovery
clients

from Service
towards charges

Total Service
Income

advertisement,
promotional
other
2006-07
2007-08
2008-09
2009-10
2010-11

and
related

services
87,269,851
109,606,106
123,269,632
133,776,210
129,857,292

TOTAL
583,779,091/-

3.

41,076,905
51,161,520
58,747,800
64,961,092
78,779,944

128,346,756
160,767,626
182,017,432
198,737,302
208,637,236

294,727,261
/-

878,506,352
/-

Whereas, it appears that M/s Godfrey Phillips India Ltd (referred to

as GPI

for short) has entered into an agreement with the assessee

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 2 of 30

(previously known as

M/s Hindustan Marketing and Advertising

Company Private Limited or HMA for short). The salient features of the
said Agreement dated 16.07.1981

(marked as RUD- III) are as

follows:

WHEREAS GPI has been engaged in the manufacture, sale and

export of cigarettes for many years past under various brand-names and
has built up a valuable brand-image in respect of each of its brands of
cigarettes throughout India more specifically set out in the Schedule
attached hereto .
AND WHEREAS HMA has approached GPI that several of the
wholesale purchasers of the aforesaid cigarettes are willing to entrust the
job of advertising and sales promotion thereof to HMA/ such charges as
may be mutually agreed to from time to time.
AND WHEREAS the agreement to be entered into between HMA
and the said wholesale purchaser is subject to the permission having
been obtained by HMA from GPI entitling it to advertise and promote
sale of cigarettes under the aforesaid brand names.
AND WHEREAS HMA has represented to GPI that HMA has
specialized expertise available with and shall make such arrangements
as may be considered necessary for effectively advertising and
promoting the sales of the said cigarettes by the said wholesale
purchasers.

THE PARTIES HERETO HAVE AGREED AS UNDER :

1. GPI hereby permits HMA to undertake advertising and / or sales
promotion of the bands of cigarettes as listed in the Schedule
hereto and any other branded products introduced by CPI from
time to time, strictly in terms of this Agreement.
2. GPI shall at all time have the absolute and unconditional right
to withdraw forthwith the said permission without assigning any
reason whatsoever. Upon withdrawal of the said permission, HMA
shalll have no claim whatsoever against GPI and undertakes and

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 3 of 30

agree not to continue to advertise or promote or in any manner

use the said brand name thereafter.
3. HMA may appoint such other agencies or parties as it may
consider necessary for carrying out the advertising programme
provided HMA undertake and ensures that such agencies or parties
conform to and carry out the obligations and responsibilities
undertaken hereunder by HMA and further undertake to keep
GPI fully informed in that behalf.
4. In order to protect its brand names and brand image GPI shall
have the absolute and unconditional right to have access to and
get information regularly regarding all facets of advertising
undertaken by HMA to ensure that nothing is done by HMA
which in any way adversely effects or derogates from the
proper use of the brand name and maintaining the brand image
in respect of the
aforesaid
cigarettes or
undermines
or
jeopardises the proprietary rights of GPI in the said brand names
or trademarks or of the trade mark proprietors concerned , as
the case may be. For this purpose, HMA shall be obliged to
furnish regularly, and promptly all details of advertisement
performance and sales promotion plans to GPI well in advance.
GPI shall be entitled to inspect and obtain such information
from the records of HMA as it may consider necessary from
time to time for the aforesaid purpose.
5. GPI shall have a proprietary rights and a copyright over
all advertisements and promotional material which may
be prepared by HMA or on its behalf by any party
whatsoever. Upon termination of this Agreement for any
reason whatsoever all
advertising
material,
including
blocks, films, layouts, hoardings etc. , which may be in
the possession or control of HMA shall be
forthwith
handed over to GPI to ensure that the same are not
used after the termination of the Agreement. HMA will
not be entitled to any reimbursement or to make any
claim against GPI in that behalf.
6. If GPI desires to entrust any job or work for advertising and
sales promotion to HMA, it may do so upon payment of such
charges as may be agreed to between GPI and HMA from time
to time. For this purpose, a specific order would be placed as and
when such job or work is entrusted to HMA setting out the
remuneration for the same.
C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

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7. HMA shall be entitled to carry out the aforesaid activities on

behalf of such wholesale purchasers who may enter
into
specific contract with
HMA, HMA may also agree to provide
such facilities to other wholesale purchases dealing with
the
aforesaid cigarettes upon such charges as may be considered
reasonable from time to time.
8. HMA acknowledges that GPI has the sole and exclusive rights in
all the trade marks and brand names which are proposed to be
advertised and promoted, either as registered proprietors or as
licensed users, and HMA shall not have any right, title, interest or
claim of any nature whatsoever, over such trade mark and brand
names.
9. HMA expressly agrees that if
any bulk

wholesaler or

advertising

it enters into any agreement with

any other

party

with

or sales promotion of the aforesaid brand names, a

specific provision would be made

in such agreements expressly

acknowledging that GPI has the sole and exclusive

trade names

regard to the

rights in the

and brand names of the aforesaid cigarettes as

registered proprietors or licensed users and neither HMA or any

other party shall have any right, title,

interest or claim of

whatsoever nature over such trade names and brand names.

4.

