Author: [email protected]

Unreported Decisions – ST – January 2021

By Vinay Kumar Jain & Sachin Mishra, Advocates

1. Whether the inclusion of actionable claim in the definition of goods as given in Section 2(52) of CGST Act, 2017 is contrary to the legal meaning of goods in Sale of Goods Act, 1930? Whether exclusion of lottery, betting and gambling from Item No.6 Schedule III of CGST Act, 2017 is hostile discrimination and violative of Article 14 of the Constitution of India? Whether while determining the face value of the lottery tickets for levy of GST, prize money is to be excluded for purposes of levy of GST? Whether while determining the face value of the lottery tickets for levy of GST, prize money is to be excluded for purposes of levy of GST?

Facts and Pleading: M/s. Skill Lotto Solutions Pvt Ltd (hereinafter referred to as ‘The Petitioner’) is an authorized agent for sale and distribution of lotteries organized by State of Punjab. The Petitioner aggrieved by the provisions of CGST Act, 2017 has filed a writ petition challenging the definition of ‘goods’ under Section 2(52) of CGST Act, 2017 and consequential notifications to the extent it levies tax on lotteries. By the Notification dated 28.06.2017 with regard to lottery run by the State Government, value of supply of lottery was deemed to be 100/112 of the face value of the ticket or the prize whereas with regard to lotteries authorized by the State Government, the value of supply of lottery was deemed to be 100/128.

The Petitioner argued that lottery is not ‘goods’ and GST is levied only on goods under the CGST Act, 2017. Hence levy of GST on lottery is ultra vires to the Constitution of India. The Petitioner further argued that GST is being levied on the face value of the lottery tickets which is impermissible since the face value of the tickets also includes prize money to be reimbursed to the winners of the lottery tickets. Further, the Petitioner argued that taxing actionable claim only is discriminatory since all actionable claims are not being taxed and only lottery is being subjected to GST.

The Respondent argued that actionable claim is a movable property and goods in the wider sense and hence covered under CGST Act, 2017. The Respondent further argued that not levying tax on other actionable claims apart from lottery, betting and gambling is neither discriminatory nor beyond the taxing policy/powers of the State. The Respondent submitted that the Union Parliament has the competence to levy GST on lotteries under article 246A of the Constitution.

Judgment: The Hon’ble Apex court held that by providing an inclusive definition of goods in Article 366(12), the Constitution framers never intended to give any restrictive meaning of goods. Therefore, definition of goods in Article 366(12) is inclusive definition and does not specifically excludes actionable claim from its definition. The Hon’ble Supreme Court relied on Sunrise Associates, (2006) 5 SCC 603 and held that lottery is actionable claim and no exception can be taken to the definition of the goods as occurring in Section 2(52) of CGST Act, 2017. Further, the Hon’ble Court held that there is no violation of Article 14 in Item No. 6 of Schedule III of the CGST Act, 2017 as there must be some rationale to tax lottery, betting and gambling. The Hon’ble Supreme Court further observed that while determining the taxable value of supply the prize money is not to be excluded for the purpose of levy of GST. The reliance was placed on M/s. Gannon Dunkerley, (1959) SCR 329 and on the circular dated 14.02.2007 which provided that the value of taxable service shall be taken into account at the total face value of the ticket sold minus the total cost of the ticket paid by the distributor to the State Government and price money paid by the distributer. Accordingly, the petition filed by the Petitioner was dismissed.

M/s. Skill Lotto Solutions Pvt. Ltd. Vs. Union of India & Ors., Supreme Court of India decided on 03.12.2020 in Writ Petition (Civil) No. 961 of 2018.

2. Whether GST can be levied on the estimated byproducts value, treating such by-products broken rice, bran and husk obtained in the course of milling of the paddy as part of the consideration for milling under the provisions of CGST/APGST Act, 2017?

Facts and Pleading: M/s. Shiridi Sainadh Industries (hereinafter referred to as ‘the Petitioner’) is a Rice Miller and registered dealer under Andhra Pradesh GST Act, 2017. The State Government through the Andhra Pradesh Civil Supplies Corporation (APCSC) procures paddy and gives to the rice mills for milling. As per the agreement, the Rice Millers have to supply rice equivalent to 67% of the paddy given for milling. The actual yield is around 61% to 62% only. The balance of 5% to 6% has to be provided by the Petitioner to the Respondent. APCSC allows the Petitioner to retain the broken rice, bran and husk obtained in the course of milling of the paddy. The Petitioner sells the said broken rice, bran and husk and GST was levied on the same.

The department alleged that as per the terms of the agreement, the taxes payable for the bye products are to be borne by the Petitioner. As per department, the Petitioner i.e. the rice miller is the supplier of the service and as per the tariff under GST, the prescribed rate for this type of service is 5%, relied on clarification issued vide Circular No.19/19/17 dated 20.11.2017. the Department alleged that milling of paddy into rice is not eligible for exemption under S.No.55 of Notification 12/2017- Central Tax (Rate) dated 28.06.2017 and such custom milling which is a job work is liable to GST @ 5% on the processing charge. Further, it was alleged that the milling is done by the Petitioner, the primary responsibility and liability for payment of the GST is with the Petitioner.

The Petitioner argued that the broken rice, bran and husk were given to the Petitioner by the APCSC not as consideration, but in exchange for the own rice given by the Petitioner to make up the shortfall of the rice after milling. The Petitioner has paid tax on the bran whereas the broken rice and husk are exempted from the tax under the GST Act. Therefore, as per the Petitioner, levying tax on the value of the by-products is legally unsustainable. The Petitioner further submitted that the GST liability if any, the same has to borne by APCSC who is the recipient of the services.

Judgment: The Hon’ble High Court held that the Petitioner offers “services” to APCSC within the meaning of Section 2(102) of the CGST Act, 2017. Further, only the custom milling charges of paddy is liable to GST @ 5% on the processing charges and not on the entire value of rice. The Hon’ble High Court observed that the submission of the Petitioner that the by-products are given to the Petitioner towards compensation is logically correct. The Hon’ble High Court relied on Food Corporation of India vs. State of A.P., 1997 SCC Online AP 1143 wherein it was held that terms of an agreement are sacrosanct and cannot be altered and as per the terms of the agreement in the present case, the by-products which are allowed to be retained by the Petitioner are not the part of the consideration. The byproducts form part of compensation but not consideration. Therefore, the Hon’ble Court held that the department erroneously concluded that the miller was allowed to retain the by-products towards consideration, though such import is impermissible from the terms of the agreement. Further the Hon’ble court held that the impugned order to the extent of including the value of by-products to the milling charges and assessing tax is legally unsustainable. Therefore, Writ Petition was allowed and the impugned Assessment Order in so far as it related to the levy of GST on the value of by-products i.e., broken rice, bran and husk treating them as part of the consideration paid to the Petitioner for milling of the paddy, was set aside.

M/s. Shiridi Sainadh Industries Vs. The Deputy Commissioner, High Court of Andhra Pradesh decided on 20.11.2020 in W. P. No. 45971 of 2018.

3. Whether grant of non-exclusive license to use, market and sub-license a ‘software’, ‘third party database’ and ‘third-party software’ amounts to ‘licensing of copyrights’ service or ‘franchisee service’ under the Finance Act, 1994?

Facts and Pleading: M/s. Sap India Pvt Limited (hereinafter referred to as the ‘Appellant’) is inter alia engaged in marketing and licensing of software known as “my SAP” along with other related software products of M/s. SAP Aktiengeselischaft Systems, Germany (hereinafter referred to as ‘SAP AG’). Subject to the terms of the agreement, SAP AG granted to the Appellant a non-exclusive license to use, market, sub-license the software, documentation, third-party database and thirdparty software to end users in the territory. In consideration of above licenses, Appellant was required to make certain payments to SAP AG.

Revenue sought to tax such payments made, under provisions of Section 66A of Finance Act, 1994 (reverse charge mechanism), on the basis that the Appellant was receiving franchisee service from SAP AG, Germany. The Revenue argued that Appellant is marketing the software in India and realizing the consideration from the clients. Out of this consideration realised, a part thereof is remitted to SAP, Germany as ‘Royalty’. This payment is towards the representational right granted by SAP, Germany, to sell the software in India and for doing the process of customization of the software for each customer. Thus, the Appellant is acting as a franchisee of SAP, Germany and, therefore, taxable.

The Appellant contended that the payments made to SAP AG, is towards licensing of the software developed by SAP AG, Germany which amounts to ‘licensing of copyrights’ and it cannot be brought under the definition of ‘franchisee service’. The Appellant further argued it has been paying service tax under ‘Information Technology Software Service’ (ITSS) w.e.f. 16.05.2008. The Appellant submitted that a new entry clearly specifying the activity to be taxable under section 65(105)(zzzze), ITSS, has been incorporated in Finance Act, 1994 w.e.f. 16.05.2008, there is a legal presumption that the said service was not covered by any taxable entry prior to that date. Further, the Appellant also argued that they are not doing any service or process identified with the SAP AG. They are acting only as their agents and not as a franchisee of SAP AG and, therefore, no service tax can be levied under the head of ‘Franchisee services’.

Judgment: The Hon’ble CESTAT held that in terms of the agreement, Appellant made payment to SAP AG for license fees for software developed by SAP AG and third-party databases and thirdparty software which their principal is authorised to license to other end users. Further, services received are squarely covered by definition of Information Technology Software Service as defined under Section 65(105)(zzzze) of the Finance Act, 1994 which was brought on statute w.e.f. 16-5- 2008. CESTAT relied on the case Commissioner of Service Tax vs. Federal Bank Limited, 2016 (42) STR 418 and observed that Appellant is paying service tax under head ‘Information Technology Software Service’ w.e.f. 16-5-2008, which is not disputed by Department. Therefore, service in question is not taxable under head ‘franchisee service’ rather taxable under ‘Information Technology Software Service’.

M/s. Sap India Pvt. Limited vs. CCE, CESTAT, Bangalore decided on 15.12.2020 in Service Tax Appeal No. 564 of 2012.

4. Whether a company is required to be registered under Odisha Goods and Services Act, 2017 and Central Goods and Services Act, 2017 for the consultancy services provided to Odisha Power Transmission Corporation Limited?

Facts and Pleading: M/s. Tokyo Electric Power Company (hereinafter referred to as the ‘Applicant’) is a Japan based company. The Applicant entered into an agreement with an Indian entity Odisha Power Transmission Corporation Limited (OPTCL) to provide consultancy services in relation to the outdoor GIS equipment. The Applicant will provide and transfer the technical knowledge in relation to the outdoor GIS equipment to OPTCL’s engineer and staffs through the actual consulting activities during the design stage and implementation stage of the M/s. Odisha Transmission System Improvement Project (“Project”). The Applicant would carry out/provide consultancy services by the expert belonging. The Applicant filed an application before Authority of Advance Ruling and sought for a ruling as to whether the Applicant is required to be registered under Odisha Goods and Services Act, 2017 and Central Goods and Services Act, 2017 for the consultancy services provided to OPTCL?

The Applicant has argued that it is neither liable to obtain registration as a regular taxpayer nor as a non-resident taxable person for the consultancy services provided to M/s. OPTCL. Further, the Applicant also argued that the project location from where the services are provided cannot be considered to be the “location of the supplier of services” and would fall outside India as it has no fixed establishment in India and the usual place of residence is also not in India. Further, it was also submitted that the services supplied by Applicant to OPTCL would be covered under the ambit of Entry No. 1 of Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017 and OPTCL shall be liable to tax under Reverse Charge Mechanism and therefore, Applicant is exempted from obtaining registration.

Judgment: The Authority held that OPTCL has provided an office to the Applicant and the office operation and maintenance charge etc. also to be borne by OPTCL. Further, after analysing the definition of ‘location of the supplier of services’, it was held by the Authority that the place of supply and the location of supplier are at the project site which is different from the place of business. It was observed by the Authority that the Applicant supplies the service at the sites from fixed establishments as defined under section 2(7) of the IGST Act, 2017. As per the Authority, the location of the supplier should, therefore, be in India in terms of Section 2(15) of the IGST Act, 2017. Therefore, the services supplied to OPTCL would not be covered under the ambit of Entry No. 1 of Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017 and shall not be liable to tax under RCM. As per the Authority, the Engineer/expert belonging to the Applicant should be treated as a supplier located in India, and made liable to pay GST, the place of supply being determined in terms of Section 12(2)(a) of the IGST Act, 2017. Accordingly, the Authority held that the Applicant, being the supplier of service in India, is liable to pay tax and therefore, required to take GST registration under Odisha Goods and Services Act, 2017 and Central Goods and Services Act, 2017 for the consultancy services provided to Odisha Power Transmission Corporation Limited.

M/s. Tokyo Electric Power Company, Odisha Authority of Advance Ruling Goods and Service Tax, decided on 19.11.2020 in AAR Order No. 02/ Odisha-Aar/2020-21.

