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McLeod wins case against tax on tea garden security

Authorities were seeking service tax for security provided by state government to tea plantations in Assam

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McLeod Russel, world's largest tea planter, has has won an initial victory in a legal battle against the government's decision to impose service tax on security provided by state security forces to tea plantations in Assam.
With Assam accounting for about 70% of country's tea output, cost of security services, provided by the state but funded by the industry, already accounts for Rs 2-3 of every kg of tea produced.

Since 1993 Assam government has been providing security to planters, their properties and their employees against insurgency activities following a memorandum of understanding between the state and the Indian Tea Association, the Kolkata-based industry body that represents the tea industry in Assam and West Bengal.

A force was created by the Assam government, called the Assam Tea Plantation Security Force, which was later renamed as Assam Industrial Security Force in 2009 under a fresh arrangement between the plantation owners and the state government.

For providing the service of this force, the Assam government gets the tea plantation owners to reimburse the salary they have to disburse to the members of this force, which consists of eight companies and 1,326 personnel.
In November 2013 the Superintendent of Service Tax in Kolkata wrote to McLeod Russel that the service provided by the Assam government would be considered as a security support service exigible to payment of service tax in the hand of service receiver.

The BM-Khaitan flagship company then approached Kolkata High Court and the petition was heard and an order was passed on Thursday where the court has quashed the notice of the service tax authority but said the tax department should decide on the issue.

While McLeod officials confirmed the development to dna, they refused to comment further.

During the hearing the government counsel argued that the security personnel are nothing but private security guards who are provided by the state to the tea plantation owners for protection of their person and property. The force has no power to carry out any investigation; in case they detect any cognizable offence they have to report the same to the nearest police station.

Despite being provided by the government, the security service falls under the category of support services under Section 66(a)(iv) of the Finance Act of 1994 where service tax was introduced.

Counsel of McLeod Russel, in turn, has argued that the security service rendered by the AISF is part of the sovereign functions of the state and cannot be called support service. The state has obligations with regard to maintenance of law and order, peace, prevention of crime in the tea growing and manufacturing area of the state. A state can never charge any tax on such services, the company argued.

Quashing the notice of the tax authorities, judge I P Mukherji said it was incumbent upon the department to make the determination whether the service could be classified as a support service and the petitioner exigible to service tax.

"No further action under the Service Tax Act can be taken by the department against the writ petitioner unless the above fact is established," the Judge said.

According to Indian Tea Association, the annual cost per estate works out to be close to Rs 30 lakh while aggregate annual expenditure for the users works out to around Rs 30 crore, or Rs 2-3 per kg of tea.

While the industry for long has been asking for financial support from the finance ministry, the additional burden of service tax at 12.36% on it is unsustainable, it feels.

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