Unreported Decisions – ST – May 2021

By Vinay Kumar Jain & Sachin Mishra, Advocates

1. Whether the orders of provisional attachment issued by the Joint Commissioner against the Appellant are in consonance with the conditions stipulated in Section 83 of the Himachal Pradesh Goods and Service Tax Act, 2017?

Facts and Pleading: M/s. Radha Krishan Industries (hereinafter referred to as ‘the Appellant’) has challenged the orders of provisional attachment issued by the Joint Commissioner against the Appellant on the count that it is not in consonance with the conditions stipulated in Section 83 of the CGST/SGST Act.

The Appellant submitted that the power of provisional attachment under Section 83 of the HPGST Act is a drastic power and must be exercised with extreme care and caution. The Appellant submitted that the power under Section 83 of the HPGST Act cannot be exercised unless there is sufficient material on record to justify that the assessee is about to dispose of the whole or part of its property to thwart the ultimate collection of tax. As per the Appellant, it has paid an output tax of approximately ₹ 12.49 crores for the relevant period, which is more than the ITC of ₹ 3.25 crores which the Appellant has allegedly taken fraudulently. Further, the Appellant submitted that even if the revenue has to attach the properties of the assessee, immovable properties must be attached, attachment of bank accounts and trading assets should be a last resort only as it paralyses the business of the assessee. Further, the Appellant also argued that the pendency of proceedings under Sections 62, 63, 64, 67, 73 or 74, of the HPGST Act, is a pre-condition for invoking the provisions of Section 83 of the HPGST Act. However, in the present case, the provisional attachment of the Appellant’s assets was made on 28-10-2020, before the proceedings were initiated against the Appellant under Section 74 of the HPGST Act on 27-11-2020. Thus, the provisional attachment was made without jurisdiction and in violation of Section 83.

Judgment: The Hon’ble Supreme Court held that the power to order a provisional attachment of the property of the taxable person including a bank account is draconian in nature and the conditions which are prescribed by the statute for a valid exercise of the power must be strictly fulfilled. As per Hon’ble Supreme Court, the exercise of the power for ordering a provisional attachment must be preceded by the formation of an opinion by the Commissioner that it is necessary so to do for the purpose of protecting the interest of the government revenue. Before ordering a provisional attachment, the Commissioner must form an opinion on the basis of tangible material that the assessee is likely to defeat the demand, if any, and that therefore, it is necessary so to do for the purpose of protecting the interest of the government revenue. The Hon’ble Supreme Court held that the expression “necessary so to do for protecting the government revenue” implicates that the interests of the government revenue cannot be protected without ordering a provisional attachment. The formation of an opinion by the Commissioner under Section 83(1) must be based on tangible material bearing on the necessity of ordering a provisional attachment for the purpose of protecting the interest of the government revenue. As per Hon’ble Supreme Court, in the facts of the present case, there was a clear non-application of mind by the Joint Commissioner to the provisions of Section 83, rendering the provisional attachment illegal. Under the provisions of Rule 159(5), the person whose property is attached is entitled to dual procedural safeguards: (a) An entitlement to submit objections on the ground that the property was or is not liable to attachment; and (b) An opportunity of being heard. The Hon’ble Supreme Court held that there has been a breach of the mandatory requirement of Rule 159(5) and the Commissioner was clearly misconceived in law in coming into conclusion that he had a discretion on whether or not to grant an opportunity of being heard. The Commissioner is duty bound to deal with the objections to the attachment by passing a reasoned order which must be communicated to the taxable person whose property is attached. As per Hon’ble Supreme Court, a final order having been passed under Section 74(9), the proceedings under Section 74 are no longer pending as a result of which the provisional attachment must come to an end.

M/s. Radha Krishan Industries vs. State of HP, Supreme Court of India, decided on 20-04-2021 in Civil Appeal No 1155 of 2021.

