Category: Uncategorized

Unreported Decisions – ST – August 2020

By Vinay Jain & Sachin Mishra, Advocates

1. Whether Rule 117 of the Central Goods and Services Tax Rules, 2017 (“CGST Rules”) is ultra vires Section 140 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) and is liable to be construed as a directory provision and not a mandatory provision?

Facts and Pleading: M/s P.R. Mani Electronics (hereinafter referred to as ‘The Petitioner’), was unable to file TRAN-1 before the extended time limit of 27.12.2017 as specified under GST law because of issues in the portal. The Petitioner subsequently approached the Sales Tax Collection Inspector on 29.12.2017 and submitted a hard copy of TRAN-1 and received an acknowledgement. In spite of repeated follow ups, there was no response with regard to entitlement of the Petitioner to Transitional Credit. Consequently, a writ petition was filed before the Madras High Court, challenging Rule 117 of the CGST Rules as being ultra vires Section 140 of the CGST Act and violative of Articles 14 and 300-A of the Constitution of India. It was further prayed that Rule 117 should be read as a directory or permissive provision and not as a mandatory or peremptory provision.

The Department argued that Input Tax Credit is in the nature of a concession granted to registered persons and therefore any conditions, including time limits, subject to which such concessions are granted should be enforced strictly. The department placed reliance om Jayam and Company v. Assistant Commissioner and another [(2016) 15 SCC 125], ALD Automotive Private Limited v. Commercial Tax O¬cer [(2019) 13 SCC 225] and Nelco Limited v. Union of India [2020 SCC Online Bom 437]. 

The Petitioner argued that the Rule 117 of the CGST Rules is ultra vires Section 140 of the CGST Act, 2017. The Petitioner further argued that the said Rule is liable to be construed as a directory provision in so far as it specifies a time limit for the submission of the declaration in TRAN-1. The Petitioner further submitted that the tax authorities were fully cognizant of the fact that registered persons were unable to submit the TRAN-1 online within the prescribed period on account of technical glitches and that is the reason for extension of time limit up to 31.03.2020 by the government. Thus, the Petitioner submitted that it clearly indicates that the provision was intended to be directory and not mandatory notwithstanding the use of the word “shall” in Rule 117(1). In this regard, reliance was placed on Delhi High Court decision in Micromax Informatics Ltd. v. Union of India [WP(C) No. 196 of 2019]; SKH Sheet Metals [2020-TIOL1031-HC-DEL-GST] and Brand Equity Treaties Ltd. v. Union of India – 2020-TIOL-900-HC-DEL-GST.

Judgment: The Hon’ble High Court relied on Jayam and Company v. Assistant Commissioner and another [(2016) 15 SCC 125] to held that the contention of the Petitioner that ITC is the property is incorrect and rather it is to be construed as a concession. The Hon’ble High Court observed that the ITC cannot be availed without complying with the conditions prescribed thereto. According to the Hon’ble High Court as the power to prescribe a time limit is expressly incorporated in Section 140 post amendment, Tran credit cannot be availed except within the stipulated time limit. The Hon’ble High Court further relied upon Nelco Limited v. Union of India [2020 SCC Online Bom 437] to held that both ITC and Tran credit cannot be availed except within the stipulated time limit. As per the Hon’ble High Court, the object and purpose of Section 140 clearly warrants the necessity to be finite. In fact, it is a time limit relating to the availing of a concession or benefit. Accordingly, the Hon’ble High Court held that the time limit is mandatory and not directory. Thus, the Hon’ble High Court held that since the Petitioner had not filed the TRAN-1 electronically but handed over in person to the STC Inspector, the prescription in Rule 117 is not satisfied. The Tran claim of the Petitioner is thus not admissible

M/s P.R. Mani Electronics v. Union of India & Ors., Madras High Court Order dated 13.07.2020 in WP. No. 8890 of 2020 and WMP No. 10803 of 2020

2. Whether ‘foreclosure charges’ levied by banks and nonbanking financial companies on premature termination of a loan can be subjected to levy of service tax under Banking and Other Financial Services (“BoFS”)?

