By Vinay Kumar Jain and Jay Chheda, Advocates
1. Whether the Assessee is entitled to make pre-deposit of Excise duty demand by debiting the Electronic Credit Ledger (CGST ITC) maintained under GST?
Facts and Pleadings: The Commissioner (Appeals), Allahabad rejected the Order-in-Appeal filed by Johnson Mathey Chemical India Pvt. Ltd. (‘assessee’) on the ground that assessee had not made the pre-deposit as per Section 35F of the Central Excise Act, 1944 (‘CEA, 1944’). The assessee had made the requisite pre-deposit of 10% by way of reversal of CGST Credit (7.5%) and DRC-03 challan in cash (2.5%), both.
The assessee challenged the order by placing reliance on the case of Dell International Services India Pvt. Ltd. v. Commissioner of Central Tax 2019 TIOL-286-CESTAT-BANG wherein pre-deposit through credit reversal has been well accepted by the Tribunal. The assessee further contended that Section 35F of the CEA, 1944 does not specify any method of payment and that many Courts have upheld the eligibility to utilize CENVAT Credit Balance for paying the mandatory pre deposit. The assessee further argued that as old credit lying in balance forms part of GST credit pool, there should be no restriction in utilization of CGST ITC.
The department contended that even though CEA, 1944 is repealed, Section 174(2)(f) of the CGST Act, 2017 provides that any proceedings prior to repeal will continue as per the previous provisions as if the Act was never repealed in the first place. Therefore, the pre-deposit should be under Section 35F of the CEA, 1944 and not the CGST Act. Further, since assessee has a central excise registration, there is no valid reason for the pre-deposit to be paid under the CGST Act. In addition, in the Form GSTR-3B filed by the assessee, there was a reversal of CGST credit for the correct amount, but the purpose of such reversal was not mentioned anywhere making it doubtful. The Department placed reliance on the case of M/s Jyoti Construction v. Deputy Commissioner of CT & GST 2021 (10) TMI-524-Orissa High Court wherein it was held that it is not possible to equate ‘output tax’ as defined under Section 2(82), CGST Act to the pre-deposit as required under Section 107(6), CGST Act. Further, Section 41(2) of the GST Act prohibits the usage of Electronic Credit Ledger (‘ECRL’) for pre-deposits and therefore the Appellate Authority made no errors in rejecting the Appeal.
Order passed by CESTAT, Allahabad: The Tribunal observed that as per the provisions of Section 41 of the CGST Act, credit lying in ECRL can only be utilized for self-assessed output tax. In the case of Dell International, the Tribunal accepted the contention of the Appellant because the Department there did not dispute that mandatory pre-deposit can be made through the CGST credit. Moreover, the said order of the Tribunal in the case of Dell International is an interim consent order.
In the case of Jyoti Construction, the Orissa High Court held that CGST Act has no provision for utilizing CENVAT Credit for anything other than payment of self-assessed output tax. The Tribunal observed that the decision of a High Court is binding on the Tribunal and that the assessee has not produced any judgement of a High Court which would support their contention. The other cases that assessee placed reliance upon are all cases about debit of pre-deposit amount from CENVAT Credit Register and as such, the same are not applicable to the present case.
In view of this, it was held that mandatory deposit under Section 35F of Excise Act cannot be made by way of debit in the ECRL maintained under CGST Act.
2. Whether consideration charged for grant of right to use trademark on exclusive basis is subject to service tax?
Facts and Pleadings: The Commissioner of Service Tax, Delhi filed the appeal before CESTAT to set aside the order passed by the Principal Commissioner of Service Tax, New Delhi (‘the Principal Commissioner’). The Principal Commissioner dropped the show cause notices (‘SCN’) alleging that M/s. Future Brands Ltd. (‘Respondent’) had not paid service tax on the “right to use Trademark” under the Trademark License Agreement between the Respondent and Pantaloon Retail (India) Ltd. (‘Pantaloon’).
The Respondent under the Trademark License agreement agreed to grant an exclusive right to use the trademark of the Respondent to Pantaloons. The department alleged that the Respondent had deliberately bifurcated the gross value into two heads viz. royalty and right to use Trademark and had paid VAT on the latter portion in order to avoid paying service tax on the same which had a higher rate of tax in comparison to VAT. The Department submitted that bifurcation of income is arbitrary. The permission to use the brand is strictly according to the licensor’s guidelines and any benefit of goodwill created by licensee’s use is mandated to flow back to the Respondent. Further, the fee payments towards license fee and additional license fee and terms and conditions do not indicate any consideration for sale.
