OIO in the case of M/s.Freshtrop Fruits Ltd.
BRIEF FACTS OF THE CASE
1. M/s. Freshstrop Fruits Ltd., situated at A-603,Shapath VI S.G.ROAD Ahmedabad- 380 015 (hereinafter referred to as the “M/s Freshstrop”), is engaged in providing taxable service falling under the Category of “Goods Transport by Road Service” and “Technical Testing and Analysis Service” as defined under Section 65 of the Finance Act, 1994. M/s Freshtrop is registered with the service tax department and is holding Service Tax Registration No.AAACF2885PST001.
2. During the scrutiny of ST-3 Returns of M/s. Freshstrop it was observed that they had not filed the ST-3 returns for the period from April 08 to March 10.Therefore, a letter dated 10.08.2010 followed by reminder dated 10.11.2010 was issued to M/s Freshtrop asking them to file the pending ST-3 returns and to submit Income Tax Return, Statement of Income and profit & loss account for the said period.
3. Vide their reply dated 18.11.2010 M/s Freshtrop submitted that they had filed all ST-3 returns with Range IX, Division: II, Service Tax Commissionerate, Ahmedabad. They also produced the copies of ST-3 returns along with Income Tax Return and profit & loss account for the F.Y. 2008-09 and 2009-10.
SCRUTINY OF ST -3 RETURNS AND INCOME TAX RETURN FOR F.Y. 2008-09 AND 2009-10 OF M/S FRESHTROP:
4. During the scrutiny of their ST -3 returns and Income Tax return for F.Y. 2008-09 and 2009-10, it was noticed that they had shown Foreign Selling Expenses during the period 2007-08,2008-09 and 2009-10 and Foreign Sea Freight during the period 2009-10. As Foreign Selling Expenses and Foreign Sea Freight incurred by M/s Freshtrop appeared taxable under section 66A and M/s Freshtrop has not paid Service Tax on the foreign selling expenses and sea freight expenses paid in foreign currency, a letter dated 03.12.2010 was issued to the assessee followed by reminder dated 20.12.2010 asking them to produce the details of the same.
5. In their reply dated 18.2.2011 M/s Freshtrop submitted that;
§ there was no liability on them to pay any service tax on foreign selling expenses as Section 66A was not attracted to their case.
§ the expenses shown in their Income tax returns were related to foreign selling expenses for the commodities like Grapes and Pomegranate which were exported by them to super markets through their consignment agents such as M/s Olympic Fruits B.V. Netherlands, M/s International Produce Ltd., U.K., M/s British and Brazilian Produce Ltd., U.K., M/s Malet Azoulay(UK) Ltd., U.K. and M/s Carmexco B.V. Neatherlands who were the distributers of above fruits in European Countries.
§ The expenses shown under the head of “foreign selling expenses” were in nature of reimbursement of sea/air freight, storage and warehousing, import duty paid by the said distributors, quality costs and testing expenses incurred by the said distributors and packing tax paid by the said distributor receiving the fruits and fruit products in foreign countries.
§ all elements of expenses arise after goods leave India. Therefore, these foreign selling expenses were not in the nature of any service received by them from any foreign service providers and hence these were not taxable under section 66A of the Act.
§ the foreign selling expenses also included commission paid to the distributors for the sales made by them and money collected by them for such sales in foreign countries. But there was no service tax on commission because it was related to the activities taking place in foreign countries, and in any case, such services of commission agent were exempted under Notification No. 13/2003-ST dated 20.6.2003,as amended.
§ Business auxiliary service of a commission agent in relation to sale or purchase of agricultural produce is fully exempted under that notification. Since grapes and pomegranates are agricultural produce, any service for purchase or sale of such fruit was exempted.
§ Foreign Sea Freight was transportation charges paid to ships and vessels for transferring of fruits from India to foreign countries and thus foreign sea freight was also an element of expenditure incurred after the goods leave the country. There was no service tax on such foreign sea freight because it was beyond the territory of India and therefore foreign sea freight was not a service received by them from the foreign service providers and hence not taxable under section 66A of the Act.