Whereas, the assessee has also entered into separate agreements

with whole-sale dealers (referred to as WDs for short) of GPI. The

assessee has not submitted any agreement with wholesale dealer entered
from 1981. The salient features of one sample

agreement dated

28.03.2009 with M/s Sundaram Chettiar Agency, Pollachi

(Sample

Agreement : marked as RUD- IV) are as follows:

(i)

the Advertising and Marketing Programmes proposed to be

planned and carried out by us for and on your behalf and at the instance
of various wholesale purchasers (WPs) of GPI products for the promotion
and sales of cigarettes

of brand names manufactured by GPI and in

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 5 of 30

respect of which permission has been granted to us by GPI subject to

certain terms and conditions, a copy of which was made available to you
at the time of the said discussions.

In regard to above we write to confirm your having agreed to

entrust

your

advertising

and

sales

promotion

of

the

said

cigarettes to us so as to carry out advertising and sales

promotion activities for and on your behalf more effectively and
economically subject to and on the terms and conditions set out herein
after:
( ii ) Clause 2.
HMA shall make the necessary arrangements for effectively
advertising the aforesaid cigarettes to ensure the promotion of sales
thereof and for this purpose, HMA will employ adequate staff at its own
expense.

( iii ) Clause 3.
HMA shall carry out the advertising and promotional activities in
such manner as may provide national as well as regional coverage.

( iv ) Clause 4.
HMA shall provide and arrange for placement of advertising material
at such points of purchase of cigarettes by consumers as may be deemed
appropriate by HMA, may also undertake such local promotional activities
as well as other advertising activities as may be considered fit and proper
by it from time to time having regard to its national and regional
advertising and sales promotional programmes for the said cigarettes.

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

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( v ) Clause 5.
HMA shall assess the requirements for advertising and sales
promotion

in

different

regions

requirements of various WPs and

keeping

in

to

consideration

the

for this purpose you may send your

requirements to HMA from time to time. HMA will plan out the advertising
and sales promotion programme in the best possible manner to ensure
effective advertising and sales promotion in various regions keeping into
consideration the interest of the WPs with whom the HMA has agreements
for the said purpose.

( vi ) Cluase 7.
For carrying out the afore said advertising and sales
activities you shall pay to HMA contribution towards the same,
calculated on the basis of maximum retail selling price exclusive
of local taxes as printed on the packets of different brands of
cigarettes at such rate as may be mutually agreed by HMA with
you from time to time..

( vii) Clause 9.
It is expressly agreed and understood that HMA shall be
liable to spend at least 67% of the total contribution made by you
on advertising, promotional and other related activities, in such
areas and in such manner and on such brands of cigarettes as
HMA may deem fit, provided that HMA will ensure
activities

are

carried

out

pursuant

to

this

that these

agreement

in

conformity with applicable legislations.. The balance

33% ( exclusive of applicable service tax which shall be charged
out of 67% contribution

referred to above) of the contribution

shall be earmarked to HMAs Personnel & Administration cost

and other overheads including profit margin. These percentages
C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 7 of 30

will be worked out on the total all India contribution accruing

from WPs with whom agreements of similar nature have been
entered in to by HMA and may be varied by mutual agreement
from time to time.

It is expressly agreed and understood that the portion of

contribution ( 67%) refer to as above shall be spent on advertising and
promotional activities to be carried out collectively for and your behalf as
pure agent. Goods and services procured from third parties in cousres of
carrying out such activities shall be held to your account collectively till
consumed/used. Therefore, any payment made to any third party
supplier/service provider shall be for and your behalf collectively.

( viii )

Clause 10.

At the close of HMAs each financial year, HMA shall ascertain the
total expenditure incurred on advertising, promotional and other activities
as per clause 9 and in case the same works out to be lower than the
total contribution attribution attributed to advertising , promotional and
other related activities on the basis of relevant ratios for the relevant
year, such shortfall in expenditure shall be carried over to next year. HMA
shall be liable to spend such carried over shortfall in expenditure within a
period of six months from the date of the close of each financial year or
such other and further extended period, as may be mutually agreed from
time to time.
However,

if in any particular year,

expenditure by HMA on

advertising and promotional activities pursuant hereto

competitors pressure, sluggish

due to the

market conditions or any other reason

whatsoever, exceeds the total advertising contribution for the period, HMA
in its sole discretion be entitled to set off the excess amount so spent,
against the advertising contribution for the immediately following period.
C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 8 of 30

( ix ) Clause 11
In case this agreement is terminated by either party as provided in
clause 17 hereof, you shall be liable to pay all the due advertising
contribution as on the date of termination and shall not be entitled for
any refund towards the unspent amount as on that date on any ground
whatsoever.

5.

Further, the sample copies of invoices issued by the assesse to the

whole-sale dealers of GPI (collectively referred to as RUD-V) show that

the gross amount for the aforesaid services has been worked out as 1% of
the total sales of the GPI brand of cigarettes by the

particular dealer

irrespective of the quantity of any particular brand sold by such dealer.

Further, the said sum of 1% has been further bifurcated into two
parts. The first part contribution has been worked out as approx. 67% of
gross payment. The balance has been worked out as 33% of the gross
payment. The said 33% has been further split into Service Charges and
Service Tax in such a manner that their sum is equal to 33% of gross
payment. For example Invoice no. PUN/14, dated 12.10.2006 issued to M/s
Johar Enterprises, Ludhiana, Punjab, the total sales of cigarettes is Rs.
68,07,000/-, the gross payment to M/s HMA @ 1% of Rs. 68,07,700/- has
been worked out as Rs. 68,070/- . The said amount of Rs. 68,070/- has
been split into Contribution of Rs. 42,858/- and Service Charges of Rs.
22,463/- and Service Tax of Rs. 2,749/- @ 12.36% of Rs.22,463/-.
Accordingly, the assessee is claiming that Service Tax of Rs. 2,749/- is
payable on consideration of Rs. 25,212/- received by them from M/s Johar
Enterprises i.e. it is their contention that service tax is not payable on
Contribution portion of the total consideration received from WDs.