In favour of the impugned order, the Respondent argued that the transfer of right to use Trademark on an exclusive basis, would qualify as ‘deemed sale’ under article 366 (29-A) of the Constitution, thereby attracting VAT and would be outside the purview of service tax. An agreement is required to be read in a manner that it reflects the true intention of the parties thereto as regards the consideration agreed to be paid in return for the activities carried out under the agreement. The Respondent further submitted that service tax and VAT are exclusive to each other and cannot be levied simultaneously. Further, incorporeal property such as ‘trademarks’ constitutes ‘goods’ for the purpose of the levy of VAT.
Order passed by CESTAT, Delhi: The Tribunal held that, under Sales Tax, there is transfer of possession and effective control in goods, while there is no such transfer of possession and effective control under Service Tax. On a perusal of the terms of the Trademark License Agreement and the Retail License Agreement executed between the Respondent and Pantaloons it would show that there is a noticeable difference between the two agreements. In the case of the Retail License Agreement, only a non-exclusive and non-transferrable license to use the trademark was granted by the Respondent to Pantaloons. Pantaloons also agreed that the Respondent would have the right to control the standard and quality of the products. There is no restriction in granting the license to others during the license period. This agreement is clearly, therefore, outside the purview of Article 366 (29A) (d) of the Constitution that defines tax on the sale or purchase of the goods. Accordingly, service tax would be payable. However, in the case of the Trademark License Agreement an exclusive license to use the trademark in any manner during the term of the agreement was granted. Such a license could not be granted to any other person during the period of the agreement. This would fall within the meaning of the phrase “transfer of right to use the goods” and would be covered by article 366 (29A) (d) of the Constitution. Accordingly, the appeal filed by the department was dismissed.
3. Whether service tax demand is sustainable under reverse charge on the services received outside the territory of India by foreign offices of the Indian entity?
Facts and Pleadings: Star India Pvt. Ltd. (‘Appellant’) is engaged in the business of rendering broadcasting services. During the period 2009-2010, three overseas companies viz. Star Asia Region FZ LLC, M/s Star Asian Movies Limited and M/s Star Television Entertainment Ltd had appointed M/s Satellite Television Asian Region Limited, Hongkong as their agent for advertisement sales and channel distribution in India either by themselves or through sub-agents and the Hongkong entity delegated their agency for India region to the Appellant. In pursuance of the agreement among the overseas entities, an amount totaling to ₹ 508 crores was paid by the three overseas entities to M/s Satellite Television Asian Region Ltd, Hongkong for use of the trademark of the Hong Kong entity.
Further, during 2009-10, the three overseas companies, namely, M/s. Star Asia Region FZ LLC, M/s. Star Asian Movies Limited and M/s. Star Television Entertainment Ltd., the three foreign companies were sought to be merged with the Appellant and the scheme had received the approval of the Bombay High Court on 18th February 2010 with 1st April 2009 being the appointed date and the effective date of merger was 29th April 2010 for M/s Star Asia Region FZ LLC and 31st May 2010 for M/s Star Asian Movies Limited and M/s Star Television Entertainment Ltd.
The department issued Show cause notice to the Appellant to demand service tax on the payments made by these foreign companies to the Hongkong entity during 2009-2010 which were reflected in the redrawn accounts of the Appellant as required after merger.
The Appellant argued that the mandatory re-drawal of accounts consequent upon approval of merger had nothing to do with the non-exclusive, non-transferable right to use the marks’ assigned to the Appellant by Hongkong entity in their agreement. The Appellant further argued that that the licence was restricted to distribution and marketing of channels for which annual licence fee was consideration on which service tax had been discharged during the period and no demand can be made under the category of ‘Intellectual Property Rights services’. Further the Appellant contended that even if, as a branch, the foreign companies did receive services, the service tax levy is restricted to services received in India and services received by overseas branches cannot be taxed in India.
Order passed by CESTAT, Mumbai: The Tribunal held that, deeming that the amalgamated entity came into being force on 1st April 2009 (appointed date), the status of the amalgamating entities outside India needs to be kept in mind and such offices have continued to operate at those locations after the appointed date. Therefore, the consequence of deemed amalgamation from 1st April 2009 would be to deem the foreign companies as overseas offices of the Appellant.
Section 66A(2) of Finance Act, 1994 makes it abundantly clear that, for the purposes of the levy of service tax, such units are to be considered as independent entities and the procurement of services outside India by the branches or offices of an Indian assessee does not fall within the purview of Rule 3 of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. Further, the Order in Original has failed to identify the ‘taxable service’ that the three foreign entities had obtained from the Hong Kong entity.
The Tribunal further observed that the the adjudicating authority has failed to consider the deemed demutualization of amalgamated entity and amalgamating entities for the period prior to effective merger and has superficially applied the appointed date conundrum to demand service tax under section 66A of Finance Act, 1994. Hence, Appeal filed by the Appellant was allowed.
Star India Pvt Ltd Vs. CST Mumbai – Final Order No. A/85826/2022 dated 1.9.2022, CESTAT Mumbai