Tobacco Board Auction Fee Is Statutory Levy, Not Taxable Service; No Service Tax Payable: CESTAT Hyderabad

The Hyderabad Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that statutory fees collected by the Tobacco Board for conducting auctions of Virginia tobacco cannot be treated as consideration for taxable services and, therefore, are not liable to service tax.

The bench consists of Judicial Member Angad Prasad and Technical Member A.K. Jyotishi, who observed that the Tobacco Board was performing statutory and regulatory functions under the governing legislation and the fees collected in that capacity could not be treated as consideration for a taxable service.

The bench noted that "the Tobacco Board performs regulatory functions under the statute and the fee collected is a statutory levy. Hence, the auction fee cannot be treated as consideration for taxable service."

The dispute arose after the Department issued a show cause notice demanding service tax on auction fees collected by the Tobacco Board during the period from May 2006 to March 2008 under the category of “auction of property” services.

The Board, a statutory body established under the Tobacco Board Act, 1975, to regulate production and marketing of Virginia tobacco, conducts auctions through designated platforms and collects a statutory fee of 2% (1% each from buyer and seller) for facilitating the auction process and providing infrastructure.

The Department treated this fee as consideration for services and raised a demand of over Rs. 2.62 crore along with interest and penalties. The Board challenged the demand, contending that the fee was a statutory levy collected in discharge of statutory functions and not a payment for commercial services.

After examining the statutory framework and judicial precedents, the Tribunal noted that the Tobacco Board performs regulatory and statutory functions mandated by law and the fees collected for facilitating auctions are prescribed under statute.

The Tribunal further held that storage of unmanufactured tobacco does not attract service tax under the category of storage and warehousing services because such services exclude storage of agricultural produce. Unmanufactured tobacco has been specifically recognised as an agricultural product under departmental clarifications. Consequently, charges collected for the storage of such goods were not taxable.

The bench stated that "statutory definition of storage and warehousing service excludes storage of agricultural produce. Therefore, activity undertaken by the appellant is outside the scope of taxable service. It is also important that demurrage charges are penal in nature and cannot be treated as consideration for any service. Therefore, no any service tax is applicable on the demurrage charges."

It was also held that demurrage charges collected for the delayed lifting of tobacco are penal in nature and cannot be regarded as consideration for any service. Since these charges are meant to discourage delay and regulate storage capacity rather than provide a service, they do not fall within the scope of taxable services.

The bench stated that "statutory fee collected by the Tobacco Board is not consideration for service. Storage of un-manufactured tobacco is outside the scope of taxable service, demurrage charges are not taxable and extended period of limitation is not invokable. Therefore, party's appeal is liable to be allowed and the Department's appeal is liable to be dismissed."

In view of these findings, the Tribunal concluded that the auction fee collected by the Tobacco Board constitutes a statutory levy rather than consideration for service, storage of unmanufactured tobacco is outside the taxable ambit, and demurrage charges are not liable to service tax.

Accordingly, the Tribunal allowed the appeals filed by the Tobacco Board and dismissed the Department's appeal.

For Appellant: B. Venugopal, Advocate

For Respondent: A. Rangadham, Authorised Representative