Tribunal Exempts Payments to USFDA from Service Tax

Case Name:

Service Tax Appeal No. 51329 of 2017 - M/s Sidmak Laboratories (India) Private Limited v. The Commissioner of Central Excise and Service Tax

Key Takeaways:

1. Payments made to USFDA for obtaining approval to export pharmaceutical products are not subject to service tax.
2. The Customs, Excise & Service Tax Appellate Tribunal referred to previous decisions and a CBEC circular to support its ruling.
3. The Tribunal held that USFDA is a statutory authority, and its approval of pharmaceuticals for export is a statutory function.
4. The distinction between statutory authorities within India and statutory authorities outside India in terms of service tax liability has no legal basis.
5. The Tribunal set aside the impugned order and provided relief to M/s Sidmak Laboratories (India) Private Limited.

Case Synopsis:

The document you provided is a final order from the Customs, Excise & Service Tax Appellate Tribunal in New Delhi. The case number is Service Tax Appeal No. 51329 of 2017. The appellant in this case is M/s Sidmak Laboratories (India) Private Limited, and the respondent is The Commissioner of Central Excise and Service Tax.

The appeal was filed by M/s Sidmak Laboratories (India) Private Limited to challenge the order-in-appeal dated 27.04.2017 passed by the Commissioner of Central Excise (Appeals – I), Meerut. The Commissioner upheld the confirmation of demand by the Original Authority but reduced the penalty imposed on the appellant under section 78 to 50%.

M/s Sidmak Laboratories (India) Private Limited is a pharmaceutical manufacturer and exporter registered with the Service Tax Department. During an audit of the appellant’s records on 24.03.2015, it was found that the appellant had paid an amount of Rs. 2,96,77,707/- to the United States Food & Drugs Administration (USFDA) as fees to obtain approval to export its products. The audit concluded that this amount falls under the category of “Technical Inspection and Certification Agency Service” under section 65 (105) (zzi) of the Finance Act, 1994, and the appellant was liable to pay service tax on such charges under the reverse charge mechanism.

Based on this finding, a show cause notice was issued to the appellant on 08.07.2015, demanding service tax of Rs.4,55,734/- along with interest under section 75. Penalty was also proposed to be imposed under section 78.

The appellant contested the proposals in the show cause notice, arguing that the payment made to USFDA, being a sovereign authority, is not chargeable to service tax. The appellant cited previous Tribunal decisions in similar cases where payments made to USFDA were held not liable to service tax. The appellant also argued that there was no justification for invoking the extended period of limitation and imposing a penalty, as there was no intent to evade payment of duty or suppression of facts.

The Commissioner of Central Excise (Appeals) confirmed the proposals in the show cause notice, except for reducing the penalty imposed on the appellant. The Commissioner held that the short payment of service tax was discovered during the audit of the appellant’s records and that the extended period of limitation was correctly invoked.

In the final order, the Customs, Excise & Service Tax Appellate Tribunal considered the arguments presented by both sides. The Tribunal referred to a previous decision in the case of Vidhi Dyestuff Mfg. Ltd. versus Raigad, where it was held that payments made to USFDA for obtaining approval to export products are not liable to service tax. The Tribunal also referred to a circular issued by the Central Board of Excise and Customs (CBEC), which stated that fees collected by sovereign/public authorities for performing statutory activities are not subject to service tax.

Based on these findings, the Tribunal held that no service tax was payable on the amounts paid by the appellant to USFDA for obtaining approval to export their drugs. Therefore, the appeal was allowed, and the impugned order was set aside.

FAQ:

Q1: What was the issue in the case?

A1: The issue was whether the payments made by M/s Sidmak Laboratories (India) Private Limited to USFDA for obtaining approval to export pharmaceutical products were subject to service tax.

Q2: What was the ruling of the Customs, Excise & Service Tax Appellate Tribunal?

A2: The Tribunal ruled that the payments made to USFDA were not liable to service tax.

Q3: What were the key factors considered by the Tribunal in reaching its decision?

A3: The Tribunal considered previous decisions and a circular issued by the CBEC, which stated that fees collected by sovereign/public authorities for performing statutory activities are not subject to service tax.