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 9 of 30

6.

Whereas, the assessee appears to have collected contribution from

wholesale dealers of M/s GPI based on their turnover and the total
amount collected is their consideration for rendering business support
services. The amount pooled by various wholesale dealers are being
spent on advertising

& promotional activities of various brands of

cigarettes of M/s GPI on national/ regional level. Hence, it appears that

the assessee is not providing exclusive service to any particular wholesale
dealer for the amount collected from that particular dealer. It is also not
providing advertising and promotional activities of that brand which is
sold in bigger quantities by that dealer or in area where such wholesale
dealer has more sales.

The arrangement only ensures that out of the

total quantity sold, 1% amount is collected by the asessee for Advertising

& Sales promotion of various GPI brands of cigarettes on All India/regional
level.

7.1

Whereas, the assessee has filed ST-3 Returns and paid Service Tax

only on a part of his gross income

under Business Support Services.

However, the assessee appears to be liable to pay service tax on the

gross amount received by them under Section 66 of the Act, in respect
of the said services classified under Section 65(105) the Act.
Section 65 (105) (zzzq) Taxable Service means any
service provided or to be provided to any person, by any other
person, in relation to support services of business or commerce,
in any manner;

Business Support Services has been defined under Section 65(104c)

of the Finance Act, 1994, as amended the provisions of which reads as
under :

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 10 of 30

Section

65(104c)

Support

Services

of

Business

or

Commerce means services provided in relation to:business or commerce and includes evaluation of prospective
customers, telemarketing, processing of purchase orders and
fulfillment

services,

schedules,

managing

information
distribution

and
and

tracking

of

logistics,

delivery
customer

relationship management services, accounting and processing of

transactions, operational assistance for marketing, formulation
of customer service and pricing policies, infrastructural support
services and other transaction processing.
Explanation For the purposes of this clause, the expression
infrastructural support services includes providing office along
with office utilities, lounge, reception with competent personnel
to handle messages, secretarial services, internet and telecom
facilities, pantry and security;

7.2

Whereas, it appears that there is no dispute that the assessee is

rendering taxable service under the category of Business Support Services

specified under Section 65(105)(zzzq) of the Act ibid as the assessee is
voluntarily depositing the service tax on a portion of total amount
received by them for rendering the said services. The only dispute
appears to be on account of correct value of the said taxable services.

7.3

Whereas, Service Tax is levied on the gross value of taxable service.

That is measure of levy. Therefore, determination thereof is crucial. Power

is vested with Central Government to notify in public interest to grant
exemptions from service tax in exercise of power conferred under Section
93 of the Finance Act, 1994. Depending on facts and circumstances of
C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 11 of 30

each taxable service provided, certain elements of cost make value of

such

services

and

such

elements

which

are

integral,

relevant,

indispensable and inevitable to provide taxable service and bring that

service to the stage of performance, contribute to the value of such
service. Service Tax being destination based consumption tax, till the
taxable service reaches its destination, all elements of cost making the
service reachable to such destination contribute to the value addition and
form part of value thereof. Agreement or understanding of parties to deal
with the consideration for the service rendered and received does not
affect incidence of tax. In whatever manner the recipient and provider of
taxable service mutually arrange their affairs for their benefit to deal with
consideration that is of no significance to law.

7.4

Whereas, in terms of Section 67 of the Finance Act, 1994, the

taxable value for the purpose of payment of service tax shall be gross
amount charged for the taxable service and shall include any amount
received towards the taxable service before, during and after provision of
such service. In the instant case, the taxable value appears to be the
gross amount charged by the assessee for the services rendered to
wholesale dealers of M/s GPI and this appears to include the amounts
shown as contribution as well as the service charges. But the assessee
have failed to include the amount shown as contribution to arrive at the
gross taxable value of the services rendered by them.

7.5.1

Whereas,

with

effect

from

19.04.2006,

Service

Tax

(Determination of Value) Rules, 2006 (here-in-after referred to as

the Valuation Rules) were issued and Rule 5(1) of the said Valuation
Rules provides that
where any expenditure or cost are incurred by the service provider
in the course of providing any taxable service, all such expenditure
or cost shall be treated as consideration for the taxable services
C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 12 of 30

provided or to be provided and shall be included in the value for

the purposes of charging service tax on the said service.

7.5.2

Further under Rule 5(2) of the Rules ibid certain expenditure or

costs incurred by the service provider as a pure agent of the recipient

of the services can be excluded from the value of taxable services subject
to the satisfaction of all the eight conditions laid down in the said Rule
5(2) which reads as under:(i)

the service provider acts as a pure agent of the recipient of

service when he makes payment to third party for the goods
or services procured;

(ii)

the recipient of service receives and uses the goods or

services so procured by the service provider in his capacity as
pure agent of the recipient of service;

(iii)

the recipient of service is liable to make payment to the third

party;

(iv)

the recipient of service authorizes the service provider to

make payment on his behalf;

(v)

the recipient of service knows that the goods and services for
which payment has been made by the service provider shall
be provided by the third party;

(vi)

the payment made by the service provider on behalf of the

recipient of service has been separately indicated in the
invoice issued by the service provider to the recipient of
service;

(vii)

the service provider recovers from the recipient of service

only such amount as has been paid by him to the third party;
and

(viii) the goods or services procured by the service provider from

the third party as a pure agent of the recipient of service are
in addition to the services he provides on his own account.

