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Unreported Decisions – ST – September 2019

By Vinay Jain & Sachin Mishra, Advocates

1. Whether demand of service tax on ‘surrender charges’, which are deducted from the fund value as per policy provisions for pre-mature withdrawal from the ULIP scheme is taxable under the category of ‘Management of Investment under ULIP Service’?

Facts and Pleading:
Max Life Insurance Co. India Limited (hereinafter referred to as ‘Appellant’) is in the business of life insurance and provides several products which are broadly classifiable into term plan product, Unit Link Insurance Product (ULIP) etc. Sometimes the policy holder or the insurer opts for pre-mature termination of the policy. In such case, the Appellant levies surrender charges, which is deducted from the fund value or the benefit value accrued in the policy.

For the period 01.10.2008 to 30.06.2010, the department has demanded service tax on surrender charges levied on the surrender of ULIP policy on the count that the surrender charges are nothing but unrecovered expenses as on the date of surrender, which the insurance companies (i.e. the Appellant) had already incurred towards procurement, administration of the ULIP policy and incidental thereto. As regard, the period 01.07.2010 to 30.04.2011, there is no demand. For the period 01.05.2011 to 30.06.2012, the department has demanded service tax on surrender charges under ‘Life Insurance Service’. The department further alleged that surrender charges are similar to pre-closure/fore-closure charges levied by a banker, at the time of fore-closure of loan and hence, taxable.

The Appellant argued that surrender charges do not have any nexus with the provision of service as it is levied on the policyholder for surrender of the ULIP policy. Further, the Appellant submitted that event on which this amount is payable is an act of discontinuance of service and not an act of management of investment under ULIP and hence, not taxable. In this regard, the Appellant also relied upon Reliance Life Insurance Company Ltd. vs. CST, Mumbai-II-2018-TIOL- 1308-CESTAT-MUM and Sriram Life Insurance Company vide Final Order No. A/30187-30189/2019 (Hyderabad) dated 08-02-2019. For the demand for period 2011-12, the Appellant submitted that when there was no change in the coverage of ULIP Management, when surrender charges are related only to ULIP and when surrender charges are accepted to be not taxable under 65(105)(zzzzf) of the Finance Act, 1994, service tax cannot be demanded on surrender charges under ‘Life Insurance Service’. The Appellant submitted that doing so would lead to redundancy of Section 65(105) (zzzzf) of the Finance Act, 1994.

Judgment: The Hon’ble Appellate Tribunal after duly considering the submission of both the sides, held that in view of the Clause (ii) in Explanation to Section 65(105)(zzzzf) of the Finance Act, 1994, service tax is leviable only on the management fee or charges which are either fixed by IRDA or actually levied by the insurer, whichever is higher and hence, service tax is not leviable on surrender charges. The Hon’ble Appellate Tribunal set aside the demand for the period 2011-12 on the count that there was no substantial change in the legislation for the said period and even the department did not demand service tax on surrender charges for the period 2011-12. The Hon’ble Appellate Tribunal further observed that it has also been clarified by the CBEC vide TRU No. 334/1/2010, that the charge pertaining to asset management alone should form the value for taxation in case of ULIP policy. Accordingly, the Hon’ble Appellate Tribunal held that as surrender charges are in the nature of penalty, no service tax can be leviable on the same.

M/s. Max Life Insurance Co. India Limited. Vs. CCE, New Delhi, CESTAT, New Delhi, decided on 21-8-2019 in the Final Order No. 51097/2019.

M/s. Max Life Insurance Co. India Limited.

2. Whether the acquisition of land made by the Appellant for setting up of the Thermal Power Plant by the Joint Venture (JV) Company is to be considered as ‘Renting of Immovable Property Service’ for ‘transfer of surface rights’? Whether the 51% equity stake which has been granted to the Appellant by the Implementation Agreement, in the JV Company, could be treated as “Business Auxiliary Service”? and Whether deployment of officers in the JV Company, would amount to rendition of service under the category of “Business Auxiliary Service”?

Facts and Pleading: Rajasthan State Mines & Minerals Limited (hereinafter referred to as ‘Appellant’) is Government of Rajasthan Undertaking formed under Companies Act, for development and extracting mines and minerals etc. in the State. The Appellant formed a Joint Venture (JV) Company named Barmer Lignite Mining Co. Limited with Raj West Power Limited for carrying out lignite mining in Barmer with 51:49 of equity share respectively. As per the agreement, the Appellant acquired land for setting up of a thermal power plant by the JV Company. The property was initially supposed to be transferred to the JV Company, however, the said transfer was later on withdrawn by the Government. The Appellant also deployed its officers in the JV Company and recovered related expenditure from JV Company on cost to cost basis.

The department alleged that the acquisition of land made by the Appellant for setting up of the Thermal Power Plant by the JV Company is to be considered as ‘Renting of Immovable Property Service’ for ‘transfer of surface rights’. The Department also alleged that the 51% equity stake which has been granted to the Appellant by the Implementation Agreement, in the JV Company, could be treated as “Business Auxiliary Service” (‘BAS’). The Department further alleged that the deployment of officers in the JV Company by the Appellant would amount to rendition of service under the category of BAS on the pretext of giving technical knowledge and other expertise. The Appellant submitted that acquisition of land made by Appellant for setting up of Thermal Power Plant by JV Company is not renting of immovable property rather it is assignment of land. Further, the Appellant submitted that ‘transfer of surface right’ is incidental to the mining activity undertaken by the JV Company and hence not taxable under ‘Renting of Immovable Property Service’. The Appellant also submitted that renting of vacant land for mining activity is specifically excluded from the definition of ‘Renting of Immovable Property Service’. The Appellant submitted that the 51% equity stake of the Appellant in the JV could not be treated as BAS, as the Appellant has not provided any promotion, marketing, sale, etc. to JV Company. Further, Appellant submitted that deployment of officers to JV Company by Appellant would not amount to rendition of service under category of BAS as amount recovered by them are on actual basis.

Judgment: The Hon’ble Appellate Tribunal held that ‘surface right’ emerges out from the mining operations as ‘incidental activity’. The main activity remains ‘mining activity’, which is nothing but ‘benefit arising out of land’. Therefore, same cannot be held to be ‘service’ per se. The Hon’ble Appellate Tribunal set aside the demand of service tax on 51% equity stake granted to Appellant in the JV, under BAS on the count that the department failed to specify the exact entry of BAS under which the same was covered. Hon’ble Appellate Tribunal further held that 51% equity share is like ‘royalty’ which cannot be considered as ‘consideration’ for rendering of any service because it is Appellant’s share of revenue arising out of the JV. Reliance was placed on Mormugao Port Trust vs. Commissioner of Cus., C. Ex. & S.T. Goa -2017 (48) STR 69 (Tri. Mumbai) affirmed by Hon’ble Supreme Court in 2018 (19) GSTL J118 (S.C.). The Hon’ble Appellant Tribunal held that the expenses recovered by the Appellant on actual basis from JV Company, towards deputation of their employee and related expenses, cannot be categorized under the category of BAS. The Hon’ble Appellant Tribunal further held that even otherwise the deputation of employees in the JV company cannot be treated as taxable service under BAS. Reliance was placed on Punj Llyod Ltd. Vs. CST, Delhi-2019 (22) GSTL 85 (Tri. Del.).

M/s. Rajasthan State Mines & Minerals Limited v. CCE, CESTAT, New Delhi, decided on 21-8-2019 in the Final Order No. 51098/2019.

M/s. Rajasthan State Mines & Minerals Limited

Unreported Decisions – ST – August 2019

By Vinay Jain & Sachin Mishra, Advocates

1. Whether manufacturing of beer affixing the Brand name of another entity under a Bottling/Brewing Agreement would be taxable under “Business Auxiliary Services” on the count that it amounts to “in relation to production and processing of goods for or on behalf of the client”? Whether on merger/amalgamation of an undertaking of service provider with the service recipient, ‘Appointed Date’ or ‘Effective Date’ shall be consider to ascertain the taxability of the activity undertaken by such undertaking of service provider to the service recipient?

Facts and Pleading:
M/s SAB Miller Breweries Pvt. Ltd (hereinafter referred to as ‘the Appellant’) has been engaged in the business of brewing and bottling of Beer. The Appellant entered into a bottling agreement with M/s SKOL Breweries Ltd. (‘SKOL’), under which the Appellant manufactured beer for SKOL. The Beer was sold after affixing SKOL’s brand name ‘Fosters’. Title, property and ownership of ‘Fosters’ beer manufactured by the Appellant vested solely with the Appellant. The said manufactured beer is sold by Appellant to ‘SKOL’ or buyers nominated by SKOL for outright price fixed by SKOL. The Appellant duly receives sale price/consideration for beer so sold by Appellant. During the relevant period, the aforesaid undertaking of the Appellant merged with SKOL (Merged entity i.e. SAB Miller India Limited) under a Scheme of Arrangement under Section 391 to 394 of the Companies Act, 1956 with an ‘Appointed Date’ of 31.03.2009 and ‘Effective Date’ of 22.06.2012.