Facts and Pleading: M/s. Repco Home Finance Ltd. and other (hereinafter referred to as the “Appellants”) provided housing loans to borrowers for a specified period subject to terms and conditions contained in the agreement. In circumstances where the borrower decided to terminate the loan before the stipulated period, the Appellants collected foreclosure charges, which were usually determined as a percentage of outstanding principal amount.

The department alleged that the termination of loan prior to the agreed term is a facility provided to the borrower for a price. As per the department, the definition of ‘Banking and Other Financial Services’ contains the phrase ‘in relation to lending’ and therefore, any activity in relation to lending will be subjected to service tax. The department also alleged the ‘foreclosure charges’ cannot be termed as an ‘interest’ or ‘penal interest’ on the count that penal interest would only be chargeable on default in making payment. Hence, as per the department these charges would have to be subjected to service tax.

The Appellants argued that the ‘Foreclosure charges’ are collected as compensation for breach of the loan agreement arising on premature termination. These receipts do not constitute ‘consideration’ as per Section 67 of the Finance Act, 1994 for provision of lending services. The Appellants further argued that foreclosure charges paid by the borrowers are not ‘at the desire of ’ the banks/ non-banking financial companies. The Appellant submitted that the foreclosure charges are recovered as compensation for disruption of a service, and not towards lending services as such. It is the borrower who unilaterally decided to cut short the period of loan by making the payment before the stipulated time resulting in a breach of the contract. Accordingly, the Appellant argued that the ‘Foreclosure charges’ cannot be subjected to service tax.

Judgment: The Hon’ble Larger Bench of CESTAT observed that the ‘Consideration’ must flow from the service recipient to the service provider and should accrue to the benefit of the service provider. The Hon’ble Larger Bench of CESTAT relied upon the definition ‘Consideration’ under Section 2(d) of the Indian Contract Act, 1872, to held that consideration must necessarily flow ‘at the desire of the promisor’. Since premature termination of loan only results in loss of future interest income, ‘foreclosure charges’ do not flow ‘at the desire’ of such banks. The Hon’ble Larger Bench of CESTAT further observed the distinction between ‘condition to a contract’ and ‘consideration to a contract’. A service recipient may be required to fulfil certain conditions contained in the contract but that would not necessarily mean that this value would form part of the value of taxable services that are provided. Accordingly, the Hon’ble Larger Bench of CESTAT held that the ‘Foreclosure charges’ are compensation paid to the banks as a result of a unilateral repudiation/ breach of contract and not towards ‘lending services’. The Hon’ble Larger Bench of CESTAT observed that though the definition of BoFS uses the term ‘in relation to lending’, it cannot be read in so widely so as to include even those acts which terminate the activity. In fact, ‘foreclosure’ is an anti-thesis to lending and therefore, cannot be construed as in relation to lending. The Hon’ble Larger Bench of CESTAT further held that ‘Foreclosure charges’ cannot be viewed as an ‘alternative mode of performance’ of contract because ‘alternative mode of performance’ still contemplates performance, whereas foreclosure is an express repudiation of the contractual terms. Treating eventuality of foreclosure as an optional performance is incorrect. Accordingly, the Hon’ble Larger Bench of CESTAT held that the ‘Foreclosure charges’ cannot be subjected to service tax.

Commissioner of Service Tax, Chennai v. M/s. Repco Home Finance Ltd., CESTAT Larger Bench, Miscellaneous Order No. 40053/2020, dated June 8, 2020.

3. Whether the construction of associated facilities like toll plaza, cattle and pedestrian crossing facilities, parking bays for buses/trucks and rest room for staff and common people are part of the road (exempt) or are liable to service tax under the head ‘works contract service’?

Facts and Pleading: M/s. GMR Project Pvt. Ltd. (hereinafter referred to as “the Appellant”) have been granted on ‘Build, Operate and Transfer (BOT)’ basis, construction and maintenance work of roads by ‘National Highways Authorities of India’ (NHAI). The Appellant also undertakes the construction of associated facilities like toll plaza, cattle and pedestrian crossing facilities, parking bays for buses/trucks and rest room for staff, etc. and common people.

