Unreported Decisions – ST – August 2020
By Vinay Jain & Sachin Mishra, Advocates
1. Whether Rule 117 of the Central Goods and Services Tax Rules, 2017 (“CGST Rules”) is ultra vires Section 140 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) and is liable to be construed as a directory provision and not a mandatory provision?
Facts and Pleading: M/s P.R. Mani Electronics (hereinafter referred to as ‘The Petitioner’), was unable to file TRAN-1 before the extended time limit of 27.12.2017 as specified under GST law because of issues in the portal. The Petitioner subsequently approached the Sales Tax Collection Inspector on 29.12.2017 and submitted a hard copy of TRAN-1 and received an acknowledgement. In spite of repeated follow ups, there was no response with regard to entitlement of the Petitioner to Transitional Credit. Consequently, a writ petition was filed before the Madras High Court, challenging Rule 117 of the CGST Rules as being ultra vires Section 140 of the CGST Act and violative of Articles 14 and 300-A of the Constitution of India. It was further prayed that Rule 117 should be read as a directory or permissive provision and not as a mandatory or peremptory provision.
The Department argued that Input Tax Credit is in the nature of a concession granted to registered persons and therefore any conditions, including time limits, subject to which such concessions are granted should be enforced strictly. The department placed reliance om Jayam and Company v. Assistant Commissioner and another [(2016) 15 SCC 125], ALD Automotive Private Limited v. Commercial Tax O¬cer [(2019) 13 SCC 225] and Nelco Limited v. Union of India [2020 SCC Online Bom 437].
The Petitioner argued that the Rule 117 of the CGST Rules is ultra vires Section 140 of the CGST Act, 2017. The Petitioner further argued that the said Rule is liable to be construed as a directory provision in so far as it specifies a time limit for the submission of the declaration in TRAN-1. The Petitioner further submitted that the tax authorities were fully cognizant of the fact that registered persons were unable to submit the TRAN-1 online within the prescribed period on account of technical glitches and that is the reason for extension of time limit up to 31.03.2020 by the government. Thus, the Petitioner submitted that it clearly indicates that the provision was intended to be directory and not mandatory notwithstanding the use of the word “shall” in Rule 117(1). In this regard, reliance was placed on Delhi High Court decision in Micromax Informatics Ltd. v. Union of India [WP(C) No. 196 of 2019]; SKH Sheet Metals [2020-TIOL1031-HC-DEL-GST] and Brand Equity Treaties Ltd. v. Union of India – 2020-TIOL-900-HC-DEL-GST.
Judgment: The Hon’ble High Court relied on Jayam and Company v. Assistant Commissioner and another [(2016) 15 SCC 125] to held that the contention of the Petitioner that ITC is the property is incorrect and rather it is to be construed as a concession. The Hon’ble High Court observed that the ITC cannot be availed without complying with the conditions prescribed thereto. According to the Hon’ble High Court as the power to prescribe a time limit is expressly incorporated in Section 140 post amendment, Tran credit cannot be availed except within the stipulated time limit. The Hon’ble High Court further relied upon Nelco Limited v. Union of India [2020 SCC Online Bom 437] to held that both ITC and Tran credit cannot be availed except within the stipulated time limit. As per the Hon’ble High Court, the object and purpose of Section 140 clearly warrants the necessity to be finite. In fact, it is a time limit relating to the availing of a concession or benefit. Accordingly, the Hon’ble High Court held that the time limit is mandatory and not directory. Thus, the Hon’ble High Court held that since the Petitioner had not filed the TRAN-1 electronically but handed over in person to the STC Inspector, the prescription in Rule 117 is not satisfied. The Tran claim of the Petitioner is thus not admissible
M/s P.R. Mani Electronics v. Union of India & Ors., Madras High Court Order dated 13.07.2020 in WP. No. 8890 of 2020 and WMP No. 10803 of 2020
2. Whether ‘foreclosure charges’ levied by banks and nonbanking financial companies on premature termination of a loan can be subjected to levy of service tax under Banking and Other Financial Services (“BoFS”)?
Facts and Pleading: M/s. Repco Home Finance Ltd. and other (hereinafter referred to as the “Appellants”) provided housing loans to borrowers for a specified period subject to terms and conditions contained in the agreement. In circumstances where the borrower decided to terminate the loan before the stipulated period, the Appellants collected foreclosure charges, which were usually determined as a percentage of outstanding principal amount.