2. Whether investment in mutual fund by appellant engaged in providing Commercial Training and Coaching Services can be considered as ‘exempt service’ of trading in goods and therefore, whether appellant is liable to pay 6%/7% of the amount of exempted services in terms of Rule 6(3)(i) of Cenvat Credit Rules, 2004?

Facts and Pleading: ACE Creative Learning Pvt. Ltd. (hereinafter “Appellant”) is engaged in providing taxable services viz. Commercial Training & Coaching Services as defined under Section 65B(44) of the Finance Act, 1994 and is availing the facility of cenvat credit of inputs, capital goods and input services under the Cenvat Credit Rules, 2004. The Appellant had also invested in the mutual funds and had earned profit during the year 2014-15, 2015-16 & 2016-17 which it had shown as under the head “other income”.

The department alleged that the investment in mutual fund is trading in mutual funds which is exempted services. Further, the department alleged that the Appellant has not maintained separate records for common input services availed in providing the output services and exempted activity i.e. trading and hence are liable to pay 6%/7% of the amount of exempted services in terms of Rule 6(3)(i) of Cenvat Credit Rules, 2004.

The Appellant argued that an investor who invested in mutual funds units cannot be designated as a service provider either at the time of forwarding money for investment or for that matter at the time of encashing investment by returning the same units to the fund. The Appellant submitted that the trading has not been defined under service tax and will have to be understood in the context of securities. It is different from redemption. Redemption is the act of redeeming which in its ordinary meaning is equal to bringing off a charge/ obligation by payment. The Appellant further submitted that for trading the mutual fund unit a person is required to have the license under Regulation 37 of SEBI and the appellant does not possess any such license to dealing mutual funds. The Appellant further submitted that the Appellant on maturity simply returns the unit to the mutual fund itself without any person being involved in transfer of units. Hence, as per Appellant, once it is not a trader in the securities, the question of proportionate reversal on common input services used for both trading and output services under Rule 6(3)(b) does not arise.

Judgment: The Hon’ble CESTAT has decided in favour of the Appellant and held that the ‘trading’ has not been defined under the Service Tax but in the context of securities, ‘trading’ means an activity where a person is engaged in selling the goods and occupy for the purpose of making profit. As per Hon’ble CESTAT, certainly trading is different from redemption of mutual fund units, in the present case Appellant cannot transfer the mutual fund units to third party and give only by redemption to the mutual fund because the Appellant is not permitted to trade mutual fund unit in the absence of a license from the SEBI. There is a restriction on the right to transfer unit and the Appellant cannot transfer units to any other person. Further, the Hon’ble CESTAT held that the Appellant cannot be termed as “service provider” because he only makes an investment in the mutual fund and earn profit from it which is shown in the Books of Accounts under the head “other income”. Hence, the Hon’ble CESTAT held that the question of invoking Rule 6 does not arise and department has wrongly invoked the provisions of Rule 6(3) demanding the reversal of credit on the exempted services.

ACE Creative Learning Pvt. Ltd. vs. Commissioner, Bangalore, CESTAT, Bangalore decided on 15-4-2021 in Final Order No. 20105/2021.

3. Whether the owner of the immovable property who rents out the property simplicitor is covered under the definition of taxable service of “renting of immovable property” in Section 65(105(zzzz) of the Finance Act, 1994? Whether levy of Service Tax on the services provided by municipalities is ultra-virus as the municipalities were not a “person” within the meaning of Section 65B(37) of the Finance Act, 1994 as it stood amended with effect from 01-07-2012 and prior to it?   