The department argued that the NHAI have entered into the concessionaire agreement with the Appellant for execution of highway projects envisaging design, construction, development, finance, operation and maintenance on BOT basis. The case of Department is that exclusion from service tax is primarily for the work of laying of road and not for allied works such as the construction of aforesaid associated facilities undertaken with regard to the said activity and hence the allied activities are taxable under the Works Contract Service

The Appellant submitted that the Appellant had been granted ‘concessionaire agreement’ on Trunkey basis, on BOT model. The Appellant argued that the construction of Toll Plaza does not amount to construction for commercial concern. The same is in furtherance of the agreement to build and manage roads as granted by the NHAI on Turnkey basis on BOT model, which is necessary for the recovery of the costs incurred by the Appellant. The Appellant further submitted that the Construction of Toll Plaza is not an isolated project activity to attract tax. The Appellant argued that it is not rendering any service to itself, when it built the Toll Plaza, etc. on or along with road, for recovery of its costs, etc. Accordingly, the Appellant submitted that the construction of Toll Plaza etc., is directly connected and attached to the service of construction of roads which is exempt under Section 97 read with Section 65(105) (zzzza) of the Finance Act, 1994

Judgment: The Hon’ble CESTAT held that the construction like toll plaza, cattle/pedestrian crossing facilities, parking bay for buses/trucks, rest room for staff and common public at large, etc. are also part of the road, as these are meant for exclusive use by the highway staff and the people using these roads. Further the Hon’ble CESTAT took note of several judgments of the Tribunal wherein even greenery done in the middle of the road, by way of divider or on the side of the roads, as well as crash barriers erected on the side of the roads all form part of the road and not exigible to service tax. The Hon’ble CESTAT also took note of the decision of the Delhi Bench of this Tribunal in the case of Jagdish Prasad Agarwal Vs. CCE, Jaipur-I [2017(3) GSL 455 (Tri. Del.)]. Accordingly, The Hon’ble CESTAT held that the Appellant is entitled for the exemption under Section 65(105) (zzzza).

M/s. GMR Project Pvt. Ltd. vs. CCE, CESTAT, Banglore, decided on 17.06.2020 in Service Tax Appeal No. 25673 of 2013.

4. Whether the services provided by M/s National Securities Depository Ltd. to their Depository Participants in nature of “provision and transfer of information and data processing” services taxable under the category of Banking and Other Financial Services as defined by Section 65(12) of the Finance Act 1994?

Facts and Pleading: M/s. National Securities Depository Ltd. (hereinafter referred to as “the Appellants”) hold securities (like shares, debentures, bonds, Government Securities, units etc.) of investors in electronic form. The Appellants also provide services related to transactions in securities. The Appellants interface with the investors through their agents called as Depository Participants. The aforesaid Depository Segment of the Appellants includes providing various services to the investors like dematerialization, rematerialization, transfer and pledge of securities in electronic form through closed user group network of business partners viz issuers/ Registrar & Transfer Agents and Depository Participants (DP). The Appellants have an electronic platform which is designed to provide information in relation to securities and enables the DP or their investors to have access to their securities holding at any time.

According to the department the aforesaid processes of de-materialization/ re-materialization; pledge, transfer of securities indicate that there is provision of information, transfer of information and data processing through electronic media. Thus, the department alleged that the Appellants are providing “provision and transfer of information and data processing” taxable under the category of “Banking and Financial Services” as defined by Section 65 (12)(a) of the Finance Act, 1994. The department relied upon Bank of Baroda [2016 (43) STR 141 (T-Mum)] = 2016-TIOL-216- CESTAT-MUM wherein on the similar facts of the case it was held that the services provided are classifiable under the taxable category of “Banking and Other Financial Services” as “provision and transfer of information and data processing”.

The Appellant contended that the Depository Participants are merely an agent Depositories. There is no service in the nature of Depository Service provided by the Appellant to the DP’s. DP’s provide the service to the customer/ client. There is no service in nature of Depository provided to the DP’s. The Appellant further argued that even if they are required to pay service tax under the category of Banking and Other Financial Service then the same will be under 65(12)(v) and not under 65 (12)(vii). The Appellant further submitted that since the depository participants act as agents for the purpose of depository services and have discharged Service Tax on entire consideration including fees, therefore, the Appellant is not liable to discharge tax on the same once again. The Appellant further argued that if it is presumed that they are providing the services to Depository Participants then also the same could be only “infrastructure support service” which is in the nature of Business Support Service and not the Banking and Other financial Service.