The department alleged that the termination of loan prior to the agreed term is a facility provided to the borrower for a price. As per the department, the definition of ‘Banking and Other Financial Services’ contains the phrase ‘in relation to lending’ and therefore, any activity in relation to lending will be subjected to service tax. The department also alleged the ‘foreclosure charges’ cannot be termed as an ‘interest’ or ‘penal interest’ on the count that penal interest would only be chargeable on default in making payment. Hence, as per the department these charges would have to be subjected to service tax.
The Appellants argued that the ‘Foreclosure charges’ are collected as compensation for breach of the loan agreement arising on premature termination. These receipts do not constitute ‘consideration’ as per Section 67 of the Finance Act, 1994 for provision of lending services. The Appellants further argued that foreclosure charges paid by the borrowers are not ‘at the desire of ’ the banks/ non-banking financial companies. The Appellant submitted that the foreclosure charges are recovered as compensation for disruption of a service, and not towards lending services as such. It is the borrower who unilaterally decided to cut short the period of loan by making the payment before the stipulated time resulting in a breach of the contract. Accordingly, the Appellant argued that the ‘Foreclosure charges’ cannot be subjected to service tax.
Judgment: The Hon’ble Larger Bench of CESTAT observed that the ‘Consideration’ must flow from the service recipient to the service provider and should accrue to the benefit of the service provider. The Hon’ble Larger Bench of CESTAT relied upon the definition ‘Consideration’ under Section 2(d) of the Indian Contract Act, 1872, to held that consideration must necessarily flow ‘at the desire of the promisor’. Since premature termination of loan only results in loss of future interest income, ‘foreclosure charges’ do not flow ‘at the desire’ of such banks. The Hon’ble Larger Bench of CESTAT further observed the distinction between ‘condition to a contract’ and ‘consideration to a contract’. A service recipient may be required to fulfil certain conditions contained in the contract but that would not necessarily mean that this value would form part of the value of taxable services that are provided. Accordingly, the Hon’ble Larger Bench of CESTAT held that the ‘Foreclosure charges’ are compensation paid to the banks as a result of a unilateral repudiation/ breach of contract and not towards ‘lending services’. The Hon’ble Larger Bench of CESTAT observed that though the definition of BoFS uses the term ‘in relation to lending’, it cannot be read in so widely so as to include even those acts which terminate the activity. In fact, ‘foreclosure’ is an anti-thesis to lending and therefore, cannot be construed as in relation to lending. The Hon’ble Larger Bench of CESTAT further held that ‘Foreclosure charges’ cannot be viewed as an ‘alternative mode of performance’ of contract because ‘alternative mode of performance’ still contemplates performance, whereas foreclosure is an express repudiation of the contractual terms. Treating eventuality of foreclosure as an optional performance is incorrect. Accordingly, the Hon’ble Larger Bench of CESTAT held that the ‘Foreclosure charges’ cannot be subjected to service tax.
Commissioner of Service Tax, Chennai v. M/s. Repco Home Finance Ltd., CESTAT Larger Bench, Miscellaneous Order No. 40053/2020, dated June 8, 2020.
3. Whether the construction of associated facilities like toll plaza, cattle and pedestrian crossing facilities, parking bays for buses/trucks and rest room for staff and common people are part of the road (exempt) or are liable to service tax under the head ‘works contract service’?
Facts and Pleading: M/s. GMR Project Pvt. Ltd. (hereinafter referred to as “the Appellant”) have been granted on ‘Build, Operate and Transfer (BOT)’ basis, construction and maintenance work of roads by ‘National Highways Authorities of India’ (NHAI). The Appellant also undertakes the construction of associated facilities like toll plaza, cattle and pedestrian crossing facilities, parking bays for buses/trucks and rest room for staff, etc. and common people.