Unreported Decisions – January 2021

By Ajay R. Singh, Advocate

1. Capital Gain deduction u/s. 54F is allowable for purchase of House Property at Abroad

The assessee has invested in construction of a new residential house within the due date u/s.139(1) of the Act. The assessee is having balanced capital gains. The assessee has not invested an amount which should have been invested in a capital gain account scheme. He filed the return of income for AY 2014-15 before the due date under section 139(1) of the Act. However, by that time, he has not utilized the amount in construction of new residential houses or deposited the same in the capital gain account scheme as notified by the Central Government. Therefore Assessing officer denied the claim of the Assessee. The Commissioner Appeals also rejected the claim of the Assessee stating that the unutilized amount of Capital Gains should be invested in the Capital Gain Scheme notified by the Central Government before the due date of filing the return of income. Hence, the same was denied.

Before the Tribunal, the assessee contended that even if the assessee deposited an unutilized portion of capital gain after the due date provided under section 139(1) of the Act, assessee is entitled for deduction u/s. 54 of the Act. This argument was not accepted by the Tribunal. Further alternate argument taken that, the assessee made investment in purchase of house at Chicago in USA which was within the stipulated time u/s. 139(4)of the Act. Even the investment in residential property in foreign country, the assessee can claim such deduction.

While deciding the issue the Tribunal has considered the arguments of the Assessee as well as following the decisions of the CIT vs. K Ramachandra Rao (2015) 230 Taxman 334 (Karn) (HC) held that assessee having invested in construction of a residential house at Chicago, he could not be denied exemption u/s. 54F on ground that he did not deposit said amount in capital gains account scheme before due date prescribed u/s. 139(1). As such, it should be understood that extended date is available as per section 139(4) of the Act. Accordingly, the assessee is entitled for exemption u/s. 54F of the Act if the unutilized capital gain is invested before the due date as mentioned in section 139(4) of the Act. Hence, Capital deduction is allowable for purchase of house property at abroad.

Sri Joseph K. Zachariah vs. ACIT

[ITA 6790 / DEL / 2019 Bench SMC -1 ; dated: 27.11.2020 AY: 2012-13. Delhi Tribunal]

2. Share Application Money is ‘Capital Asset’ for the purpose of Section 2(14) of Income Tax Act

The assessee, M/s. Morarjee Realties Ltd. transferred its investments held in the shape of equity shares, preference shares and rights to apply for shares i.e. share application money held in M/s. MBL, to an entity MGM Shareholders Benefit Trust. The assessee similarly transferred equity shares in certain entities as well as share application money held in M/s. Morarjee Legler Limited to M/s. MBL. While doing so, the assessee suffered Long Term Capital Losses as well as Short Terms Capital Losses and the set-off of loss was denied by AO. However, upon further appeal, CIT (A) allows the same. The revenue was further in appeal before Tribunal.

The Tribunal observed that though losses arising out of transfer of equity shares and preference shares would be allowable to the assessee but share application money could not be considered as Capital Asset within the meaning of Sec.2(14) of the Act. The issue raised was whether share application money could be considered as capital asset or not. The Tribunal held that the share application money as transferred/assigned by the assessee would constitute a ‘Capital Asset’ within the meaning of S.2 (14) of the Act. It does not fall under any of the exclusions,hencethe losses incurred was allowable to the assessee.

DCIT vs. M/s. Morarjee Realities Ltd.

(ITA No. 2343/Mum/2009, Bench “F” dated: 15/12/2020, AY 2004 – 2005 Mumbai Tribunal)

Unreported Decisions – ST – December 2020

By Vinay Kumar Jain & Sachin Mishra, Advocates

1. Whether Proviso to Section 50 of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) is retrospective in operation even as the Notification brought it into effect prospectively?

Facts and Pleading: Section 50 of the CGST Act deals with levy of interest on delayed remittance of the output GST liability. Section 100 of the Finance (No.2) Act, 2019 inserted a Proviso to Section 50 which stated that interest is leviable only on that portion of output liability which is discharged by way of cash. The date on which the said amendment would become effective was not specified. Later, in the minutes of the 39th GST Council meeting where the recommendation to insert the Proviso was discussed, it was stated that the amendment would be retrospective w.e.f. 1.7.2017. Subsequently, vide Notification No. 63/2020-Central Tax, dated 25.8.2020, the Central Government notified 1.9.2020 as the date on which the Proviso would come into force. This led to doubts and apprehension in the industry. The Central Board of Indirect Taxes and Customs (‘CBIC’) issued a Press Release dated 26.8.2020 stating that the notification was issued prospectively only to get over technical limitations and the decision of the GST council in the 39th meeting would be given full effect. The GST Authorities had issued notices to the assessees levying interest on the total output liability including the portion discharged by way of Input Tax Credit (‘ITC’). In case of many assessees, no opportunity was granted before confirming the levy of interest and proceedings to recover interest by attachment of bank accounts were resorted to. The issue before the Madras High Court was thus, on the effective date of application of the Proviso to Section 50 of the CGST Act.

The Assessees argued that the credit was available even before output tax liability arose and hence the question of delay does not arise. Interest is a measure of compensation and since ITC is already available in the electronic ledger, there is no question of the same being due to the revenue. No opportunity was granted before raising the impugned demand and consequential proceedings. The Assessees also argued that the Proviso has been inserted to set right an anomaly and is therefore retrospective in operation. The Assessees relied on the decision of Madras High Court in Refex Industries Limited v. Assistant Commissioner, decision dated 6.1.2020 in W.P. No. 23360 & 23361 of 2019 wherein it was held the proviso to be applicable retrospectively.

The Revenue argued that Section 41 of the CGST Act provides that the entitlement to credit is only with the filing of return on self-assessment basis. Thus, same cannot be availed of till such time a return is filed by an assessee. As per Section 49 of the CGST Act, only when a credit entry is made in the electronic credit ledger the entitlement to avail the same arises. The effective date of applicability of Section 100 of the Finance (No.2) Act, 2019 was not notified when the decision in Refex Industries was rendered. Thus, the decision is of no benefit to the assessee. The Revenue further argued that the Telangana High Court in Megha Engineering and Infrastructure Ltd. v. Commissioner of Central Taxes, Hyderabad [W.P. No. 44517 of 2018] has held that liability to pay interest is on the total output liability including that portion discharged by utilising ITC. The Revenue relied on a clarification which was issued by the CBIC bearing No. 20/16/07/2020-GST, dated 10.2.2020 to the effect that liability to interest would arise on total amount of tax liability as revealed in the GST return.

Judgment: The Hon’ble High Court held that the Proviso to Section 50 of the CGST Act is retrospective in operation notwithstanding the notification bringing it into effect from 1.9.2020. Thus, interest is leviable only on that portion of the output GST liability discharged belatedly by way of cash with effect from 1.7.2017. The Hon’ble High Court also held that the decision of the Madras High Court in the case of Refex Industries, has dealt with this very issue and held in favour of the Petitioner. The Hon’ble High Court held that the Department is enriching itself doubly by, on the one hand, holding in its coffers the available credit and on the other, seeking the payment of interest upon the same sum. It is settled that where a Proviso was designed to eliminate unintended and prejudicial consequences which would cause hardship to a party, such a Proviso should be seen to be remedial and one that mitigated the prejudice caused from inception. Moreover, interest is intended to compensate the revenue for loss of capital. In the present case, there is no loss insofar as the revenue is in possession of the credit which is as good as cash. The decision of the Telangana High Court in Megha Engineering is dated 18.4.2019, i.e., long prior to the amendment made to Section 50 by insertion of the Proviso and the clarifications issued by the GST Council and CBIC. The Hon’ble High Court held that this entire controversy has now been settled by the CBIC vide its Circular in F.No. CBIC 20/01/08/2019-GST, dated 18.9.2020 where it has reiterated that the amendment by insertion of Proviso of Section 50 of the CGST Act is intended to be retrospective and thus, recovery of interest will only be on net cash tax liability from 1.7.2017. The Hon’ble High Court observed that the Centre, the State and the CBIC are in agreement that the operation of the Proviso of Section 50 should only be retrospective and the interpretation to the contrary by the authorities constituted under the CBIC is misplaced. Further, on perusal of the minutes of 31st GST council meeting dated 22.12.2018, minutes of 35th GST Council meeting dated 21.6.2019, minutes of 39th GST Council meeting dated 14.3.2020, press release of the GST Council post the 39th meeting and the CBIC press release dated 26.8.2020, the Hon’ble High Court held that it is clear that the amendment is intended to be retrospective in nature.

M/s. Maansarovar Motors Private Limited and Ors. v. Assistant Commissioner and Ors., Madras High Court decided on 29.09.2020 in W.P. Nos. 28437, 29998, 31081 of 2019.

2. Whether Rule 5A of the Service Tax Rules, 1994 saved and authorities have power under Section 174(2)(e) of the CGST Act, 2017 to institute any investigation, inquiry, verification, assessment proceedings, adjudication, etc. after the enactment of CGST Act, 2017?

Facts and Pleading: M/s. Vianaar Homes Private Limited (hereinafter referred to as ‘the Petitioner’) is inter alia engaged in the business of construction of housing complex. On 21.1.2020, the Petitioner was visited by officers of CGST, Audit II and required to produce some documents and information regarding to several group of companies of the Petitioner, to which the Petitioner complied. This process of visitation was repeated and it seemed that the process of audit and verification proceedings had begun. Aggrieved by this the Petitioners challenged the letter that commenced the audit process by the Respondents.

The Petitioner contended that the Respondents have exercised powers beyond their jurisdiction under Rule 5A of Service Tax Rules, 1994 and are not proper officers. The Petitioner also contended that the Section 25 of the General Clauses Act, 1897 isn’t applicable since the Central Goods and Services Tax Rules, 2017 have been framed with effect from 22.6.2017 and supersede Service Tax Rule, 1994. The Petitioner further contended that since no obligation or liability has been accrued or incurred and no right of privilege has been acquired by the Respondents, Section 6 of the General Clauses Act, 1897 cannot save the Rule 5A of the Service Tax Rules, 1994. The Petitioner contended that since the proceedings were not instituted at the time of repeal, Section 174(2)(e) of CGST Act cannot save the current proceedings and no service tax was due from Petitioners. The Petitioner further contended that the duty, tax etc. that is within contemplation of the saving clause is only that which falls within the ambit of section 72 & 73 of the Finance Act, 1994 and Rule 5A proceedings are in the nature of a roving enquiry that would not result in tax becoming due, and, therefore, cannot be resorted to in the facts of the present case.

The Respondents contended that the arguments advanced by the Petitioners have already been considered and dismissed in the case of Aargus Global Logistics Pvt. Ltd. v. UOI, 2020-TIOL-593- HC-DEL-ST wherein it has been held that Rule 5A of Service Tax Rules, 1994 survives the CGST Act. The Respondents contended that by virtue of Section 3 of CGST Act, CGST officers are vested with the right to exercise powers under the Central Excise Act/Finance Act. It was further contended that the legislature intent cannot be to overlook the cases where there has been a duty evasion by an assessee prior to coming into force of the CGST Act, and the adjudication process for determining the said evasion has not commenced. The Respondents contended that the saving clause was imported for the very reason to assess the cases like the present one.

Judgment: The Hon’ble High Court has held that Rule 5A of Service Tax Rules, 1994 was saved even after the omission of Chapter V of the Finance Act, 1994. The Hon’ble High Court has held that the proceedings which formed the subject matter of Service Tax Rules, 1994 cannot be ignored just because the new law was implemented simultaneously with the repeal of old rules. If audit/verification would lead to any tax not paid or short paid, the adjudicatory process would necessarily follow. The Hon’ble High Court relied on the judgement of State of Punjab vs Harnek Singh, (2002) 3 SCC 48 and went on to look at the intention of legislature behind including the saving clause and came to conclusion that unless a different intention appeared the repeal of an act wouldn’t affect anything duly done or suffered. After determining the legislative intent for replacement of acts and looking at the articulation of Section 6 and Section 24 of the General Clauses Act, 1897 and the saving clause of CGST Act, the Hon’ble High Court has held that the Rule 5A of Service Tax Rules, 1994 is saved even though Chapter V of the Finance Act, 1994 is omitted.

M/s. Vianaar Homes Private Limited Vs. Assistant Commissioner (Circle-12), Central Goods & Services Tax, Audit-II and Ors. High Court of Delhi, decided on 03.11.2020 in W.P. (C) 2245/2020 and CM Appl. 7832/2020.

3. Whether levying of Service Tax on the Appellant under the category of “Banking and other Financial Services” on the amounts/value charged by the foreign bankers while delivering their inward remittance in foreign currencies to the Indian Bankers of the Appellant valid? Whether the services received by the Appellant from overseas companies for receipt of clinical or non-clinical overviews related to marketing the pharmaceutical goods manufactured and exported by the Appellant fall under the category of “Scientific or Technical Consultancy Services”?

Facts and Pleading: M/s. Aurobindo Pharma Ltd. (hereinafter referred to as ‘the Appellant’) is inter alia engaged in manufacturer of bulk drugs as well as providing of various services. (i) The export sale proceeds from their overseas customers are collected by the Appellant’s Indian Banker. The Indian Banks, who collect the said amount for the Appellant, in the process are required to pay certain charges to the foreign banks who transfer the funds to Indian Banks. (ii) The Appellant is also receiving consultancy from overseas companies with regards some clinical and non-clinical overviews which are required to be enclosed as part of the application to be filed before the Regulatory Authorities in various European countries for the purpose of marketing the pharmaceutical goods manufactured and exported by the Appellant.

