Category: Recent Decisions: Part A: Service Tax

Facts
The Respondent Manufacturer availed CENVAT credit of service tax charged and collected by the job workers. CENVAT credit was denied contending that such services were not liable to service tax.

Held
Tribunal observed that job workers were registered with service tax department and paid service tax which was accepted and retained as statutory dues by department. Also proper invoices evidencing service tax payment were issued. It was therefore held that when service tax is paid by the service provider and the CENVAT credit thereof is availed by recipient of service in conformity with statutory provisions, such credit cannot be denied at recipient’s end merely on the ground that activities were exempt from service tax.

Facts
The petitioner admitted liability of service tax on specified transactions during the recording of statement. Consequently, the petitioner was arrested for non-deposit of service tax vide section 89(1)(d) of the Finance Act, 1994 i.e. for failure to deposit service tax collected beyond a period of six months from the due date. After the due process of prosecution, bail was granted and an interim order was passed directing a deposit of 25% of entire outstanding. On obtaining legal advice post prosecution it was known that service tax was not liable on material supplied free of cost. The said fact was represented to the department. However, ignoring the submissions and on the basis of statements recorded, department started adopting coercive methods to recover disputed dues. Therefore the present writ petition is filed objecting recovery of service tax by department without formal adjudication u/s. 73 of the Finance Act, 1994. The revenue contended that the matter is still under investigation and the process to issue SCN was under contemplation.

Held
The High Court held that since there was no assessment order against the petitioner, he cannot be forced to pay an amount merely because he admitted the service tax liability in statements recorded. Department has the liberty to initiate appropriate action for recovery only after service tax liability is confirmed vide adjudication order and is not deposited. In case the petitioner misuses or does not comply with the terms of bail order or interim order, department can apply for cancellation of the bail order or vacation of the interim order.

Facts
The Assessee made an excess payment of service tax in the month of October 2007, June and September, 2008 and adjusted the same in the months of April, July and October 2008 without following the procedure provided under Rule 6(4A) and 6(4B) of the Service Tax Rules, 1994. The department contended that since the amount was adjusted suo-motto without intimating and being in excess of the prescribed limit, the same was recoverable with interest and penalties. Commissioner (Appeals) dropped the demand and the Revenue is in Appeal.

Held

The Tribunal noted the undisputed fact of excess payment of service tax which is required to be adjusted against the liability for subsequent period. It was held that Rule 6(1A) of the Service Tax Rules, 1994 provides for adjustment of service tax paid in advance. Similarly Rule 6(3) of the said rules cannot be given a narrow interpretation of adjustment only at the time of refund to the client. Thus non-observance of a procedure is only technical lapse and therefore condonable. It was further held that refund can be claimed of the excess paid in which case interest is also payable to the assessee. When one opts for adjustment so as to eliminate the hassles of refund by foregoing the interest, strict interpretation and denying adjustment would result in unjust enrichment of the revenue which can never be the intention of the Rule.

Facts
The Appellant is engaged in lease financial business and has discharged service tax at the applicable rate prevailing on the date of entering into the hire purchase agreement. The department contends that service tax is payable at the rate prevalent when the lease rental is being paid and accordingly there is a demand for the differential service tax liability. It was argued that service tax liability is factored in the EMI that is fixed for their client and therefore the applicable rate is the rate prevailing on the date of the agreement only.

Held
The Tribunal relied upon the decision in the case of Art Leasing Ltd vs. CCE [2007 (8) STR 162 wherein it is held that the installment payments are only obligations of the hirer whereas the taxable event occurs when the contract is entered into. Therefore the contention that service is continued to be provided during the payment of installments is not correct. Accordingly it was held that rate of service tax will be the rate prevalent on the date of contract and the demand for differential liability is set aside.

(Note: The ratio of the aforesaid decision may be applied to the applicability of Rule 5 of the Point of Taxation Rules, 2011 wherein, in case of new services and new levies where the payment is received after the applicability of the new levy, the new rate is made applicable. As per the aforesaid decision, if the taxable event occurs prior to the applicability of the new levy, new rate cannot be made applicable merely because the payment is received later.)

