Category: July 2018

Unreported Decisions – ST – July 2018

By Vinay Jain & Sachin Mishra, Advocate

1. Whether leasing of the entire club property under a joint venture agreement is liable to service tax under the category of ‘Renting of Immovable Property Services’?

Facts & Pleadings: 

M/s. Ambience Hospitality Pvt. Ltd. (hereinafter referred to as “appellants”) entered into a Joint Venture Agreement with Ambience Hospitality Management (P) Ltd. (“AMPL”), for running a club on “Revenue-Sharing Basis”. Under the agreement, AMPL was responsible for operating, running and maintaining the club and to share a percentage of the revenue earned per month with the appellants which was subsequently modified to be a fixed monthly payment. During the period, June 2007 to March 2009, appellants filed refund application as they had wrongly paid service tax considering the said activity to be ‘Renting of Immovable Property Services’.

The department contended that the appellants were receiving a monthly rental from AMPL and the same was taxable under ‘Renting of Immovable Property Services’. Further, department also contended that part of the demand is also barred by limitation.

The appellants contended that lease of a club does not fall under the meaning of “immovable property” under Section 65 (105)(zzzz) of Finance Act, 1994, inasmuch as clause (d) excludes building used solely for residential purposes & building used for the purposes of accommodation including hotels, boarding house, holiday resort, tents, camping facilities. The appellants further claimed that it is not a ‘simple leasing of immovable property’ but ‘leasing of entire business of club’ to the lessee under Joint venture. Hence not covered under the definition of ‘renting of immovable property services’. The appellants also argued that they had paid service tax under mistake of law hence, provisions of 11B of the Central Excise Act, 1944 are not applicable. In support of the same the appellants relied upon the decision of Union of India vs. ITC Limited reported in 1993 (67) ELT (SC) and K.V.R Constructions vs. CCR Bangalore 2010 (17) STR 6.

Judgment: The Hon’ble CESTAT held that the appellants and AMPL intended to run the club on principal to principal basis and the method of arriving at the value of consideration shall not determine the nature of the contract. Hence, the change in the revenue sharing clause of the agreement did not change the colour of the revenue sharing arrangement between the parties to that of tenancy. As per the Hon’ble CESTAT, there was no delivery of possession of club to AMPL by way of tenancy but only the right to manage and operate the club for mutual benefit was given by the appellants on a principle to principle basis. This does not attract the provisions of Service Tax. The Hon’ble CESTAT finally observed that in view of Union of India vs. ITC Limited reported in 1993 (67) ELT (SC), a tax wrongly realized is made outside the provisions of the Act and such amount cannot be retained by department, conflicting with Article 265 of the Constitution.

M/s. Ambience Hospitality Pvt. Ltd. vs. CCE, Delhi-IV, CESTAT, New Delhi decided on 17.12.2018 in Appeal No. 05/ST/Appeal/DLH-IV/2013.

M/s. Ambience Hospitality Pvt. Ltd.

2. Whether the remittance of ‘certain foreign exchange’ for ‘foreign expenditures’ in relation to ‘expenses incurred outside India’ amount to repatriation of export proceeds received in convertible foreign exchange?

Facts & pleadings: M/s. IMRB International (hereinafter referred to as the ‘appellants’) are inter alia engaged in rendering services under the category of ‘Market Research Agency Services’. The appellants have been rendering such services to their clients situated in India as well as abroad. The appellants were not paying service tax on the amount received for services rendered to foreign clients as the same amounted to export of service.

The department alleged that in respect of such foreign currency receipts, the appellants are liable to pay service tax in terms of proviso provided in Notification Nos. 6/1999-ST and 21/2003-ST. The department contended that in view of the above notifications, as a part of the amount received in foreign convertible exchange was repatriated outside India, the benefit of export of service will not be allowed.

The appellants contended that the appellant has made certain remittances in foreign exchange in connection with the foreign jobs of the appellant, purchase of software licences and other expenses. The appellants argued that this cannot be considered as repatriation in foreign currency rather this was in the nature of remittances, which cannot attract the provisions of the above Notifications. The appellants further contended that the services provided to overseas clients should be considered as services consumed abroad and hence not liable for service tax. Hence the appellants need not take recourse to the exemption notification to claim immunity from payment of service tax on the foreign currency receipts.

Judgment: The Hon’ble CESTAT observed that the appellants have made certain remittances in foreign currency for purchase of software licences and other expenses connected with providing services to foreign clients. The CESTAT held that such remittances will not fall within the mischief of the proviso in Notification No. 6/1999-ST and 21/2003-ST. In this regard, Hon’ble CESTAT followed the principle that the intention of the Government is always not to tax “Export of Services”. The Hon’ble CESTAT further held that the appellant was fully entitled to make remittances in foreign exchange outside the country for legitimate business expenses as per the guidelines issued by Reserve Bank of India from time to time. In this regard, the CESTAT relied upon the decision of the Tribunal in the case of SGS India Pvt. Ltd. vs. CST, 2011 (24) STR 60 (Tri.Mumbai) to set aside the demand.

M/s. IMRB International vs. CST, Kolkata, CESTAT, Kolkata, decided on 6-12-2018 in Appeal No. 171/2008.

M/s. IMRB International

Note: The Whole decisions can be downloaded from the CTC website www.ctconline.org under Knowledge Centre.

Unreported Decisions – July 2018

By Ajay R. Singh, Advocate

1. S. 28(i): Business loss – The claim of loss arises out of write-off of obsolete stock as a business loss – was incidental to its regular business – Allowable

The assessee company is engaged in the business of manufacturing and service of flame arresters and industrial safety valves. The AO during the course of the assessment proceedings observed that the assessee had written-off stock of ₹ 52,43,318/-. However, the AO was not persuaded to accept the contention of the assessee that the actual stock write-off of material used in manufacturing and trading activity was to be taken as a revenue loss while computing the income of the assessee as per the normal provisions. The AO holding a conviction that the write-off of the stock was an item of the balance sheet, therefore, added the same to the total income of the assessee.