Judgment: The Hon’ble CESTAT observed that the Appellant’s have an electronic system providing for transmission of data to various participants/ partners in their business and they provide the platform to their Depository Participants through which they interact with Investor, Issuer, Registrar and Transfer Agents & Clearing House. For providing these services the Appellant charges certain fees from their Depository participants. The Hon’ble CESTAT further observed that the Appellant is providing “provision and transfer of information and data processing” in relation to their depository operations. Accordingly, the Hon’ble CESTAT held that the by providing for provision and transfer of information and data processing in relation to the depository services, the Appellants have provided the “Banking and Other Financial Services” as defined by 65(12) (a)(vii) to the Depository Participants and the Depository Participants have in turn utilized these as input services to provide Depository Related services to their users/ clients.

M/s. National Securities Depository Ltd. vs. CST, CESTAT Mumbai, decided in Final Order No. A/85598/2020 dated 08.06.2020.

Unreported Decisions – ST – June 2020

By Vinay Jain & Sachin Mishra, Advocates

1. Whether the phrase ‘technical difficulties on the common portal’ under Sub-rule (1A) to Rule 117 of the CGST Rules, 2017 will include within its ambit any delay caused in filing TRAN-I due to any other technical difficulties at the end of the assessee? Whether the accumulated CENVAT credit is a vested right of the assessee and a constitutional right under Article 300A of the Constitution of India? Whether the time limit specified in Rule 117 of CGST Rules for filling Tran-1 form is procedural in nature and not a mandatory provision?

Facts and Pleading: Four Writs were filed before the Hon’ble Delhi High Court seeking relief in the nature of a writ of Mandamus directing department (i.e. Respondents) to permit Petitioners to file Form TRAN-1 beyond the period provided under the CGST Rules, 2017. The said delay was caused due to numerous difficulties faced at the end of the Petitioners such as filing of refund application instead of filing the Form TRAN-1 in time; switch over from dependence on tax compliance at group level in the earlier regime to unit level in the GST regime; mistakenly declaring of less value of accumulated CENVAT credit than the actual value etc.

According to the department as all the aforesaid delay were caused due to the personal negligence and ignorance of Petitioners themselves, the same will not fall within the ambit of ‘technical difficulties on the common portal’ under Sub-rule (1A) to Rule 117 of the CGST Rules, 2017. The department also submitted that benefit of taking credit is not a vested right of an assessee and cannot be claimed in perpetuity as the same is subject to certain conditions, safeguards and limitations provided under the GST law. Department also relied on the provisions of section 164 of the CGST Act to contend that in view of said section they can make rules to carry out the provisions of GST Act.

The Petitioners relied upon the earlier judgments including A.B. Pal Electricals v Union of India (W.P.(C) 6537/2019 (decided on 17.12.2019) in favour of the assessee on this issue. The Petitioners also submitted that the GST system is in a nascent “trial and error” phase and they should not be made to suffer on account of inefficiency in the systems of the Respondents. The Petitioners also argued that the accumulated CENVAT credit is vested right and constitutionally protected right under Article 300A of the Constitution, which cannot be taken away by framing Rules without there being any substantive provision in this regard under the CGST Act, 2017. The Petitioners also submitted that the time limit specified in Rule 117 of CGST Rules is procedural in nature, and not a mandatory provision, and thus period provided therein cannot be enforced so as deprive the Petitioners from availing their vested right.