The department argued that the NHAI have entered into the concessionaire agreement with the Appellant for execution of highway projects envisaging design, construction, development, finance, operation and maintenance on BOT basis. The case of Department is that exclusion from service tax is primarily for the work of laying of road and not for allied works such as the construction of aforesaid associated facilities undertaken with regard to the said activity and hence the allied activities are taxable under the Works Contract Service
The Appellant submitted that the Appellant had been granted ‘concessionaire agreement’ on Trunkey basis, on BOT model. The Appellant argued that the construction of Toll Plaza does not amount to construction for commercial concern. The same is in furtherance of the agreement to build and manage roads as granted by the NHAI on Turnkey basis on BOT model, which is necessary for the recovery of the costs incurred by the Appellant. The Appellant further submitted that the Construction of Toll Plaza is not an isolated project activity to attract tax. The Appellant argued that it is not rendering any service to itself, when it built the Toll Plaza, etc. on or along with road, for recovery of its costs, etc. Accordingly, the Appellant submitted that the construction of Toll Plaza etc., is directly connected and attached to the service of construction of roads which is exempt under Section 97 read with Section 65(105) (zzzza) of the Finance Act, 1994
Judgment: The Hon’ble CESTAT held that the construction like toll plaza, cattle/pedestrian crossing facilities, parking bay for buses/trucks, rest room for staff and common public at large, etc. are also part of the road, as these are meant for exclusive use by the highway staff and the people using these roads. Further the Hon’ble CESTAT took note of several judgments of the Tribunal wherein even greenery done in the middle of the road, by way of divider or on the side of the roads, as well as crash barriers erected on the side of the roads all form part of the road and not exigible to service tax. The Hon’ble CESTAT also took note of the decision of the Delhi Bench of this Tribunal in the case of Jagdish Prasad Agarwal Vs. CCE, Jaipur-I [2017(3) GSL 455 (Tri. Del.)]. Accordingly, The Hon’ble CESTAT held that the Appellant is entitled for the exemption under Section 65(105) (zzzza).
M/s. GMR Project Pvt. Ltd. vs. CCE, CESTAT, Banglore, decided on 17.06.2020 in Service Tax Appeal No. 25673 of 2013.
4. Whether the services provided by M/s National Securities Depository Ltd. to their Depository Participants in nature of “provision and transfer of information and data processing” services taxable under the category of Banking and Other Financial Services as defined by Section 65(12) of the Finance Act 1994?
Facts and Pleading: M/s. National Securities Depository Ltd. (hereinafter referred to as “the Appellants”) hold securities (like shares, debentures, bonds, Government Securities, units etc.) of investors in electronic form. The Appellants also provide services related to transactions in securities. The Appellants interface with the investors through their agents called as Depository Participants. The aforesaid Depository Segment of the Appellants includes providing various services to the investors like dematerialization, rematerialization, transfer and pledge of securities in electronic form through closed user group network of business partners viz issuers/ Registrar & Transfer Agents and Depository Participants (DP). The Appellants have an electronic platform which is designed to provide information in relation to securities and enables the DP or their investors to have access to their securities holding at any time.
According to the department the aforesaid processes of de-materialization/ re-materialization; pledge, transfer of securities indicate that there is provision of information, transfer of information and data processing through electronic media. Thus, the department alleged that the Appellants are providing “provision and transfer of information and data processing” taxable under the category of “Banking and Financial Services” as defined by Section 65 (12)(a) of the Finance Act, 1994. The department relied upon Bank of Baroda [2016 (43) STR 141 (T-Mum)] = 2016-TIOL-216- CESTAT-MUM wherein on the similar facts of the case it was held that the services provided are classifiable under the taxable category of “Banking and Other Financial Services” as “provision and transfer of information and data processing”.
The Appellant contended that the Depository Participants are merely an agent Depositories. There is no service in the nature of Depository Service provided by the Appellant to the DP’s. DP’s provide the service to the customer/ client. There is no service in nature of Depository provided to the DP’s. The Appellant further argued that even if they are required to pay service tax under the category of Banking and Other Financial Service then the same will be under 65(12)(v) and not under 65 (12)(vii). The Appellant further submitted that since the depository participants act as agents for the purpose of depository services and have discharged Service Tax on entire consideration including fees, therefore, the Appellant is not liable to discharge tax on the same once again. The Appellant further argued that if it is presumed that they are providing the services to Depository Participants then also the same could be only “infrastructure support service” which is in the nature of Business Support Service and not the Banking and Other financial Service.
Judgment: The Hon’ble CESTAT observed that the Appellant’s have an electronic system providing for transmission of data to various participants/ partners in their business and they provide the platform to their Depository Participants through which they interact with Investor, Issuer, Registrar and Transfer Agents & Clearing House. For providing these services the Appellant charges certain fees from their Depository participants. The Hon’ble CESTAT further observed that the Appellant is providing “provision and transfer of information and data processing” in relation to their depository operations. Accordingly, the Hon’ble CESTAT held that the by providing for provision and transfer of information and data processing in relation to the depository services, the Appellants have provided the “Banking and Other Financial Services” as defined by 65(12) (a)(vii) to the Depository Participants and the Depository Participants have in turn utilized these as input services to provide Depository Related services to their users/ clients.
M/s. National Securities Depository Ltd. vs. CST, CESTAT Mumbai, decided in Final Order No. A/85598/2020 dated 08.06.2020.