Failure to intimate the department under Rule 6(3A) of the CENVAT Credit Rules is a mere procedural lapse and denial of benefit of proportionate reversal of credit is not justified.

Facts
The Appellant is a manufacturer availing the benefit of Notification No. 6/2006-CE and clearing goods at a NIL rate of duty. A show cause notice was issued demanding 10%/5% of the value of exempted goods under Rule 6(3)(i) of the CENVAT Credit Rules, 2004 (CCR) on the contention that common inputs and input services were used in the manufacture of exempted and dutiable goods and no separate accounts were maintained. It was argued that assessees not maintaining separate accounts have two options under the CCR i.e. either pay 5% or 10% of the value of exempted goods or do a proportionate reversal of CENVAT credit on inputs and input services attributable to manufacture of exempted goods as per the formula prescribed under Rule 6(3A) of CCR. The second option being beneficial was chosen and credit was reversed. The department argued that no intimation was provided as required under Rule 6(3A) of the CCR and therefore they were bound to pay as per the first option.

Held
The Tribunal observed that sub-rule 6(3) provides for two options and it was noted that Rule 6(3A) of the CCR did not provide that failure to intimate would make the assessee lose the choice of a proportionate reversal of credit. It was held that failure to intimate would not automatically result in application of Rule 6(3)(i) and such a procedural lapse was condonable and denial of a substantive right was unjustified. Further the revenue’s plea of remanding the matter was also rejected on the ground that the amount of credit proportionately reversed along with interest formed a part of the reply to the show cause notice and the same was never disputed.

(Note: Readers may note that Notification No. 13/2016-CE(N.T) has inserted a new sub-rule (3AA) in the CENVAT Credit Rules, 2004 effective from 01/04/2016 providing that on failure to exercise the option under sub-rule 6(3) and follow the procedure provided under sub-rule 6(3A), the Central Excise officer may allow the assessee to follow the procedure and pay the proportionate amount on payment of interest @ 15% from the due date of payment, till the date of payment thereof. Accordingly intimation to the department now appears mandatory.)

Facts
Facts In a dispute relating to availment of CENVAT credit on certain services, the Respondent assessee relied on the earlier judgement of co-ordinate Bench of the Court which upheld the availability of credit. The department contended that since the amount involved in the said judgement was below the monetary ceiling prescribed, no appeal was filed against it. Therefore the said judgement has no value of precedence and the Court should decide the present dispute afresh.

Held
The Court rejected the argument of the department and held that a decision attains finality in absence of any challenge before higher Court. Reason for nonchallenging has no relevance and accordingly dismissed the appeal filed.

Facts
The final assessment was completed and refund was determined. The assessee filed application for refund but was granted refund under section 11B only for part of the amount. However, thereafter, by invoking section 11A of the Central Excise Act, 1944, the very same Assistant Commissioner, who sanctioned refund earlier, issued Show Cause Notice followed by order directing recovery of refund sanctioned. This order for recovery of refund was confirmed by Commissioner (Appeals) as well as the Tribunal. Before the High Court, it was contended that refund application is allowed under section 11B and department has not followed procedure laid down by section 35E (2) of Central Excise Act, 1944 therefore it is not open for department to take recourse u/s. 11A. The department contended that where there is erroneous refund, the same can always be recovered by initiating proceedings u/s. 11A without taking recourse to section 35E.

Held

The High Court held that a careful look at the scheme of sections 11A, 11B and 35E would show that an application for refund is not to be dealt with merely as an administrative act. Section 11B is a complete code in itself. Hence, power exercised u/s. 11B is that of an adjudicating authority and order passed is certainly one of adjudication. Therefore, it must be presumed that before according sanction for refund, an adjudicating authority had actually followed the procedure under section 11B and passed an order of adjudication. Section 11A(1) prescribes the procedure for recovery of any duty of excise, which is erroneously refunded. The power u/s. 35E is not actually to correct any error directly on the part of an adjudicating authority. This power is available only for directing the competent authority to take the matter to the Commissioner (Appeals).