M/s Sidmak Laboratories (India) Private Limited, Dehradun filed this appeal to assail the order-in-appeal dated 27.04.2017 passed by the Commissioner of Central Excise (Appeals – I), Meerut whereby he upheld the confirmation of demand by the Original Authority, but had reduced the penalty imposed upon the appellant under section 78 to 50%.

2. The appellant manufactures pharmaceutical products, which it also exports. It is registered with the Service Tax Department for providing various taxable services. During the course of audit of the appellant‟s record on 24.03.2015, it was found that the appellant had shown in its balance sheet that it paid an amount of Rs. 2,96,77,707/- to the United States Food & Drugs Administration as fees to obtain approval to export its

products. It appeared to the audit that the amount so paid falls under the category of “Technical Inspection and Certification Agency Service” under section 65 (105) (zzi) of the Finance Act, 1994 and the service recipient was liable to pay service tax on such charges under reverse charge mechanism in view of section 66C of the Act. Accordingly, a show cause notice2 dated

08.07.2015 was issued to the appellant demanding the service tax of Rs. 4,55,734/- from the appellant under the proviso to section 73 (1) of the Act along with interest under section 75. Penalty was proposed to be imposed upon the appellant under section 78.

3. The appellant resisted the proposals in the SCN, which were, however, confirmed by the Assistant Commissioner in his order-in-original dated 09.08.2016 and, on appeal, have been upheld by the Commissioner (Appeals) in the impugned order except to the extent of reduction of penalty.

4. Learned counsel submitted that the demand of service tax is not sustainable for several reasons as follows :-

(1) The payment was made to USFDA, which is a sovereign authority and amounts paid as fees to sovereign authorities are not chargeable to service tax. In identical cases, the Tribunal has held that payments made to USFDA

are not liable to service tax in Vidhi Dyestuff Mfg. Ltd. versus Raigad

; Roha Dyechem Pvt. Ltd. versus Commissioner of Central Excise ;

(2) There is no reason/justification for invoking extended period of limitation. The appellant is registered with the Service Tax Department and has been filing returns regularly and there cannot be any allegation of intent of the appellant to evade payment of duty or even suppression of facts. It was open for the officers to scrutinize the returns and call for

any records which they deem necessary for the purpose. Evidently, the information regarding the payments made to the USFDA were available in the records of the appellant itself ;

(3) Extended period of limitation also cannot be invoked for the reason that the present case is completely revenue neutral. Had the appellant paid service tax on the fees paid to the USFDA for obtaining approval for export of its products, the same would have been available to it as Cenvat credit and, therefore, there cannot be any intention to evade payment of duty and without the intent, extended period of limitation cannot be invoked;

(4) There is no justification to impose penalty as there was no willful suppression by the appellant. The issue is, at best, purely interpretational.

5. On behalf of the department, learned authorize representative supported the impugned order and reiterated its findings. He submitted that the short payment of service tax was unearthed during the course of audit of the records of the appellant. Had the detailed audit not been conducted by the department. The appellant could have escaped this liability to pay service tax. Therefore, extended period of limitation was correctly invoked and penalty were also correctly imposed.

6. He further submitted that payments made to the Governments/sovereigns are not liable to tax but this exemption is available only for the payments made to Central or State Governments of India and not to any authority under foreign Governments as clarified by the CBEC Circular No. 89/7/2006-ST

dated 18.12.2006.

7. We have gone through the records of the case and considered the submissions made by both sides.

8. The short question to be answered is if the payments made by the appellant to USFDA as fees for obtaining approval are exigible to service tax under reverse charge mechanism at the hands of the appellant. On identical matter in the case of Vidhi Dyestuff Mfg. Ltd. versus Raigad, a bench of this Tribunal held as follows :-

“4. On consideration of the submissions made by both the sides we find that the issue is no more res integra as the facts are not disputed. The facts in the case are that the appellant had sought certification of their products by Food and Drug Administration, USA for the products manufactured by them. The Food and Drug Administration of USA certifies the quality of the products which enables the appellant to sell the products in USA, where it is statutorily required that the such products needs to be certified by US FDA. It is the case of the appellant that the certification is nothing but a statutory requirement and the amounts paid by them to US FDA are nothing but fees.