Judgment: The Hon’ble High Court after analysing several judgments and legislative history and intent of the transition provisions held that the phrase technical difficulties on the common portal’ under Sub-rule (1A) to Rule 117 of the CGST Rules, 2017 should be given a wider interpretation. As per the Hon’ble High Court it will include within its ambit any difficulty faced by the assessee whether at its own end or at the end of the government in filing the Form TRAN-1 within the prescribed time limit. Further, the Hon’ble High Court also held that the CENVAT credit which stood accrued and vested is the property of the assessee and is a constitutional right under Article 300A of the Constitution and the same cannot be taken away merely by way of delegated legislation by framing rules, in absence of any substantive provision in the GST Act, 2017. Further, the Hon’ble High Court also held that in absence of any consequence being provided under Section 140, to the delayed filing of TRAN-1 Form, Rule 117 has to be read and understood as directory and not mandatory. Further, the Hon’ble High Court went on to read down the provision of Rule 117 in so far as it prescribed the time limit for filing of form TRAN-1. However the Hon’ble High Court also noted that it cannot extend in perpetuity and in absence of any specific provision in the GST Act, time limit provided in terms of the residuary provisions of the Limitation Act, i.e. the period of three years should be the guiding principle and accordingly held that Tran-1 declaration can be filed for a period of three years from the appointed date i.e. by 30.6.2020. The Hon’ble court also directed the respondent to publicise the content of this judgement so that similarly placed assessee can also take advantage of this judgement and file declaration by 30.6.2020.

Brand Equity Treaties Limited vs. U.O.I., High Court of Delhi decided in W.P.(C) 11040/2018 and C.M. No. 42982/2018 on 05.05.2020.

2. Whether Circular No. 26/26/2017-GST dated 29.12.2017 which provides for rectification of mistakes in GSTR-3B pertaining to earlier tax period only in any subsequent tax period in which the error is noted is ultra vires the provisions of CGST Act, 2017 and contrary to Articles 14, 19 and 265 of the Constitution of India?

Facts and Pleading: M/s. Bharti Airtel Limited (hereinafter referred to as ‘Petitioner’) is inter-alia engaged in the business of providing telecommunication services in India. Due to nonoperationalization of Forms GSTR-2A, GSTR-2 and GSTR-3 and the system related checks, the Petitioner recorded ITC based on its estimate in GSTR-3B for the period July 2017 to September 2017. As the actual value of ITC was not available, the Petitioner had to discharge its GST liability in cash. Thus, when the exact value of ITC was discovered through GSTR-2A, the Petitioners realised that there was excess payment of taxes, by way of cash, to the tune of approximately Rs. 923 crores. Accordingly, Petitioner desired to correct its returns for the said period, but was being prevented from doing so, as there was no enabling statutory procedure implemented by the Government. Accordingly, the Petitioner preferred this writ petition challenging Rule 61(5) of the GST Rules, Form GSTR- 3B and Circular No. 26/26/2017-GST dated 29.12.2017 as ultra vires the provisions of CGST Act, 2017 and contrary to Articles 14, 19 and 265 of the Constitution of India.

GST department submitted that Circular No. 26/26/2017-GST dated 29.12.2017 does provide for the rectification of mistakes pertaining to earlier tax period in any subsequent tax period in which the error is noted. As per department, it is not a case wherein the said circular does not provide for rectification at all and thus is in alignment with the CGST Act, 2017. The department also submitted that the Petitioner can very well claim refund of the ITC lying in the electronic credit ledger. The department further submitted that if rectification will be allowed to be reflected in the previous tax period Form GSTR-3B of the supplier, it would lead to many complexities such as requirement of modification of the particulars furnished in Form GSTR-3B by the recipient as well.

The Petitioner argued that the output tax liability has substantially reduced on account of low tariff in the telecom sector. As a result, the input tax credit which has accumulated on account of erroneous reporting, cannot be fully utilized in the prevailing tariff structure. Thus, relief provided under the Circular No. 26/26/2017-GST dated 29.12.2017 will not remedy the loss caused to the Petitioner. The Petitioner argued that the inability of the government to run their IT system as per the structure provided under the CGST Act, 2017 cannot prejudice the rights of a registered person. According to the Petitioner, the summary scheme introduced by Rule 61(5) of CGST Rules, 2017 being in complete variance with the machinery originally contemplated under the GST Scheme, stifled the rights of the Petitioner by not permitting the validation of the data prior to the same being uploaded. Thus, the Petitioner pleaded that it should be allowed to rectify GSTR-3B for the period July 2017 to September 2017.