The Department alleged that the Appellant is rendering services in relation to the manufacture or processing of non-excisable goods (Alcohol) for or on behalf of SKOL which is covered under amended definition of ‘Business Auxiliary Service’ under Section 65(105) (zzb) read with Section 65(19) of the Finance Act, 1994. The Department further alleged that the Scheme of Arrangement itself indicates that merger becomes effective only upon fulfillment of all the conditions as per Clause 16 of the Scheme of Arrangement. Hence, according to the department, the ‘Effective Date’ should be 22.06.2012 i.e. the date on which letter of incorporation was obtained from Registrar of Companies. Therefore, the Appellant has independently rendered the aforesaid ‘Business Auxiliary Service’ to SKOL.

The Appellant argued that the manufacturing of the said Beer was on account of Appellant and the title, property and ownership of manufactured beer having brand name ‘Fosters’ vested solely with the Appellant. Further, the manufacturing and selling activities were different contracts and the Appellant was not working on behalf of anyone. Accordingly, the aforesaid activities amounted to ‘manufacture’ and ‘outright sale’ of beer and thus, cannot be considered to fall within the scope of the expression “in relation to production and processing of goods for or on behalf of the client” i.e. under amended definition of ‘Business Auxiliary Service’ under Section 65(105) (zzb) read with Section 65(19) of the Finance Act, 1994. The Appellant also argued that it is entitled to benefit of Notification No. 39/2009-ST dated 23.9.2009 (Exemption to value of inputs used for providing taxable service during manufacture/processing of alcoholic beverages) read with Circular No. 332/17/09-TRU dated 30.10.2009. The Appellant, while relying upon various judgments including Marshal & Sons & Co India Ltd. vs. ITO, (1997) 2SCC 302, argued that the Appellant had since merged with SKOL during the relevant period, therefore services rendered by the Appellant to self cannot be chargeable to service tax. In this regard, the Appellant submitted that when the court does not alter the ‘Appointed Date’ i.e. 31.3.2009 in the present case, agreed upon by the parties then the same should be considered for all purposes.

Judgment: The Hon’ble Appellate Tribunal decided against the Appellant on merits on the count that the aforesaid activity undertaken by the Appellant is covered within the ambit of “in relation to production and processing of goods for or on behalf of the client” i.e. under amended definition of ‘Business Auxiliary Service’ under Section 65(105) (zzb) read with Section 65(19) of the Finance Act, 1994. According to the Hon’ble Appellate Tribunal the Appellant is producing and manufacturing beer on behalf of SKOL and the activity of manufacture of alcoholic beverages is non-excisable, hence, covered within the scope of Business Auxiliary Service. However, Hon’ble Appellate Tribunal accepted the submission of Appellant that it is eligible for exemption under Notification No. 39/2009-ST dated 23.9.2009. Further, the Hon’ble Appellate Tribunal relied on the case of Marshal & Sons & Co India Ltd Vs ITO, (1997) 2 SCC 302 to held that when the Court does not alter the ‘Appointed Date’ in the sanction order, the ‘Appointed Date’ in the scheme should be considered as the date when the scheme becomes effective. Hence, the Hon’ble Appellate Tribunal held that in absence of any date given by the Court in the present case, the ‘Appointed Date’ i.e. 31.03.2009 should be taken into as the date when the merger/amalgamation of the undertaking of the Appellant with SKOL became effective. Consequentially, according to the Hon’ble Appellate Tribunal, the undertaking of the Appellant and SKOL have merged during the relevant period and the said services rendered after 31.03.2009 would be services to self and hence, not be liable to service tax.

M/s. SAB iller Breweries Pvt. Ltd. vs. Commissioner of Service Tax, Aurangabad, Appeal No. ST/85828/2014 ST/ CO/91102/2014, Decided on 11.07.2019, Final Order No. A/86242/2019.

M/s. SAB Miller Breweries Pvt. Ltd.

M/s. SAB Miller Breweries Pvt. Ltd.

Unreported Decisions – August 2019

By Ajay R. Singh

1. S. 37 – Business expenditure – commission paid to intermediating or Sole Agent for the getting the order and rendered various post sale services – The payment has arisen out of contractual obligation – allowable as business expenditure.

The assessee, a manufacturer of fencing products. During the course of assessment proceedings, the AO noticed that the assessee had claimed commission expenses of ₹ 1,13,60,951/- and out of it ₹ 92,56,287/- was paid to only one party M/s. Arab Link Equipment Trading (ALET) which is based in Dubai. On further verification, the AO found that M/s. Consolidated Contractors Co. had given the purchase order directly to ALET, who in turn gave it to the assessee. As per the AO this means that ALET is purchasing goods from the assessee, who is supplying the material to the site which was given in the purchase order and any commission payment should be substantiated by the genuineness of payment and services rendered. The AO after perusing the e-mails filed by the assessee noted that M/s. Consolidated Contractors Co. has appointed ALET as a sole agent of the present assessee. The AO thus came to a finding that M/s. Consolidated Contractors Co. has appointed ALET as the agent of the assessee and had directed the assessee to pay the difference in amount between the quoted price to ALET and hence the services rendered by ALET in getting the contract to the assessee from M/s. Consolidated Contractors Co. are not proved. As per the AO, it is M/s. Consolidated Contractors Co. who has appointed ALET to be the sole agent of the assessee in UAE. On the basis of above reasons, the AO disallowed the commission expenses of ₹ 92,56,287/- claimed by the assessee to have been paid to ALET.

The ITAT held that the letter dated 01.04.2009 written by ALET to the assessee for supply of fencing products to M/s. Consolidated Contractors Co. prove the genuineness of services rendered by ALET to the assessee. ALET is the main intermediary company for the sale by the assessee to M/s. Consolidated Contractors Co. This fact is accepted by the AO. Also ALET has procured the order and rendered various post sale services such as customs clearance at Muscat; arrange the transport from the port to the site; arrange goods for inspection; passing of the bills and getting payments released from M/s. Consolidated Contractors Co. The payment has arisen out of contractual obligation. Therefore, the appeal filed by the revenue is dismissed..

ACIT 24(1) vs. A-1 FENCE PRODUCT CO., ITA NO.: 5346/M/2016, date: 13/05/2019 (Mum.)(Trib.)

A-1 FENCE PRODUCT CO.

2. S. 45: Capital Gains – Gains on sale of FSI/TDR rights received has no cost of acquisition incurred – as these are generated by the plot itself – no capital gains assessable to tax:

The assessee has sold TDR/FSI development rights for ₹ 6,00,00,000/- which was claimed as exempt from tax. According to the AO the transfer of development rights clearly attracts the capital gain tax as it is a transfer of capital asset. Accordingly, the AO determined the market value of the TDR/FSI rights at ₹ 8,76,55,000/- which was the value as per stamp duty valuation as against ₹ 6,00,00,000/- declared from sale of TDR/FSI and accordingly determined the capital gain in the hands of the assessee at ₹ 3,80,00,000/- as against nil returned by the assessee.

The Ld. CIT(A) has held that the assessee has permitted the builder load FSI/TDR on the plot and construct the new building for which the assessee has received ₹ 6,00,00,000/-. The Ld. CIT(A) has further held that as the TDR rights have arisen only on account of amendment in DC Regulations 1991 and therefore there is no cost of acquisition and no capital gains tax was attracted. The Ld. CIT(A) also held that since there is no sale of land and building, the provisions of section 50C of the Act were also wrongly invoked by the AO. Finally ld. CIT(A) deleted the addition made by the AO on account of capital gain on sale of TDS/FSI rights by holding that the same is not chargeable to capital gain tax.

The ITAT upheld the order of CIT(A) relying on the Hon’ble Bombay High Court in the case of CIT vs. Sambhaji Nagar Co-op. Hsg. Society Ltd. (2015) 370 ITR 325 (Bom.) wherein it has been held that in case of sale of FSI/TDR rights by the assessee to the developers which have accrued in favour of the assessee following promulgation of Development Control Rules for Greater Mumbai, 1991 and the said developmental right were generated by the plot itself and there is no cost of acquisition and therefore not liable for any capital gain tax. Therefore, dismissed the appeal of the Revenue.