5. With regard to the contentions raised by them learned counsel that in order to market the goods in USA the products needs to be certified by US FDA for which they have to pay a fee which have been charged under reverse charge mechanism, we find that in similar set of facts the Tribunal in the case of K.G. Denim Ltd. versus Commissioner of Central Excise, Salem – 2015 (37) STR 140 had held that payment of charges for textile processing to M/s Testex, Swiss will not fall under the category of reverse charge mechanism. The ratio of the said judgment squarely covers the issue in the case in hand”.

9. We have also considered the Board‟s Circular relied upon by the Revenue. It reads as follows :-

“Subject: Applicability of service tax on fee collected by Public Authorities while performing statutory functions /duties under the provisions of a law – regarding

A number of sovereign/public authorities (i.e. an agency constituted/set up by government) perform certain functions/ duties, which are statutory in nature. These functions are performed in terms of specific responsibility assigned to them under the law in force. For examples, the Regional Reference Standards Laboratories (RRSL) undertake verification, approval and calibration of weighing and measuring instruments; the Regional Transport Officer (RTO) issues fitness certificate to the vehicles; the Directorate of Boilers inspects and issues certificate for boilers; or Explosive Department inspects and issues certificate for petroleum storage tank, LPG/CNG tank in

terms of provisions of the relevant laws. Fee as prescribed is charged and the same is ultimately deposited into the Government Treasury. A doubt has arisen whether such activities provided by a sovereign/public authority required to be provided under a statute can be considered as „provision of service‟ for the purpose of levy of service tax.

2. The issue has been examined. The Board is of the view that the activities performed by the sovereign/public authorities under the provision of law are in the nature of statutory obligations which are to be fulfilled in accordance with law. The fee collected by them for performing such activities is in the nature of compulsory levy as per the provisions of the relevant statute, and it is deposited into the Government treasury. Such activity is purely in public interest and it is undertaken as mandatory and statutory function. These are not in the nature of service to any particular individual for any consideration. Therefore, such an activity performed by a sovereign/public authority under the provisions of law does not constitute provision of taxable service to a person and, therefore, no service tax is leviable on such activities.

3. However, if such authority performs a service, which is not in the nature of statutory activity and the same is undertaken for a consideration not in the nature of statutory fee/levy, then in such cases, service tax would be leviable, if the activity undertaken falls within the ambit of a taxable service.

4. Trade and field formations may be advised accordingly”.

10. As is evident from paragraph 3 of the Circular even according to the Board, if an authority performs a service, which is in the nature of statutory activity and a fees is levied for the purpose it does not fall within the ambit of a taxable service, but if a service is performed by the authority, which is not in the nature of statutory activity it will be exigible to service tax. There cannot be any two opinions that USFDA is a statutory authority mandated by the US laws to regulate the import of pharmaceuticals into the country. It is the counterpart of the Drugs Controller General of India without whose approval pharmaceuticals manufactured abroad cannot be imported into India. We have no doubt in our mind that US FDA is a statutory authority and its approval of pharmaceuticals to be exported to that country is the statutory function. Therefore, any fees paid to obtain the approval will get squarely covered even as per the CBEC Circular. The distinction drawn by the lower authorities between statutory authorities within India and the statutory

authorities outside India has no legal basis. We, therefore, respectfully following the decisions of this Tribunal in the case of Vidhi Dyestuff Mfg. Ltd. versus Raigad ; Roha Dyechem Pvt. Ltd. versus Commissioner of Central Excise, hold that no service tax was payable on the amounts which the appellants had paid to US FDA to obtain their approval for export of their drugs.

11. As we have found in favour of the appellant on merits itself, the submissions on the limitation and penalty need not be examined.

12. The appeal is allowed and the impugned order is set aside with consequential relief, if any, to the appellant.

(Order pronounced in open court on 15/11/2023.)

(JUSTICE DILIP GUPTA)

PRESIDENT

(P.V. SUBBA RAO)

MEMBER (TECHNICAL)