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

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Explanation 1-

For the purposes of sub-rule (2), pure agent

means a person who(a)

enter into a contractual agreement with the recipient of

service to act as his pure agent to incur expenditure or
cost in the course of providing taxable service;

(b)

neither intends to hold nor holds any title to the goods

or services so procured or provided as pure agent of the
recipient of service;

(c)

does not use such goods or services so procured; and

(d)

receives only the actual amount incurred to procure

such goods or services.

Explanation 2 For removal of doubts it is clarified that the value of

the taxable service is the total amount of consideration consisting of
all components of the taxable service and it is immaterial that the
details of individual components of the total consideration is
indicated separately in the invoice.

8.

Whereas, the assessee was requested to explain why the gross

value received for the services rendered should not be taken as taxable
value. The assesee, vide his letter received on 15.07.2011 (RUD- VI)
submitted that:

1.

REC0VERY FROM CLIENTS TOWARDS ADVERTISEMENT,

PROMOTIONAL AND OTHER

1.1

RELATED SERVICES

At the outset, it is material to note that all aspects of Cigarette

trade are highly regulated. It is pertinent here to state that Cigarettes and
Other Tobacco Products (Prohibition of Advertisement and Regulation of
C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 14 of 30

Trade and Commerce, production, supply and Distribution) Act, 2003 and
the

Rules

framed

there

under

inter

alia

govern

the

Advertisements/promotions aspects of the Commodity under issue. In

view of this heavily regulated legal framework, the wholesale dealers
(WDs) of M/s Godfrey Phillips India Limited (GPI) felt a requirement for an
expert who could advise on this aspect of the trade so as to enable them
to enhance their business prospects within the relevant/applicable legal
framework.

Accordingly,

WDs,

through

contractual

agreement,

authorized HMA to coordinate and advise on their advertising and local

business promotion needs. Besides, entrusting the primary task of
coordination and advisory, as aforesaid, the said contractual agreement
also authorizes HMA

to procure and supply advertising material at

respective locations as may be necessary and required by WDs from time

to time.

1.2

In lieu of undertaking the above noted activities, WDs pay certain

amount on monthly basis to HMA. The said amount consists of three parts
viz.
1 Consideration

for

coordinating

and

advising

them

on

their

advertising and local business promotion needs,

2 Service tax applicable on the above ,and
3 Value towards procurement and supply of advertising material on
behalf of WDs.

1.3

The first mentioned category of receipts, as noted above, pertains

to coordination and advisory relating to the advertising and business

promotion needs of WDs. HMA accounts these receipts as its income/
revenue and admittedly pays service tax thereon under the taxable
category of Business Support Service.

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 15 of 30

1.4

The second mentioned category of receipts relate to service tax

applicable on the first mentioned category of receipts, which is separately

charged and recovered from the WDs. This amount is accounted as
recoverable from WDs and payable to the Central Government.

1.5

The third category of receipts relates to value towards procurement

of advertising material on behalf of WDs for supply to their respective

locations. WDs contribute/ pay certain amounts to HMA and authorize the
later to procure specified advertising material on their behalf. HMA
accordingly spend/ utilize the amount received as contribution exclusively
to procure goods on behalf of WDs. The goods so procured are supplied to
WDs for further distribution/promotion by them to their end consumers
under various business promotion schemes in vogue. HMA accounts
receipt of these contributions from WDs and payment to third parties for
purchase of goods respectively as receivable and payable in its books
of accounts. In other words, the receipt of these contributions and
corresponding payment to third parties is not accounted respectively as
income and expenditure of HMA. The amount so received from WDs are
not charged to service tax in the light of provisions applicable from time
to time and in particular Rule 5(2) of the Service Tax (Determination of
Value) Rules, 2006. We would like to further explain the basis of nonapplicability of service tax on third mentioned category of receipts in the
following paragraphs.

1.5

It is submitted that the subject amount is not received as

consideration for any services provided by HMA to WDs. This amount has
been recovered as contribution towards purchase of goods/ advertising
material for all WDs. In fact HMA is maintaining the pool/ fund created for
procurement of advertising products for WDs. Thus, the contribution

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 16 of 30

which goes to fund/ pool cannot be treated as consideration for the

services provided by the HMA.

1.6

The above stated position has been duly substantiated and evident

from the legal and contractual position in place. It is submitted that Rule
5(2) of the Service Tax (Determination of Value) Rules, 2006 sufficiently
clarifies that any expenditure or costs incurred by the service provider as
a pure agent of the recipient of service shall be excluded from the value
of taxable service.

1.7

It

is

submitted

that

the

transaction

comprising

receipt

of

contributions from WDs and spending thereof by HMA to procure goods/

advertising material on behalf of WDs falls within the purview of said Rule
5(2) and therefore not chargeable to service tax under any circumstance.
Here we would like to bring forth contractual position in place to
substantiate the above view.