ACIT-25(2) vs. Dilip R. Shringarpure, ITA No. 6103/ Mum/2017, DOH: 26/06/2019 (Mum)(Trib)

Dilip R. Shringarpure

3. S. 36(1)(vii) : Bad debts-Law after 1989-Assessee writing off debts in its books of account – Sufficient-Not necessary for assessee to establish debt became irrecoverable.

The assessee is a company engaged in the business of manufacture and sale of gear boxes, couplings etc. and during the relevant year also had an undertaking located at Chennai engaged in development of software i.e., Computer Aided Design (‘CAD’). The assessee maintains separate sets of accounts with respect to its said two businesses. During the course of scrutiny assessment, AO found that the assessee debited an aggregate amount of
₹ 80,09,923/- in its profit & loss a/c towards bad debts written off. AO declined the claim of bad debts by observing that the assessee was not able to prove as to how the said debts have become ‘bad debt’. Onus was on the assessee to prove the “debts’ had become ‘bad debts’. AO concluded that since the assessee has failed to substantiate its claim with any document whatsoever, it cannot be allowed. The CIT(A) confirmed the action of the AO.

The Tribunal held that during the course of the assessment proceedings the assessee duly furnished details of the aforesaid amounts written off in its profit & loss a/c. for the subject year inter alia containing names of the party, amount written off and the particulars of the years in which the debts so written off were considered as income in the books and also furnished necessary explanation in this regard as desired by the A.O. It was explained to the A.O that subsequent to the amendment by the Direct Tax Laws (Amendment) Act, 1987 with effect from 1st April, 1989 the pre-conditions for allowance of a bad debts written off as per section 36(l)(vii) read with section 36(2) namely, (a) the bad debt in question must be written off as irrecoverable in the accounts of the assessee for the relevant previous year; and (b) the amount of bad debt must have been taken into account in computing the income of the assessee at any time prior to its write off in the accounts, have been satisfied in the case of the assessee. There is no condition of proving that debt has become bad during the relevant assessment year. However, for disallowing the amount, AO has relied on the judicial pronouncements which pertain to the period prior to the amendment. Thus, without appreciating the legal position in this regard, the A.O has disallowed the entire aforesaid amount of ₹ 80,09,923/- on the allegation that the assessee has not been able to prove how the debts have become ‘bad debt’. Notwithstanding the fact that no such documents were required to be furnished by him, the A.O alleged that the assessee failed to substantiate its claim with any document whatsoever and it cannot be allowed. The aforesaid action of the A.O in summarily disallowing the entire amount of ₹ 80,09,923/- is against the position in law. Thus, it directed the AO to delete the disallowance.

M/s. Flender Limited vs. DCIT-8(2)(1), ITA No. 2550/ Mum/2018, DOH: 26/06/2019 (Mum)(Trib)

M/s. Flender Limited

 

Unreported Decisions – July 2019

By Ajay R. Singh

1. S 263 – Revision – Merger – The taxability of the rental income was subject matter of appeal before Commissioner (Appeals) – Commissioner could not exercise powers u/s. 263.

The assessee company is engaged in property development. During assessment proceeding the assessing officer while passing the assessment order treated the lease rental income of Rs.11,78,29,224/- as income from ‘other sources’.

On appeal before CIT(A), the lease rental income was allowed as ‘business income’. No further appeal before Tribunal was filed by revenue. Subsequently, the ld. Pr. Commissioner issued a show cause notice u/s. 263.

In the show cause notice the ld. Pr. Commissioner show caused as to why the assessment order passed under section 143(3) be not set aside directing the AO to pass the assessment order afresh qua the treatment given to lease rental income. As per the ld. Pr. Commissioner, the lease income was liable to be assessed under the head “Income from House Property”. The assessee filed its reply stating that as per the doctrine of the merger the assessment order passed u/s. 143(3) dated 19.01.2015 merged with the order of appellate authority.

On appeal the Tribunal held that the Commissioner (Appeals) examined the taxability of the rental income after deep analysis of the facts. Factually, the appraisal shows that the issue regarding the nature of lease income was the subject matter of assessment by the AO and also the adjudication by the ld. CIT(A) thereafter. The ld. Pr Commissioner issued show cause notice u/s. 263 for proposed revision of the assessment order on the ground that the lease income be assessed as income under the head as “House Property”. In reply to the show cause notice the assessee specifically stated that the subject matter of proposed revision was considered in the appeal by ld. Commissioner (A) while deciding the appeal of the assessee, therefore, as per doctrine of merger the assessment is merged with the order of ld. Commissioner (A). The taxability of the lease rental income was examined and considered by ld. Commissioner (A) and thereby considering the doctrine of merger, once the issue has been examined and decided by ld. Commissioner (A), the revision order u/s. 263 cannot be made.

Thus, in the present case, the ld. Pr Commissioner was wrong in revising the assessment order on the taxability of rental income as income from house property. Therefore, the order passed by him is not valid.

M/s. Amazia Developers Pvt vs. DCIT-1(1)(1), ITA No.2499/ Mum/2017, DOH: 08/05/2019 (Mum.)(Trib.)

M/s. Amazia Developers Pvt

2. S 79 – Losses – Set-off and carry-forward of loss- in applying section 79 only business loss should be taken into account and not unabsorbed depreciation.

The assessee claim carry forward of business losses on account of set off of brought forward business losses including unabsorbed depreciation which was not allowed by the AO for the reason that the share holding pattern of the assessee company has changed up to 99.99% of the shares which was originally held by Abener Engineering & Construction, LLC it transferred to its 100% holding company Abener Energia, S.A. thus although transfer of shares during the year there was no change in the ultimate beneficiary shareholder which continue to be ultimate holding of Abener Energia, SA. The AO therefore, disallowed the carry forward of business losses of ₹ 10,90,40,397/- including the unabsorbed depreciation of ₹ 59,26,702/-.

The CIT(A) held that in this case, the shareholding of the assessee has changed entirely to the extent of 99.99% and hence, the provisions of section 79 of the Act are squarely applicable. The AO has rightly not allowed the carry forward of the losses. The assessee has raised a without prejudice ground that the unabsorbed depreciation should be allowed as the same is not covered within the purview of section 79 of the Act. The Hon’ble Apex Court in the case of CIT vs. Subhulaxmi Mills Ltd. [249 ITR 795] has held that section 79 of the Act applied only to business loss and not to unabsorbed depreciation. This principle has been subsequently followed in plethora of decisions. The assessee has submitted that of the loss disallowed to be carried forward of ₹ 10,9040,397, unabsorbed depreciation was ₹ 59.26,702. CIT(A) was of the view that unabsorbed depreciation is not a loss but allowance u/s 32 of the Act. Accordingly, directed that the assessee be allowed the carry forward of losses to the extent of unabsorbed depreciation after due verification is made by the AO.

Tribunal held that the CIT(A) has rightly directed the AO to delete the disallowance of unabsorbed depreciation and hence, the appeal of Revenue was dismissed.

DCIT-15(1)(1). vs. Abeinsa Business Development Pvt. Ltd, ITA No. 1183/Mum/2018, DOH: 08/05/2019 (Mum)(Trib)

Abeinsa Business Development Pvt. Ltd

3. S.271(1)(c) – Penalty – Penalty is not to be imposed if there is no conscious breach of law.

The levy of penalty was on two counts. One issue was the claim of deprecation on the premises which was let out. Assessee’s submission in this regard was that the said premises was also partly used by the assessee for godown. This was rejected by the assessing officer, and assessee’s appeal against the above was sustained by the CIT-A. Another issue was claim of the assessee that it was not liable to taxation under MAT provisions u/s. 115JA was rejected on the ground that assessee’s case was falling u/s. 115 JB. Inasmuch as assessee was not situated in a notified Special Economic Zone. Penalty u/s 271(1)(c) was also levied on the above issues. The CIT-A also sustained the penalty on the ground that the claim of the assessee was patently dubious.

The Tribunal held that as regards the claim of deprecation on which penalty has been levied, the assessee’s claim, was that it was also using the said let out premises as godown has been rejected. This aspect has to be looked from the point of view that the said prices was let out to the assessee’s wife itself. Hence the assessee claim that the said prices was also being partly used for godown purposes cannot be said to be ex facie bogus. It was observed that assessee’s conduct in this regard cannot be said to be contumacious warranting levy of penalty.