The department has alleged that (i) service tax is payable under the category of “Banking and other Financial Services” on the amounts/value charged by the foreign bankers while delivering their inward remittance in foreign currencies to the Indian Bankers of the Appellant. The department has also alleged that (ii) the Appellant is liable to pay service tax under reverse charge mechanism on the charges paid to overseas companies for the aforesaid clinical and non-clinical overviews under “Scientific or Technical Consultancy Services”.

The Appellant contended that (i) even though the Appellant does not receive the entire amount of sale proceeds, but certain charges are deducted in receiving the sale proceeds as collection charges by the foreign bankers having tie-up with the Indian Banks, such charges cannot be said to be service charges recovered from the Appellant by the foreign banks. Thus, there is no relation of service provider and service recipient in the present case and hence Appellant cannot be chargeable to service tax under “Banking and other Financial Services”. The Appellant relied upon Green Ply Industries Ltd., 2015 (38) STR 605 (Tri-Del). The Appellant submitted that (ii) they have already paid Service Tax for the period from 1.6.2007 onwards under the category of ‘Management of Business Consultancy Service’ and such payment is not disputed by the Department and hence, same cannot be classified under “Scientific or Technical Consultancy Services”. The Appellant further submitted that overseas companies provide the services which are in nature of overviews and do not involve application of pure sciences for conducting research on samples of pharmaceutical products. Such services are not used for any scientific or development purposes but to meet the regulatory objective of the European Union in marketing their products. The Appellant argued that overseas companies are not Technology or Scientific organization but are a consultant firm engaged in providing regulatory compliance related services in Europe.

Judgment: (i) The Hon’ble CESTAT relied on Green Ply Industries Ltd., (supra) wherein it was observed that export sale proceeds from overseas customers are collected by appellants’ Indian Banker and even though appellants do not receive entire amount of sale proceeds, but certain charges are deducted in receiving sale proceeds as collection charges by foreign bankers having tie-up with Indian Banks, such charges cannot be said to be service charges recovered from appellants by foreign banks. The Hon’ble CESTAT held that there is no relation of service provider and service recipient in the present case and hence, amount deducted by foreign banks in transferring funds from overseas customers to Indian Bank, who ultimately passed on amount to Appellant cannot be chargeable to service tax under category of “Banking and other Financial Services”. (ii) The Hon’ble CESTAT relied upon IPCA Laboratories, 2019 (21) GSTL 502 (Tri-Mum) to held that when such services are provided for marketing of the product in the overseas market to meet the regulatory requirement, the same cannot fall under the category of “Scientific or Technical Consultancy Services”.

M/s. Aurobindo Pharma Ltd. vs. CCE & ST, CESTAT, Hyderabad, decided on 9.9.2020 in Service Tax Appeal No. 26923 of 2013.

4. Whether service tax paid on premium paid to DICGC for getting insurance on depositor’s accounts is eligible for credit under CENVAT Credit Rules, 2004? Whether CENVAT credit of the service tax paid on the commission paid to the brokers for underwriting the government securities etc. and for making investments in securities to maintain mandatory SLR as per the Banking Regulation Act, 1949 is admissible?

Facts and Pleading: M/s. Bank of America (hereinafter referred to as ‘the Appellant’) is a scheduled commercial bank. In order to provide financial services certain statutory requirements are imposed on the banks. (i) One such condition is deposition of amount with the Deposit Insurance Credit Guarantee Corporation (‘DICGC’) for getting insurance on depositor’s accounts. Service tax is charged on the amount that is paid as premium to the DICGC for which credit can be claimed later as CENVAT. (ii) The Appellant are also authorized by the Reserve Bank of India as a primary dealer (PD), to underwrite government securities. In addition to earning interest and trading profits on these government securities, Appellant also get underwriting commission which is subject to service tax. As per Section 11(2)(b)(ii) of the Banking Regulation Act, 1949, Appellant is statutorily required to deploy 20 to 25% of their funds in Government Securities and are also require to maintain mandatorily prescribed Statutory Liquidity Ratio (SLR). For the purpose of these the Appellant avail the services of stock brokers to buy and sell these government securities in open market.

(i) The Appellant argued that issue in respect of admissibility of CENVAT Credit of the service tax paid on the premium paid to DICGC, by the banks, has been settled by the larger bench of the tribunal in case of South Indian Bank, 2020-TIOL-861-CESTATBANG- LB, holding that CENVAT Credit is admissible. The Appellant also relied upon DBS Bank Ltd, Appeal No ST/89524/2018 decided on 07.09.2020, Yes Bank Ltd, Appeal No ST/86654/2016, decided on 15.09.2020 and IndusInd Bank, Appeal No ST/86705/2016 decided on 29.09.2020 wherein aforesaid decision of Larger Bench was followed. (ii) The Appellants relied on PNB Metlife India Insurance Co Ltd, 2015-TIOL-1097-HC-KARST and Reliance Industry Ltd, 2016 (1) TMI 19 CESAT Mumbai, to argue that the service tax paid by the Appellant will be admissible because it was paid on availing the services mandated by the RBI of maintaining capital adequacy or maintenance of SLR as per Banking Regulation Act, 1949. The Appellant further argued that the commission paid for under writing by the stock broker is a statutorily mandated activity. The Appellant also submitted that since the services of stock broker is essential for providing underwriting services to the RBI and also for maintaining prescribed SLR, there being a direct relation and nexus between the input and output services, the CENVAT Credit availed by Appellant on the commission paid to the brokers will be admissible.

(i) On the first issue, the department merely stated that they await confirmation from concerned Commissionerate on whether any appeal has been filed against the said judgment. (ii) The department contended that the services claimed by the Appellant to be taken by the broker are not in relation with providing of output services. Therefore, the service tax paid on brokerage commission will not be admissible as CENVAT Credit as it fails to fulfill the definition of input service under Rule 2(l) of the CENVAT Credit Rules, 2004. The department alleged that the an act of sale of unsubscribed government securities after completion of under writing is simply trading and not related with input service required for output service. The department further contended that the objective of maintaining SLR is to maximize profit and not to provide service to their clients which means it is an investment not related to output service. Therefore, the service tax paid on brokerage or commission cannot be said to be an input service for providing the output service.

Judgment: The Hon’ble CESTAT held that baking companies provide two different services that is deposit and lending, these two streams are distinctively recognized by the law as well and DCIGC insures only the deposits and not lending. That being so, as per the Hon’ble CESTAT, the “business of banking” cannot be said be said to be insured under the DCIGC. The Hon’ble CESTAT held that the manner in which the scheme operates is to mitigate the risk faced by the depositor while making the deposits with the bank and not the risk which bank or banking business incurs. The Hon’ble CESTAT relied on Dilip Kumar and Co – 2018-TIOL-302-SC-CUSCB, wherein a five-member bench of Hon’ble Apex Court has favored the strict interpretation of the fiscal statue. As per Hon’ble CESTAT, the provisions of the Finance Act, 1994 and the CENVAT Credit Rules 2004 should be considered in the light of the said the principles of interpretation as laid down by the Apex Court in the above referred decision. As per Hon’ble CESTAT, the larger bench has while deciding the case of South India Bank (supra), relied heavily on the decision of the Karnataka High Court, in case of PNB Metlife Insurance (supra) which was related to insurance of the bank. Hon’ble CESTAT is of the view that by extending the benefit by referring to insurance of the bank, and the banking business, may not be the justified approach as per this decision. In their view the matter needs reconsideration, in light of this decision of the Hon’ble Apex Court and hence, Hon’ble CESTAT has referred the issue again to Larger Bench for reconsideration.

M/s Bank of America Vs Principal Commissioner, CESTAT, Mumbai, decided on 2.11.2020 in Service Tax Appeal No. 87659 of 2016.

Unreported Decisions – December 2020

By Ajay R. Singh, Advocate

1. Penalty u/s. 271(1)(c) – Bogus Purchase – Estimation no penalty can be levied

The assessee company wasengaged in the business of Builder and Contractor filed its ROI on 28.09.2012 . Assessment was completed 143(3) of the Act on 18- 03-2015, upon making addition of ₹ 49,54,960/- being income calculated on total purchase of ₹ 1,90,63,350/- u/s. 69C of the Act in the absence of verification/non-production of bills/vouchers by the assessee. Penalty proceeding was initiated u/s. 271(1)(c) of the Act .

In appeal, quantum appeal the Ld CIT(A reject the books of accounts and restricted the addition to the tune of ₹ 19,19,401/- applying GP ratio @ 7.3% being average of preceding two years.

The Ld. AO imposed penalty to the tune of ₹ 5,93,095/- on the count of furnishing inaccurate particulars of income of the assessee. In appeal, the same was confirmed by the ld CIT(A) .

The Hon. ITAT observed that the ld CIT(A) while reducing / restricting the addition to the tune of ₹ 19,19,401/- rejected the books of accounts u/s. 145(3) r.w.s 144 of the Act; applied GP ratio @ 7.3% being average of preceding two years as best of his judgment. Thus it is a trite law that penalty cannot be imposed on 271(1)(c) on an estimated income and hence, the penalty is not sustainable and liable to be deleted.

KBC Estates Pvt Ltd vs ITO

[ITA 6790 / DEL / 2019 Bench SMC -1 ; dated: 27.11.2020 AY: 2012-13. Delhi Tribunal]

Unreported Decisions – ST – November 2020

By Vinay Jain & Sachin Mishra, Advocates

1. Whether the Assessee is entitled to utilise and set off accumulated unutilised amount of Education Cess (EC), Secondary and Higher Education Cess (SHEC) and Krishi Kalyan Cess (KKC), (all jointly referred to as the “Cess”) against the Output GST Tax Liability after the switch over of Indirect Taxation System to GST Regime with effect from 01.07.2017?

Facts and Pleading: The issued involved in this case is about the set off, adjustment or utilisation of the Input Tax Credit of Cess paid at the time of manufacture or import by the Assessee, which provides Technical and Call Centre Services all over the country, against the Output GST liability under the provisions of Central Goods and Service Tax Act, 2017 (CGST Act, 2017). The Ld. Single Judge of the Hon’ble High Court decided the said issue in favour of the Assessee and the same has been challenged in this writ appeal. The Revenue claimed that with the levy of Cess having been dropped in the year 2015 by the Finance Act, 2015, the unutilised amount of Education Cess (EC) and Secondary and Higher Education Cess (SHES) which could not be set off by the Assessee during the contemporary period prior to 30.06.2017, cannot be allowed to be carried forward under the transitory provisions of Section 140 of the CGST Act, 2017. The Revenue submitted that it became a dead claim of the Assessee and since the levy of Cess was not continued after 2015 nor such levy was subsumed in the listed 16 taxes which were subsumed under the GST law, the credit in respect of such Cess could not be claimed against the Output GST liability. The Revenue further claimed that such unutilised Cess could not stand at parity with unutilised Input credit of specified excise duty and therefore, the claim of the Assessee in this regard was misconceived. The Revenue further submitted that Section 140(1) of the CGST Act, 2017 and Section 140(8) of the CGST Act, 2017 signifies an implied lapse of the availed Cenvat Credit of Cess which were availed and lying unutilised in earlier regime and thus cannot be transitioned into the GST Regime.

The Assessee argued that as per Cenvat Credit Rules, 2004, the Assessee had already taken or availed the credit of the EC and SHEC paid by him on the inputs and therefore, the right to utilise the same against the Output Tax Liability was a vested and indefeasible right of the Assessee and could not be taken away by the Legislature when a switch over was made to GST Regime with effect from 01.07.2017. The Assessee further argued that the amendment to Section 140(1) by CGST (Amendment) Act, 2018 with retrospective effect from 01.07.2017 by insertion of words “of eligible duties” in Section 140(1) of the CGST Act, 2017 and the words “eligible duties and tax” did not affect Section 140(8) of the CGST Act, 2017 as no such similar insertions were made in Section 140(8) of the CGST Act, 2017. The said Sub-section (8) of Section 140 independently covers the case of the present Assessee which entitled him to take such credit of the EC and SHEC. The Assessee further argued that such Cess was collected in the form of duty and taxes only and therefore, even though they were imposed by the Finance Act, 1994 the collection of levy was in the nature of duty or tax and the same was liable to be set off and utilised against the Output Tax Liability. The Assessee also submitted that Explanation 1 and 2 of Section 140 of the CGST Act, 2017 clearly stipulated and while Explanation 1 talks of the expressions “Eligible Duties” in Sub-sections (1), (3), (4) and (6) of Section 140, Explanation 2 talks of expressions “Eligible Duties and Tax” in Sub-sections (1) and (5), under the specified enactments mentioned in Explanations 1 and 2 and since the EC and SHEC were not mentioned in those Explanations 1 and 2, therefore, the Cess did not fall within the ambit and scope of “Eligible Duties” or “Eligible Duties and Taxes” and the claim of the Assessee with respect to the set off could not be denied on the anvil of the said expressions. The Assessee also submitted that the CGST (Amendment) Act, 2018 insofar as it amended Explanations 1 and 2 to Section 140 were not yet enforced and would be so enforced from a date which was yet to be notified and therefore, the Assessee’s claim under Section 140(8) of the Act could not be defeated taking help of Explanation 3 as well. Explanation 3 was inserted in Section 140 also by CGST (Amendment) Act, 2018, with retrospective effect from 01.07.2017 when GST Regime was made operational.