6. A letter dated 09.03.2011 was issued to the assessee requesting them to submit the copies of contracts/agreements with the foreign distributors and copies of invoices raised by their distributors. They were further requested to give the details/documents regarding the procurement, receipt, storage, grading & sorting, packing, pre-cooling, cold storage, manufacturing process and dispatch of their products.
6.1 Vide their reply dated 19.7.2011 M/s Freshtrop submitted the followings documents:
(i) Month wise and year wise details and documents of foreign selling expenses and foreign sea freight incurred during F.Y. 2006-07 to 2010-11.
(ii) Income tax return with computation sheet and balance sheet, Profit and Loss account for F.Y. 2006-07 to 2007-08.
6.2 They further submitted that
§ they send the goods on consignment basis to various agent in Europe and United Kingdom. The agents sell the goods on behalf of them and send them the Account sales of the goods sold. They enclosed a copy of account sale.
§ Agents charge them commission on the Gross Sales value and other expenses incurred by them. Sales realization is remitted to them after deducting the expenses and commission.
§ they did not have any written agreement with their consignment agents.
§ they procured grapes during grapes season from February to April from the farmers. They enclosed a copy of the purchase challan. The grapes purchased from the farmers are sorted and packed in their factory which were thereafter pre-cooled and stored in their cold storages. These goods were sent on consignment basis to their agent through refrigerated containers. They also enclosed a copy of excise invoice.
8. Statement of Shri Chirag Malviya, Senior Manager (Accounts) of M/s Freshtrop was recorded on 1.8.2011
8.1 Shri Chirag Malviya, Senior Manager (Accounts) of M/s Freshtrop has in his statement inter-alia stated that:
- they procure grapes and pomegranates from Global Gaap certified farmers; that this certificate is issued by Foodcert India Pvt. Ltd., Hyderabad. Foodcert India Pvt. Ltd issue certificates to the farmers on behalf of Isacert B.V., Netherland (Europe).
- they purchase grapes and pomegranates from Global Gaap certified farmers;
- they send their workers to these farms to harvest grapes and pomegranates from farms and bring it to their factory in their trucks in plastic crates;
- in their factories grading and sorting is done by their workers. Grapes are graded and sorted in fix sizes such as 18 mm, 20mm and 22mm and rotten and yellow berries are removed. Then grapes are packed in punnets of 500gms. Punnets are imported by them. Then 10 punnets of 500gm each are packed in one corrugated box. There are two varieties of grapes one is green and other is black and green. Then bar code stickers are fixed as per the buyer’s specific requirement. Bar code stickers are prepared by them as per specification given by the buyers.
- In case of pomegranates, fruits eaten by birds and having sun burns are sorted and fruits of best quality are packed in the boxes of 12 and 18 numbers. These fruits are kept in pre cooling room for pre cooling process which is mandatory process for exporting these fruits since these fruits are perishable items in nature and these fruits require pre- cooling before storing in cold storage. These fruits are pre-cooled in our pre -cooling room. In the process of pre cooling we pre-cool the fruits at 0 to 5 degree centigrade. These pre-cooled fruits are then stored in cold storage to maintain the temperature till they are exported. 2300 boxes are sent in one container after their pre-cooling. These boxes are sent in 20 pellets of 115 boxes in one refrigerated container.
8.2 On being asked he stated that they get export order during foreign tour of their Director and also on e-mail from M/s Olympic Fruits B.V. Netherland based on market requirement.
8.3 On being asked he stated that they send the goods on consignment basis to M/s Olympic Fruits B.V. Netherland in Europe. From their factory containers are sealed by Excise Authority which is then sent to Nhava- Sheva port of Mumbai and then the containers are loaded on vessel. It normally takes 20-25 days to reach Europe. The consignment is then released by M/s Olympic Fruits B.V. Netherland after paying the custom duty and freight charges. The goods are warehoused by M/s Olympic Fruits B.V. Netherland in their warehouse and later on sold by them to super markets. M/s Olympic Fruits B.V. Netherland gives them advance payment of approximately 30% of the sale value against their documents of export. M/s Olympic Fruits B.V. Netherland sells the goods and sends them the Account sales of the goods sold. M/s Olympic Fruits B.V. Netherland charges them commission on the Gross Sales value and other expenses incurred by them. Sales realization collected from the super market is remitted to them after deducting the advance payment, expenses and commission. They have no written agreement with M/s Olympic Fruits B.V. Netherland. M/s Olympic Fruits B.V. Netherland also followed the same practice from different suppliers from different countries.