As regards the levy of penalty on account of tax u/s. 115 JB under MAT is concerned, the assessee’s claim was that it was falling under 115 JA. This claim was also supported by the certificate of the auditors. In this view of the matter assessee’s conduct cannot be said to be contumacious warranting levy of penalty. If the claim was wrong the responsibility was that of the auditor who duly certified the same. Hence it was a mistake on the part of the auditor and the assessee cannot be visited with penalty for the mistake of its consultant. In this regard reliance was placed on the case of Hindustan Steel vs. State of Orissa 83 ITR 26, wherein it was held that the authorities may not levy the penalty if the conduct of the assessee was not contumacious. The levy of penalty was deleted.

M/s. Kamdar Private Ltd. v DCIT 1(2), ITA No. 6589/ Mum/2017, DOH: 03/06/2019 (Mum)(Trib)

M/s. Kamdar Private Ltd.

 

Unreported Decisions – ST – July 2019

By Vinay Jain & Sachin Mishra, Advocates

1. Whether the service tax paid on commission paid to insurance agents under “Insurance Auxiliary Service” under reverse charge mechanism and then recovered from insurance agents is required to be deposited to the government as per Section 73A(2) of Finance Act, 1994? Whether pre-recruitment training and post-recruitment training expenses should be included in the taxable value of commission paid to the insurance agents for the purposes of discharging service tax?

Facts and Pleading: The appellants are inter-alia engaged in the business of providing life insurance services. The appellants appointed various individuals as insurance agents for selling life insurance products. The appellants were discharging service tax on the commission paid to such insurance agents under reverse charge mechanism. As per terms of agreement, the appellant recovered a portion of the aforesaid service tax paid by them from such insurance agents. Further, the Appellants also incurred certain expenditure on pre-recruitment training and post-licence training on insurance agents. These expenses were in the nature of booking of conference hall, arranging of faculties, travelling, etc.

(i) The department alleged that appellants have wrongly collected the said service tax from the insurance agents and have not deposited the same with government exchequer. Thus, appellants are liable to deposit the said amount to Government exchequer under Section 73A(2) of the Finance Act, 1994. (ii) Further, the department alleged that the aforesaid pre-recruitment training and post-license training expenses incurred by Appellants on the insurance agents should be included in the gross taxable value of the services rendered by such insurance agents.

(i) The Appellants argued that Section 73A(2) of the Finance Act, 1994 will apply only in cases wherein the person is not liable to pay service tax. When the person is liable to pay service tax, the same is covered under Section 73A(1) of the Finance Act, 1994. The Appellants are covered under Section 73A(1) and not under Section 73A(2). However, present demand is under Section 73A(2) and therefore, not sustainable. Otherwise also, whatever amount was collected from the insurance agents the same has been paid to the government exchequer. Therefore, the second recovery will not lie. Reliance was also placed upon Mafatlal Industries Ltd & Ors. vs. UOI, (1997)5 SCC 536 to contend that that once the excise duty is paid on clearance, it will not be payable again on collection from the buyers. Further, the Appellants contended that contractually tax liability can be shifted from one person to another and relied upon decision of Supreme Court in the case of Rashtriya Ispat Nigam Limited vs. Dewan Chand Ram Saran, 2012 (26) STR 289 (SC).

(ii) The appellants also argued that there was no bar under the law to recover tax paid by assessee from any other person. Further, the appellants argued that the pre-recruitment expenses where not liable to be included in the taxable value of the services rendered by the insurance agents on the count that the persons who received such pre-recruitment training were not registered as insurance agents under Insurance Act. Further, on post-licence training expenses, the appellants submitted that these expenses incurred by the appellant in providing training facilities to the Insurance Agents are in fact used by the appellant itself in furtherance of their own routine insurance business. The appellants also relied upon decision in Bhayana Builders Case, 2018-TIOL-66-SC-ST and Intercontinental Consultants & Technocrats Pvt. Ltd., 2018-TIOL-76-SC-ST to submit that whatever has been agreed between the parties can only form part of taxable value and in any case reimbursement of expenditure cannot form part of taxable value.

Judgment: (i) The Hon’ble Appellate Tribunal accepted the submissions of the appellants and relied upon the decision of HDFC Standard Life Insurance Co. Ltd. Vs. Commr. C.E, Mumbai-II 2017 (49) STR 301(Tri-Mum.) to grant relief to assessee. The Appellate Tribunal after extensive analysis of Section 73A(1) and (2) of the Finance Act, 1994 held in favour of assessee that once the tax has been discharged, no further liability will arise. (ii) Further, the Hon’ble appellate Tribunal agreed with the submission of the appellant that expenses incurred in pre-recruitment training and post-license training of insurance agents by the Appellants cannot form part of the gross taxable value of commission paid to the Insurance Agents in determining the service tax liability as reimbursement of expenditure cannot form part of taxable value.

Bajaj Allianz Life Insurance Co. Ltd. vs. CST, CESTAT, Mumbai, decided on 31.05.2019 in the Final Order No. A/86013- 86023/2019.

Bajaj Allianz Life Insurance Co. Ltd.

2. Whether the activity of operating power plants can be equated to “Management of Immovable Property” for the purpose of the definition of “Maintenance or Repair Service” under Section 65(64)? Whether operation fees and maintenance fees charged for operating and managing power plants is thus taxable under the Finance Act, 1994?

Facts and Pleadings: Wartsila India Ltd., (hereinafter referred to as the ‘Appellant’) is engaged in the business of operation of power plants and generation of electricity therefrom. The appellants have entered into operation and maintenance agreements with various customers at various locations, most of whom belong to the steel and automobile industry. As per the said agreements, the appellants have undertaken the primary activity of running the power plant for generation of electricity for which operation fee and maintenance fee is charged to the customer. The appellants were paying service tax on the maintenance fee so collected.

The case of the department was that the power plant is an immovable property and the operation thereof amounted to “management of immovable property”. Thus, the department contended that the “operation fee” so charged is liable to service tax under the category “Maintenance or Repair Service”.

The Appellant submitted that the principle of Noscitur A Sociis would apply to construe the term “management” as mentioned in the definition of “Maintenance or Repair Service” under Section 65(64) and would not include in its ambit operational activities. The Appellant further submitted that management and operation are distinct functions of an organization. Where the former is associated with overall superintendence of work, the latter is concerned with actual execution of daily functions. Since the Appellants were directly involved in running the power plant for the generation of electricity themselves, any maintenance work done was merely incidental to the generation of electricity. Hence, the scope of their operations could not be covered under “management of immovable property” and was thus outside the purview of being taxable under the head of “Maintenance or Repair Services”.

Judgment: The Hon’ble Appellate Tribunal held that management of immovable property does not include operation activities. The Hon’ble Appellate Tribunal held that since the sole purpose of the Appellant was the actual task of generating electricity and not the management of the power plant, any maintenance done would be incidental to the generation of electricity. Hence, the Hon’ble Appellate Tribunal held that neither is taxable under the head of “Maintenance or Repair Services”.

Wartsila India Ltd. vs. CST, CESTAT, Mumbai, decided on 14.06.2019 in the Final Order No. A/86114/2019.

Wartsila India Ltd.

Unreported Decisions – ST – June 2019

By Vinay Jain & Sachin Mishra, Advocates

1. Whether ‘Transfer of Development Rights’ can be equated with ‘Benefits to arise out of land’ for the purposes of definition of ‘Immovable Property’ as enumerated under Section 3 (26) of the General Clauses Act, 1897 read with Section 65B(44) of the Finance Act, 1994? Whether transfer of such “Development Rights” is in that sense “transfer of immovable property” and therefore, not taxable under the Finance Act, 1994?

Facts and Pleading:: DLF Commercial Projects Corporations (hereinafter referred to as the ‘Appellant’) is engaged in the business of construction and development of integrated township. The Appellant entered into an agreement with DLF Ltd. As per the said agreement, the Appellant was receiving business advances. The said business advances were transferred by the Appellant to various companies who were using the same for purchasing lands or development rights in the land. The said companies were known as Land Owning Companies. After the construction, Land Owning Companies along with DLF Ltd., entered into a tripartite agreement with prospective buyers for sale of the constructed property.

The case of the department was that the Land Owning Companies transferred the Development Rights to Appellant which was in turn, transferred by the Appellant to DLF Ltd. The department alleged that the advances received by the Appellant from DLF Ltd. was the consideration for transfer of such Development Rights. Therefore, the Department was of the view that the Appellants are liable for service tax on such transfer of development rights.

The Appellant submitted that there was no transfer of development rights from the Appellant to DLF Ltd. as the Land Owning Companies remained the owner of the land. The Appellant also argued that the ‘transfer of development rights’ being immovable property is beyond the ambit of Finance Act, 1994. The Appellant contended that the rights given to developer to develop the land and sell super-structure in perpetuity shall fall within the meaning of ‘benefit arising out of land’ under the definition of ‘Immovable Property’ as enumerated under Section 3 (26) of the General Clauses Act, 1897. Thus, the Development Rights fall outside the purview of ‘Service’ as per section 65B(44) of the Finance Act, 1994.