Judgment: The Hon’ble High Court held that the Explanation 1 to Section 140 confines “Eligible Duties” to seven specified duties. Therefore, only the seven specified duties as “Eligible Duties” in respect of inputs held in stock on the appointed date will be eligible to be carried forward and adjusted against GST Output Tax Liability with reference to Explanation 1, Cess are absent from the seven categories in Explanation 1. Therefore, the Hon’ble High Court observed that on a plain meaning, such Cess in question cannot be inserted in Explanation 1 to cover them for being carried forward with reference to Explanation 1 which applies for specified four Sub-sections of Section 140 of the CGST Act, 2017. The addition of words “and Taxes” with “Eligible Duties” in Explanation 2 is only on account of addition of “Service Tax” in Explanation 2 which specifies eight duties and taxes for set off. The Hon’ble High Court further observed that merely because the assessee has “taken” in his Electronic Credit Ledger the amount of such Cess, it does not entitle him to utilize the said unutilised amount of such Cess against the Output GST Liability. The “taking” of the input credit in respect of EC and SHEC in the Electronic Ledger after 2015 does not even permit it to be called an input Cenvat Credit and therefore, mere such accounting entry will not give any vested right to the Assessee to claim such transition and set off against such output GST liability. The Hon’ble High Court observed that carry forward in Electronic Ledger and filing of Form TRAN-1 will not confer any such right on the Assessee. Accordingly, the Hon’ble High Court held that the learned Single Judge erred in allowing the claim of the Assessee under Section 140 of the CGST Act, 2017.

ACCGST & CE Vs Sutherland Global Services Pvt Ltd, High Court of Madras decided on 16.10.2020 in Writ Appeal No. 53 of 2020.

Sutherland Global Services Pvt Ltd

2. Whether the construction of Traffic and Transit Management Centre for Bangalore Metropolitan Transport Corporation would be liable to service tax under the category ‘Works Contract Services’ or would be excluded from the ‘Works Contract Services’ for being a ‘transport terminal’?

Facts and Pleading: M/s. B. G. Shirke Construction Technology Private Limited (hereinafter referred to as the ‘Appellant’) is a company duly engaged in construction of various infrastructure projects across the country. Appellant entered into contract dated 30.7.2008 with Bangalore Metropolitan Transport Corporation (hereinafter referred to as “BMTC”) for construction of a Bus Transport Terminal at Shantinagar, Bangalore. The contract for construction of Bus Transport terminal was composite contract involving supply of materials as well as labour. Accordingly, sales tax was also paid under Karnataka VAT on supply of materials in Works Contract. The Appellant did not pay service tax on the count that services provided to BMTC amounted to construction of “Transport Terminal” and the same was excluded from the scope of Works Contract Services.

The department alleged that the present transaction is liable to service tax under the category ‘Works Contract Services’ as the construction of Bus Transport Terminal is not excluded from the ambit of “Works Contract”. According to department, the BMTC has constructed the Transport Terminal with the main purpose of resolving the traffic congestion and also to raise fixed source of income, by way of letting out major portion of Terminal to private parties on Lease Rental basis. Therefore, construction of Terminal is undertaken for commercial purposes.

The Appellant argued that the transaction in the present case is one of construction of “Transport Terminal” and hence the same is excluded from the scope of “Works Contract  Service”. The Appellant further argued that independently the construction of Bus Terminal will not be covered under clause (ii)(b) to Explanation to Section 65(105)(zzzza) of the Finance Act, 1994. The Bus Terminal is not constructed “primarily for use of commerce or industry”. The Appellant also submitted that assuming the services provided by the Appellant are liable to Service Tax, in terms of Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007, the Appellant would be eligible for the benefit of the composition rate.

Judgment: The Hon’ble CESTAT observed that the generic expression ‘transport terminal’ must be read in the context of its usage for servicing means of public transport. The Hon’ble CESTAT held that even though airports are separately enumerated in the exclusions, it too is a transport terminal as the distinguishing characteristic of such facilities is connectivity, interface and buffer. Further, Hon’ble CESTAT observed that the aforesaid buffer for stepping-up or stepping down to capacity of the next level of interface, is constructed to offer a bouquet of services and goods to passengers, during the waiting time. Therefore, Hon’ble CESTAT held that the utilisation of built-up space by commercial entities does not diminish from the essential purpose of such terminals. The Hon’ble CESTAT observed that traditionally as well, every bus terminal has outlets serving the passengers. The Hon’ble CESTAT held that an artificial delineation of space by the tax authorities without any legislative intent is not tenable. Accordingly, the Hon’ble CESTAT held that in the absence of any express legislative intent to limit the application of the exclusion of ‘transport terminal’ on the basis of scale of use or scale or access, the aforesaid bus transport terminal constructed by the Appellant will fall within the ambit of said exclusion.

M/s. B. G. Shirke Construction Technology Private Limited v. CCE, CESTAT, Mumbai decided on 27.11.2019 in Final Order No. A/87495/2019.

M/s. B. G. Shirke Construction Technology Private Limited

3. Whether service tax is payable under reverse charge mechanism by an Indian Supplier on the amount deducted by a foreign bank from the invoice value of goods sold by the Indian supplier to foreign customer?

Facts and Pleading: M/s AKR Textiles (hereinafter referred to as ‘the Appellant’) has supplied goods to foreign buyer namely M/s C&A Buying, Germany. The foreign buyer has entered into an arrangement with a foreign bank namely, M/s Amsco Finance Ltd. to make payment to all overseas suppliers including the Appellant. For all the transactions done through it, the foreign bank deducts service fee of 3% from the invoice value of the goods charged by the Appellant. The foreign bank also deducts charges from the sale proceeds towards transfer of foreign exchange to Indian bank which in turn pays to the Appellant.

The department alleged that when the foreign bank deducts the charges towards transfer of foreign exchange to the Indian bank, since the same is deducted from the sale proceeds, it is a service rendered by the foreign bank to the Appellant and that there is a service provider and service recipient relationship between the foreign bank and the Appellant. Therefore, the department alleged that the Appellant is liable to pay service tax on the same under reverse charge mechanism as recipient of service. Similarly, the department also alleged that the Appellant is also liable to pay service tax on the service fee deducted by the foreign bank under reverse charge mechanism as recipient of such service as the Appellant has given consent for such deduction to the foreign bank.

The Appellant submitted that there is no contractual relationship between the Appellant and foreign bank. The Appellant also contended that, as per Notification No. 29/2004-ST dated 22.9.2004, the activity, to be construed, at best, as bill discounting for the period before introduction of ‘negative list’ regime, was exempted. The Appellant further submitted that, for the period thereafter, the said activity is specifically covered under the Negative List under section 66D(n)(i) of Finance Act, 1994.

Judgment: The Hon’ble CESTAT agreed with the Appellant to held that the agreement entered into between the foreign buyers with its intermediary and the consent of the Appellant to deduct of service fee, is a procedural exercise intended only to ensure reconciliation of remittance amount with export value and does not establish any contractual relationship with the Appellant. While setting aside the demand for the period prior to 01.07.2012, the Hon’ble CESTAT relied upon Rogini Garments and Ors v. CCCE&ST, Final Order no. 41819- 41832/2017 dated 29.08.2017 to held that in such cases, services are provided by the foreign bank to the Indian bank and not to the Indian Exporter. The Hon’ble CESTAT also held that the benefit of Notification No. 29/2004-ST dated 22.9.2004 cannot be denied to the Appellant. Further, as regard demand for the period post 01.07.2012, the Hon’ble CESTAT observed that the foreign bank is acting as an intermediary to repatriate the value of export proceeds to the Appellant on behalf of the foreign buyer. Thus, foreign bank is an ‘intermediary’ within the meaning assigned in Place of Provision of Service Rules, 2012 and as the services have been performed in Hong Kong i.e. outside the taxable territory of India, the demand of service tax post 01.07.2012 also fails.

M/s. AKR Textile v. CCE, CESTAT, Chennai decided on 8.10.2020 in Final Order No. 40794-40815/2020.

M/s. AKR Textile

Unreported Decisions – ST – October 2020

By Vinay Jain & Sachin Mishra, Advocates

1. Whether the Assessee is entitled to utilise and set off accumulated unutilised amount of Education Cess (EC), Secondary and Higher Education Cess (SHEC) and Krishi Kalyan Cess (KKC), (all jointly referred to as the “Cess”) against the Output GST Tax Liability after the switch over of Indirect Taxation System to GST Regime with effect from 01.07.2017?

Facts and Pleading: The issued involved in this case is about the set off, adjustment or utilisation of the Input Tax Credit of Cess paid at the time of manufacture or import by the Assessee, which provides Technical and Call Centre Services all over the country, against the Output GST liability under the provisions of Central Goods and Service Tax Act, 2017 (CGST Act, 2017). The Ld. Single Judge of the Hon’ble High Court decided the said issue in favour of the Assessee and the same has been challenged in this writ appeal.

The Revenue claimed that with the levy of Cess having been dropped in the year 2015 by the Finance Act, 2015, the unutilised amount of Education Cess (EC) and Secondary and Higher Education Cess (SHES) which could not be set off by the Assessee during the contemporary period prior to 30.06.2017, cannot be allowed to be carried forward under the transitory provisions of Section 140 of the CGST Act, 2017. The Revenue submitted that it became a dead claim of the Assessee and since the levy of Cess was not continued after 2015 nor such levy was subsumed in the listed 16 taxes which were subsumed under the GST law, the credit in respect of such Cess could not be claimed against the Output GST liability. The Revenue further claimed that such unutilised Cess could not stand at parity with unutilised Input credit of specified excise duty and therefore, the claim of the Assessee in this regard was misconceived. The Revenue further submitted that Section 140(1) of the CGST Act, 2017 and Section 140(8) of the CGST Act, 2017 signifies an implied lapse of the availed Cenvat Credit of Cess which were availed and lying unutilised in earlier regime and thus cannot be transitioned into the GST Regime.

The Assessee argued that as per Cenvat Credit Rules, 2004, the Assessee had already taken or availed the credit of the EC and SHEC paid by him on the inputs and therefore, the right to utilise the same against the Output Tax Liability was a vested and indefeasible right of the Assessee and could not be taken away by the Legislature when a switch over was made to GST Regime with effect from 01.07.2017. The Assessee further argued that the amendment to Section 140(1) by CGST (Amendment) Act, 2018 with retrospective effect from 01.07.2017 by insertion of words “of eligible duties” in Section 140(1) of the CGST Act, 2017 and the words “eligible duties and tax” did not affect Section 140(8) of the CGST Act, 2017 as no such similar insertions were made in Section 140(8) of the CGST Act, 2017. The said Sub-section (8) of Section 140 independently covers the case of the present Assessee which entitled him to take such credit of the EC and SHEC. The Assessee further argued that such Cess was collected in the form of duty and taxes only and therefore, even though they were imposed by the Finance Act, 1994 the collection of levy was in the nature of duty or tax and the same was liable to be set off and utilised against the Output Tax Liability. The Assessee also submitted that Explanation 1 and 2 of Section 140 of the CGST Act, 2017 clearly stipulated and while Explanation 1 talks of the expressions “Eligible Duties” in Sub-sections (1), (3), (4) and (6) of Section 140, Explanation 2 talks of expressions “Eligible Duties and Tax” in Sub-sections (1) and (5), under the specified enactments mentioned in Explanations 1 and 2 and since the EC and SHEC were not mentioned in those Explanations 1 and 2, therefore, the Cess did not fall within the ambit and scope of “Eligible Duties” or “Eligible Duties and Taxes” and the claim of the Assessee with respect to the set off could not be denied on the anvil of the said expressions. The Assessee also submitted that the CGST (Amendment) Act, 2018 insofar as it amended Explanations 1 and 2 to Section 140 were not yet enforced and would be so enforced from a date which was yet to be notified and therefore, the Assessee’s claim under Section 140(8) of the Act could not be defeated taking help of Explanation 3 as well. Explanation 3 was inserted in Section 140 also by CGST (Amendment) Act, 2018, with retrospective effect from 01.07.2017 when GST Regime was made operational.

Judgment: The Hon’ble High Court held that the Explanation 1 to Section 140 confines “Eligible Duties” to seven specified duties. Therefore, only the seven specified duties as “Eligible Duties” in respect of inputs held in stock on the appointed date will be eligible to be carried forward and adjusted against GST Output Tax Liability with reference to Explanation 1, Cess are absent from the seven categories in Explanation 1. Therefore, the Hon’ble High Court observed that on a plain meaning, such Cess in question cannot be inserted in Explanation 1 to cover them for being carried forward with reference to Explanation 1 which applies for specified four Sub-sections of Section 140 of the CGST Act, 2017. The addition of words “and Taxes” with “Eligible Duties” in Explanation 2 is only on account of addition of “Service Tax” in Explanation 2 which specifies eight duties and taxes for set off. The Hon’ble High Court further observed that merely because the assessee has “taken” in his Electronic Credit Ledger the amount of such Cess, it does not entitle him to utilize the said unutilised amount of such Cess against the Output GST Liability. The “taking” of the input credit in respect of EC and SHEC in the Electronic Ledger after 2015 does not even permit it to be called an input Cenvat Credit and therefore, mere such accounting entry will not give any vested right to the Assessee to claim such transition and set off against such output GST liability. The Hon’ble High Court observed that carry forward in Electronic Ledger and filing of Form TRAN-1 will not confer any such right on the Assessee. Accordingly, the Hon’ble High Court held that the learned Single Judge erred in allowing the claim of the Assessee under Section 140 of the CGST Act, 2017.