Hon’ble High Court made reference to its own judgment in case of Madurai Power Corpn. vs. Dy. CCE 2008 (229) ELT 521, where Court had occasion to consider interplay between section 11A and section 35E of Central Excise Act, 1944. It held that no one can have a quarrel with the proposition that sections 35E and 11A operate in different fields and are invoked for different purposes. However if the department’s interpretation of section 11A is accepted, it would lead to a situation of recognizing power of recovery in a subordinate authority when refund is already granted by a superior authority after adjudication, which is obviously not the legislative intent. It was held that harmonious reading of provisions of sections 11A and 35E indicates that section 11A does not contemplate overriding section 35E. Hence once refund application is allowed u/s. 11B, such refund cannot be said to be erroneous refund in terms of section 11A (1). The recourse available for recovery of refund sanctioned in terms of section 11B is therefore to follow procedure laid down in section 35E and not section 11A.

Facts
Appellant utilised MODVAT credit of duty paid on import of machinery in 1999 and also claimed depreciation in respect of same duty component in their income tax returns for that year and subsequent years. After detection of this mistake in 2002, all income tax returns were revised but for one year in which the time limit for filing of revised return had expired. Therefore, in the said year, a rectification application was made u/s. 154 of the Income Tax Act along with revised computation and depreciation claim was given up. Income Tax Department accepted the revised return for other years, but rejected the rectification application. The attempt of filing a rectification application was allowed by Commissioner Income Tax (Appeals) on 30/04/2005, but on further appeals by aggrieved parties, it failed upto the Supreme Court. In the proceedings under central excise law, show cause notice was issued denying claim of MODVAT credit. However, in the Order-in-Original, it was held that they would be eligible for credit after the date of acceptance of withdrawal of depreciation by the department i.e. filing of revised return or as the case may be date of order of Commissioner Income Tax (Appeals) accepting the claim for rectification application u/s. 154 (30/04/2005) and ordered recovery of credit accordingly. No appeal was preferred by the Excise Authorities against the said Order-in-Original. However, against the recovery of MODVAT credit, appellant filed the appeal. The appeal was allowed by Commissioner (Appeals), but department preferred an appeal before Tribunal. The Tribunal allowed the department’s appeal and restored the Order-in-Original and also modified the portion by which assessee was held as entitled to CENVAT credit from 30/04/2005. The Appellant preferred appeal before High Court raising a substantial question of law as to whether the Tribunal was justified in restoring Order-In-Original directing recovery of MODVAT credit by disregarding the admitted fact that claim for depreciation was given up under income tax law.

Held
Hon’ble High Court observed that the appellant started up with a claim for two benefits and ended up losing both the benefits. It is only after the detection by the department, an attempt was made to withdraw one of the two benefits. The mistake was explained on the ground that its head office and factory are located in different States. It was held that once the claim for depreciation under Income Tax Act was given up, the benefit of MODVAT credit cannot be denied. It further held that order of Tribunal modifying the Order-in-Original to the extent it allowed credit after 30/04/2005 is also not correct as the said order was not appealed against by the department before Commissioner (Appeals). As regards the year in which appellant gave up depreciation but lost legal battle with Income Tax Department, the Original Authority is directed to work out the amount of depreciation given up for the purpose of finding out the extent to which benefit is available.

Facts
The issue before the High Court was whether the removal of “admission and access to entertainment event and amusement facilities” [section 66D(j) of the Finance Act, 1994] from the Negative List of ‘Services’ by an amendment made by Finance Act 2015 and the consequent levy of service tax on such activity would result in the Union Parliament trenching upon the exclusive field assigned to the State, under Entry 62 List II of the Seventh Schedule of the Constitution of India. It was argued that resort to the residuary entry can be had only when it is found that the object of tax is not available in any of the other entries in List II and List III. Further there can be no service element found, since what the petitioners offer is amusement and entertainment and what the recipients get is also amusement and entertainment, which clearly is covered by Entry 62. Under Kerala Local Authorities Entertainments Tax Act, 1961 the levy of tax is with reference to the price for admission to any entertainment at the prescribed rates. The measure applicable to amusement parks is also provided based on the investment and area in which such park is situated at the rates fixed by the local authority within the range of rates provided in the table. Hence the activity is already taxed by the States. Further before legislative competence of the Parliament can be traced to the residuary entry, the legislative incompetence of the State Legislature has to be clearly established. The Petitioners broadly relied upon the following decisions:

a. Single Judge of this Court in Kerala Classified Hotels & Resorts Association vs. Union of India [2013] 35 taxmann.com 568 (Ker.), which was affirmed by a Division Bench in Union of India vs. Kerala Bar Hotels Association [2014] 51 taxmann.com 365 (Ker.).

