AGARWAL SHRAFF & CO.

CHARTERED ACCOUNTANTS
52 Weston Street 5th Floor
KOLKATA – 700 052
PHONE: 22259194
e-mail: shraff@vsnl.net

Sri R.K. Shah October 17, 2008

V.P. ( Commercial)
Birla Tyres
Shivam Chambers
53 Syed Amir Ali Avenue
Calcutta – 700 019

Dear Sir,

Please refer to your note to Syt. S.K. Parikji forwarded to us for opinion regarding
applicability of service tax on commission to marketing agents. Opinion has been sought
on the following:-

a) Whether to stop payment of service tax on total commission payable to the

existing marketing agents.

b) Whether to enter into two separate agreements with the marketing agents for CFA
activities and selling activities in the same name and pay service tax on CFA
activities and discontinue on selling activities.

c) Whether to enter into two separate agreements with the marketing agents for CFA
activities and selling activities in two different names and pay service tax on CFA
activities and discontinue on selling activities.

d) To cancel agreement of existing marketing agents and enter into in new names
and stop paying service tax.

In this connection we would invite your attention to our opinion dated 6th October, 2003
wherein we had referred to circular no. 59/8/2003 dated 20th June, 2003. It has been stated
in the above circular that if a person is providing services as both consignment agent as
well as a commission agent than benefit of exemption notification no. 13/2003 –ST dated
20.6.2003 would not be available to him. Such a person would already be covered in the
category of Clearing and Forwarding agent and would be liable to pay service tax in that
category. In other words, the present exemption notification is available only to such
commission agent who is not a consignment agent.

In this connection it would be worthwhile to also refer to sub-section 2 of section 65A of

Finance Act 1994, wherein it has also been provided that when for any reason, a taxable
service is, prima facie, classifiable under two different heads, a service would be
classified under the head,

(a) which provides most specific description,

 AGARWAL SHRAFF & CO.
CHARTERED ACCOUNTANTS
52 Weston Street 5th Floor
KOLKATA – 700 052
PHONE: 22259194
e-mail: shraff@vsnl.net

(b) in case of a composite service having combination of different taxable services, which
cannot be classified in the manner specified in clause (a) it would be classified under the
head of service which give them their essential character and
(c) in case the test of (a) and (b) does not resolve, it shall be classified under head which
occurs first under sub clauses of clause (105) of Section 65 which equally merit
consideration, i.e. the service that was subjected to service tax earlier.

Regarding your query (b), if two separate agreements are made in the same name for CFA
activities and selling activities then whether service tax would be applicable on the
selling activities, my opinion is that service tax would be applicable because even if two
separate agreements are entered into, it would still be the same person providing services
of both consignment agent as well as a commission agent.

However if two separate agreements are made with the marketing agents for CFA
activities and selling activities in two different names, than to determine whether service
tax would be applicable on the selling activities, the question arises as to whether services
provided as selling agent can be clubbed with the services provided in the name of
clearing and forwarding agent.

To answer the above query we can draw an analogy from the various judgements
provided in relation to exemption provided to SSI units under Central Excise Law. Under
central excise a SSI unit having a turnover of less than 3 crores in the previous year is
exempted from payment of duty upto a turnover of one crore. It is a common scenario
among the Small Scale Industries to run two or more units with a view to remain either
within the total exemption of one crore or to remain within the maximum ceiling of 3
crore. Even though two units are legally independent, excise authorities view this aspect
with a jaundiced eye and investigate the matter for the purposes of treating both the units
as one by clubbing the clearances. A number of judgements are available on this aspect in
favour of department as well as in favor of SSI units. The following three factors are
taken into account for the purposes of clubbing of clearances:

a) Financial flow back between the companies.

b) Actual control over the running of the unit.

c) Constitution and share holding pattern of the units.