ACCGST & CE Vs Sutherland Global Services Pvt Ltd, High Court of Madras decided on 16.10.2020 in Writ Appeal No. 53 of 2020.

Sutherland Global Services Pvt Ltd.

2. Whether the construction of Traffic and Transit Management Centre for Bangalore Metropolitan Transport Corporation would be liable to service tax under the category ‘Works Contract Services’ or would be excluded from the ‘Works Contract Services’ for being a ‘transport terminal’?

Facts and Pleading: M/s. B. G. Shirke Construction Technology Private Limited (hereinafter referred to as the ‘Appellant’) is a company duly engaged in construction of various infrastructure projects across the country. Appellant entered into contract dated 30.7.2008 with Bangalore Metropolitan Transport Corporation (hereinafter referred to as “BMTC”) for construction of a Bus Transport Terminal at Shantinagar, Bangalore. The contract for construction of Bus Transport terminal was composite contract involving supply of materials as well as labour. Accordingly, sales tax was also paid under Karnataka VAT on supply of materials in Works Contract. The Appellant did not pay service tax on the count that services provided to BMTC amounted to construction of “Transport Terminal” and the same was excluded from the scope of Works Contract Services.

The department alleged that the present transaction is liable to service tax under the category ‘Works Contract Services’ as the construction of Bus Transport Terminal is not excluded from the ambit of “Works Contract”. According to department, the BMTC has constructed the Transport Terminal with the main purpose of resolving the traffic congestion and also to raise fixed source of income, by way of letting out major portion of Terminal to private parties on Lease Rental basis. Therefore, construction of Terminal is undertaken for commercial purposes.

The Appellant argued that the transaction in the present case is one of construction of “Transport Terminal” and hence the same is excluded from the scope of “Works Contract Service”. The Appellant further argued that independently the construction of Bus Terminal will not be covered under clause (ii)(b) to Explanation to Section 65(105)(zzzza) of the Finance Act, 1994. The Bus Terminal is not constructed “primarily for use of commerce or industry”. The Appellant also submitted that assuming the services provided by the Appellant are liable to Service Tax, in terms of Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007, the Appellant would be eligible for the benefit of the composition rate.

Judgment: The Hon’ble CESTAT observed that the generic expression ‘transport terminal’ must be read in the context of its usage for servicing means of public transport. The Hon’ble CESTAT held that even though airports are separately enumerated in the exclusions, it too is a transport terminal as the distinguishing characteristic of such facilities is connectivity, interface and buffer. Further, Hon’ble CESTAT observed that the aforesaid buffer for stepping-up or stepping down to capacity of the next level of interface, is constructed to offer a bouquet of services and goods to passengers, during the waiting time. Therefore, Hon’ble CESTAT held that the utilisation of built-up space by commercial entities does not diminish from the essential purpose of such terminals. The Hon’ble CESTAT observed that traditionally as well, every bus terminal has outlets serving the passengers. The Hon’ble CESTAT held that an artificial delineation of space by the tax authorities without any legislative intent is not tenable. Accordingly, the Hon’ble CESTAT held that in the absence of any express legislative intent to limit the application of the exclusion of ‘transport terminal’ on the basis of scale of use or scale or access, the aforesaid bus transport terminal constructed by the Appellant will fall within the ambit of said exclusion.

M/s. B. G. Shirke Construction Technology Private Limited v. CCE, CESTAT, Mumbai decided on 27.11.2019 in Final Order No. A/87495/2019.

M/s. B. G. Shirke Construction Technology Private Limited

3. Whether service tax is payable under reverse charge mechanism by an Indian Supplier on the amount deducted by a foreign bank from the invoice value of goods sold by the Indian supplier to foreign customer?

Facts and Pleading: M/s AKR Textiles (hereinafter referred to as ‘the Appellant’) has supplied goods to foreign buyer namely M/s C&A Buying, Germany. The foreign buyer has entered into an arrangement with a foreign bank namely, M/s Amsco Finance Ltd. to make payment to all overseas suppliers including the Appellant. For all the transactions done through it, the foreign bank deducts service fee of 3% from the invoice value of the goods charged by the Appellant. The foreign bank also deducts charges from the sale proceeds towards transfer of foreign exchange to Indian bank which in turn pays to the Appellant.

The department alleged that when the foreign bank deducts the charges towards transfer of foreign exchange to the Indian bank, since the same is deducted from the sale proceeds, it is a service rendered by the foreign bank to the Appellant and that there is a service provider and service recipient relationship between the foreign bank and the Appellant. Therefore, the department alleged that the Appellant is liable to pay service tax on the same under reverse charge mechanism as recipient of service. Similarly, the department also alleged that the Appellant is also liable to pay service tax on the service fee deducted by the foreign bank under reverse charge mechanism as recipient of such service as the Appellant has given consent for such deduction to the foreign bank.

The Appellant submitted that there is no contractual relationship between the Appellant and foreign bank. The Appellant also contended that, as per Notification No. 29/2004-ST dated 22.9.2004, the activity, to be construed, at best, as bill discounting for the period before introduction of ‘negative list’ regime, was exempted. The Appellant further submitted that, for the period thereafter, the said activity is specifically covered under the Negative List under section 66D(n)(i) of Finance Act, 1994.

Judgment: The Hon’ble CESTAT agreed with the Appellant to held that the agreement entered into between the foreign buyers with its intermediary and the consent of the Appellant to deduct of service fee, is a procedural exercise intended only to ensure reconciliation of remittance amount with export value and does not establish any contractual relationship with the Appellant. While setting aside the demand for the period prior to 01.07.2012, the Hon’ble CESTAT relied upon Rogini Garments and Ors v. CCCE&ST, Final Order no. 41819-41832/2017 dated 29.08.2017 to held that in such cases, services are provided by the foreign bank to the Indian bank and not to the Indian Exporter. The Hon’ble CESTAT also held that the benefit of Notification No. 29/2004-ST dated 22.9.2004 cannot be denied to the Appellant. Further, as regard demand for the period post 01.07.2012, the Hon’ble CESTAT observed that the foreign bank is acting as an intermediary to repatriate the value of export proceeds to the Appellant on behalf of the foreign buyer. Thus, foreign bank is an ‘intermediary’ within the meaning assigned in Place of Provision of Service Rules, 2012 and as the services have been performed in Hong Kong i.e. outside the taxable territory of India, the demand of service tax post 01.07.2012 also fails.

M/s. AKR Textile v. CCE, CESTAT, Chennai decided on 8.10.2020 in Final Order No. 40794-40815/2020.

M/s. AKR Textile

Unreported Decisions – ST – October 2020

By Vinay Jain & Sachin Mishra, Advocates

1. Whether supply of SKID equipment to facilitate distribution of gas to consumers will leviable to service tax under ‘Supply of tangible goods for use’ under Section 65(105) (zzzzj) of the Finance Act, 1994?

Facts and Pleading: M/s. Adani Gas Ltd. (hereinafter referred to as the ‘Appellant’) was in the business of distributing Compressed Natural Gas and Piped Natural Gas (“PNG”) to industrial, commercial, and domestic consumers. To facilitate the distribution of gas, the Appellant installed an equipment described as SKID at their customer’s sites. The SKID equipment consisted of isolation valves, filters, regulators and electronic meters. The equipment regulated the supply of PNG and recorded the quantity consumed by the customer, which was then used for billing purposes. The Appellant entered into a Gas Sales Agreement (“GSA”) with the consumers to whom PNG was supplied.

The Revenue alleged that SKID equipment was installed, maintained and repaired by the Appellant at the cost of the customer and neither ownership nor possession of the equipment was transferred to the customer. Therefore, as per Revenue, conditions of ‘supply of tangible goods for use’ under Section 65(105) (zzzzj) of the Finance Act, 1994 were satisfied. Revenue also argued that since the Appellant had not paid VAT for the charges collected on supply of pipelines and the equipment, this transaction must be treated as a service.

The Appellant argued that in the present case, there was no transfer of the right to use the equipment nor was there any element of service in the supply of the equipment therefore, the said supply of SKID equipment will not be covered under ‘supply of tangible goods for use’ under Section 65(105) (zzzzj) of the Finance Act, 1994. The Appellant also argued that the equipment was installed by the Appellant as a seller of gas and was not used by the customer and the contractual rights to the customer, including the right to verify and dispute the bill, must be kept distinct from the use of the SKID equipment. The Appellant also argued that amounts collected under the head of ‘gas connection charges’ were in the nature of interest-free security deposits, which were required to be refunded in part, or in full, depending on the duration of the contract which determined depreciation and they were not collected as a consideration for providing a service.

Judgment: The Hon’ble Supreme Court held that as there was no transfer of ownership or possession of SKID equipment by the assessee to its customers, thus, the ingredient of not transferring the ownership, possession or effective control of the goods under Section 65(105)(zzzzj) of the Finance Act, 1994 was satisfied. The Hon’ble Supreme Court observed that the expression ‘use’ does not have a fixed meaning and the content of the expression must be based on the context in which the expression is adopted. The expression ‘use’ in the present context signified the application of the goods for the purpose for which they were supplied under the terms of the contract. The Hon’ble Supreme Court further observed that the SKID equipment ensured benefit to both seller and customer and the seller was concerned with the precise quantification of the gas supplied while the customer had an interest in ensuring the safety of its facilities and that the billing was based on the correct quantity. The Hon’ble Supreme Court further observed that Section 65(105)(zzzzj) did not require exclusivity of use. The Hon’ble Supreme Court held that the extent of the refund of gas connection charges collected from the consumers depended on their usage and the percentage of refund varied from customer to customer, while the remaining amount was retained by the assessee, as regards the domestic customers, no deposit receipts were provided and accordingly, the Appellant’s argument that the charges constituted a refundable security deposit was hence rejected.

Commissioner of Service Tax, Ahmedabad v. Adani Gas Ltd., Supreme Court Judgment dated 28.8.2020 in Civil Appeal No. 2633 of 2020.

2. Whether the amended Rule 89(5) of the CGST Rules, 2017 is ultra vires Section 54(3) of the CGST Act, 2017 and the Constitution of India? Whether clause (ii) of proviso to Section 54(3) of the CGST Act is ultra vires the Constitution of India?

Facts and Pleading: The Petitioners in the batch of Writ Petitions before the Madras High Court were engaged in businesses wherein the rate of tax on inputs/input services exceeded the rate of tax on output supplies. This resulted in a ‘inverted duty structure’ leading to accumulation of Input Tax Credit (‘ITC’) in their hands. Clause (ii) of proviso to Section 54(3) of the CGST Act provides that refund is allowed where the unutilised credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. The manner in which such refund is allowable is laid down in Rule 89(5) of the CGST Rules. Since its introduction, the Rule has undergone several changes. Aggrieved by the amendment made vide Notification 21/2018-CT dated 18.4.2018 to the extent the refund was not allowed on ITC in respect of input services, the validity of amended Rule 89(5) as being ultra vires Section 54(3) of the CGST Act was challenged while also challenging the constitutional validity of Clause (ii) of proviso to Section 54(3).

The Petitioner argued that Proviso to Section 54(3) ought to be construed by bearing in mind the words of Section 54(3) which states that refund of ‘any unutilised ITC’ would be available. The Petitioner submitted that the proviso acts as an entry barrier and once the entry barrier is crossed, the entitlement to refund would be governed by Section 54(3) and not by the proviso. The Petitioner submitted further submitted that Clause (i) of proviso to Section 54(3) of the CGST Act which deals with refund of unutilised ITC in case of zerorated supplies allows refund of both inputs and input services which indicates that the legislative intent is not to limit such refund only to input goods. Reliance was placed on VKC Footsteps India Pvt. Ltd. v. Union of India [2020 VIL 340 Guj] wherein it was held that the amended Rule 89(5) is ultra vires Section 54(3). With regards to unconstitutionality of Proviso to Section 54 (3), the Petitioner argued that if clause (ii) of proviso to Section 54(3) of the CGST Act is interpreted as being applicable only to assessees who use input goods and not to those who use input services, it would amount to discrimination between persons who are similarly situated by making an invidious classification. Goods and services are treated in identical fashion with regard to all the aforesaid four elements of taxation i.e., taxable event, the taxable person, the rate of tax and the measure of tax. The differentiation between goods and services, in GST legislation, is only from the viewpoint of administrative convenience. In order to uphold the constitutional validity of the Section, the principle of reading down should be resorted to. Thus, the word ‘inputs’ must be read in its wide, common parlance meaning, to include input services as well. The Petitioner argued that as per Article 38 of the Constitution of India, the legislation should be interpreted in such a manner that inequalities are mitigated and this principle is applicable even in the context of tax legislations.