b. Decision of the High Court of Madras in Mediaone Global Entertainment vs. Chief CCE [2013] 36 taxmann.com 57. The respondents sought dismissal of the writ petitions on the ground of “aspect theory” and there being two distinguishable aspects involved, one the services offered by the petitioners and the other the amusements and entertainments enjoyed by the entrants.

Held

The fact that admission/access to entertainment events and amusement facilities are included in the negative list itself is a pointer that the same partakes a service and the Parliament initially exempted it from the levy. When it is argued that the amusement and entertainment is offered, the corollary is that what is offered for amusement for a fee is essentially a service offered for consideration. There is also definitely an element of service in providing a facility, which would result in the enjoyment of an activity capable of being termed as an amusement or entertainment for a fee. Union Parliament therefore has the legislative competence to tax the aspect of service in an amusement park. The argument that the field being entirely occupied by Entry 62 List II, as the Entertainments Tax Act of the State provides a measure of tax based on the investment made and the area covered; which takes in the entire facilities offered and the same having been taxed by the State and therefore there could be no further tax levied on the service i.e. the provision of such facilities, was not accepted by the Court. Relying upon State of W.B. vs. Kesoram Industries Ltd. [2004] 10 SCC 201, the Court held that the Courts have been cautioned not to mix up the object of taxation and the measure employed. Further Relying upon All-India Federation of Tax Practitioners vs. Union of India [2007] 7 SCC 527 and Federation of Hotel & Restaurant Association of India vs. UOI [1989] 46 Taxman 47 (SC,) the Court held that the Supreme Court has time and again, after the Finance Act, 1994 came into force, upheld the tax levied on ‘services’ as being available to the Parliament under the residuary clause. In such circumstances, it cannot at all be said that the field is entirely covered by Entry 62 List II. Amusements are covered by Entry 62 List II and the aspect of ‘service’ involved when the facilities for amusement are offered for a price cannot be ignored. The Decision of Single Bench and Division Bench in the case of Kerala Classified Hotels & Resorts Association (supra) to the extent they dealt with constitutional validity of service tax on supply of food in restaurant by way of service in the context of Article 366(29A)(f) was distinguished on the ground that there is no question of a deeming provision being employed in the present case. Also the Court did not concur with Madras High Court to the extent it expressed a view in Mediaone Global Entertainment’s case (supra) that what is not taxable under section 66B is “tax on admission to entertainment events or access to amusement facilities”, the reason being, “tax on admission or entry of such events is covered in the State List, which is subjected to Entertainment Tax”. In this regard the Court held that Parliament is quite aware of their power. This is because even dehors inclusion in the Negative List the Parliament would not be able to trench upon the field specifically set apart for the States under List II. Therefore, the Negative List also did not refer to ‘amusement’ but tax on admission on entry of such events quite understanding the power to levy service tax on such facilities offered by one to another for a consideration. However, the High Court refrained from referring the matter to a Division Bench on the ground that the issue dealt with in the said case and in the instant cases is on different subjects and distinct transactions.

Note:
In Godfrey Philips India Ltd., the Apex Court held that luxuries is an activity of enjoyment. It further held that tax on luxury could only be levied on an activity and cannot be on goods or items of luxury. ‘Service’ also refers to “an activity”. In the present case also, the High Court expressed a view that ‘amusements’ refer to ‘activities’. However, apparently it did not examine the proposition as to whether, activities of amusement can be said to fall under Entry 62 List II, on the same reasoning as given by Supreme Court in Godfrey’s case, stating that no such ground was raised before it.