Judgment: The Hon’ble High Court after analysing several judgments and legislative history behind the filing of the returns has held that that due to the failure of the government to operationalise GSTR-2 & 3 in time, the Petitioner could not file the correct ITC available to it in the relevant period. The Hon’ble High Court held that the Government has failed to fully enforce the scheme of the CGST Act, 2017 and cannot take benefit of its own wrong of suspension of the Statutory Forms and deprive the rectification of the returns to reflect ITC pertaining to a tax period to which the return relates to. As per the Hon’ble High Court, Petitioner has a substantive right to rectify the ITC for the period to which it relates. Thus, the Hon’ble High Court held that the rectification/ adjustment mechanism for the months subsequent to when the errors are noticed is contrary to the scheme of the CGST Act, 2017. The Hon’ble High Court also held that the refund of excess cash balance in terms of Section 49(6) read with Section 54 of the CGST Act does not effectively redress Petitioner’s grievance. Accordingly, the Hon’ble High Court the rectification of the return for that very month to which it relates is imperative and, accordingly, read down para 4 of the Circular No. 26/26/2017-GST dated 29.12.2017 to the extent that it restricted the rectification of Form GSTR-3B in respect of the period in which the error has occurred.

Bharti Airtel Limited vs. U.O.I., High Court of Delhi decided in W.P.(C) 6345/2018, CM APPL. 45505/2019 on 05.05.2020.

3. Whether for the purposes of service tax the value of photography service can be determined separately from the value of certain consumables and chemicals which are used on the paper for printing the image? Whether such printed photograph can be said to be a ‘deemed sale of THE CTC NEWS | June 2020 8 www.ctconline.org goods’ in terms of Article 366(29A)(b) of the Constitution of the India? Whether the expression “sale” as appearing in Notification No.12/2003-ST dated 20.6.2003 will cover deemed sale as well?

Facts and Pleading: M/s Agrawal Colour Advance Photo System (hereinafter referred to as the ‘Appellant’) is engaged in the business of processing, printing and exposure of colour photographic film. The Appellant was paying service tax on 30% of the value of the invoices raised on account of service rendered to the customers and was paying VAT on the balance value.

The Department argued that the value of service provided in relation to photography would be the “gross amount charged” including the cost of material, goods used/consumed. The department alleged that the consumables and chemicals used for providing photography service disappear when the photograph emerges and therefore, there is no element of sale involved on those consumables. Department also alleged that the said contract is predominantly a service contract and the supply of material and consumables is merely incidental. Department submitted that the value of other goods and material, if sold separately would be excluded under exemption Notification No.12/2003 and the term ‘sold’ appearing thereunder has to be interpreted using the definition of ‘sale’ in the Central Excise Act, 1944 and not as per the meaning of ‘deemed sale’ under Article 366(29A)(b) of the Constitution.

The Appellant submitted that the term “sold” used in Notification No.12/2003-ST dated 20.6.2003 must be interpreted to cover “deemed sale” under Article 366(29A) of the Constitution and therefore, if a service contract is a works contract then no service tax can be charged on the goods component. The Appellant submitted that since the photography involves both the processing activity as well as supply of goods, therefore, it is a works contract. There is an element of both sale and service in photography, thus, service tax would not be leviable on sale portion.

Judgment: The Hon’ble High Court after analysing several judgments and legislative history behind the enactment of Clause 29-A in Article 366 of the Constitution of India held that the ‘works contract’ which is indivisible in nature can be bifurcated into two parts, one for “sale of goods” and other for “services”, thereby making goods component of the contract liable to sales tax and service portion to service tax. The Hon’ble High Court relied upon State of Karnataka etc. vs. M/s Pro. Lab & others, 2015-VIL-06-SC-LB wherein the proposition that processing of photography was a contract for service simplicitor with no element of goods at all was rejected, to held that in view of Clause 29-A in Article 366, the dominant intention behind such a contract, namely, whether it was for sale of goods or for services, is immaterial and not a good law anymore. The Hon’ble High Court also relied upon Safety Retreading Company Private Limited vs. Commissioner of Central Excise, Salem, (2017) 3 SCC 640 – 2017-VIL-06-SC-ST to held that gross turnover in respect of which the Appellant has paid sales tax/VAT under State Act as works contractor is excluded from purview of service tax. Accordingly, the Hon’ble High Court held that for the purposes of service tax the value of photography service can be determined separately from the value of certain consumables and chemicals which are used on the paper for printing the image. The Hon’ble High Court also held that such printed photograph can be said to be a ‘deemed sale of goods’ in terms of Article 366(29A)(b) of the Constitution and will qualify for deduction in value in terms of Notification No.12/2003-ST dated 20.6.2003. Thus, the Larger bench of the tribunal in the case of Aggarwal Colour Advance Photo System Vs. CCE Bhopal stands overruled.

