Judgment:
1. The appellant M/s Mckinsey India, a branch of Mckinsey, U.S.A., is engaged in providing management consultancy services to its various clients in India. They have entered into agreement with clients, prior to commencing any consignments/engagements for provision of detailed strategic consulting service and for all the project undertaken by them during the period October 1998 to March 2003 numerous expenses including Out of Pocket Expenses (OPE) for each project were incurred by them and the same were recovered from the clients.
2. Since value of taxable services in relation to the service provided by management consultant to the clients is gross amount charged by such consultant from the clients for services rendered in connection with the management of any organization in any manner, it was felt that the entire amount was chargeable to service tax. However, certain OPE were considered as not liable to service tax i.e. one relating to traveling, boarding and lodging expenses, provided the assessee substantiate the same with the help of documentary evidence.
3. As a result of audit undertaken in 2002 for the period April 2000 to September 2000 and subsequent investigations, assessee could not provide satisfactory explanation and supportive documents for OPE amount (sic) 35,68,38,421/- out of total sum of Rs. 40,82,55,661/- for the period October 1998 to March 2003 and accordingly a show cause notice was issued seeking to demand service tax amounting to Rs. 1,78,41,921/- in respect of such inadmissible OPE. These expenses mainly related to traveling, lodging and boarding expenses except for a sum of Rs. 6,32,92,925/-, which was disallowed as being expenses relating to infrastructure and establishment charges unrelated to traveling, lodging and boarding.
4. This scrutiny further revealed that for rendering the management consultancy services, the assessee has obtained certain core documents from its Head Office and borrowed services from its subsidiary as well as its Head Office for which a sum of Rs. 89,27,55,541/- was paid by them to their Head Office and subsidiaries of Mckinsey. It was considered that these services were critical to the job undertaken by the assessee and were vital and pivotal to carry out assignment and therefore these core document charges and borrowed service charges and market research charges incurred by the assessee were liable to service tax and since the applicant was subsidiary of the principal it has acted as agent in providing these paid services and therefore he was liable to pay service tax as agent and accordingly a demand of Rs. 4,46,37,777/- was also raised.
5. It further came to notice that besides above amount, an amount of Rs. 21,96.35,560/- was recovered by the assessee from its client towards the core documents charges, borrowed service charges and market research charges and treated as OPE, on which no service tax was paid.
The service tax evaded on this amount came to Rs. 1,09,81,778/- which was also demanded through a single show cause notice. Total service tax amounting to Rs. 7,34,61,477/- was demanded from the appellants as per details above for the period 16th October 1998 to 31st March, 2003 alongwith interest and various penalties under Section 75, 76, 78 were proposed. The show cause notice was adjudicated by the Deputy Commissioner, who confirmed the entire demand alongwith interest and imposed penalty of Rs. 200/- per day under Section 76 for every day of failure on their part and upto the date of payment of service tax, a penalty of Rs. 14,15,00,000/- on M/s Mckinsey under Section 78 of the Finance Act, 1994. On appeal, his order was upheld by Commissioner (Appeals).
6. We have considered the rival submissions from both sides. The appellants have made the pleading, with reference to the finding of the lower adjudicating authorities, as Commissioner (Appeals) has more or loss adopted the same without giving any of his own reasoning. We are also passing our orders on the basis of the findings given by the Deputy Commissioner. The issues to be decided are as under: (1) Disallowance of abatement of traveling, lodging and boarding expenses on account of insufficient documentary evidence.
(2) Liability to pay service tax on miscellaneous expenses incurred on items other than traveling, lodging, boarding and described as infrastructural and establishment expenses.
(3) Liability to service tax in respect of payments received in foreign exchange.
(4) Liability to service tax on expenses incurred in procuring core document and borrowing other services from Head Office and other Mckinsey entities for which no recovery was made from client and service tax has been charged as agent of the principal.
(5) Liability to service tax on expenses incurred on core documents and borrowed service charges of which recovery was made from the client.
(1) Disallowance of abatement of traveling, lodging and boarding expenses on account of insufficient documentary evidence.