Judgment: The Hon’ble Appellate Tribunal held that as the Appellant was never the owner of the land, it could not have transferred the development rights to DLF Ltd. The Hon’ble Appellate Tribunal also held that the advance received from DLF Ltd. was transferred by the Appellant to the Land Owner Companies. Hence, the Hon’ble Appellate Tribunal held that it is mere transaction of sale and purchase of land by the Appellant for DLF Ltd. for further development. The Page 19 www.ctconline.org THE CTC NEWS | June 2019 Hon’ble Appellate Tribunal further relied upon the Hon’ble Allahabad High Court’s judgment in the case of Bahadur and Others vs. Sikandar and Others and the Hon’ble Bombay High Court’s judgments in the cases of Chheda Housing Development Corporation vs. Bibijan Shaikh Farid and Shadoday Builders Private Ltd. and Ors, vs, Jt. Charity Commissioner and Ors. to held that the ‘Transferrable Development Right’ is immovable property as it is a ‘benefit arising out of land’. Therefore, Hon’ble Appellate Tribunal held that the development rights are excluded from the ambit of ‘service’ as per Section 65B(44)(a)(i) of the Finance Act, 1994 read with Section 3 (26) of the General Clauses Act, 1897.

DLF Commercial Projects Corporations vs. C.S.T. Gurugram, CESTAT, Chandigarh, decided on 22-05-2019 in the Final Order No. 60554/2019.

DLF Commercial Projects Corporations

2. Whether value of taxable services on which service tax is payable under the Reverse Charge Mechanism should be included in the ‘Aggregate Value’ for the applicability of Small Service Provider (SSP/SSI) Exemption under Notification No. 6/2005-Service Tax dated 1-3-2005?

Facts and Pleadings: M/s. Crossword Agro Industries (hereinafter referred to as the ‘Appellant’) are inter alia engaged in manufacturing & exporting of agricultural diesel engines. The Appellant had been paying transport charges and discharging the service tax liability under reverse charge mechanism as per section 66A of the Finance Act, 1994. During the financial year of 2005-06, the Appellant had not paid service tax on output services as its entire taxable value was under the basic exemption limit of ₹ 4 lakhs as described under Notification No. 6/2005-ST dated 1-3-2005.

Department alleged that the value of taxable service received by the Appellant on which the Appellant has discharged service tax liability under Reverse Charge Mechanism is to be considered as part of the ‘Aggregate Value’ for the purpose of grants of exemption Notification No. 6/2005-ST dated 1-3-2005.

Appellant contended that the ‘aggregate value’ for the purposes of Notification No. 6/2005-ST dated 1.3.2005 do not include the value of taxable service received by anassessee on which service tax liability has been discharged under Reverse Charge Mechanism. The ‘aggregate value’ includes only those taxable services charged in the first consecutive invoices issued or required to be issued by theassessee. Therefore, the Appellant are eligible for the Small Service Provider (SSP/SSI) Exemption.

Judgment: The Hon’ble Appellate Tribunal held that the ‘aggregate value’ for the purposes of Notification No. 6/2005-ST dated 01.03.2005 only includes the amount charged by the assessee. In so far as service tax paid by the Appellant under reverse charge basis is concerned, the Hon’ble Appellant Tribunal held that the consideration was paid by the Appellant to the foreign service provider i.e. it is the foreign service provider who has charged for the taxable services and not the Appellant. Hence, the said taxable value of service on which service tax was paid by the Appellant under reverse charge basis shall not fall under the aggregate value for the purposes of Notification No. 6/2005-ST dated 01.03.2005.

M/s. Crossword Agro Industries vs. C.C.E. & S.T. Rajkot, CESTAT, Ahmedabad, decided on 03.05.2019 in the Final Order No. A/10784/2019.

M/s. Crossword Agro Industries

3. Whether a discount received by an Air Ticket Agent from an IATA for purchasing an air ticket of a passenger from the IATA amounts to ‘commission’ and thus, taxable under the category of ‘Business Auxiliary Services’?

Facts and Pleadings: M/s. Mahan Travels (hereinafter referred to as ‘the Appellant’) are agent for booking air tickets however, they are not registered with the IATA agent. The Appellant purchase tickets from IATA agent and in turn sell it to the travellers. However, the tickets are directly booked by IATA agent in the name of the respective traveller. The IATA agent in turn gives discount to the Appellant.

Department alleged that the ‘discount’ received by the Appellant is nothing but ‘commission’ received by the Appellant from IATA agent for booking tickets of the travellers and hence the said transaction is taxable under ‘Business Auxiliary Services’.

The Appellant contended that the Appellant is purchasing the tickets on principal to principal basis. The Appellant first purchases the said ticket from an IATA agent and then sells it to the respective travellers. The Appellant further contended that the discount received by the Appellant from IATA agents is nothing but a trade discount and hence, no service tax is payable on the same.

Judgment: The Hon’ble Appellate Tribunal held that the even though the tickets were directly booked in the name of travellers, the Appellant had firstly purchased the said tickets from IATA agents on principal to principal basis. Thereafter, the Appellant has independently sold the said tickets to the travellers. The Hon’ble Appellate Tribunal held that the said discount cannot be considered as ‘commission’ rather it is nothing but a trade discount/trade margin. Thus, the Hon’ble Appellate Tribunal held that the present transaction is one of sell and purchase and the trade margin does not amount to any ‘service’, hence the same is beyond the scope of Finance Act, 1994.

M/s. Mahan Travels vs. C.C.E. & S.T. Ahmedabad, CESTAT, Ahmedabad, decided on 08.05.2019 in the Final Order No. A/10847/2019.

M/s. Mahan Travels

Unreported Decisions – June 2019

By Ajay R. Singh

1. S. 54 : Capital Gains – Utilisation of gift received from husband for purchase of new house – Amount invested in new asset need not be entirely sourced from capital gains. [S.45]

The assessee claimed deduction u/s. 54 of the Act on account of investment in residential house this long term capital gains was declared at nil. The AO also noted that the investment is not made within the stipulated period and did not allow the exemption u/s. 54 of the Act. It was noted by the AO that the investment is not made before the due date of filing of return of income u/s. 139(1) by the assessee. The AO also noted that the investment in new house is made by assessee’s husband and not assessee to the extent of ₹ 70 lakh. Hence, he stated that the assessee is not entitled for claim of deduction u/s. 54 of the Act.

Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) agreed with the contention of the assessee that where the investment is made within the due date of filing of return u/s. 139 of the Act the assessee is entitled for exemption u/s. 54 of the Act. In present case total investment was made before due date of the Act. Accordingly, the CIT(A) allowed the claim of deduction to the extent of ₹ 12,62,000/-. But he confirmed the action of the AO and denied the deduction u/s. 54 of the Act on the amount of ₹ 70 lakh which was paid by husband of the assessee as gift.

On further appeal the ITAT held that as regards the dispute of entitlement of claim of deduction u/s. 54 of the Act whether the investment made within the stipulated period or not, the CIT(A) has allowed the claim in favour of assessee and Revenue has not challenged the same. It means, Revenue has not filed any appeal and the same is confirmed by the ld Sr. DR. The only dispute remains is whether the amount gifted by assessee’s husband of ₹ 70 lakh on 13-10-2014 by making direct payments to the builder out of NRO saving Bank Account can be considered as payment made by assessee. For this, the ld Counsel for the assessee relied on the decision of this ITAT in the case of Deepak A. Shah vs. ITO in ITA No. 526/Mum/2016 for AY 2010-11, wherein the Tribunal following the decision of ACIT vs. Dr. P. S. Pasricha (2008) 20 SOT 468 (Mum) in ITA No. 6808/Mum/2003 for AY 2001-02 vide order dated 11-01-2008 has held that the same fund may or may not be utilized for the purchase of another residential house but the requirement of law is that the assessee should purchase a residential house within the period and the source of fund is quite irrelevant. In the instant case, the facts are that the assessee has received gift from her husband and invested a sum of ₹ 70 lakh in purchase of new residential house. The assessee has fulfilled all the conditions prescribed u/s. 54 of the Act and hence, she is entitled for claim of deduction. The appeal of assessee was allowed.

Sanmeetkaur M. Kohli vs. ITO -3(1)(1), ITA No. 6500/Mum/2017, DOH: 18/04/2019 (Mum.)(Trib.)

Sanmeetkaur M. Kohli

2. S. 80HHB : Deduction – Projects outside India – the assessee company derives profit from foreign Projects and complied with the entire requirement – deduction u/s. 80HHB ought to be allowed.