8.4 On being asked he stated that they are engaged in purchasing, harvesting, grading, sorting, packing, pre-cooling of fresh pomegranates and grapes at their three units situated in Maharashtra. The first unit is at Gate no. 171, Vill. Jaulke Dist. Nasik, the second one is at Survey no, 1366, Savlej-Wayfale Road, Dist. Sangli, The third unit situated at Gat No. 2425/26/30/31, Malharpet-Pandharpur Road, Dist Satara. At their fourth unit which is situated at Gate No. 598/1, Vill Janori, Dist. Nasik, they are purchasing and processing of mango, guava, pomegranate and tomato. For processing they have an automatic plant in which final products are pulp and concentrate which are packed in aseptic bags of 215 kgs to 270 kgs which are then packed in barrels of food grade quality. These drums are stored under normal temperature and sold as per order mainly in domestic market. In case of export of processed fruit it is directly sold to the parties in European countries. In some cases orders are procured by agents to whom commission is paid by them.
8.5 He was shown Income Tax return and Balance sheet for F.Y. 2006-07 wherein under head “schedule-S” they have shown selling and distribution expenses amounting to Rs. 10,88,71,394/-. On being asked about the foreign selling expenses he stated that these are for foreign commission, foreign custom duty, foreign sea freight and foreign storage and ware housing expenses.
8.6 Further, he was shown balance sheet for the period 2007-08 to 2009-10 wherein under the head expenditure in foreign currency they have shown foreign selling expenses, foreign testing expenses, and foreign sea freight. On being asked about these charges paid in foreign currency he further stated that foreign selling expenses includes commission, foreign clearing and forwarding charges, foreign custom duties, foreign storage and warehousing expenses.
8.7 On being asked he stated that they have paid services tax only on foreign commission paid to agents for getting orders of export for mango pulp, guava pulp and pomegranates concentrate.
9. From the above paragraphs it appeared that
(i) M/s. Freshstrop used to send goods to their consignment agents to be sold in super markets on their (M/s Freshstrop’s) behalf.
(ii) The consignment agents were paying some amount as an advance to M/s. Freshstrop.
(iv) Consignment agents were getting the goods released from the ports by paying certain expenses such as Customs Duty, Port transportation, packing charges etc. These expenses were paid by the consignment agents first and then they recovered the same from M/s. Freshstrop as reimbursement.
(v) Consignment agents were storing the goods at their warehouses.
(vi) Consignment agents were getting goods tested for quality standards in compliance to the European standard and these charges also reimbursed to them by M/s. Freshstrop.
(vii) The consignment agents were forwarding the goods from warehouse to the supermarkets and were paying road transport charges.
(viii) The consignment agents were selling goods to supermarkets according to the instructions of M/s. Freshstrop.
(ix) The consignment agents then prepared and sent statement to M/s. Freshstrop showing details of sales expenses, advance paid by them, their commission amount and balance amount due.
10. That the consignment agents such as M/s Olympic Fruits B.V. Netherlands, M/s International Produce Ltd., U.K., M/s British and Brazilian Produce Ltd.,U.K., M/s Malet Azoulay (UK) Ltd., U.K. and M/s Carmexco B.V. Netherlands apart from acting as a distributers of fruits in European Countries also perform the following functions:
a. Clearance of consignment from the port.
b. Payment of Duty, Freight, Packing Charges, Port Handling charges etc.
c. Storage/ Storage at Port
d. Transportation of the consignment to the consumers.
10.1.1 It is thus evident that over and above the commission amount, the consignment agent are also charging sea/air freight, storage and warehousing charges, quality assurance charges, road freight, packing charges, distribution charges, terminal handling, port handling etc which are being reimbursed by M/s Freshstrop to them (consignment agents).