The Department argued that historically, goods and services have been subjected to different treatment and merely because the GST provisions deal with both goods and services, it cannot be concluded that all the benefits that are available to a person who avails input goods should be extended to those who avail input services. The Department argued that the expression ‘where the credit has accumulated on account of rate of tax on inputs’ qualifies and curtails the expression ‘refund of any unutilised input tax credit’ in Section 54(3). The Department argued that the Rule 89(5) merely supplements Section 54(3) (ii) and that it fulfils the purpose of eliminating arbitrariness in determining the entitlement to refund on the basis of Section 54(3)(ii). The Department further argued that the word ‘inputs’ in Section 54(3)(ii) of the CGST Act is intended to carry the meaning ascribed to the said word in Section 2(59) of the CGST Act. The Department further submitted that the Gujarat High Court in the case of VKC Footsteps India failed to consider the proviso to Section 54(3). The Department further argued that the classification of registered persons into those who are entitled to a refund of unutilised input tax credit and those who are not by differentiating between those who procure input goods and input services is legitimate as both the CGST Act as well as the Constitution clearly differentiate between goods and services.

Judgment: The Hon’ble High Court observed that though Section 54(3) allows refund of ‘any unutilised ITC’, clause (ii) of proviso to Section 54(3) uses the words ‘accumulated on account of ’ rate of tax on inputs being higher than rate of tax on output supplies. The Hon’ble High Court held that if the proviso is interpreted merely to be a condition to claim refund of entire unutilised ITC, the words ‘accumulated on account of ’ would become redundant. The Hon’ble High Court observed that the proviso, in addition to prescribing a condition also performs the function of limiting the quantity of refund. Accordingly, Hon’ble High Court held that Rule 89(5), as amended is thus within the rule making power under Section 164 and is in line with Section 54(3). The Hon’ble High Court observed that the unamended Rule 89(5) wherein refund was available on both inputs and input services exceeded the scope of Section 54(3). The Hon’ble High Court further observed that aforesaid decision of the Gujarat High Court did not consider the scope, function and impact of proviso to Section 54(3). The Hon’ble High Court observed that under GST law, goods and services are treated similarly in certain respects but differently in other respects and even with regard to rate of tax, almost all services attract a uniform rate of 18%, whereas goods are taxes at rates that vary considerably. The Hon’ble High Court further observed that refund claim, other than a claim for excessive taxes paid inadvertently on account of the erroneous interpretation of applicable law or the declaration of a provision as unconstitutional is in the nature of a benefit or concession and right of refund is purely statutory and cannot be availed of except strictly in accordance with the prescribed conditions. The Hon’ble High Court held that the Parliament has wide latitude for classification and thus, the non-conferment of the right of refund to the unutilised input tax credit from the procurement of input services cannot be said to be violating Article 14 of the Constitution of India.

Transtonnelstroy Afcons Joint Venture and Ors. v. UOI, Madras High Court Judgment dated 21.9.2020 in WP. No. 8596 of 2019 and other Petitions.

3. Whether re-insurance services are used for provision of insurance services and, therefore, would qualify as ‘input service’ for the Appellant? Whether the amendment to the definition of ‘input service’ in Rule 2(l) w.e.f. 1.4.2012 would affect the eligibility of the Appellant to Cenvat credit on reinsurance services during the relevant period? Whether the Appellant is eligible to avail Cenvat credit of re-insurance service provided by pool member companies under the Insurance Pool?

Facts and Pleading: M/s. Shri Ram General Insurance Company Ltd. (hereinafter referred to as ‘the Appellants’) is engaged in providing general insurance policies like motor insurance, fire insurance, marine insurance and others. The Appellant is also availing reinsurance service from Indian as well as foreign re-insurance companies in respect of these insurance policies and it has been availing Cenvat credit of service tax paid on such re-insurance services.

The department alleged that the re-insurance service is not essential for providing insurance service as the Appellant can provide insurance service without obtaining re-insurance service. The department further alleged that re-insurance services were obtained by the Appellant after issuance of insurance policies to the customers, i.e. after provision of ‘output services’ and thus, the same cannot be said to have been used for rendering ‘output services’. The department argued that re-insurance services pertaining to motor vehicles have been included in the definition of ‘input service’ only by way of an amendment of Rule 2(l) of the Cenvat Credit Rules, 2004 w.e.f. 1.4.2012 and thus, will not qualify as ‘input service’ prior to the said date. Further, with the said amendment, reinsurance services pertaining to other than motor vehicles is also not eligible for credit. The department further alleged that the invoices issued by the pool member companies are not proper documents, as they have been issued without providing any service and without any payment of premium.

The Appellant submitted that re-insurance services are used for provision of insurance services and thus, qualify as ‘input service’ for the Appellant on the count that obtaining re-insurance service is not only a prudent business requirement but also a statutory requirement under the provisions of the General Insurance (Re-insurance) Regulations 2000. In this regard, the Appellant relied upon CCE vs. PNB Metlife India Insurance Co. Ltd., 2015 (39) S.T.R. 561 (Kar.). The Appellants also argued that the amendment in Rule 2 (l) of the Cenvat Credit Rules, 2004 does not affect the eligibility of the Appellant to avail Cenvat credit on re-insurance services. The Appellant submitted that the exclusion clause under ‘input service’, cannot be read to cover re-insurance services since they are not insurance services in respect of a motor vehicle. The Appellants also argued that the Appellant is eligible to avail Cenvat credit on re-insurance services provided by member companies under the Indian Motor Third Party Insurance Pool that has been created under Section 34 of the Insurance Act.

Judgment: The Hon’ble CESTAT held that re-insurance services are used by the insurer for providing output insurance service on the count that the re-insurers have paid service tax on the same and charged the same to the Appellant. The Hon’ble CESTAT observed that without the use of such re-insurance services, it may not be commercially prudent for any insurance company to assume such high risks under the original insurance policies. The Hon’ble CESTAT held that the insurance policy has a direct correlation with the respective reinsurance obtained by the Appellant and therefore, the fact that re-insurance services were obtained by the Appellant after issuance of insurance policies to the customers is irrelevant. The Hon’ble CESTAT further held that the re-insurance service is a statutory requirement and without obtaining re-insurance services, the Appellant cannot be permitted to engage in insurance business. The Hon’ble CESTAT further held that amendment w.e.f. 1.4.2012 under ‘input service’ in rule 2(l) would not affect the eligibility to Cenvat credit on reinsurance services as exclusion clause cannot be read to cover re-insurance services, which are not insurance services in respect of a motor vehicle. In other words, the reinsurance services are insurance of insurance and not insurance of motor vehicles Further, the Hon’ble CESTAT observed that under the pool arrangement, each company pays the reinsurance premium after deducting the amount due from the other member companies and the service tax liability stands discharged on the whole re-insurance premium paid to the other members and therefore, the invoices issued are for provision of service. Therefore, Hon’ble CESTAT held that the Appellant would be eligible to avail the Cenvat credit of service tax paid thereon.

M/s. Shriram General Insurance Company Ltd. v. CCE, Jaipur, CESTAT New Delhi decided on dated 4.3.2020 in Final Order No. 50709-50711/2020.

4. Whether the activity of collection of octroi on entry of goods for consumption and use in the municipal area on behalf of Municipal Corporation of Greater Mumbai will be taxable under ‘port service’ under section 65(105)(zn) of the Finance Act, 1994?

Facts and Pleading: M/s. Mumbai Port Trust (hereinafter referred to as ‘Appellant’) was vested with the responsibility under Mumbai Municipal Corporation (Levy of Octroi) Rules, 1965 to collect octroi on entry of goods for consumption and use in the municipal area for which 3% of such collections was retained as recompense.

According to the department, the said activity will be taxable under ‘port services’ under section 65(105)(zn) of the Finance Act, 1994. The department alleged that the Appellant is not a government/local authority but a trust which is a commercial organisation and therefore cannot provide sovereign function. The department also alleged that the octroi was not a collection of the government but is levied by the local bodies to fund its operations. The department relied upon Kandla Port Trust v. CCE, 2019 (24) GSTL 422 (Tri-Ahmd)] to allege that any fees charged in relation to goods are chargeable to service tax for being within the ambit of ‘port services’.

The Appellant contended that the collection of taxes by local bodies is no less of a sovereign function than that of either the government. Furthermore, the Appellant contended that it merely acts as a pass through for the Municipal Corporation of Greater Mumbai and that they merely retain the administrative expenses towards collection, that otherwise would have been borne by the municipal authority. Therefore, the same cannot be considered as a consideration, arising from offer and acceptance, for rendering of ‘port service’ but mere transfer arrangements between two governments.

Judgment: The Hon’ble CESTAT observed that the collection of octroi for the entry and consumption of specified goods in Greater Mumbai has been legislated under the Mumbai Municipal Corporation Act, 1888 and the Mumbai Municipal Corporation (Levy of Octroi) Rules, 1965. The Hon’ble CESTAT further observed that the Appellant is a statutory authority established under law and subsequently incorporated within the ambit of Major Port Trusts Act, 1963 and the Appellant was one of the three agencies of the Central Government empowered to enforce collection of the octroi. The Hon’ble CESTAT observed that the Appellants are surely undertaking sovereign functions very much similar to the empowerment of the officers of central excise to collect service tax. The Hon’ble CESTAT held that retention of a portion of such collection, is also similar to the allocation of estimates to the field formations of the CBEC for meeting administrative expenses and therefore, same cannot be considered as consideration for rendition of any service. Accordingly, the Hon’ble CESTAT held that the collection of octroi by the Appellant is in pursuance of discharge of sovereign privilege and therefore not taxable.

M/s. Traffic Manager, Mumbai Port Trust vs. CST Mumbai, CESTAT, Mumbai, decided on 23.07.2020 in Final Order No: A/85644/2020.

5. (I) Whether service provided by Hyatt International to Asian Hotels Ltd (hereinafter as ‘The Appellant’) for operation and management of its hotel fall under “management consultant”? (II) Whether Service Tax is leviable on the expenses reimbursed to Hyatt International under ‘business auxiliary service’? (III) Whether amount paid to Hyatt International for maintenance and repair of software will be taxable under ‘maintenance or repair services’ prior to 1.6.2007? (IV) Whether promotional activity undertaken for Hyatt Chain of hotels will be covered under ‘business auxiliary service’? (V) Whether currency conversion charges leviable to Service Tax under ‘business auxiliary services’? (VI) Whether miscellaneous amount received from guests in relation to Business Centre will be covered under ‘convention services’?

Facts and Pleading: (I) The Appellant had entered into agreement with Hyatt International for operation and management of Appellant’s hotel, for which the Appellant paid a fee to Hyatt International. (II) The Appellant had also agreed to reimburse Hyatt International of the expenses incurred by it in running the Hotel. (III) The Appellant had also paid Hyatt International for maintenance and repair of software. (IV) M/s. Hyatt Chain Services Ltd. undertakes certain promotion activities for the Hyatt Chain of hotels (including the Appellant) as a whole and thereafter passes on the cost of the same to various Hyatt hotels on actual basis without any mark up. (V) The Appellants were also collecting currency conversion charges from hotel guests for conversion of currency. (VI) The Appellant received certain miscellaneous amount from guests towards courier, photocopy, lost key, secretarial, etc. in relation to Business Centre.

(I) According to department, the aforesaid service provided by Hyatt International to the Appellant would fall under “management consultant’ service. (II) The department has claimed Service Tax on the expenses reimbursed to Hyatt International under ‘business auxiliary service’. (III) The Department claimed Service Tax on expenses paid towards maintenance of software under ‘repair or maintenance services’ as a service recipient for the period 18.8.2006 to 31.3.2007. (IV) The department alleged that the M/s Hyatt Chain Services Ltd. undertakes certain promotion activities for the Hyatt Chain of hotels which is taxable under ‘business auxiliary service’. (V) Department claimed Service Tax on conversion charges of currency received from hotel guests under ‘business auxiliary services’ as a service provider. (VI) The department claimed Service Tax on the miscellaneous income from Business Centre on the ground that it is part and parcel of ‘convention’ service as a service provider.

(I) The Appellant submitted that since Hyatt International actually operates the Hotel, the service is not covered under ‘management consultant’ service-relied on Basti Sugar Mills Company Ltd. vs. CCE, 2007 (7) STR 431 (Tri-Del) affirmed by Supreme Court in 2012 (25) STR J 154 (SC) and Indian Hotels Company Ltd. vs. CST, 2016 (41) STR 913 (Tri.-Mumbai). (II) The Appellant submitted that the expenses reimbursed are not towards provision of any ‘business auxiliary service’, but are part and parcel of the overall agreement for operation and management of the hotel. The Appellant submitted that such reimbursements are made to Hyatt International on actual basis and do not form part of value of any taxable service-reliance placed on Intercontinental Consultants & Technocrats Private Limited vs. UOI, 2013 (29) STR 9 (Del.) affirmed by Supreme Court in 2018 (10) GSTL 401 (SC). (III) The Appellant contended that maintenance of software is not covered under ‘maintenance or repair services’ prior to 1.6.2007, as ‘computer software’ was introduced only from 1.6.2007 via an Explanation in definition ‘goods’. (IV) The Appellant submitted that M/s. Hyatt Chain Services Ltd. merely undertakes certain promotion activities for the Hyatt Chain of hotels as a whole and thereafter passes on the cost of the same to various Hyatt hotels on actual basis without any mark up. It is merely sharing of joint promotional expenses at a global level. In any case, the relation between the Appellant, other Hyatt hotels and M/s. Hyatt Chain Services Ltd. is not that of a service provider and client. Thus, the activities undertaken by M/s. Hyatt Chain Services Ltd. are not covered under ‘business auxiliary service’. (V) The Appellants claimed that the currency conversion charges cannot be subjected to Service Tax as these charges are received from hotel guests for conversion of currency and service is rendered by the Appellant independently and not on behalf of anybody or in the capacity of an agent. Further, the Appellant also did not even know the purpose for such conversion by customer hence the same cannot be treated as auxiliary to business of the customer. Customer may or may not be using the same for business purpose (VI) The Appellant claimed that miscellaneous amount received from guests do not have any connection with convention centre service and the Appellant had duly discharged Service Tax on amount charged for letting convention centre.