The assessee company during the year under consideration was engaged in the business of undertaking jobs for construction of tanks/vessels for storage of chemicals on labour basis and/or on turnkey basis had filed its return of income for A.Y. 1999-2000, after claiming deduction u/s. 80HHC. Subsequently, the AO observed on a perusal of the records that the assessee company was not engaged in the business of manufacturing or trading of any commodity/product and was only undertaking jobs for construction of tanks/vessels for storage of chemicals on labour basis and/or on turnkey basis. The AO held that the assessee was not eligible for claim of deduction u/s. 80HHC. The CIT(A) upheld the order of the AO and dismissed the appeal.

The ITAT disposed off the appeal vide a consolidated order for AY 1999-2000, AY 2003-04 & AY 2004-05. The Tribunal in its aforesaid order observed that the assessee was not eligible for claim of deduction u/s. 80HHC. Insofar the fresh and the alternate claim raised by the assessee for deduction u/s. 80HHB of the IT Act was concerned, the Tribunal restored the matter to the file of the AO for considering the same after affording an opportunity of being heard to the assessee. The Tribunal while restoring the matter to the file of the AO relied on its earlier order for AY 2000-01 wherein the AO was specifically directed to give opportunity to the assessee to create the necessary reserve account as per the provisions of Sec. 80HHB. The AO in the course of the set aside proceedings declined to allow the claim of deduction under Sec. 80HHB on the grounds that conditions specified in Sec. 80HHB has not been fulfilled on time. The CIT(A) upheld the view taken by the AO and dismissed the appeal.

Further, in the second round appeal filed by the assessee before the ITAT it was held that the adverse inferences drawn by the lower authorities on the ground that the assessee had neither claimed any deduction u/s. 80HHB nor fulfilled the conditions laid down in 80HHB, is without any merits. In fact, it was only pursuant to the direction by the Tribunal which had restored the matter to the file of the AO for considering the assessees alternate claim of deduction u/s. 80HHB, that the latter had became conversant of its entitlement under the said statutory provision. The assessee in compliance of the requirement contemplated in Sec. 80HHB had obtained the certificate in Form 10CCAH, dated 08-11-2011 duly signed and verified by a CA and the assessee had maintained separate ledger accounts in respect of the profits and gains derived from execution of the foreign project. Further the assessee was obligated to have debited an amount equal to 50% of its profit and gains for the year under consideration i.e., AY 1999-2000 to the profit and loss account and credited the same to a reserve account viz., “Foreign Projects Reserve Account”, which was to be utilised by it during the period of five years next following for the purpose of its business other than for distribution by way of a dividend or profits had submitted it along with a revised computation of income with the AO in the course of the set aside proceedings, vide its letter dated 08-11-2011. The assessee had submitted before the lower authorities the copies of the agreements with the foreign company viz. National Oil (Tanzania) Ltd. along with the other requisite details as regards the same, and had also explained the facts of its case before them.

The assessee had duly satisfied the requisite conditions which rendered it eligible for claim of deduction u/s. 80HHB, therefore, the lower authorities had erred in declining to allow the said claim of deduction on the basis of incorrect observations. The claim of deduction raised by the assessee u/s. 80HHB of the Act be allowed.

M/s. Prashanth Projects Limited. vs. DCIT-10(3), ITA No. 4308/Mum/2015, DOH: 12/04/2019 (Mum.)(Trib.)

M/s Prashanth Projects Limited.

3. S. 2(22)(e) : Deemed dividend – Not a shareholder–Addition cannot be made as deemed

The assessee company had received loan from Muchhala Magic Land Pvt. Ltd. During the year the ld. AO observed that Mr. Arunkumar J. Muchhala is holding 32.18% of shares of Rithika Hotels Pvt. Ltd., i.e., the assessee company and was also holding 32% shares in Muchhala Magic Land Pvt. Ltd. The ld. AO also observed that as on 31-03-2012, Muchhala Magic Land Pvt. Ltd. had accumulated profits of ₹ 5,25,64,264/- and as on 31-03-2013 of ₹ 3,02,70,140/-. Accordingly, the ld. AO held that all the conditions prescribed in para 10.3 of Circular No. 495 were duly complied with by the assessee and hence, the loan of ₹ 34,00,000/- received by the assessee from Muchhala Magic Land Pvt. Ltd., is to be treated as deemed dividend u/s. 2(22)(e) of the Act and accordingly, the ld. AO added the same to the total income of the assessee.

ITAT held that the provisions of Sec. 2(22)(e) of the Act could not be applied on the ground that it was not holding any shares in the lending company. Reliance was placed on the decision of Hon’ble Delhi High Court in the case of CIT vs. Ankitech (P) Ltd. & Ors reported in 340 ITR 14 (Del) which in turn followed the decision of Hon’ble Jurisdictional High Court in the case of CIT vs. Universal Medicare (P) Ltd. reported in 324 ITR 263(Bom). The decision of Hon’ble Delhi High Court in the case of Ankitech P. Ltd. had been approved by the Hon’ble Supreme Court in the case of CIT Delhi vs. Madhur Housing and Development Company in Civil Appeal No. 3961 of 2013 along with other civil appeals vide order dated 5-10-2017 by fully endorsing the views of the Hon’ble Delhi High Court supra. Accordingly, it was held that assessee company was not a shareholder in the lending company and hence, the provisions of Section 2(22)(e) of the Act cannot be made applicable to the facts of the instant case.

DCIT-11(1)(1). vs. Ritika Hotels Pvt. Ltd., ITA Nos. 6131 & 6132/Mum/2017; DOH: 24/04/2019 (Mum)(Trib).

Ritika Hotels Pvt. Ltd

 

Unreported Decisions – May 2019

By Ajay R. Singh, Advocate

1. S. 37(1) – Business expenditure – Asset Management Company of Mutual Funds due to business exigencies claims and recovers from Mutual Funds lesser amount than amount of expenditure, fees, etc., actually incurred during course of its business [as allowed under SEBI Regulation], then, unless it is established that there were no business exigencies or claim was not genuine, expenditure cannot be disallowed.

The assessee is engaged in the business of asset management and investment advisory services. During the year the assessee has launched NFOs on behalf of various clients. The AO observed that the expenses incurred in relation to launching of equities and NFOs on behalf of the above companies cannot be treated as expenses of the assessee as the said expenses were liability of the Mutual funds entities on whose behalf the assessee launched the NFOs. Accordingly, the AO disallowed the excess of expenditure as incurred by the assessee over and above the SEBI limit to the tune of ₹ 85,43,750/-.

The ITAT held that the SEBI Regulations specify the limit beyond which the companies on whose behalf the NFOs are launched cannot be exceeded and therefore the expenses in excess of the said SEBI limit of ₹ 85,43,750/- was claimed by the assessee as expenses incurred in the ordinary course of business u/s. 37(1) of the Act. The Ld. CIT(A) recorded a finding of facts that said expenses were incurred by the assessee under investment management agreement which provided that the excess expenses incurred over and above the limit specified by the SEBI Regulation shall be borne by the AMC i.e. assessee. In view of the same , the expenses are incurred by the assessee in the ordinary course of business as the assessee is in the business of providing asset management and investment revisionary services for launching the equity and NFOs on behalf of various clients the assessee. Moreover, it has been specifically agreed between the parties that any expenses incurred in excess of limit specified by the SEBI Regulation shall be borne by the AMC. The Tribunal relied on decision of Hon’ble Bombay High Court in the case of CIT vs. Templeton Asset Management (India) P. Ltd. In the result, the appeal of the Revenue is dismissed.

ACIT-14(2)(2) v M/s. Mirae Asset Global Investment (India) Pvt. Ltd, ITA No.230/Mum/2018, AY 2012-13; Bench: D; DOH: 19/02/2019 (Mum)(Trib)

Mirae Asset Global Investment (India) Pvt. Ltd.

2. S. 147 : Reassessment – Change of opinion – Assessment completed after enquiry and replies furnished by assesse could not be reopened. [S.148 ] S. 148 : Reassessment – Notice for reassessment – Recording of reasons –- Reasons recorded cannot be supplemented by detailed reason vide annexure – Reopening is bad in law.

The assessee being resident corporate entity stated to be engaged in financial advisory services, trading and investment in shares was subjected to reassessment proceedings for the impugned AY u/s 143(3) r.w.s 147 on 20/03/2015 by AO wherein the assessee was saddled with certain addition of ₹ 520 Lacs on account of Share Premium and Share Capital.