M/s Agrawal Colour Advance Photo System vs. CCE, The High Court of Madhya Pradesh, decided in CEA No. 1/2013 dated 13.03.2020.

4. Whether the Service Recipient is right in reducing the value of consideration for the services rendered by the Service Provider on the count that the agreement provided for payment of service tax by the service provider even though the said services were exempted?

Facts and Pleading: Metrro Waste Handling Pvt Ltd (‘The Petitioner’) entered into agreement with South Delhi Municipal Corporation (‘SDMC’) for providing the services of lifting/collecting of municipal solid waste/garbage/malba/drain silt etc. and dumping the same to nearby designated site. The agreed rate was of Rs.1934/- per day per vehicle for eight hours of working. The agreement stated that rate was all inclusive including service tax, labour cess, accident claims etc. The Petitioner raised invoices for the services provided without any reference to service tax payable and SDMC paid full payment. However, in 2015, SDMC, pursuant to the auditor’s objection started deducting the amounts from the agreed rate on an alleged ground of non-application of service tax.

The SDMC argued that the consideration for the said services was fixed by considering the element of service tax payable on the said transaction and the same has also been specified in the agreement which stipulates that the rate was all inclusive including service tax, labour cess, accident claims etc. Thus, as no service tax was payable on the said transaction, there was no justification for the Petitioner to demand the said rate.

The Petitioner argued that the that the consideration that was payable by SDMC was Rs.1934/- is per day per vehicle for eight hours and there was nothing to show that any component of this amount included service tax. Hence, to claim that the Petitioner has not paid service tax and hence not entitled to component of service tax, is a false contention. The Petitioner further submitted that when the parties entered into the contract on 27.08.2012, it was known that there was no service tax payable for the services in question as Mega Exemption Notification No.12/2012, specifically under Clause 25 exempted waste collection or disposal services provided to the Government or local parties. Hence, the consideration that was agreed upon as payable to the petitioner, did not include any component of service tax as is being mischievously pleaded.

Judgment: The Hon’ble High Court perused the service agreement in dispute and concluded that there was no stipulation in the agreement that in case service tax, insurance, registration charges, parking charges, etc. are varied, the charges payable will be increased/ decreased, which manifest that there is no stipulation in the agreement that the charges are in any manner linked with the service tax. Further, as both the parties were aware that in view of Mega Exemption Notification No.12/2012, service tax was not payable on the present transaction at any stage, SDMC cannot subsequently unilaterally change the terms of the contract and reduce the negotiated rate payable to the Petitioner. The Hon’ble High Court also held that while interpreting the terms of the contract, the court can get assistance from the conduct of the parties and by the conduct of the parties in present case, the Hon’ble High Court deduced that the parties understood that the service tax was not a component of the agreed rate. Accordingly, the court directed SDMC to make payment of the amount deducted from bill.

Metrro Waste Handling Pvt Ltd vs. South Delhi Municipal Corporation, High Court of Delhi decided in W.P.(C) 12084/2016 & CM APPL.47741/2016 on 12.05.2020.

5. Whether the income received towards salary as director of a private limited company shall be included in the aggregate value as supply of good or service under the CGST Act, 2017?

Facts and Pleading: Mr. Anil Kumar Agrawal (‘Applicant’) is an unregistered person and is in receipt of various types of income such as 1) salary of director, 2) interest income from different sources 3) rental income from commercial and residential property, etc. The Applicant inter alia sought advance ruling on whether the income received from the aforesaid sources shall be included in the aggregate value as supply of good or service under the CGST Act, 2017.