The service receiver to whom the burden of tax is ultimately passed on is not entitled to challenge the levy as the liability is imposed on the service provider. Further in case of a joint development agreement, the land owner and the third parties avail of construction services from the builder.

Facts
The petitioner has entered into a joint development agreement with one of the Respondents for the property owned by him and his siblings for construction of a Residential Complex. 65% of the built up area is to be handed over to the petitioner against conveyance of 35% of undivided share of land. In terms of the agreement, the builder viz. one of the respondents issued a letter demanding service tax and VAT. A writ petition is filed challenging the payment of service tax on a mere exchange of property and the provisions of section 66B and 66E(b) of the Finance Act, 1994 and thereafter the prayer was modified to challenge only the circular No 151/2/2012 dated 10/02/2012 and the recommendations of the TRU dated 20/01/2016.

Held
The Hon. High Court held that the writ petition is not maintainable as the law makes the service provider liable to pay service tax and it is open for him to either pass on the burden or not. After having entered into an agreement for development and accepting the burden of service tax to the extent liable, the petitioner cannot now challenge the circulars imposing an obligation upon persons who have entered into such contracts. If the person to whom the burden is ultimately passed is allowed to challenge a levy, the same will lead to a disastrous consequence considering the number of consumers. Further it was also noted that the agreement for development gave rise to a bouquet of rights for the builder, one was construction of an area, a part of which could be sold to third parties along with undivided share of land. The petitioner did not stand on a different footing than those persons except that the consideration was paid in the form of undivided share of land and not by cash and therefore the petition was dismissed.

The applicant is a subsidiary (Indian) of the foreign (US) company. It required services of a consultant who was in employment with the foreign company. Accordingly, a tripartite agreement was entered between employee, Indian company and US company for usage of the services of the employee by the Indian company for a particular term. During the consultants’ stay in India, he is to be treated as an employee of the Indian company while his social security interests continue to be taken care of by the foreign company. After the advent of the negative list, all earlier definitions got obliterated and new definition of ‘service’ was enacted under section 65(44) wherein service provided by an employee to the employer in the course of employment was granted exclusion from the definition of service. Social security costs were not reimbursed by the Indian company to the US company. Department contended that social security expenditure incurred by foreign company amounts to consideration paid by the applicant for employing the consultant and shall not be covered by the exclusion. Further, RBI circular was relied upon.

Held
The agreement explicitly mentioned that the consultant would be considered as an employee of the Indian company during his stay in India although his social security interests shall be borne by the US company. No salary was received from the US company during his stay in India and hence salary granted by Indian company and US company were mutually exclusive. In view of the clear provision, service of the consultant cannot be regarded as otherwise than a service provided by employee to the employer even though social security costs were paid by the US company. RBI circular is irrelevant for interpretation of the term ‘service’. Indian company is not liable to service tax on salary and allowances paid to the employee in terms of employment agreement.

Facts
The Applicant intends to provide services of an advertising agency providing professional services to the advertisers in relation to placement of advertisements in various media. They propose to follow two business models- viz. placement of advertisement on behalf of the advertiser wherein they would raise an invoice on the advertiser charging service tax on the agency commission and secondly engage in buying and selling of advertising inventory on its own account wherein the applicant charges a consolidated amount which includes the cost to the media owner and their margin. They could also entail incentive/volume discount from the media owners. The question before the authority was whether the incentive/ volume discount received in both the above business models is liable for service tax.

Held
The Authority noted the definition of ‘service’ provided u/s. 65B(44) of the Finance Act, 1994 and stated that there has to be a nexus between activity and consideration. The term “activity for a consideration” involves an element of a contractual relationship which could be express or implied. The revenue has no evidence to indicate that an activity was undertaken resulting in giving volume discount by the media owner especially when the choice of selecting the media owner was of the advertiser. Further it was held 43 that volume discount is gratuitous and there is no legal/ contractual obligation to give such discounts and therefore the incidental receipt of incentives/volume discounts are not liable to service tax.