ITAT held that the reassessment proceedings have been initiated vide issuance of notice u/s. 148 dated 27/03/2014 which shows that the reassessment have been triggered within a period of four years from the end of the relevant assessment year and therefore, the rigors of first proviso to Section 147 of the Act viz. failure on the part of the assessee to fully and truly disclose all material facts necessary for the assessment, were not applicable to the fact of the present case. The only requirement to be fulfilled in such a case was that Ld. AO had reasons to believe that certain income escaped assessment in the hands of the assessee. The AO was not clinched with any new tangible material so as to initiate the reassessment proceedings against the assessee since upon perusal of records, Ld. AO came to a conclusion that share application money was reflected as Nil in the financial statements as against the information received from the investigation wing that the assessee received certain share premium during the impugned AY. However, the factum of mere receipt of share premium by assessee during impugned AY could not lead to a conclusion that there was escapement of income in the hands of the assessee unless some basic material on record substantiate the same. No prima-facie case was made out by Ld. AO as to how the receipt of share premium constituted unexplained cash credit in the hands of the assessee which has led to escapement of income for the impugned AY.

The revenue has placed on record form for recording the reasons for initiating proceedings under Section 148 and for obtaining the approval of The Addl. Commissioner / Pr. Commissioner of Income Tax along with Annexure containing reasons recorded for re-opening of assessment to submit that detailed reasons were recorded to initiate the reassessment proceedings against the assessee for the impugned AY. However, in our opinion, no cognizance of the same could have been taken in view of the fact that the said approval has been signed by the sanctioning authority only on 31/03/2016 whereas notice u/s. 148 was already issued to the assessee on 27/03/2014 and re-assessment was framed on 20/03/2015. Secondly, nothing could be placed on record to establish that the detailed reasons recorded by revenue as given in the attached Annexure were ever supplied to the assessee. Therefore, the only reasons recorded for re-opening, which were to be considered so as to adjudicate the jurisdictional issue, were the reasons dated 27/03/2014 as supplied to the assessee. It is trite law that reasons once recorded could not be altered, modified, substituted or amended subsequently so as to justify the reassessment proceedings

The Tribunal concluded that the reassessment proceedings suffered from jurisdictional defect and Ld. AO could not be clothed with second inning to review the already concluded issues in original assessment proceedings. Therefore, the reassessment proceedings could not be sustained under law.

Capri Global Advisory Services Pvt. Ltd. v DCIT-1(1)(1), ITA No. 170/Mum/2017, AY : 2009-10; Bench C ; DOH: 10/04/2019 (Mum)(Trib)

Capri Global Advisory Services Pvt. Ltd.

3. S 144C – the assessee a LLP – was not an ‘eligible assessee’ section 144C(15)(b) – Assessing Officer passed a draft assessment order under section 144C(1) – the draft assessment order passed u/s 144C(1) in case of the assessee is invalid.

The assessee claiming itself to be a limited liability partnership (LLP) was incorporated in Germany on 4th September 2012. During the year the Assessing Officer pass a draft assessment order under sub–section (1) of section 144C of the Act.

The assessee submits that, the assessee is not being an “eligible assessee” as defined under section 144C(15) of the Act, the A.O could not have passed the draft assessment order u/s. 144C(1) of the Act. The A.O can pass a draft assessment order under sub–section (1) of section 144C of the Act only in respect of an eligible assessee. The definition of eligible assessee under section 144C(15)(b) of the Act, it means any person in whose case there is a variation in income as a consequence of order passed by the T.P.O under section 92CA(3) of the Act, and any foreign company. In assessee.s case neither any variation has arisen as a consequence of an order passed by the T.P.O under section 92CA(3) of the Act nor the assessee is a foreign company as it is a limited liability partnership.

ITAT held that the A.O has neither made any reference to the T.P.O u/s. 92CA(1) of the Act nor the T.P.O has passed a ny order under section 92CA(3) of the Act. Therefore, the variation proposed in the draft assessment order is not as a consequence of any order passed by the T.P.O. Thus, it requires to be seen whether the assessee can fit into the definition of a foreign company as provide du/s 144C(15) (b)(ii) of the Act. As per the definition of foreign company under section 2(23A) of the Act, it means a company which is not a domestic company. Section 2(22A) of the Act defines domestic company to be an Indian Company or any other company which declares and pays dividend within India out of its income. Whereas, from the documentary evidences placed before us including the return of income filed by the assessee as well as the residency certificate issued u/s. 10F of the Act, it is seen that the status of the assessee has been shown as limited liability partnership. In fact, the Department has allotted PAN to the assessee in the status of a partnership firm. The definition of firm under section 2(23) of the Act includes a limited liability partnership. The status of the assessee has been shown as firm in the order . Thus, from these facts, it becomes clear that the assessee is not a foreign company but a limited liability partnership. Held that the draft assessment order passed in case of the assessee for the impugned assessment year is invalid. Therefore, all the proceedings consequent thereupon are also invalid.

Maquet Holdings B.V. & Co. KG. v DCIT-3(2)(1), ITA No. 2572/Mum/2017, AY 2013-14 Bench : I ; DOH: 12/04/2019 (Mum)(Trib)

Maquet Holdings B.V. & Co. KG.

 

Unreported Decisions – ST – May 2019

By Vinay Jain & Sachin Mishra, Advocates

1. Whether the Appellants are eligible to avail CENVAT Credit on ‘inputs’, ‘capital goods’ and ‘input services’ used in the construction of mall wherein the input services and capital goods were availed / procured both prior and post 1.6.2007 i.e. introduction of levy on ‘Renting of Immovable Property Services’?

Facts and Pleadings: Deepak Fertilisers & Petrochemicals Corporation Ltd. (hereinafter referred to as the Appellants) have been providing taxable service under the head ‘Renting of Immovable Property Service’ from its mall located in Pune. The Appellants have availed CENVAT Credit on Capital Goods and Input services used in construction of said mall.

Department alleged that Cenvat credit cannot be availed solely on the ground that mall is an immovable property and construction of such mall is neither subjected to service tax nor excise duty.

Appellant contended that Cenvat credit on the capital goods cannot be denied as the credit availed pertains to eligible chapter headings such as Air Conditioners, Escalators, Transformers etc falling under chapter 82, 84, 85 etc. Further, Appellant argued that mall is an immovable property which comes at the intermediate stage and ultimately is used in providing taxable output services. The Appellant have interpreted the definition of “input service” and submitted that the activities relating to setting up of premises of provider of output service also falls within the ambit of input service. The Appellant have relied on Navaratna S.G. Highway Prop. Pvt. Ltd, Vamona Developers Pvt. Ltd, Oberoi Mall Ltd, City Centre Mall Nashik Pvt Ltd cases to substantiate its arguments. Appellant further contended that Cenvat credit on input services received prior to 1.6.2007 also cannot be denied on the ground that as on date of commencement of provision of output services, all the services provided by the Appellant were liable to service tax. Thus, in effect all the services received by the Appellant in constructing the mall have been used in providing output services which are liable to service tax.

Judgment: The Appellate Tribunal while relying on various judgements held that the CENVAT Credit is admissible to the Appellant on the duty paid on capital goods and service tax paid on input services used in the setting up of the Mall. The Court reiterated the findings of City Centre Mall Nashik held that the definition of input service includes service used in relation to set up, premises of provider of output service or an office relating to such premises.

Deepak Fertilisers & Petrochemicals Corporation Ltd. vs. CCE, Pune, CESTAT, Mumbai, decided on 1.4.2019 in the Final Order No. A/85699/2019

Deepak Fertilisers & Petrochemicals Corporation Ltd.

2. Whether the services received by the Appellant from M/s Lear Corporation, USA against software usage agreement are in the nature of ‘Management, Maintenance Or Repair service’ as alleged by the Revenue or in the nature of ‘Information Technologies Software Service’ claimed by the Appellant? Whether the amount received under he said Agreement prior to 01.03.2008 chargeable to service tax under Reverse Charge Mechanism?

Facts and Pleadings: Lear Automotive India Pvt. Ltd. (hereinafter referred to as ‘the Appellant’) entered into an ‘software usage agreement’ with Lear Corporation, USA, wherein the Appellant was allowed usage of the said software. The charges paid by the Appellant for usage of the said software were equivalent to the annual maintenance charges paid by Lear Corporation, USA to its vendors of the software depending on the usage by the Appellant. The Appellant started paying Service Tax on the said services w.e.f. 16.5.2008 under the category of ‘Information Technology Software Service’.

The Department alleged that the services rendered by Lear Corporation, USA to the Appellant being in the nature of ‘support software maintenance’, the Appellant is liable to pay service tax on the amount paid by to Lear Corporation, USA under the reverse charge mechanism.