Facts and Pleading: Cuddalore Municipality along with other Municipalities (hereinafter referred to as the ‘Petitioners’) have challenged several show cause notices and order-inoriginals issued against them demanding service tax on the amounts received by the Petitioners towards renting of immoveable property. The Petitioners have challenged these proceedings on the ground that the Petitioner municipalities were not a “person” within meaning of the meaning of Section 65B(37) of the Finance Act, 1994 as it stood amended with effect from 01.07.2012 and thereafter and therefore, the question of levying tax on services provided by the respective municipalities under the provisions of the Finance Act, 1994 does not arise. The Petitioners also submitted that even if the Petitioners are to be considered as a “local authority” with the meaning of Section 65B(31) of the Finance Act, 1994 as it stood amended with effect from 01.07.2012, the Petitioners were exempted from payment of service tax in terms of Sl. Nos. 38 & 39 to the Mega Exemption Notification No. 25/2012 – ST dated 20-06-2012.

The Revenue submitted that respective Municipalities were “persons” for the purpose of Finance Act, 1994. It was submitted that the period prior to 2012, even if there was no definition for the word “person”, the definition of “person” in the General Clause Act would apply and therefore, the Petitioners were liable to pay tax. The Revenue also claimed that after 01-07-2012, the definition of “person” in Section 65B(37) includes a “local authority”. The definition of “local authority” includes the Municipality in Clause (e) of Article 243P of the Constitution of India. It was further submitted that the definition of “person” includes the artificial and juridical person and there is no dispute that the respective Petitioners were the “persons” for payment of service tax

Judgment: : The Hon’ble High Court held that for the period prior to 01-07-2012, levy under Section 65(105) (zzzz) of the Finance Act 1994 is attracted only when service was provided by “any other person”, i.e., by a person other than the owner. As per Hon’ble High Court, the expression “any other person” can only mean any other person other than the owner of the property. Therefore, Hon’ble High Court held that the owner of the immoveable property is not liable to pay tax under Section 66 of the Finance Act, 1994 for the period up to 30-06-2012. Hon’ble High Court held that since the Petitioners-municipalities are the owner of property, question of it being made liable to pay service tax for any service in relation to such renting of immoveable property does not arise even if it had rented out its immoveable property for use in the course of or for furtherance of, business or commerce of the person who was renting it. Further, for the period post 01-07-2012, the Hon’ble High Court held that if the activity carried out by the Petitioners are categorised as “Support Service”, it cannot be a provision of taxable service and such service was not liable to tax under Section 66B of the Finance Act, 1994. As per Hon’ble High Court, for support service provided, the recipient was liable to pay tax on reverse charge basis under Rule 2(1)(d)(E) of the Service Tax Rules, 1994 as amended by Notification No. 36/2012-ST dated 20-06-2012 as in force from 01-07-2012. Accordingly, the Hon’ble High Court held that the Petitioner-Municipalities can be held liable to pay service tax only for service specified in Sub-Clauses in (i), (ii) and (iii) of Clause (a) of Section 66D of the Finance Act, 1994. Further, the Hon’ble High Court held that as far as renting of immoveable property is concerned, though under Rule 2(1)(d)(E) of the Service Tax Rules, 1994, service tax is payable by the service provider, it has to be held that if such services are provided by a Government or Local Authority, they are exempted under Section 65D(1)(a) of the Finance Act,1994 as amended and as in force from 01-07-2012.

Cuddalore Municipality vs. UOI, High Court of Madras, Madras, decided on 22-03-2021 in W.P. No. 8900 of 2018.

4. Whether the Appellant is eligible to avail Cenvat credit of service tax paid on insurance premium paid in respect of “workmen compensation insurance policy”?

Facts and Pleadings:  M/s. Dharti Dredging and Infrastructure Ltd. (hereinafter referred to as the ‘Appellant’) is a service tax provider and avails Cenvat credit on the inputs and input services under Cenvat Credit Rules (CCR), 2004. The Appellant has availed Cenvat credit on service tax paid on insurance premium paid in respect of “workmen compensation insurance policy”. The same was denied by the lower authorities and the Appellant filed appeal before Hon’ble CESTAT. However, Hon’ble Single Member (Judicial), CESTAT, found that contrary views had been expressed on the same issue by two benches of the same strength (both single member benches) in Hydus Technologies India Pvt. Ltd. vs. C.C.E., CUS. & S.T., Hyderabad-ll, 2017 (52) STR 186 (Tri-Hyd) and Ganesan Builders Ltd. vs. CST, Chennai-II – 2017-TIOL-3152-CESTAT-Madras. Hence, the matter was referred to a larger Bench for a decision.

