Creative Service Tax Pondicherry

The Assistant Commissioner of Central Excise, No.14, Municipal Street, Azeez Nagar, Reddiarpalayam, Pondicherry-10.

Tuesday, March 21, 2006

Dear Sir, Sub: ST- Non-Payment of Service Tax on “Management Consultancy Service”- Issue of notice- reg. Ref: Letter C.No:V/30/24/2005- S.Tax dated 12.12.2005. Please refer to your above letter wherein you have demanded Service tax of Rs. 2,20,000/- on the taxable value of Rs.44,00,000/- received by us during the financial year 2001-02 and in 2002-03 in respect of “Management Consultant Service” and further sought to recover interest and penalty under various provisions of the Finance Act, 1994. In this regard we would like to bring to your kind attention the following facts;1) That entire amount of Rs. 44,00,000/- was received by us from M/s Creative Polypack Ltd, Calcutta. 2) That M/s Creative Polypack Ltd. is a company under the same management with Common Directors and owned by Substantially same shareholders. 3) That even though the amount received from M/s Creative Polypack Ltd. was credited to the Accounting Head “Management Fees” but the accounting head is not indicative of the nature of the payment. 4) That as both the companies are under the common management and ownership, hence several facilities are provided by M/s Aparana Paper Processing Industry (P) Ltd, Pondicherry to M/s Creative Polypack Ltd, Calcutta for cost reduction and better profitability of group companies. 5) That a facilitation charge is levied upon M/s Creative Polypack Ltd. to ensure equitable distribution of profit amongst the group companies. 6) That such charges are not recovered as consideration for providing any consultancy but for recovery of costs of providing various facilities. As defined under Clause 105 (r) of section 65 of the Finance Act,1994 taxable service in the case of Management Consultancy service, means any service provided to a client by a Management consultant in connection with the Management of any organization in any manner and the term “service provider’ shall be construed accordingly. Hence according to above definition there must be a consultant – client relationship between service provider and service receiver. However in our case it is not possible to have a consultant – client relationship between M/s Aparana Paper Processing Industry (P) Ltd, Pondicherry and M/s Creative Polypack Ltd, Calcutta as both the companies are acting under the direction of same management. Company is an artificial judicial person. A corporation is a distinct, legal entity separate and apart from its members, stockholders, directors or officers. Although it is a separate entity, it can act only through its members, officers, or agents and cannot have knowledge

or belief of any subject independent of the knowledge or belief of its people. A corporation can buy, trade, sell and make loans, literally anything a natural person can do except that it cannot think. A corporation is an artificial person. Its rights, duties and liabilities are no different than those of a natural person under similar conditions except, of course, where it is required to comprehend or think. That’s what the board of directors is for; they do the thinking. In our case since Board of directors for both M/s Aparana Paper Processing Industry (P) Ltd, Pondicherry and M/s Creative Polypack Ltd, Calcutta is the same, so it is not possible for M/s Aparana Paper Processing Industry (P) Ltd, Pondicherry to provide any management consultancy to M/s Creative Polypack Ltd independent of their Board of Directors. Both the companies are managed by same set of people who guides the management of the company. It would be absurd to come to a conclusion whereby M/s Aparana Paper Processing Industry (P) Ltd, Pondicherry can provide consultancy on any subject which is independent of the thought process of its Board of directors since it is artificial natural person and cannot have a thinking of its own. Since in our case both the companies are acting under the direction of same management, hence a situation cannot be conceived whereby one company will make the payment to other company for management consultancy. It is the Board of Directors who are paid their remuneration for providing management and direction. Further as per section 73 of the Finance Act, 1994, show cause notice can be issued within one year of the non payment of service tax. For extending the period of limitation show cause notice must state that there has been fraud, willful misstatement or suppression of facts. However show cause notice issued on 12.12.2005, even though related to period 2001-02 and 2002-03, has not mentioned any cause for extension of period of limitation. The statutory returns and information were being submitted regularly and there was no willful misstatement or suppression of fact submitted to the department. Hence in view of the above facts and circumstances as well the expiry of period of limitation, we request you to kindly drop the show cause notice for recovery of Service Tax, Interest and penalty. We further request you to kindly give us an opportunity to be heard in person. Thanking you, Yours faithfully, For Aparana Paper Processing Industry (P) Ltd Authorised signatory