The Appellant contended that the Appellant is liable to service tax under ‘Information Technology Software Service’ i.e. from 16.5.2008 as the present transaction is in the nature of development of software. The Appellant also contended that the as the services received through internet was taxable only from 1.3.2008, the Appellant is not liable to pay service tax under reverse charge mechanism in view of Rule 3(ii) of the Import of Service Rules, 2006. The Appellant also submitted that in any case, ‘maintenance and repair of computer software’ was not part of ‘maintenance and repair service’ prior to 1.6.2007. Lastly, the Appellant also contended that the present transaction is merely sharing of costs which does not amount to provision of any service.

Judgment: The Hon’ble Appellate Tribunal held that the amount charged to the Appellant is for software maintenance services and not for usage of software per se. The Hon’ble Tribunal further held that there were no evidence in support of the claim of the Appellant that they were required to pay Lear Corporation, USA was not maintenance charges of the software but the charges for usage of software and the services received by the Appellant under the category of ‘Management, Maintenance, or Repair Service’. However, the Hon’ble Appellate Tribunal granted relief on the count that the services received through internet is taxable only from 1.3.2008 in view of Vodafone Cellular Ltd. vs. CCE, Order No. A/91120/2017 dated 30.11.2017.

Lear Automotive India Pvt. Ltd. vs. CST, Mumbai, CESTAT, Mumbai, decided on 8.10.2018 in Final Order No. A/88338/2018

Lear Automotive India Pvt. Ltd.

Unreported Decisions – ST – April 2019

By Vinay Jain & Sachin Mishra, Advocates, Lakshmikumaran & Sridharan Attorneys

1. Whether while making a declaration under Section 107(1) of the Service Tax Voluntary Compliance Encouragement Scheme, 2013, the declarant is required to declare ‘all service tax due or payable’ and not paid as on 1.3.2013 for ‘all the services’? Whether disclosure of service tax payable on some services and non-disclosure of service tax payable on other services would amount to ‘substantially false’ declaration under Section 111(1) of the Finance Act, 1994?

Facts and Pleadings: M/s Raj West Power Limited (hereinafter referred to as ‘Appellant’), is inter-alia engaged in the business of generation of electricity. The Appellant filed a declaration to the designated authority under Section 107(1) of the Service Tax Voluntary Compliance Encouragement Scheme, 2013 (hereinafter referred to as ‘VCES, 2013’) on 30.12.2013 under the category of ‘Business Support Service’ and ‘Manpower recruitment Service’ received during the period April 2011 to June 2012.

The Department alleged that while making the above declaration under VCES, 2013, the Appellant failed to declare service tax payable under reverse charge on the remittance made in foreign convertible currencies to the service providers under ‘Banking and Other Financial Services’. It was the case of the department that in terms of Section 105(1)(e) of the Finance Act, 1994, ‘Tax Dues’ means ‘all the service tax due or payable’ under Finance Act, 1004 and not paid as on 1.3.2013. In this regard, the department also relied upon Form VCES-1 which provides that a calculation sheet is required to be separately furnished if the ‘tax dues’ relate to more than one service. Therefore, the department alleged that the declaration made by the Appellant under the VCES, 2013 amounts to ‘substantially false’ declaration and thus liable to be rejected under Section 111(1) of the Finance Act, 1994.

The Appellant contended that service tax payable if any, under ‘Banking and other Financial Services’ under reverse charge mechanism was not the subject matter of the opted declaration under the VCES, 2013. The Appellant was under bonafide belief that no tax was payable under reverse charge mechanism at the time when such declaration was made. The Appellant submitted that the provisions of Section 111 of the Finance Act, 1994 cannot be resorted to, if the Appellant has not made any declaration regarding service tax payable for the so-called service of ‘Banking and other Financial Services’.

Judgment: The Hon’ble CESTAT referred to Second Proviso of Section 106 (1) of the Finance Act, 1994, that provides that where a notice or an order of determination has been issued to any person in respect of any period on any issue, no declaration shall be made of tax dues on the same issue for any subsequent period. The Hon’ble CESTAT observed that Second Proviso of Section 106 (1) of the Finance Act, 1994 contemplates that there can be many issues but a declaration could be made on some issue/issues. The Hon’ble CESTAT also referred to Circular dated 8.8.2013 that provides that the assessee can declare ‘tax dues’ concerning an issue which is not part of the audit paragraph. The Hon’ble CESTAT further observed that the requirement of furnishing a calculation sheet separately if service tax dues are in respect of more than one service under the Form VCES-1 cannot be the basis to conclude that to avail benefit of VCES, 2013, the declarant must necessarily disclose ‘all the tax dues’. Accordingly, the Hon’ble CESTAT held that under Section 111(1) of the Finance Act, 1994, the Commissioner should have reasons to believe that the declaration made by declarant under VCES, 2013 was ‘substantially false’ in relation to the specific service mentioned in the declaration. The department cannot invoke the above provision regarding a service for which declaration was never made on the count that the department had reason to believe that tax for that service should also have been included in the declaration. Accordingly, the Hon’ble CESTAT allowed the benefit of VCES, 2013 to the Appellant.

M/s. Raj West Power Limited vs. CST, Jaipur, CESTAT, New Delhi, decided on 28.2.2019 in the Final Order No. 50381/2019.

M/s. Raj West Power Limited

2. Whether the value of goods supplied free of cost by the service recipient shall be included in the ‘gross value’ to claim abatement under Notification dated 1.3.2006? Whether benefit of Exemption Notification dated 1.3.2006 can be denied on the count that the assessee has availed Cenvat credit on input services in relation to soil testing by wrongly discharging service tax under ‘Consulting Engineer Service’ and not under ‘Commercial or Industrial Construction Service’?

Facts and Pleadings: M/s. Madhya Bharat Telecom Infrastructure (hereinafter referred to as the ‘Appellants’) is inter-alia engaged in providing infrastructure related construction service to telecom companies which includes construction of civil work and telecom towers. The Appellant paid 100% service tax on the work order related to soil testing under ‘Consulting Engineering Service’ and availed benefit of Cenvat credit on input services. Whereas, the Appellant availed benefit of 67% abatement under Notification dated 1.3.2006 for the work order related to ‘Commercial or Industrial Construction Service’.

The Department alleged that the value of goods supplied free of cost by the service recipient shall be included in the ‘gross value’ to claim abatement of 67% under Notification dated 1.3.2006. The case of the department was that the activity of soil testing is integral part of construction services and hence taxable under ‘Commercial or Industrial Construction Service’. The department further alleged that in view of Section 65A(2)(b) of the Finance Act, 1994, the essential character of the said activity was construction service only. Therefore, by availing Cenvat credit on input services, the Appellant was not entitled to the benefit of Exemption Notification dated 1.3.2006.

The Appellant contended that even for the purposes of claiming abatement under Notification dated 1.3.2006, in view of Bhayana Builders (P) Ltd. 2018-TIOL-66-SC-ST, the value of free of cost supplies shall not be included in the ‘gross value’. The Appellant further submitted that the Appellant has not availed any Cenvat credit on the ‘Commercial or Industrial Construction Service’ rendered by it, the Appellant has only availed Cenvat credit on ‘Consulting Engineer Service’ on which it has not claimed any abatement under Notification dated 1.3.2006. Further, there are two separate work orders for both the soil testing as well as construction service, hence not a composite service.

Judgment: The Hon’ble CESTAT held that the principle laid down in the decision of Bhayana Builders (P) Ltd. 2018-TIOL-66-SC-ST should be applicable even while claiming abatement under Notification dated 1.3.2006 and the value of free of cost supplies shall not be included in the ‘gross value’. The Hon’ble CESTAT further held that the term ‘such taxable service’ in the proviso to Notification dated 1.3.2006 shows that the benefit of abatement can only be denied in cases wherein Cenvat credit on the input service has been availed by the assessee on that specific taxable service on which abatement has been claimed. Since, in the present case, the Appellant has not availed any Cenvat credit on input services relating to ‘Commercial or Industrial Construction Service’, abatement cannot be denied under proviso to Notification dated 1.3.2006. Further, the fact that there are two separate work orders for the soil testing as well as construction service and soil testing is independent of construction service as negative outcome of soil testing will result in non-rendition of construction service, the present transaction is not a composite service. In view thereof, Section 65A(2)(b) of the Finance Act, 1994 is not applicable. Accordingly, the Hon’ble CESTAT allowed the benefit of Notification dated 1.3.2006 to the Appellant.

Madhya Bharat Telecom Infrastructure vs. CCE, CESTAT New Delhi, decided on 25.2.2019 in Final Order No. 50371/2019

Madhya Bharat Telecom Infrastructure