Appellant received services of a foreign architect for designing and planning of various commercial buildings and service tax liability was discharged on actual consideration paid. As regards TDS liability under the income tax law, in respect of consideration paid to foreign architect, it was borne by the appellant as determined by the terms of agreement. Service tax demand was raised on said TDS component by contending that the TDS would also form part of consideration.

Held

On perusal of the agreement between the appellant and the foreign architect, it was found that the gross amount charged was exclusive of TDS. It was noted that the erstwhile Rule 7 of Service Tax (Determination of Value) Rules, 2006 clearly stated that actual consultant charges needs to be taxed. Hon’ble Tribunal observed that combined reading of erstwhile section 67 of Finance Act, 1994 and the said Rule 7 indicates that amount billed by the service provider is liable for service tax. In present case, when it was found that service tax was paid on entire invoice amount and nothing was on record to provide that TDS component was collected from foreign architect, it was held that TDS liability borne by appellant and paid out of its own pocket cannot constitute consideration for service and accordingly there is no service tax liability.

The Appellant filed 3 refund claims of unutilized CENVAT credit availed on input services in terms of Rule 5 of the CENVAT credit Rules, 2004. The said claims were consequential refund claims arising out of Order-in- Appeal wherein the Commissioner (Appeals) had ordered the Original Authority to grant refund. The claim was rejected by the adjudicating authority on the ground that they failed to declare in their ER-2 Returns the details of availment of CENVAT credit on input services and also failed to furnish the documents in support of their claim. It was contended that matter was remanded back with a direction to sanction refund claim and thus it was not within the power of the adjudicating authority to revisit the case and reject refund claim without filing any appeal to higher appellate authority. The First Appellate authority upheld the order rejecting the refund. Aggrieved by the same, the present appeal is filed.

Held

Hon’ble Tribunal observed that Commissioner (Appeals) had passed a speaking order granting refund and nothing was left for the lower authority to revisit the merits of the case. It was held that the lower authorities did not follow the judicial discipline as without contesting the order of Commissioner (Appeals) before higher judicial authority, it was not open for them to reject the refund claims by again getting into the merits of the case when the same is already dealt with by the superior authority. Appeal was therefore allowed.

The respondent received commission on the sale of bonds of RBI. No service tax was charged on the commission amount. The adjudicating authority confirmed the demand of service tax considering the commission received as inclusive of service tax. The department filed an appeal contesting that no evidence was provided to prove that amount received was inclusive of service tax and the decision in the case of Agro Industries Ltd vs. Commissioner of Central Excise 2007 (210) E.L.T. 183 (SC) was relied upon and it was provided that the judgement in case of Advantage Media Consultant-2008 (10) S.T.R. 49 (Tri-Mumbai) was incorrectly relied by first appellate authority.

Held
Tribunal observed that service tax was not separately charged on the commission during the relevant time and since Supreme Court has dismissed the department’s appeal against the judgement in case of Advantage Media Consultant-2008 (10) S.T.R. 49 (Tri-Mumbai), the Revenue’s appeal is devoid of merits and accordingly dismissed the appeal.

The Appellant wrongly paid service tax and made an application for refund. The refund claim was rejected stating that it was filed beyond one year from the relevant date as provided under section 11B of the Central Excise Act, 1944. It was argued that the payment made was without authority of law and therefore was not barred by limitation.

Held

The Tribunal noted that in every case of refund the amount is refundable only where it is not payable, accordingly the section will not apply for the reason that it is neither service tax nor excise duty. If this is accepted then section 11B will stand redundant. Therefore it was held that when payment is made under a particular head such as service tax, excise duty etc. the subsequent refund of the amount not payable should be treated as refund of service tax / duty only and therefore the time limitation provided under section 11B shall apply.

Note: (Readers may note that the decision has distinguished the decision of Geojit BNP Paribas Financial Services Ltd [2015-TIOL-1602-HC-KERALA-ST] reported in August-2015 issue of BCAJ, decision of Madhvi Procon P. Ltd [2015-TIOL- 87-CESTAT-AHM, Jyotsana D.Patel [2014-52 taxmann.com 255 (Mumbai-CESTAT )] referred to in February 2015 issue of BCAJ).