Aggrieved, the assessee assailed the aforesaid addition made by the AO in appeal before the CIT(A). The CIT(A) observed that the assessee on being queried as regards its claim of stock written-off amount had submitted that being in the business of manufacturing of safety valves and flame filters etc., the stock was written off, as the same had become redundant due to change in the engineering designs of the devices. The AO had also not disputed that the assessee had sold some materials which were spoiled by rusting and had offered such scrap sales to tax under the head ‘Other income’. The CIT(A) concluded that the claim of the assessee of loss arising out of write-off of obsolete stock as a business loss was incidental to its regular business.

The Tribunal held that the view taken by the CIT(A) that now when the AO had duly accepted the fact that actual stock write-off was because of the redundancy of the stock of castings due to change in the engineering design of the devices and rusting of the materials therefore, there was no justifiable reason on his part for disallowing the claim of the assessee. The observation of the AO that as the stock was a balance sheet item, therefore, its writing-off as a revenue expenditure was not called for. The stock in question was produced during the business operation, thus any loss arising due to diminution in its value, as had been accepted by the revenue in the past, had to be allowed as a deduction.

ACIT vs. M/s. Protego India Pvt. Ltd., ITA No.1268/Mum/2016, AY 2012-13 dated 23-5-2018 (Mum.)(Trib.)

M/s. Protego India Pvt. Ltd.

2. S. 153C : Assessment – Search – No incriminating material or evidence was found in the course of search / survey – Addition merely based on the disclosure made by Co-owner – And statement of third person – Held no addition can be made [S. 132]

The assessee is an individual. A search u/s. 132(1) of the Act was conducted, in case of a third group. On the basis of the seized documents a survey under section 133A of the Act was carried out at the business premises of the assessee, on 5-1-2007. Consequent to the survey proceedings, the assessee was summoned under section 131 of the Act and a statement was recorded by him on 13-2-2007. During the recording of statement, when the assessee was called upon to explain the alleged discrepancies found on the basis of materials seized/impounded, he offered an amount of ₹ 75 lakh towards cash receipts on sale of shops in a project developed by him with another party viz., M/s. Guru Prerna Enterprises. In the return of income filed for the impugned assessment year in response to the notice issue u/s. 153C of the Act, the assessee also offered the amount of ₹ 75 lakh as undisclosed business income.

The AO on the basis of the statement recorded from third party and also the fact that the co-developer has offered undisclosed income in the ratio of 60% in case of sale of shops and 40% in case of flats, the AO proceeded to work out the undisclosed income derived by the assessee from sale of shops and flats at ₹ 2,80,25,655 and added back to the income of the assessee.

The learned CIT(A) also found that no incriminating material or evidence was found in the course of search/survey either from the premises of Guru Prerna Enterprises or the assessee regarding receipt of cash on sale of flats and shops. He also observed that the other witness also never stated that the assessee received any cash on sale of flats and shops. It is the assessee who had accepted receipt of some unaccounted cash on sale of shops and specifically denied of having received any cash on sale of flats. Further, out of 67 shops, assessee had already sold 65 shops through other brokers. He, therefore, held that by placing too much reliance on the statement of third party, no addition could have been made. More so, when no evidence of receipt of cash was found at the time of search/survey.

The CIT(A), however, proceeded to estimate the total cash receipt on sale of shops/flats at ₹ 1 crore, the assessee having already offered an amount of ₹ 75 lakh, the learned CIT(A) sustained the addition of further amount of ₹ 25 lakh.

The ITAT dismissed the department appeal and also allowed the cross appeal of the assessee on the basis of the fact that CIT(A) having found that there is no evidence to indicate that the assessee has received any cash over and above what has been declared by him, even the addition made of ₹ 25 lakh purely on estimate basis cannot be sustained. Therefore, the entire addition made by the Assessing Officer in the instant case was deleted.

DCIT vs. Umesh H. Gandhi, ITA No. 2745/Mum/2016 & CO. No 289/Mum/2017, AY 2007-08 dated 28-2-2018 (Mum)
(Trib)

Umesh H. Gandhi

3. S.153A : Assessment – Search – Noting on loose papers – Additions cannot be made as undisclosed income

A search and seizure action was initiated against the assessee, wherein, certain loose papers were seized. Statement was also recorded. The seized documents were rough profit & loss account. The assessee was asked to reconcile the same with audited financial statements. The ld. AO added the difference as unaccounted income of the assessee (i.e., difference in profit & loss account).

The assessee, contended that the assessee is merely entitled for commission out of the travelling business. The seized documents are loose papers and are merely dump documents.

The learned CIT(A) considered the factual matrix and deleted the addition.

The Tribunal noted that as per audited books of account, the total income of the assessee was ₹ 2,24,21,235/-, which is more than the seized rough profit & loss account of ₹ 1,39,36,342/-, meaning thereby, the assessee has offered more income compared to the rough noting mentioned in the seized profit & loss account. The assessee is merely entitled to commission in the business of travelling. The assessee justifiably explained the factual matrix. The figures explained by the assessee are matching with the audited books of accounts. In view of this factual matrix, Tribunal upheld the CIT (A) order, thus, the appeal of the Revenue was dismissed.

ACT vs. Zaireen Travel Services, ITA Nos. 1145 & 1146/Mum/2015, (Mum.)(Trib.)

Zaireen Travel Services

Note: The Whole decisions can be downloaded from the CTC website www.ctconline.org under Knowledge Centre.