The Assistant Commissioner of Central Excise, Tuesday, March 21, 2006

No.14, Municipal Street, Azeez Nagar,

Reddiarpalayam, Pondicherry-10.

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