Judgment: (I) The Hon’ble CESTAT held that Hyatt International is not providing any service of a ‘management consultant’ to the Appellant as it cannot be said to be providing any advice, consultancy or technical assistance rather it is itself running the hotel. (II) The Hon’ble CESTAT observed that Section 67 that only such amount is subject to service tax which represents consideration for provision of service and any other amount which is not a consideration for provision of service cannot be subjected to service tax. Further, the Hon’ble CESTAT relied on Intercontinental Consultants Case to held that expenses which are reimbursed, cannot be subjected to levy of Service Tax under ‘business auxiliary service’. (III) The Hon’ble CESTAT relied on Kasturi & Sons Ltd. 2011-TIOL-240-HC-MAD-ST, ‘Computer Software’ was only included via an Explanation to definition of goods w.e.f. 1.6.2007 and thus, any service relating to software would not be subject to levy of Service Tax prior to 1.6.2007 under ‘management, maintenance or repair’ services. (IV) The Hon’ble CESTAT relied on Historic Resort Hotels Pvt. Ltd., 2017-TIOL-3660-CESTAT-DEL and M/s. Gujarat State Fertilizers and Chemicals Ltd. & Anr. Vs. CCE, 2016-TIOL-198-SCST, to held that sharing of expenditure for common facilities cannot be treated as service by one to another and therefore set aside the demand of service tax on promotional activities undertaken by M/s. Hyatt Chain Services Ltd. for the Hyatt Chain of hotels under ‘business auxiliary service’. (V) The Hon’ble CESTAT relied upon M/s. Marudhara Motors, Final Order No. ST/58225/2017 dated 1.12.2017 to held that currency conversion charges were claimed from the customers and since there was no involvement of any third party on whose behalf service could be said to have been provided to the customers, Service Tax could not have been demanded under ‘business auxiliary services’. (VI) The Hon’ble CESTAT observed that the aforesaid miscellaneous charges collected by the Appellant from the hotel guests do not in any manner whatsoever relate to holding of a convention and therefore set aside the demand on the same.

M/s. Asian Hotels Ltd. vs. CST, CESTAT New Delhi, decided on 16.09.2019 in Final Order No. 51223/2019.

Unreported Decisions – October 2020

By Ajay R. Singh, Advocate

1. S. 68 r.w.s. 115BBE : Cash Credit – demonetization of currency – unaccounted sales only profit therefrom could only be taxed as income of assessee:

It is evident from entries found in cash book and from statement recorded from assessee in course of survey that assessee purchased gold in period of demonetization which was obviously for sale to persons on receiving cash from them as the same is normal practice of gold trade. The gold purchased in period of demonetization was towards agreed sale to persons on receiving amount there from those persons. Thus the source of payment for purchase of gold is out of amount received from its sales and so it is to be treated as properly explained. It is only profit on sale of said purchased gold which is income of assessee which was undisclosed income of assessee and the same could only be subjected to tax. It is settled law that in case of unaccounted sales only profit therefrom could only be taxed as income of assessee.

Nawal Kishore Soni vs. ACIT (ITAT Jaipur) dt: September 15, 2020; ITA No. 1307, 1308, & 1309/JP/2019; Assessment Years: 2015-16 to 2017-18

2. S. 56(2)(viib)/Rule 11UA: Fair market value of shares – assessee are free to adopt any one of the methods :

The appellant has challenged the addition of ` 3,96,54,531 u/s. 56(2)(viib) of the Act by the AO on account of issuance of shares on basis of Discounted Free Cash Flow Method instead of Net asset method.

Section 56 allows the assessees to adopt one of the methods of their choice. But, the AO held that the assessee should have adopted only one method for determining the value of the shares. In our opinion, it was beyond the jurisdiction of the AO to insist upon a particular system, especially the Act allows to choose one of the two methods. Until and unless the legislature amends the provision of the Act and prescribes only one method for valuation of the shares, the assessee are free to adopt any one of the methods

Karmic Labs Pvt. Ltd. v/s. ITO, Ward-15(2) (1); ITA No. 3955/Mum/2018 Assessment Year: 2014-15; Mumbai ITAT; dt: 28/07/2020

Unreported Decisions – September 2020

By Ajay R. Singh, Advocate

1. S. 10(38)/68: Bogus Capital Gains from Penny Stocks – third party statement – cross examination not provided:

The Tribunal observed that the primary material to make additions in the hands of assessee was the statement of one Shri Vipul Bhat and the outcome of earch proceedings on his associated entities including M/s. SAL. However, there is nothing on record to establish vital link between the assessee group and Shri Vipul Bhat or any of his group entities. The assessee, all along, denied having known Shri Vipul Bhat or any of his group entities. However, nothing has been brought on record to controvert the same and establish the link between Shri Vipul Bhat and the assessee. The opportunity to cross-examine Shri Vipul Bhat was never provided to the assessee which is contrary to the decision of Hon’ble Supreme Court in M/s. Andaman Timber Industries V/s. CCE (CA No. 4228 of 2006) wherein it was held that not allowing the assessee to cross-examine the witnesses by the adjudicating authority though the statement of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity in as much as it amounts to violation of principal of natural justice because of which the assessee was adversely affected

The AO has not discharged the onus of controverting the documentary evidences furnished by the assessee and by bringing on record any cogent material to sustain the addition. The allegation of price rigging / manipulation has been levied without establishing the vital link between the assessee and other entities. The whole basis of making additions is third party statement and no opportunity of cross-examination has been provided to the assessee to confront the said party. As against this, the assessee’s position that that the transactions were genuine and duly supported by various documentary evidences, could not be disturbed by the revenue .

Dipesh Ramesh Vardhan vs. DCIT (alongwith other appeals) [I.T.A. No. 7648/Mum/2019 dated : 11/8/2020, AY : 2014-15 “D” BENCH, MUMBAI]  

Dipesh Ramesh Vardhan

Unreported Decisions – ST – September 2020

By Vinay Jain & Sachin Mishra, Advocates

1. Who is the recipient of service rendered by Foreign Intermediary Bank in relation to transfer of money relating to exports made by the exporters in India, the exporter on whose behalf the Indian bank acted or the Indian bank itself ?

Facts and Pleading: M/s. State Bank of Bikaner & Jaipur (herein after referred to as ‘The Appellant’) is inter alia engaged in providing banking services to the importers/ exporters by facilitating the settlement of payment between them for import and export of goods/services. In an export transaction from India, the exporter submits the export documents to the Appellant and informs the name and address of buyer’s bank for sending the export documents against acceptance and payment of Bill of Exchange. The Appellant forwards these documents to the Foreign Bank for collection of payment from the importer. If the exporter decides to bear all the bank charges, then the Foreign Bank charges its fees from the exporter for handling of export documents and collection of export proceeds. The foreign bank charges are then recovered from the exporter by deducting the same from the amount collected from the importer. There is no agreement between the Appellant and Foreign Bank. The aforesaid settlement transactions are governed by the URC 522 and UCP 600 protocols issued by International Chamber of Commerce. A trade notice was issued in 2014 inter alia clarifying that the Banks availed the services of the Foreign Bank and were, therefore, liable to pay service tax on the bank charges/commission deducted by the Foreign Bank under the reverse charge mechanism, both before and after July 01, 2012. Based on this a SCN was issued to the Petitioner demanding service tax on foreign bank charges under Reverse Charge Mechanism.

The Appellant argued that the foreign bank charges cannot be considered as ‘consideration’ received by the Appellant and included in the value of services. The Appellant cannot be considered as the recipient of the service provided by the Foreign Bank. The nexus between consideration (i.e. foreign bank charges) and the services provided by the Foreign Bank is established between the Foreign Bank and the exporter/ importer and not between the Foreign Bank and the Appellant Bank. Accordingly, as per the Appellant, the Foreign Bank and the Appellant Bank are co-service providers to the exporters/ importers.

The department argued that the Appellant being service recipient of the services provided by the Foreign Bank, the Appellant is liable to pay service tax on the aforesaid foreign bank charges under reverse charge mechanism. The department alleged that there exists a flow of service chain between the Exporter, the Appellant, the Foreign Bank and the importer, in which each of them is rendering independent service to one another, reliance was placed on CST vs Melange Developers Pvt. Ltd. 2019-TIOL-1684-CESTATDEL- LB. The department further alleged that the Appellant acted as guarantor for the Indian exporter in the financing of international trade, and, therefore, it cannot be a pure agent of the Indian exporter.

Judgment: The Hon’ble CESTAT held that the Appellant provides service to the exporters by sending the export documents to the bank of the importer abroad and collects payment. Thus, the role of the Appellant is to settle the payment relating to export/import. For performance of such activity, the Appellant charges service tax to the exporters. The Hon’ble CESTAT held that the Appellant cannot be said to be the recipient of service for the activities undertaken by the Foreign Banks situated outside India. The Appellant merely acts on behalf of the Indian exporter and facilitates the service. The Hon’ble CESTAT further observed that the Appellant has not paid any consideration to the Foreign Bank and, therefore, the Appellant cannot be said to be the recipient of any service by the Foreign Bank. Thus, the Hon’ble CESTAT held that the since the Appellant is not the recipient of any service rendered by the Foreign Bank, there is no liability to pay service tax on a RCM. Further, the Hon’ble CESTAT relied upon the decision of Madras High Court in BGR Energy Systems Limited, 2019-VIL-574-MADST, wherein the Trade Notice dated 10.2.2014 was examined and it was held that the it cannot be said that the bank of the exporter in India was the recipient of service provided by the Intermediary Bank or the Foreign Bank situated in Iraq. In fact, the Indian Bank of the exporter had only facilitated the service to be rendered by the Foreign Bank for the purpose of providing Bank Guarantee on behalf of the exporter. Accordingly, it was held that the Appellant is not the recipient of the services rendered by foreign bank. Interestingly, the Hon’ble CESTAT has not commented on the question as to whether the Indian exporter is the recipient of the service.

M/s. State Bank of Bikaner & Jaipur Vs. Commissioner of Central Excise & Service Tax, Alwar, CESTAT New Delhi decided on 5.8.2020 in Final Order No. 50737/2020

M/s. State Bank of Bikaner & Jaipur

2. Whether the amended Rule 89(5) of the Central Goods and Services Tax Rules, 2017 (“CGST Rules”) is ultra vires Sections 54(3) and 164(1) of the Central Goods and Services Tax Act, 2017 (“CGST Act”) to the extent it excludes the input service within the ambit of inverted duty structure refund?

Facts and Pleading: M/s. VKC Footsteps India Pvt. Ltd. (hereinafter referred to as the “Petitioner”) is inter alia engaged in manufacture and supply of goods attracting GST @ 5%. Majority of the inputs/input services used by Petitioner attracted GST at the rate of 12% / 18%, thereby resulting in accumulation of Input Tax Credit (“ITC”). By way of Notification No. 21/2018-CT, dated 18.4.2018, a revised formula was prescribed under Rule 89(5) of CGST Rules resulting in denial of refund of credit accumulated on account of “input services”. Further, by way of Notification No. 26/2018-CT, dated 13.6.2018, the said formula was made effective from 1.7.2017. Aggrieved by the same, the Petitioner had challenged the validity of amended Rule 89(5) of CGST Rules as being ultra vires Section 54(3) of CGST Act in as much as it denied refund of ITC accumulated on account of “input services”.

The Petitioner argued that GST being a consumption tax, tax burden is borne only by the final consumer and not the business. In order to avoid cascading effect of taxes in the form of unabsorbed excess tax on inputs with consequent increase in cost of product, a mature GST law provides for refund of accumulated unutilised excess input tax credit. Rule 89(5) of CGST Rules, under the garb of fixing formula for determining pro-rata amount of credit relatable to inverted duty structure turnover vis-à-vis total turnover, has instead, erroneously restricted the refund of ITC to inputs alone. There is nothing either in Section 54(3) of CGST Act or under proviso (ii) to said section to restrict refund to ITC on inputs. Restrictive formula prescribed in Rule 89(5) of CGST Rules, in effect, whittles down the effect of the word “any” employed in Section 54(3) of CGST Act. Such an exercise cannot be considered as a rule “for carrying out the provisions of the Act”, thereby rendering it violative of rulemaking power conferred by Section 164(1) of CGST Act.