1.8

In accordance with the terms of Rule 5(2), HMA has entered into a

contractual agreement with the WDs (recipient of service) to act as their

pure agent for procuring goods and services from third parties. The
relevant text of the agreement is reproduced as under.
It is expressly agreed and understood that the portion of
contribution (67%) refer to as above shall be spent on
advertising and promotional activities to be carried out
collectively for and your behalf as pure agent. Goods and
Services procured from third parties in course of carrying
out such activities shall be held to your account
collectively till consumed. Therefore, any payment made
to any third party supplier/ service provider shall be for
and your behalf collectively.
C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 17 of 30

Also it is agreed and understood that HMA will act as your

agent in carrying out the aforesaid activities and 33% of
the contribution shall be deemed as its service charge for
carrying out these activities

1.9

The above text of the contractual agreement brings forth the

following points.
a With regard to the third category of receipts viz contributions
made by WDs for purchase of goods/ advertising material,
HMA has acted as Pure Agent of WDs.
b The goods/ Advertising material procured by HMA have been
undisputedly used by WDs. This position is evident from the
fact that the goods so procured by HMA were supplied as such
to WDs under the cover of VAT invoice. On receipt of such
goods, WDs have utilized by distribution to their consumers
under various business promotion schemes.
c HMA has made payment to the supplier of goods (third
parties) on behalf of WDs. This position is evident from the
specific clause in the contractual agreement which reads as
follows Therefore, any payment made to any third party
supplier/ service provider shall be for and your behalf
collectively.

It is needless to mention that WDs have duly

authorized HMA to make payment to third parties for

purchase of goods/ advertising material on their behalf and it
was in the knowledge of WDs that goods/ advertising material
supplied by HMA have procured by the later from third
parties.
d It may further be noted that the amount spent by HMA
towards purchase of goods/ advertising material have been

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 18 of 30

recovered from WDs by separately charged/ indicated in the

invoice raised for the said purpose.
e It is also an undisputed fact that contributions received from
WDs have been incurred solely to procure goods/ advertising
material on their behalf and for no other purpose strictly in
terms of the contractual agreement in place. It may also be
noted that any amount remained unspent/ received in
advance remains parked in recoverable/ payable account in
the books of HMA and at no time it is considered as income of
HMA.
f

It is also an undisputed fact that the activity of procuring

goods/ advertising material for WDs is apart from and in
addition to the taxable services provided by HMA to WDs. It
has been clarified in the foregoing paragraphs that HMA is
primarily into the coordination of and advising on advertising
and business promotion needs of WDs and for carrying out the
said activity, it receives consideration which is charged to
service tax under Business Support Service. Thus the activity
of procuring goods/ advertising material for WDs is in addition
to the aforesaid primary activity.

g It is further clarified that HMA does not hold or intend to hold

any title to the goods/

procured

for WDs by utilizing the

contributions pooled by WDs. This position is evident from the

specific clause in the contractual agreement which reads as
Goods and Services procured from third parties in course of
carrying out such activities shall be held to your account
collectively

till

consumed.

This

position

can

also

be

corroborated from the fact that the goods/ advertising

material procured by HMA has not been accounted as
expenditure or capitalized in the books of HMA.

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 19 of 30

1.10 The above explained position has proved beyond doubt that the
third category of receipts viz. contribution made by WDs satisfies the
conditional requirement of Rule 5(2) and therefore has been validly not
charged to service tax by HMA.

9.1

Whereas, from the reply of the assessee, it appears that the

assessee has paid Service Tax after excluding the cost/expenditure

incurred by them on advertising, promotional and other related activities,
from the gross amount charged from the wholesale dealers,

for the

purpose of determination of the taxable value, on the ground of having

acted as a pure agent of the WDs, while incurring such expenses in the
course of providing the said services.
9.2

Whereas, from the agreement between the assessee and the

wholesale dealers of GPI, it appears that the assessee has been providing
the services of planning, coordination and execution of business
promotion and related advertising needs of the whole-sale dealers of GPI
and the expenditure incurred by the assessee for the provision of service
cannot be considered as expenditure incurred as a pure agent of
wholesale dealers of GPI. As such, as per the agreement it appears that
the relationship of the assessee with the wholesale dealers of GPI is in
nature of service provider and service recipient and they received
consideration (contribution+ service charges) from wholesale dealers of
GPI in lieu of service rendered to them as provider of Business Support
Services.

9.3

And whereas, it has also been observed that in terms of the said

agreement the assessee has received consideration from the wholesale

dealers of GPI

during the period 2006-07 to 2010-11. However, the

assessee has considered approximately 67% of the gross amount

received, attributable to Recovery from clients towards advertisement,
promotional and other related services as having received as pure agent
C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 20 of 30

under Rule 5(2) of Service Tax (Determination of Value) Rules, 2006.

However, it appears that without employing such material/services
procured out of such recovery amount, the assessee would not have
been able to perform the services of advertising and sales promotion
needs of their clients i.e. wholesale dealers of GPI. Therefore, it appears
that the procurement of advertisement, promotional and other related
materials/services (for which contribution is said

to have been

recovered from clients) are essential for provision of advertising and sales
promotion services as per the
towards

agreements and the expenses made

procurement of such materials/services by the assessee for

provision of Business Support Services cannot be termed as expenses or

cost incurred as a pure agent under Rule 5 (2) of Service Tax
(Determination of Value) Rules, 2006.

10.

From the above, it appears that the conditions prescribed under Rule

5 (2) of Service Tax (Determination of Value) Rules, 2006 have not been
satisfied in the subject case as explained under:-

(i)

The payment made by the assessee (service provider) to third party

for procurement of the goods or services is necessary for rendering
the services of advertising and
employing such

sales promotion. Further, without

goods or services, the assessee would not have

been able to render Business Support Services to the wholesale

dealers. Hence, the assessee is not acting as a pure agent of
whole sale dealers of GPI (recipient of service) while making
payments to third parties or incurring such expenses.