As regards traveling, lodging and boarding expenses, though the service tax is chargeable on gross amount received from the client, abatements have been allowed on traveling, lodging and boarding expenses as per circular issued by the CBEC vide F. No. B-II/03/98-DRU dated 07.10.92. However expenses incurred on such traveling, boarding to the extent of 35,68,38,421/- has been denied on the ground that the appellants have failed to substantiate their claim by providing necessary documentary evidence and there were discrepancies in the amount of claim and the supporting vouchers in respect of 11 jobs selected on a sample basis by the adjudicating authority. It is the appellants contention that merely because, there were same discrepancy in the claim made by the employees and the supporting voucher being either in excess or less than the amount indicated in the voucher, the entire amount has been denied which is not correct. It was explained that some times the claim made by the employees is in excess, for want of supporting voucher as no bills are issued in respect of such expenses example of which are some tips given in the restaurant, driver's, meals of the drivers etc. It was submitted that the adjudicating authority should have allowed atleast that much expenses which was duly supported by voucher instead of rejecting the entire claim. Further, it was submitted that though entire supporting documents were submitted to the adjudicating authority, which they concede were about 70% running into several carton loads, the adjudicating authority has chosen not to see them and has rejected all the charges on the basis of sample survey of some of the document pertaining to few jobs.
This was incorrect as each document has to be looked into and the entire amounts for which vouchers were produced should have been allowed.
We find merit in the contention of the appellants and notice that the adjudicating authority has disallowed the entire expenses by referring to some discrepancies in the sample test check done by him and disallowed the entire claim. This was incorrect. However, since the revenue is claiming that the entire document, were not submitted to them, the matter is remanded back to the adjudicating authority to look into the documents furnished by the appellant and also to look into the remaining documents which the appellants may like to furnish now in support of their claim and to allow the claim in respect of amounts actually indicated in the voucher, as there is no dispute that the appellants are entitled to the abatement of expenses incurred on traveling and boarding charges etc.
(2) Liability to pay service tax on miscellaneous expenses incurred on items other than traveling lodging, boarding and described as infrastructural and establishment expenses.
The next issue is regarding sundry expenses incurred on heads other than traveling, boarding and lodging charges. These expenses are on account of telephone and other communication charges, courier charges, office supplies, IT supplies and consumables, temporary help delivery/petty cash, postage, time sheet expenses, inter office expenses, bank fee, rental hiring of computers etc. These expenses have been disallowed as according to adjudicating authority only those expenses which were in the nature of traveling, lodging and boarding i.e. non establishment and non infrastructure expenses could be considered for abatement as per the circular issued by the Board and not other expenses as they are distinctly establishment/infrastructure related expenses and are essential and necessary in effective performance of the service rendered by the noticees to their clients under the job arrangement letters for a given project. It was submitted that the adjudicating authority has disallowed the expenses in view of the trade notice, which is of clarificatory nature and the principle of beneficial interpretation should apply. The terms 'such as' used in the trade notice is only illustrative and not exhaustive. Such expenses are the obligation of the client, but for administrative convenience, the client makes a request to the appellant to incurr such expenses on his behalf and therefore are clearly reimbursable and eligible for abatement. In support thereof reliance was placed on CESTAT decision in the case of Glaxo Smithkline Pvt. Ltd. - 2005 (188) E.L.T. 171.
As regards abatement of these expenses we find that Section 67(q) of the Finance Act, 1994 this value of service provided by management consultant to client as gross amount charged by such consultant from the client for services rendered in connection with the management of any organization in any manner. The section does not provide for exclusion of any charges or abatement of any expenses and it is on account of the trade notice alone that abatement is being given. The clarification given in the trade notice is in connection with the market research agency only and not management consultant but has been applied in the case of management consultant also. OPE means expenses which cannot be budgeted for and have to be incurred on the spot to meet immediate requirement and are therefore contingent in nature. These must be the expenses which are primarily to be incurred by the client and not the service provider. Therefore it has to be first established, that normally the services were required to be provided by the client and were rendered on behalf of the client as per in request and it will be then only that the expenses will be reimbursable. The distinction should be not on the basis of non infrastructure and not establishment services, but with respect to the liability of the client to incur such expenses. For e.g. if the service provider has to visit the project site, then he has to be provided some office place for which necessary furniture, computer, telephone and other facilities have to be given. These can be said to be expenses which are required to be incurred by the client but are incurred by the service provider on behalf of the client who is thereafter reimbursed these expenses and will therefore be eligible for abatement. On the other hand, office expenses incurred in running the normal office of service provider cannot be said to be expenses incurred on behalf of the client.