The Revenue alleged that the insurance policies where the benefit goes to individual employees being specifically excluded from the definition of “input service” under CCR, 2004, no Cenvat credit of service tax paid on ‘Workmen Compensation Insurance Policy’ is admissible to the Appellant.

In Hydus Technologies India Case, it was held that Cenvat credit is available in respect of service tax with respect to gratuity insurance, employees deposit linked insurance, employees health insurance, etc., on the ground that “the benefit bestowed by one legislation cannot be taken away or made highly difficult and impractical to be adhered to by another field of law” and accordingly, the benefit was allowed despite specific exclusion by Rule 2(l). However, in Ganesan Builders Case, CESTAT-Chennai denied the benefit of Cenvat credit on input services following the definition of input service including the exclusion clause therein under Rule 2(l) of CCR, 2004, as amended w.e.f. 01-04-2011.

The Appellant submitted that they have obtained an insurance policy to cover their liability for payment of compensation to their workers under Workmen Compensation Act, 1923. Section 3 of this Act mandates the employer to pay compensation to the workers in the event of personal injury to a workman by accident arising out of and in the course of his employment. The Appellant has taken an insurance to cover this potential liability. As per Appellant, the benefit of insurance is not going to the employees at all. As per the Workmen Compensation Act, 1923, the employees are entitled to compensation whether or not the Appellant takes the insurance policy. Therefore, the insured is the Appellant and not the individual employees. The Appellant further submitted that the decision of CESTAT-Chennai in the case of Ganesan Builders is no longer good law because it has been overruled by the Hon’ble High Court of Madras, which decision is reported in 2019 (20) GSTL 39 (Madras).

Judgement: The Hon’ble Larger Bench, held that the present case is identical to the case of Ganesan Builders decided by the Hon’ble High Court of Madras inasmuch the policy in question pertains to workmen compensation scheme. As per Hon’ble Larger Bench, the insured, as can be seen from the insurance policies is the Appellant and not the individual employees. In other words, the benefit of the policy, if any, goes to the Appellant and not to the individual employees. The Hon’ble Larger Bench held that the Section 3 of Workmen Compensation Act, 1923 places the liability for compensation upon the employer and Section 4 determines the amount of compensation to be paid. As per Hon’ble Larger Bench, if the Appellant had not taken this insurance policy the employees would still be eligible for full compensation as per sections 3 and 4 of the Workmen Compensation Act, 1923. Thus, the Hon’ble Larger Bench held that what is sought to be covered by these insurance policies in the present case is the liability of the Appellant against any potential claim under Sections 3 and 4 of the Workmen Compensation Act, 1923. Therefore, in the present case the workmen are not the beneficiaries of the policy but it is the Appellant. Therefore, the benefit of the insurance in the present case flows directly to the Appellant themselves and not to individual employees. Therefore, as per Hon’ble CESTAT Larger Bench, the view expressed by the Tribunal in Hydus Technologies India lays down the correct position in law and the view expressed by the Tribunal in Ganesan Builders has been over ruled by the Madras High Court in 2019 (20) G.S.T.L. 39 (Mad.). Therefore, Hon’ble Larger Bench held that the present policy is not excluded by clause (C) of Rule 2(l) as has been held by the Hon’ble High Court of Madras in the case of Ganesan Builders.

M/s. Dharti Dredging and Infrastructure Ltd. vs. CCT, Larger Bench, CESTAT, Hyderabad, decided on 01-04-2021 in Service Tax Appeal No. 30531/2018.