(ii)

In view of (i) above and the fact that the procurement of such
materials/services by the assesee is in order to provide the services
as agreed upon between the parties, there is no question of such
materials/services to have been procured by the assessee in

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 21 of 30

the capacity of pure agent of wholesale dealers of GPI. The

recipient of service (wholesale dealers of GPI) receives Business
Support Service in the form of advertising and sales promotion
services rendered by the assessee. The recipient of service does
not appear have received

and used materials/services so

procured by the assessee, which in fact are indispensible

input/input service of the assessee for providing the said Business
Support Service.

(iii)

The wholesale dealers of GPI are not

liable to make

payment to the third party, from where the procurements (of

services/goods) are made by the assessee. The assessee alone is
legally/contractually liable to make any payment which may be
required for procuring materials/services in course of providing the
Business Support Services to

wholesale dealers of GPI. The

concept of reimbursement as a pure agent of the service recipient

arises only when the person actually paying was under no
obligation to pay the amount and he pays the amount on behalf of
the buyer of the services and recovers the said amount from the
buyer of the services. When the service recipient has an obligation
legal or contractual to pay certain amount to any third party and
the said amount is paid by the service provider on behalf of the
service recipient, the question of reimbursing the expenses
incurred on behalf of the recipient as his pure agent arises, which
is not the case here.

(iv)

None of the recipients of service (WDs) authorizes the

assessee to make any particular payment on his behalf and
also

no procurement and consequently no expenditure can be

attributed to any WD exclusively; only a pool of expenses appears

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 22 of 30

to be in existence from where all such expenses incurred in course

of provision of services to all clients, may have been sourced;

(v)

As per the agreement, the assessee has been receiving payments

from wholesale dealers for rendering the service of advertising and
sales promotion needs. Further, it is the sole responsibility of the
assessee to plan, coordinate and execute the business promotion
and related marketing needs of wholesale dealers. It appears that
the assessee plans the entire sales promotion and advertising
activities, procures input raw materials/services from a source of
his choice at a price negotiated by him and uses such input
material/services in order to execute the said plan for providing the
services as stipulated in the said service agreement. Therefore, any
specific expense/payment made to the third party towards
procurement of materials/services, by the service provider
in course of providing such services, may not be known to
the service recipient,

as no exclusive authorisation from any

individual client for any exclusive material/service appears to exist.

Hence, there is no involvement of any identified third party (under
the contract) and the wholesale dealers only know that the
assessee has to provide the services of advertising and
sales promotion to them.

(vi)

The assessee has received gross amount from wholesale dealers of

GPI in lieu of Business Support Services . Considering 67% of the
gross amount attributable

to

Recovery from clients towards

advertisement, promotional and other related services and claiming

the same as reimbursable expenses on account of pure agent
under Rule 5(2) of Service Tax (Determination of Value) Rules, 2006,
itself tend to indicate that the assessee is not working as a pure
agent. Therefore, there is no reason to indicate the payment
C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 23 of 30

made by the assessee

to third party on behalf of

the

clients, in the invoice. The separate head contribution shown in

invoice by the assessee in fact constitutes the income element of
the assessee, and which only underlines that the assessee is under
contractual obligation to spend the same portion

of income for

procurement of materials/services in the course of provision of the

said service, in terms of the respective agreements. The income
under the

separate head contribution in the invoice is

neither a payment made by the service provider to a third

party, nor is it on behalf of the recipient of service.

(vii)

In view of the fact that the assessee has received gross amount
from wholesale dealers of GPI for rendering the Business Support
Services, there is no question of paying any amount to the
third

party

and

consequently

recovering

it

from

the

wholesale dealers of the GPI. There is no specific payment

made to any specific third party as such. The amount
recovered by the service provider (assessee) from the
recipient of service can not be said to be the same ( actual)
as the payment made to any third party , because there is no
direct relation

of procurement of goods/services, payment made

there to and the recovery effected from the WD in respect to any

particular transaction. In this case, 67% of the total receipts has
been claimed as benefit of pure agent without any linkage
whatsoever with the actual expenses. The payment, in fact is the
expense portion of the assessee

incurred

on advertising,

promotional and other related activities in the course of provision

of the said service.

Further, as per clause 10 of the said

agreement, in the event of any shortfall in spending 67% of the

gross income

on advertising, promotional and other related

activities during any year, the same is liable to be carried over to

the next year. Similarly, in cases where the expenditure on
C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 24 of 30

advertising, promotional and other related activities, exceeds the

said contribution of 67%, the assessee is entitled to set off the said
excess amount so spent, for the immediately following period. In
such a situation, when the payment of any specific amount to third
party is not recognized/identified, the question of recovery of the
same amount from the service recipient as pure agent

does not

arise.

(viii)

The question of incurring of expenses in procurement of

materials/services from any where or from any third party
as a pure agent of recipient of service in addition to the
Business Support Service provided by the assessee, does
not arise. In fact goods or services so procured

constitute the

kernel of the said service- i.e. planning and execution of sales

promotion and advertising of GPI-brand products for WDs of GPIprovided by the assessee; alienation of such

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 25 of 30

procurement of goods or services may extinguish completely the service

itself.

11.