In view of above, this issue is also remanded back to the adjudicating authority to look into the nature of the expenses and to determine whether it was the liability of the client to provide the same or not and to decide accordingly. The practice prevalent in the trade can also be taken into account for this purpose.
(3) Liability to service tax in respect of payments received in foreign exchange.
A payment amounting to Rs. 94,21,266/- has been received in reimbursable foreign exchange and as per the appellants contention the same is not liable to service tax in view of the exemption to such receipt under Notification No. 2/99-ST dated 22.08.1999 as superseded by Notification No. 99-ST dated 09.04.1999. These payments in foreign currency relate to travel, lodging, boarding, other miscellaneous expenses, borrowed service charges, core document charges etc. The adjudicating authority has disallowed the exemption on the ground, that the notification was not available to management consultancy services as they are not taxable services defined under Section 65(48) of the Act as it existed during the relevant period and that there is no proof that Mckinsey has not repatriated the foreign exchange outside India. It was submitted that management consultant services were introduced under the Act w.e.f. October 16, 1996 and hence was always a part of the definition of the taxable services. If allegation in the show cause notice is true then the service provided by the appellants itself would not be liable to tax and accordingly there would be no case for revenue to demand service tax, interest and penalties. The certificate by the Chartered Accountant was produced to substantiate claim of receipt in foreign exchange and non repatriation of the same by the appellant.
We find that management consultant services was a taxable service under Section 65(48) of the Finance Act, 1994 during the relevant time and therefore the appellants were entitled to exemption under Notification No. 6/99. As regards non repatriation of foreign exchange, Chartered Accountant certificate has now been produced and since this was not available before the adjudicating authority, the matter is remanded back to be adjudicating authority to look into the Chartered Accountant's certificate and if nothing contrary is found the exemption should be extended to them.
(4) Liability to service tax of expenses incurred in procuring core document and borrowing other services from Head Office and other Mckinsey entities for which no recovery was made from client and service tax has been charged as agent of the principal.
During the course of rendering management consultancy services, the appellants procured core documents from its Head Office for which charges amounting to Rs. 42,65,57,062/- were paid to the Head Office and not recovered. Similarly the appellants borrowed some services from M/s Mckinsey entities as well as its Head Office for which Rs. 45,52,73,707/- were paid to Head Office and other Mckinsey entities and the same were also not recovered from the client as there was a limit in the contract that OPE recoverable from the client will not exceed 15% of the total consultancy charges. The revenue has considered that these services were critical to the job and vital and pivotal to carry out the assignment and therefore the core document charges, borrowed service charges and market research charges incurred by the appellants were liable to service tax. The adjudicating authority further held that since these services were provided by the principal/branches/subsidiary to the noticees and as the noticee was the subsidiary of the principal it had acted as an agent in providing these services and it is imperative that the noticee pays appropriate amount of service tax on the same. The total amount to paid came to Rs. 89,27,55,541/- which was held liable to service tax amounting to Rs. 4,46,37,777/- alongwith interest. It was submitted that the appellants have not been reimbursed by the client in respect of the services borrowed by them and since they were in the nature of information and data available with the agency from which it has been borrowed without any analysis and providing consultancy, they cannot be considered as a management consultancy services at all. Once the adjudicating authority consider them as an agent, an agent cannot be charged service tax for the services received by him. They also cannot be charged as a recipient of the services, if it is considered that the services were provided by Mckinsey, U.S.A. and its entities to them in India as the provision for charging service tax from the recipient came only w.e.f. June 16, 2005 and even in that case show cause notice has not invoked those provisions.
