Shared Expenditure: Whether Taxable as Service?

Introduction

Taxability of shared expenditure has been a subject of
extensive litigation under service tax for quite some time. It is a common
business practice to share common facilities or outsourced services by group
companies under a common roof. Typically, one company receives the invoice from
outsourced service provider and then the cost is shared by each participating
entity by way of reimbursements generally in proportion of actual usage.
Similarly, sometimes, common expenses like advertisement expense is incurred by
a manufacturer and shared with its dealers as the benefit is derived by both,
the manufacturer and the dealers. In the case of Union of India vs. Mahindra
and Mahindra Ltd. 1989 (43) ET 611 (Cal), the High Court observed that the
manufacturer and distributor had mutual interest in maximising sale of its
products. The contract between them was to further this desire and it no way
affected the real nature of transaction which appeared to be of sale on
principal-to-principal basis. However, in the case of Maruti Suzuki India
Ltd. vs. CCE 2008 (23) ELT 566 (Tri.-Del), it was held that when the
contract envisages such expenses to be incurred by the dealer and failure to do
so gives a right to the manufacturer to get advertisement done on their own and
recover such expenses from the dealer, such expense incurred by the dealer
would be payment on behalf of manufacturer and requires to be considered
additional consideration for sale and added to the assessable value.

The Mumbai Tribunal in JM Financial Services Ltd. vs. CST
Mumbai-I 2013-TIOL-757-CESTAT-MUM held to the effect that whether revenue
such as incentive or processing fee or expense like electricity etc., when
shared by the parties on principal-to-principal basis, no service is said to
have been rendered. Also in Reliance ADA Group Pvt. Ltd. vs. CST Mumbai-IV
2016-TIOL-603-CESTAT-MUM, it was held that when common services are procured
by one company from service providers, that company acts as a manager/trustee
to incur expenses on behalf of participating group companies and then cost
thereof is shared by all the beneficiaries by making reimbursements.These
reimbursements of the cost incurred cannot be regarded as consideration flowing
for taxable service, but it is rather a receipt towards the reimbursement of
cost/expenses in terms of cost sharing agreement with the participating group
companies.Similarly, in case of CST vs. Arvind Mills Ltd. 2014 (35) STR 496
(Guj), the High Court of Gujarat held that in case of deputation of
employees to subsidiary company, salary and perquisites reimbursed by group
companies, the assessee could not be said to be engaged in providing specified
services to client. Hence, they were not liable for service tax.Identically,
recently in Franco Indian Pharmaceutical (P) Ltd. (2016) 69 taxmann.com 198
(Mumbai-CESTAT), it was held that services provided to many employees and
respective share in salaries paid by the employer is not taxable as a service
of manpower supply. It was further observed that the position will remain the
same even if appointment letter is not signed jointly and any one company has
hired employees and employees are lent or deputed to other companies.

Recent decision of Supreme Court

Recently, the matter of Gujarat State Fertilizers and
Chemicals Ltd. vs. CCE 2016 (45) STR 489 (SC) came up for examination of
Supreme Court wherein GSFC had collected incinerating charge from Gujarat Alkalies
& Chemicals (GACL). The service tax department issued a show cause notice
alleging that the said charges are towards storage and warehousing service
provided by GSFC to GACL. The fact of the matter was that both GSFC and GACL
received Hydro Cynic Acid (HCN) from Reliance Industries Ltd. through a common
pipeline which was used by them for manufacturing of their final product and
used by the two companies in 60:40 ratio. Subsequent to the use, incineration
also was required to be undertaken; the expense on this process was shared by
the two in 50:50 ratio. This arrangement was made in terms of an agreement
between GSFC and GACL. The said facts were adequately explained to the service
tax department. However, the contention of GSFC against service tax liability
was not accepted by the adjudicating authority as well as the first and second
Appellate authorities.

The Appellant, GSFC explained that HCN being one of the main
raw materials was received from RIL, Vadodara directly through a pipeline by
gravity from their plant. As per agreement between GSFC and GACL, sodium
cyanide unit, the quantity received in an intermittent hold tank was consumed
in 60:40 ratio. The hold tank existed for sustaining continuous process of both
the plants facilitating smooth operation of suction pumps and specifically
avoiding starvation of pumps which could disturb the process. If there was any
problem at any of the consumers’ end, the supply from RIL would be stopped and
remaining quantity in the tank would be consumed immediately by either of the
plants. Hence storage of HCN did not happen at all. Moreover, the agreement
between the parties clearly provided that though HCN handling and incineration
facilities were installed in GSFC premises, the expenses thereto were to be borne
by both the parties. For incineration, neither GACL paid nor GSFC received any
fee or a charge but shared cost of incineration as per agreement including
those of repair, maintenance or replacement of spare parts and other overheads.
Thus, both GSFC and GACL were equally responsible for storage and consumption
and no one worked for another and the expense was shared in predetermined
proportion. In facts of the case, GSFC contended that in any case, the
arrangement did not involve storage or warehousing service to GACL and
therefore service tax was not attracted.

The revenue at the other end contended that since HCN was
first kept in holding tank and from this it was distributed in 60:40 ratio, the
holding tank would qualify as storage facility. Further, the fact that GSFC
collected incineration charge from GACL, it was correctly held that GSFC
provided service of storage. According to revenue, since there were questions
of fact based on which concurrent findings were reached by authorities, they
should not be interfered with by the Court as the scope of appeal required the
Court to deal with substantial question of law only. 

Considering all the facts and the terms of agreement between
the parties, the Court observed that there was no dispute that joint investment
was made by the parties for creation of common facility. On accepting this
fact, handling and incineration facilities were in the nature of joint venture
between two of them and they simply agreed to share expenditure. The payment
made by GACL was towards its share of expense. In order to attract service
tax, there has to be element of service provided by one person to the other for
which charges for providing service are collected. When this ingredient is
missing in the facts of the case, the question of service tax does not arise.

Conclusion

When the Apex Court has decided in principle that the element
of service does not exist when common expenses are shared by beneficiaries on
principal-to-principal basis, the long drawn litigation should find a
closement. However, considering approach of the revenue for all practical
purposes, it is less likely that at lower levels, raising dispute would stop.