In view of the above and having failed to satisfy the conditions

stipulated under Rule, 5(2) Service Tax (Determination of Value) Rules,

2006, the expenditure (referred to as contribution by the assessee)
incurred

by the assessee in providing services relatable to collective

advertising and sales promotion of various WDs of GPI products does not
appear to have been

borne by the assessee as pure agent of these

service recipients. The portion of the income billed and recovered under
the heads viz. contribution in invoices and shown as contribution
received from clients for the expenses to be incurred on their behalf or as
Recovery from clients towards advertisement, promotional and other
related services in the Annual Accounts for the period 2006-07 to 201011, appears to form a part of the gross income/consideration for the
services rendered and therefore the same is liable to be included in the
taxable value for the purpose of levy of service tax under the provisions of
Section 67 of the Finance Act, 1994 and Rule 5 of Service Tax
(Determination of Value) Rules,2006.

12.

Whereas, it appears that the assessee has been providing Business

Support Services as defined under Section 65 (104c) read with Section 65

(105) (zzzq) of the Finance Act, 1994 to their clients-- Whole-sale Dealers
(WDs) of GPI brand products-- for considerations, but have not paid the
service tax leviable on the gross value which appears to be the correct

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 26 of 30

taxable value for such levy and has thereby short paid service tax. As per
details submitted by the assessee (RUD- II & V), the assessee has not
paid/short-paid

service

tax

amounting

to

Rs.

6,66,19,520/-

(inclusive of E. Cess & SHEC) by way of not including the income under
the head

contribution / contribution received from clients for the

expenses to be incurred on their behalf / Recovery from clients towards

advertisement, promotional and other related services , amounting to
Rs. 58,37,79,091/- in the gross taxable value for the purpose of levy of
service tax for the period 2006-07 to 2010-11. The total tax liability of the
assessee on this account is as detailed below:(Amount in Rs.)
Differential

S.T.

Amount

Rat

(contribution

not

included
the

in

taxable

value
whereon
Service
has
Year

Differential

&

Service

no

Amount

Tax
been

paid
8,72,69,851

2006-07

12.2
4

10,96,06,106
2007-08

12.3
6

12,32,69,632
2008-09

12.3
6

13,37,76,210
2009-10

(%)

10.3
0

Total

Tax

Amount:

short

Short

paid/not

paid/not

paid

E. Cess

SHEC

1,04,72,382

2,09,448

1,31,52,733

2,63,055

1,31,527

1,47,92,356

2,95,847

1,47,923

1,33,77,621

2,67,552

1,33,776

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Tax

paid

1,06,81,830

1,35,47,315

1,52,36,126

1,37,78,949

Page 27 of 30

2010-11

12,98,57,292

TOTAL

58,37,79,091/
-

10.3

1,29,85,729

2,59,714

1,29,857

1,33,75,300

6,47,80,821/
-

12,95,616/
-

5,43,083/
-

6,66,19,520/
-

The said amount appears to be recoverable from the assessee in

terms of Section 73 of the Finance Act, 1994.

13. From the foregoing it appears that the assessee has contravened
the following provisions of Service Tax, the Chapter V of the Finance Act,
1994, as amended, read with the provisions of Service Tax Rules, 1994, as
amended:a Section 67 of the Finance Act, 1994 as amended read with Rule 5 of
Service Tax (Determination of Value) Rules, 2006 in as much as the
assessee failed to pay appropriate amount of service tax on the
gross amount received by them for rendering the taxable service;
b Section 70 of the Finance Act, 1994 as amended read with Rule 7 of
the Service Tax Rules, 1994 as amended in as much as the assessee
has failed to file their half-yearly ST-3 returns properly as required to
the proper officer ;
c Section 66 and Section 68 of the Finance Act, 1994, as amended
read with Rule 6 of the Service Tax Rules, 1994 as amended in as
much as they have failed to deposit the Service Tax on the gross
amount received by them for rendering Business Support Service
during the period 2006-07 to 2010-11;
d Section 91 read with Section 95 of Finance Act (No.2), 2004 &
Section 136 read with Section 140 of the Finance Act, 2007 in as
much as they failed to pay Education Cess and Secondary and
Higher Education Cess respectively at the applicable rates.

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 28 of 30

14.

Whereas, it further appears that the assessee by doing so, had

intentionally and wilfully suppressed the facts of the correct taxable value
of the services provided by them and did not pay the Service Tax as
leviable on such

gross value of the services and did not file prescribed

ST-3 Returns accordingly. Thus, by not disclosing the entire facts/ income
to the Department, the said value has escaped the assessment for Service
Tax liability, resulting into contravention of various provisions of the said
Act and the said Rules aforesaid with intention to evade payment of
impugned Service Tax. The fact of rendering of these services and under
valuation thereof would not have come to the notice of the department
but for the audit conducted by the department. Thus, it appears that the
provision of proviso to Section 73 (1) of the Act ibid can be invoked and
thus, demand and recovery can be made for non-payment of Service Tax
for five years from the relevant date.

15.

Whereas, it appears that interest is also chargeable and recoverable

from the assessee, from the due date till the date of actual deposit, under
the provision of Section 75 of the said Act on account of failure on their
part to credit the due Service Tax to the Government account at
appropriate rate.

16.

Whereas, it

also appears that the assessee have rendered

themselves liable to penal action for aforesaid contraventions under

Section 76 of the said Act as the assessee have failed to deposit the due
Service Tax with the government for the period 2006-07 to 2010-11.

17.