We find that service tax has been demanded from the appellant as an agent of its principal in USA in respect of the charges paid by them to their Head Office and other subsidiaries. Obviously an agent who acts on behalf of the principal cannot be charged to service tax for documents/services which he has received from his principal as he is not rendering any service. The nature of the borrowed services and core document have not been revealed by either side nor the service has been identified under which such charges incurred can be levied to service tax. In any case an agent who acts on behalf of the principal cannot be charged to service tax for the information and the so called services received by him on behalf of his principal as one cannot render services to oneself. Once the clients have not been charged these expenses forming part of the management consultancy provided by the appellant, the question of charging any service tax on the same simply does not arise. In view of the same, we set aside the demand of Rs. 4,46,37,777/-.
(5) Liability to service tax on expenses incurred on core documents and borrowed service charges for which the recovery was made from the client.
Expenses under this head and the averments made are the same as in the previous case except the fact that in this case the expenses have been recovered from the client. In this regard the main plea of the appellant is that the services have been borrowed on account of the client who is required to submit the necessary data and on his inability to do so, the same is borrowed from other Mckinsey entities and its Head Office. They are in the nature of OPE and are so recovered by all management consultants. These were being referred to as OPE even prior to 1998 when service tax for the first time was imposed on management consultancy charges. Therefore once the trade notice refers to abatement of OPE, the same should be allowed. The appellants however conceded that best the charges recovered towards expenses paid to the Head Office in respect of core documents and borrowed service charges from its Head Office can be charged to service tax as Mckinsey Indian being branch of Mckinsey, U.S.A., the branch Office was providing the service on behalf of its principal. But charges recovered in respect of borrowed services from other Mckinsey entities cannot be charged to service tax.
We, however note that the value of taxable service under Section 67(q) of the Finance Act, 1994 is the gross amount charged by management consultant from the client and therefore the law by itself does not provide for any abatement and the tax is to be paid on the total gross amount. The abatement of OPE has been allowed on the basis of trade notice which gives example of OPE, as those relating to traveling, boarding and lodging. Though the reference is illustrative, it does give an indication as to what is to be considered as OPE. The expressed OPE has not been defined in any enactment and even though the appellants were given an opportunity to point out if the meaning of OPE has been considered under any other enactment or services, they failed to do so. In common parlance, OPE means expenses which are sundry in nature, cannot be budgeted for and have to be incurred on the spot to meet immediate requirement and are therefore contingent in nature. These must be expenses which are primarily to be incurred by the clients and not the service provider. Therefore, as said earlier, it has to be first established that normally the expenses in question were required to be incurred by the clients and were incurred on his behalf as per the client's request and it is then only that the expenses can be considered as reimbursable and eligible for abatement. Core documents and other borrowed services are essentially one which form necessary input for providing the management consultancy services.
When a client engage Mckinsey at a high premium, he does so because he knows that Mckinsey has branches all over world and therefore it will have the benefit of research undertaken all over the world by it and therefore it cannot be excepted of him to pay for the data which has been procured by the appellant from its Head Office and other Mckinsey entities. No material has been produced before us to show that such data is normally supplied by the client and they merely act as an agent of the client for procuring such data/services. The fact that the clients have been charged only Rs. 21,96,35,580/- as against Rs. 89,27,55,541/-absorbed by the appellant themselves, shows that these charges are massive ad that they are normally not provided by the client. If that would have been the case, that it is the client's job to provide such data, the agreement would not have limited the reimbursement to the extent of 15% only and would have recovered the entire amount. We therefore hold that this information and data was essential for providing management consultancy service and therefore once these charges have been recovered from the client, its abatement cannot be allowed.