If it is established that both the units are absolutely independent and do not depend up on
the other units and there is no financial back or financial assistance, the scope for
clubbing of clearances is considerable reduced.
 AGARWAL SHRAFF & CO.
CHARTERED ACCOUNTANTS
52 Weston Street 5th Floor
KOLKATA – 700 052
PHONE: 22259194
e-mail: shraff@vsnl.net

It has been also pronounced by various judgements that using a common office premises,
sharing a common telephone and sharing a common computer and appointment of a
common manager cannot be the grounds for clubbing of clearnces. On the other hand, if
few persons are running a unit as partners and they also start another unit – a pvt. ltd.
company- and if the same partners are directors of the pvt. limited company there are
ample chances for clubbing of clearances. It is also accepted that one of the partners
being a director in the second unit will not be the conclusive proof for mutuality of
interest which leads to clubbing of clearnces.

It was held by Hon’ble Supreme Court in the case of Deputy Commissioner of Sales Tax
v. K. Kelukutty reported in 1986(24) E.L.T. 186 (SC) while referring to the partnership
firms, their lordship of the apex court have observed – “ An agreement between the
partners to carry on a business and share of profits may be followed by a separate
agreement between the same partners to carry on another business and share profits
therein. The intention may be to constitute two separate partnership and therefore two
distinct firms….. It will all depend on the intention of the partners. The intention of the
partners will have to be decided with reference to the terms of agreement and all the
surrounding circumstances, including evidence as to the interlacing or interlocking of
management, finance and other incidents of the respective business.”

There are plethora of judgements available on the above aspect both in favor of
department as well as assessee. Some of them are mentioned below for reference :-

- Assisstant Collector V. Shri J.C. Shah – 1978 (2) E.L.T. (J317) (S.C.)
- Servo Electronics v. Union of India – 1996 (87) E.L.T. 599 (S.C.)
- Jaswant Sugar Mills Ltd. v. Union of India – 1981 (8) E.L.T. 177 (Del.)
- Rice and Oil Mills Partnership Firm v. Dy. Suerintendent – 1981 (8) E.L.T.
59(Ker)
- Padma Packages (P) Ltd. v. Collector – 1997 (90) E.L.T. 175 (Tribunal)
- Supreme Engineering Works v. Collector of Central Excise, Pune – 1996 (82)
E.L.T. 102 (Tribuanl)
- H.T. Bhavnanai Chemicals Pvt. Limited v. Collector of Central Excise, Baroda –
1997 (92) E.L.T. (Tribunal)
- Rubby Rubber Industries Limited v. Comm. of C.Ex., Calcutta –II – 2002 (149)
E.L.T. 970 (Tribunal)
- Renu Tandon v. Union of India – 1993 (66) E.L.T. 375 (Rajasthan)
The ratio of all the judgements referred above is that decision in clubbing cases depends
on the evidences present in a particular case and is, more or less, applicable to facts and
 AGARWAL SHRAFF & CO.
CHARTERED ACCOUNTANTS
52 Weston Street 5th Floor
KOLKATA – 700 052
PHONE: 22259194
e-mail: shraff@vsnl.net

circumstances of that particular case. The ratio cannot be picked up and straight away
applied to the facts of any given case. No doubt, the same is a guiding factor and has to
be judiciously kept in mind while deciding a case. Nevertheless, the facts, the
circumstances, the evidences and above all the purpose and intent of the parties, are the
relevant factors which have to be considered and appreciated while trying to arrive at the
real face of the units.

Hence based on the above analogy in our opinion if separate agreements are entered into
in two different names then we should take enough precautions to ensure that both the
entities can be established as independent entities. In our opinion, wherever it is possible
to enter into such agreements we can escape from the payment of service tax on
commission paid for selling activities.

You may contact the undersigned for any further clarification in this regard.

Thanking You,

Yours faithfully,
For Agarwal Shraff & Co.
Chartered Accountants

(Vinay Kumar Shraff)

Partner

CC : 1) Sri S.K. Parikh

Sr. president & Company Secretary
Keshoram Industries Limited

2) Sri Vikash Agarwal

Keshoram Industries Limited