Whereas, it also appears that the assessee have rendered

themselves liable to penal action for aforesaid contraventions under

Section 77 (1) (a) & 77(2) of the said Act as the assessee have failed to

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 29 of 30

file the periodical ST-3 Returns in proper manner for the period 2006-07 to
2010-11.

18.

Whereas, it also appears that the assessee have rendered

themselves liable to penal action for aforesaid contraventions under

Section 78 of the said Act as the assessee have deliberately suppressed
the facts with the intention to evade payment of Service Tax.

19.

Now, therefore, M/s H. M. A. Udyog Private Limited are required to

show cause to the

Commissioner of

Service Tax, Delhi, having office

located IAEA House, 17-B, I.P. Estate (near W.H.O. Building), Ring Road,
New Delhi 110 002 within 30 days of receipts of this notice as to why:i

Total Service tax amounting to Rs 6,66,19,520/- (Rupees Six Crore

Sixty Six Lakh Nineteen Thousand Five Hundred Twenty only)
inclusive of the Service Tax amount Rs. 6,47,80,821/- (Rupees Six
Crore Forty Seven Lakh Eighty Thousand Eight Hundred Twenty One
only), Education Cess amount Rs. 12,95,616/- ( Rupees Twelve
Lakh Ninety Five Thousand Six Hundred

Sixteen only) and SHEC

amount Rs. 5,43,083/- (Rupees Five Lakh Forty Three

Eighty Three

Thousand

only) as detailed in para 12 above should not be

demanded and recovered from them under proviso to Section 73(1)

of Finance Act, 1994 read with Section 66, 67 & 68 of the Finance
Act, 1994 and Rule 6 of the Service Tax Rules, 1994, read with
Section 91 and Section 95 of Finance Act, 2004 and Section 136
read with Section 140 of the Finance Act, 2007 for Education Cess
and SHEC respectively;
ii

Interest as applicable should not be charged and recovered from

them under Section 75 of the Act ibid from the due date till the date
of actual deposit;

iii

Penalty under Section 76 of the Finance Act, 1994 should not be

imposed upon them for failure to pay the Service Tax in accordance

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 30 of 30

with the provision of Section 68 of the said Act read with Rule 6 of
Service Tax Rules, 1994;
iv

Penalty under Section 77 of the Finance Act, 1994 should not be

imposed upon them for contravention of Section 70 of the Finance
Act, 1994 for not filing the periodical ST-3 Returns in proper manner
for the relevant period; and

Penalty under Section 78 of the said Act should not be imposed

upon them for deliberately suppressing the facts with the intention
to evade payment of Service Tax.

20.

M/s H. M. A. Udyog Private Limited, is further directed to submit a

written reply incorporating all the evidences upon which they intend to
reply in support of their defence. They must also indicate whether or not
they would like to be heard in person before the case is finally
adjudicated.

21.

M/s H. M. A. Udyog Private Limited, is further informed that if no

cause is shown against the action proposed to be taken within the

stipulated period of 30 days of the receipt of this notice or they do not
appear for personal hearing on the date and time fixed for personal
hearing, the case will be decided ex-parte, on the basis of the evidence
placed on record without any further reference.

22.

This Show Cause Notice is being issued without prejudice to any

other action that may be taken against M/s

H. M. A. Udyog Private

Limited, New Delhi, or any other person(s)/firm(s)/company(ies) whether

or not named herein under the Service Tax Law or any other Law for the
time being in force in India or any other demand of Service Tax which may
be issued to them in respect of service(s) referred to hereinabove or
services other than those covered in this notice, if any, provided by M/s H.

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 31 of 30

M.

A.

Udyog

Private

Limited,

New

Delhi,

or

any

other

person(s)/firm(s)/company(ies).
Enclosures :RUD No I to VII (129 pages)
As above and as per list attached
Sd/(Gautam Bhattacharya)
COMMISSIONER
SPEED POST/ Registered AD
M/s, HMAUdyog (Pvt.) Limited,
40-41, BhilwaraBhawan,
1st Floor, Community Centre,
New Friends Colony, New Delhi-11002

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 32 of 30

List of Relied Upon Documents (RUDs) in respect of Show Cause

Notice issued to M/s HMA Udyog Private Limited
S.No RUD
.

Name of the document

No.

No.

of RUD

pages

Page
no.

1.

Copy of STC/ST-2

2.

II

Annual

Financial

Records

to

2009-10

2006-07

1-2

85

3-87

88-92

10

93-102

13

103-115

14

116-129

containing Schedule-9 to P&

L Accounts, and Schedule-9
to P&L Accounts for the
period 2010-11
3.

III

Copy of Agreement between

M/s HMA and M/s GPI

IV

Sample Copy of
the
M/s

some of

Agreements between
HMA and

Whole-sale

Dealers

of

cigarettes/branded products
of M/s GPI
5

Sample Copy of some of the

invoices issued by M/s HMA
to their clients

VI

Reply dated 14.07.2011 by

M/s

HMA,

received

on

15.07.2011
TOTAL Pages

129
pages

C.No. I-26(494)ST/AMR-465/ B-V/HMA/2009

Page 33 of 30

Copy forwarded for information and necessary action to:

i

The Assistant Commissioner, Service Tax, Div-II. He is requested to issue

demand for subsequent period, if any.

ii
iii

The Superintendent (Adjudication), Hqrs., New Delhi.

Guard File.
iv Stationary Group (Service tax, Audit)
v Superintendent, Range-17, Service Tax Division II, New Delhi

DEPUTY COMMISSIONER
SERVICE TAX

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