Once the service tax is payable on the gross amount, such expenses cannot be considered as allowable OPE. The service tax amounting to Rs. 1,09,81778/- on this account is therefore upheld. It was submitted that the authorities below have upheld the application of extended period of five years for demand of service tax on the ground that the noticees have never disclosed in their return, that they were recovering extra amount from their clients in the nature of OPE and have not claimed any abatement from the gross amount and have never submitted any documents to substantiate their claim of OPE and therefore there was no occasion for the departmental officers to demand supporting documents, as they were not in the know of their realising extra charges from their client and thus they did not disclose wholly and truly all material facts required for verification of the assessment under Section 71 of the Act. It was submitted that they have filed their ST-3 returns as prescribed and these returns nowhere required them to make a separate disclosure of OPE claimed by them as abatement and therefore they cannot be charged with not disclosing wholly and truly all material facts required for assessment. The ST-3 return were duly verified by the departmental officer and in some cases less charge was pointed out which was duly paid by them. Section 71 as it then existed, requires the central excise officer to verify the correctness of the amount declared and after the ST-3 return have been verified, it cannot be said that some information was not disclosed. The department itself has allowed abatement of Rs. 5.14 Crores even though no such disclosure was made in the ST-3 return.
It was accordingly submitted that larger period cannot be invoked and penalties under Section 73 and 78 cannot be imposed. A plea was also made that Section 80 empowers the departmental authorities not to impose penalty under Section 76, 77, 78 & 79 for any failure referred to in these provision, if the assessee proves there was reasonable cause for the said failure. It was submitted that in view of the trade notice, which refers to OPE, they were under bonafide belief that such expenses are admissible for abatement and therefore they did not disclose such OPE believing that they were not required to be disclosed as such and therefore penalty should not have been imposed.
7. We have considered the submissions. We find that the period under dispute is from October 1998 to March 2003. Section 70 was amended in 16.07.2001 and amended section empowered the assessee to assess tax due himself and thereafter to furnish return in the prescribed manner.
Section 71 provides that the Superintendent of the Central Excise may on the basis of information contained in the return filed by the assessee under Section 70, verify the correctness of the tax assessed by the assessee on the services provided. Thus the verification was confined to the information contained in the return and it was in case of doubt only that superintendent could have called for further documents. Thus for period after 16.07.2001, there was a self assessment procedure and verification was required on the basis of information furnished in the return and not beyond that. Since the appellants have not claimed any abatement in their returns, the question of calling for documents relating to the same does not arise.
As regard period prior to 16.07.2001, though Section 70 only required the assessees to furnish return in prescribed form without any provision of self assessment, Section 71 relating to the assessment required superintendent to assessed returns as such and in case he felt that any further document was needed, he was required to obtain a written permission from the Commissioner for obtaining any documents etc. from the assessee. Therefore even earlier verification was limited to the information furnished in the service tax return and documents could be called for only with the permission of the Commissioner. The scheme of the service tax was that the assessment will be made on the basis of information furnished in the return and no invoices or bills were required to be submitted alongwith return and the verification of invoice or bills if any was to be done by the audit only as has also been done by audit in the present case. It is not the appellant's case that they have furnished the invoices but department has chosen not to verify them. The appellants admitted that no invoices or supporting documents were submitted by them alongwith the returns.
8. As regards bonafide belief and the plea that the proforma of ST-3 return no where required them to indicate the abatement claim, we find that the proforma of ST-3 return required them to declare the value of taxable service charged or billed alongwith value of taxable service received. Value of taxable service has been defined under Section 67(q), as the gross amount received from the client. Thus the applicant was under obligation to declare the total gross amount and not the amount after deducting so called OPE. Even the trade notice does not come to their rescue, as it relates to market research service agent only and then it refers to OPE such as traveling, boarding and lodging only. This does not give idea at all, that even core document charges and borrowed services and market research charges will be considered as OPE. In any case even trade notice made it clear that the service tax assessee are required to provide documentary evidence substantiating its claim for abatement from the gross amount received from the client for service rendered to the concern Central Excise authorities. This made it very clear that the appellant were required to first declare the gross amount received by it and then claim abatement duly supported by documentary evidence. For this reason, it cannot be said that the appellants had a bonafide belief that the so called OPE were eligible for abatement and were not required to be reflected in the ST-3 return for claiming abatement from the gross amount.
9. In view of this we hold that the extended period has rightly been invoked and grounds for non-imposition of penalty under Section 80 have not been made out. However, since substantial amount of demand has been held to be unsustainable and some part has been remanded for reconsideration of the abatement claim, the penalties shall be re-determined, taking into account the total service tax held as liable to be paid.