Whereas refund of unutilized ITC in respect of tax paid on input services is permitted in case of zero-rated supplies, there is no intelligible differentia supporting rejection of refund of such ITC accumulated on account of inverted duty structure alone. On this count, the amended rule is discriminatory.

The Department argued that Rule 89(5) of CGST Rules only provides the mode of calculation of refund available, and to that extent, there is no embargo placed by Section 54(3) of CGST Act. Rule-making power conferred by Section 164 of CGST Act is worded in the widest possible manner. Therefore, amendment made to Rule 89(5) of CGST Rules is intra vires the provisions of the CGST Act.

Judgment: The Hon’ble High Court held that Sub-section (3) of Section 54 of CGST Act, 2017 provides for claim of refund of “any unutilised input tax credit”. The phrase “input tax credit” is defined in Section 2(63) of CGST Act to mean the credit of input tax. The phrase “input tax” as defined in Section 2(62) of CGST Act means the tax charged on any supply of goods or services or both made to any registered person. The term “input” is defined in Section 2(59) of CGST Act to mean any goods other than capital goods, and “input service” as per Section 2(60) of CGST Act means any service used or intended to be used by a supplier. Thus, “input” and “input service” are both part of the “input tax” and “input tax credit”. Therefore, as per provisions of Section 54(3) of CGST Act, the legislature has provided that registered person may claim refund of “any unutilised input tax credit”. By way of Rule 89(5) of CGST Rules, such claim of the refund cannot be restricted only to “input”, excluding the “input services” from the purview of “input tax credit”. Moreover, clause (ii) of proviso to sub-section (3) of Section 54 of CGST Act also refers to both supply of goods or services and not only supply of goods as per amended Rule 89(5) of the CGST Rules. Intent of the government by framing the rule restricting the statutory provision cannot be the intent of law as interpreted in Circular No. 79/53/2018-GST, dated 31.12.2018. Accordingly, the Hon’ble High Court held that the Explanation (a) to Rule 89(5) which denies the refund of unutilised input tax paid on input services as part of input tax credit accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act, 2017.

M/s. VKC Footsteps India Pvt. Ltd. v. Union of India and others, Gujarat High Court Judgement dated 24.7.2020 in R/Special Civil Application No. 2792 of 2019 and others.

M/s. VKC Footsteps India Pvt. Ltd.

3. Whether Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (“IGST Act”) which deem the place of provision of intermediary service as location of service provider is ultra vires Articles 14, 19, 265 and 286 of the Constitution of India (“Constitution”)?]

Facts and Pleading: M/s. Material Recycling Association of India (hereinafter referred to as the ‘Petitioner’) was an association comprising of recycling industry engaged in manufacture of metals and casting etc. for various upstream industries in India. The members of the association facilitated sale of recycled scrap goods in India and other countries on behalf of their foreign principals. As per Section 2(13) of the IGST Act, the members were regarded as “intermediaries” of the foreign principals. As per Section 13(8)(b) of the IGST Act, since the foreign principal (recipient of the service) is located outside India, the place of supply shall be the location of supplier of services i.e. India. Accordingly, the supply being an intra-state supply, the members were held liable to pay Central Goods and Services Tax (“CGST”) and State Goods and Services Tax (“SGST”).

The Appellants argued that the aforesaid services cannot be regarded as “intermediary services” but are “export of service” as per Section 2(6) of the IGST Act. Being a “zerorated supply” as per Section 16(1) of the IGST Act, they are eligible to claim refund of Integrated Goods and Services Tax (“IGST”) paid in view of Section 16(2) of the IGST Act. As per Article 286(2) of the Constitution, Parliament is not authorized to legislate and artificially assign the place of supply to be within India when clearly the services are being exported out of India. The powers under Article 286(2) are confined within the scope of Article 286(1). Though the intermediary services are rendered outside India, assessees are subjected to CGST and SGST. Further, despite the recipient of services being outside India, the services are still deemed to be rendered within the state. Nature of intermediary services remains substantially same as compared to advisory services. However, the place of supply in case of advisory services is the location of the recipient. When the service remains the same, there appears to be no intelligible differentia as to why they are treated differently. Such differentiation also does not have any nexus with the object sought to be achieved. Entry 12AA of Notification No. 20/2019-Integrated Tax, dated September 30, 2019 exempts services provided by an intermediary when location of both supplier and recipient of goods is outside India. There is discrimination between cases where recipient is in India and where recipient is outside India. The provisions in the service tax regime whereby similar rules were available for intermediary services cannot be applied in GST regime since the term “recipient” is clearly defined in the GST regime which was not the case in the service tax regime. Section 13(8)(2)(b) is against the basic principle of GST being a destination based tax since the tax is leviable in India even though the services are consumed outside India. Section (13)(8)(b) of the IGST Act suffers from incurable defect of vagueness and is therefore, liable to be struck down. The Petitioner further submitted that it contributes to tax cascading and double taxation since the same transaction would be subjected to tax as import of service in the country of the recipient of service. The section suffers from unreasonableness as it creates a deeming fiction for a clear case of export of service which is contrary to the object of GST law.

The department alleged that as per Section 13(8)(b) of the IGST Act, since the place of supply is in India, the transaction cannot be regarded as export of services since the conditions specified in Section 2(6) are not satisfied. Going by the strict interpretation of the aforesaid provisions, the question of violation of Articles 265 and 286 does not arise. The reason for deferential treatment for determining place of supply in case of an intermediary is that an intermediary provides service to both supplier and recipient, and hence, it may not be feasible to apply the general rule by prescribing one person as the recipient. The provisions in GST regime, being in consonance with the provisions in service tax regime, the determination of place of supply in case of an intermediary as location of supplier is a policy decision of the government which cannot be said to be unlawful or violative of the Constitution. Parliament has got wide amplitude to create deeming fictions under taxation matters and to levy tax thereon. Benefits accruing to exporters of services are meant for those who actually export services and not to every other entity which is directly or indirectly associated with the exporter, like an intermediary. Violation of Article 14 of the Constitution is not tenable, because one service cannot be compared with other service to justify Article 14. The challenge on lack of intelligible differentia is also not tenable since it is very much within the powers of the government to categorize goods and services for the purpose of taxation in such manner as it meets the policies and objectives of the government. There are exceptions to the default rule under Section 13(2) of the IGST Act for determining place of supply as specified in Section 13(3) to 13(12) of the IGST Act. This is within the legislative competence as the legislature is free to pick and choose the supply that it intends to tax and the manner in which it intends to tax.

Judgment: The Hon’ble High Court held that the Section 13(8)(b) of the IGST Act is framed by the Parliament in consonance with Article 246A(2) of the Constitution. The legislature thought it fit to consider the place of supply in case of “intermediary services” to be the location of the supplier of services. On a conjoint reading of Sections 2(6) and 2(13) of the IGST Act, person who is an intermediary cannot be considered as an exporter of services because he is only a broker who arranges and facilitates the supply of goods or services or both. On reading Notification 20/2019-Integrated Tax, it can be inferred that Section 13(8)(b) was enacted to levy CGST and SGST and such intermediary services therefore, are kept out of the purview of IGST. There is no distinction between the intermediary services provided by a person in India or outside India. Merely just because the invoices are raised on the person outside India with regard to the commission and foreign exchange is received in India, it would not qualify to be export of services when the place of supply is in India. There is no deeming provision in the present case as submitted by the petitioner, but instead there is a clear stipulation in the Act legislated by the Parliament to consider the location of the service provider of intermediary to be the place of supply. Provision similar to Section 13(8) (b) existed in the service tax regime as well. Therefore, this being a consistent stand of the government, it cannot be treated as “export of services” under the IGST Act. There is no double taxation since the commission paid would not be taxable in the hands of the recipient, but on the contrary, would be entitled to get deduction of such payment by way of expenses.

M/s. Material Recycling Association of India v. Union of India & Ors. Gujarat High Court Judgment dated 24.7.2020 in R/Special Civil Application No. 13238 of 2018 and 13243 of 2018.

M/s. Material Recycling Association of India

4. Whether the expression “quantified” under Section 121(r) of the Finance Act, 2019 for filing of a declaration under Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 (“SVLDRS, 2019”) will also include duty liability admitted in an oral statement prior to 30.06.2019?

Facts and Pleading: M/s. Seventh Plane Networks Private Limited (hereinafter referred to as the ‘Petitioner’) has filed the present Writ challenging the rejection order whereby the declaration filed by the Petitioner under SVLDRS, 2019 was rejected on the ground that the amount of duty involved in the audit had not been quantified on or before the 30.6.2019.

According to the department that petitioner was ineligible to apply under the SVLDRS, 2019 as the amount of duty involved in the audit had not been quantified before 30.6.2019 as the expression “quantified” under Section 121(r) of the Finance Act, 2019 means a written communication of the amount of duty payable under the indirect tax enactment.

The Appellant contended that though audit memo was issued in writing on 2.7.2019, yet the petitioner had accepted the demand on disputed points on 28.6.2019. In this regard, the Petitioner relied upon para 2(v) of Circular No. 1074/07/2019-CX dated 12.12.2019 read with paras 4(a) and 10(g) of Circular dated 27.8.2019 that allow relief under SVLDRS for cases under investigation and audit where the duty involved had been admitted by the assessee/declarant in a statement on or before 30.6.2019.

Judgment: The Hon’ble High Court observed that the that the expression “quantified” in Section 121(r) has been extended /widened by way of para 2(v) of Circular dated 12.12.2019 read with paras 4(a) and 10(g) of Circular dated 27.8.2019. The Hon’ble High Court held that the audit in the present case was concluded on 28.6.2019 and the amount due and payable was not only determined as well as communicated to the petitioner but was also admitted by the Petitioner on 28.6.2019. Accordingly, the Hon’ble High Court was of the view that the duty liability stood admitted in an oral statement by the Petitioner before 30.6.2019 and consequently stood quantified prior to the cut-off date in accordance with the beneficial circulars dated 12.12.2019 and 27.8.2019. The Hon’ble High Court further observed that a liberal interpretation has to be given to the SVLDRS, 2019 and the circulars issued thereunder as their intent is to unload the baggage relating to legacy disputes under the Central Excise and Service Tax and to allow the businesses to make a fresh beginning.

M/s. Seventh Plane Networks Private Limited vs. UOI, High Court of Delhi, decided on 14.08.2020 in W.P.(C) 3934/2020.

M/s. Seventh Plane Networks Private Limited

5. Whether the Appellant is liable to pay Service Tax on Sale of water? Whether the Appellant is liable to pay service tax on the advances received for construction of terminal which in turn was used for bunkering under ‘Renting of Immovable Property Service’?

Facts and Pleading: M/s. United Port Services Pvt Ltd (hereinafter referred to as ‘the Appellant’) is inter-alia engaged in purchase and sale of water at port and the differential of the sale and purchase price is the profit earned by the Appellant. The Appellant has also received some advance from M/s Asian Tanking Pvt Ltd. for construction of terminal which in turn was used for bunkering.

According to the department that the aforesaid sale of water by the Appellant at port falls within the ambit of Port Services under Section 65 (105) (zn) of the Finance Act, 1994. The department has also alleged that the amount was an advance paid by M/s Asian Tanking Pvt Ltd. towards hiring or renting of bunkers and the same is taxable under the Renting of Immovable property service under Section 65 (105 (zzzz) of the Finance Act, 1994.

The Appellant submitted that the Water supply done by the Appellant is actually a sale of water which is outside the purview of the Finance Act, 1994 and was also specifically excluded during a negative list period in view of Section 66D(e) of the Finance Act, 1994. The Appellant submitted that they have purchased the water from their suppliers at a lower price than their sale price and thus earned a profit. Therefore, no service tax can be levied upon them on the value of sale of water. The Appellant further contended that the advances have been received from their customers for construction of a terminal which is to be used for bunkering. The activity has not come to fruition and in terms of their agreement they were entitled to retain the advances received which they did. The Appellant submitted that the merely, because they have received some amount from their customers it does not mean that they are liable to pay service tax on such amounts unless the amounts were received towards rendering of a taxable service.

Judgment: The Hon’ble CESTAT observed that selling goods on their own account to customers does not qualify as a service or else, every merchant in the country should be held to be rendering a service. Thus, the Hon’ble CESTAT was of the considered view that sale of water is not exigible to Service Tax rather it is squarely covered by the definition of purchase and sale of goods. The Hon’ble CESTAT further observed that a plain reading of the definition of port service also shows, it is a service rendered within a port or other port, in any manner. It is not sale of goods (including water) within the port. Many goods may be sold or bought within the port, but all these do not become services merely because the venue of the sales happens to be the port area. Accordingly, the aforesaid demand under Port Services was set aside. Further, the Hon’ble CESTAT held that the Appellant have received amounts as advances for construction of a terminal for bunkering and merely because the Appellant has received some amounts from their customers they do not have to automatically pay service tax unless such amounts are relatable to rendition of a taxable service. Accordingly, as the department failed to show that the aforesaid advance was received for any Renting of Immovable property service, demand on this count was also set aside.

M/s. United Port Services Pvt Ltd vs. CCE, CESTAT Hyderabad, decided on 21.02.2020 in Service Tax Appeal No. 2820 of 2012.

M/s. United Port Services Pvt Ltd.