AAR Observations: The AAR observed that income received towards salary as director can be broadly classified into two categories, one as executive director and another one as nominated (non-executive) director. The AAR is of the view that income received towards salary as executive director of the company for the service provided by the Applicant as an employee to the employer cannot be considered as supply of goods or service under the provisions of CGST Act, 2017. Further, the AAR observed that in case of income received as nominated (non-executive) director of the company, the Applicant provides service to the company which is taxable under reverse charge mechanism in view of Section 9(3) of the CGST Act, 2017 read with Entry No. 6 of Notification No. 13/2017-CT (Rate) dated 28.06.2017. The AAR also observed that interest income being exempted supply and hence included in the aggregate value. On rental income, the AAR observed that as aggregate value includes both taxable as well as exempt supplies, rental income from commercial/residential property being taxable supply and services by way of renting of residential dwelling for use as residence being exempted supply are includible in the aggregate value.

Mr. Anil Kumar Agrawal, The Authority for Advance Ruling in Karnataka, GST decided in Advance Ruling No. KAR ADRG 30/2020 dated 04.05.2020.

Unreported Decisions – ST – July 2020

By Vinay Jain & Sachin Mishra, Advocates

1. Whether after the Finance (Amendment) Act, 2020 under Section 140 of the CGST Act, 2017, mistake committed by the assessee at the time of filing of GST TRAN-1 can be rectified subsequently? Whether the decision in Brand Equity Treaties Ltd. And Ors. v. Union of India, [2020] 116 taxmann.com 415 (Delhi) stands valid after the aforesaid amendment which inserted the words “within such time” in Section 140 of the CGST Act, 2017, inter-alia empowering the Central Government to prescribe the time limit for filing TRAN-1, retrospectively?

Facts and Pleading: M/s SKH Sheet Metals Components Private Limited (hereinafter referred to as ‘The Petitioner’), is inter-alia engaged in manufacture of final products and sale to OEMs. In order to avail the credit in the electronic credit ledger under the GST laws, the Petitioner filed ‘GST TRAN-1’ on 27.08.2017. However, on submission of the said Form, Petitioner realized that as against the total credit of Rs. 6,52,58,081/-, only Rs. 1,01,24,382/- was reflected on the common GST portal. The CENVAT credit of Rs.5,51,33,6991/- was not displayed in the electronic credit ledger. Petitioner filed a revised declaration in the nature of Form GST TRAN-I on 27.12.2017 and reflected the correct figures under column 5(a) of the Form, however, the amount was still not transferred to the electronic credit register and was shown as “blocked credit”. The Petitioner made several efforts before numerous authorities to rectify the aforesaid mistake, however, all such authorities rejected the plea of the Petitioner.

The Department argued that the case of the Petitioner fell in the category “the taxpayer has successfully filed TRAN-I, but no technical error has been found” as the Petitioner did not encounter any technical glitch on the portal, his request to file a revised TRAN-1 form beyond the limitation period was not accepted. The department also argued that the decision in Brand Equity Treaties Ltd. And Ors. v. Union of India, [2020] 116 taxmann.com 415 (Delhi) is no more valid in view of the Finance (Amendment) Act, 2020 under Section 140 of the CGST Act, 2017. According to department, with the insertion of the words “within such time” in Section 140 (1) retrospectively, the Central Government has been granted the power to prescribe the time limit for filing TRAN-1 and hence the finding of this Court in Brand Equity Treaties Case (supra) that the limitation period under Rule 117 for filing TRAN-1 is merely directory and not mandatory is no longer valid.

The Appellant relied upon several decisions of the Hon’ble High Court including Brand Equity Treaties Case (supra) to argue that the several Courts have permitted the similarly situated taxpayers to file the Form GST TRAN-1 beyond stipulated period of time even to those taxpayers, who may not have faced “technical glitch on the portal” but were otherwise prevented in filing the TRAN-1 form on account of certain human errors or factors and reasons which were beyond their control. The Petitioner further submitted that irrespective of the said decisions, since admittedly the TRAN-1 form in the case of the Petitioner was filed well before the specified date, notwithstanding the benefit granted by the Court in the said judgment, the Petitioner is entitled to transition the credit.

Judgment: The Hon’ble High Court held that the presumption of department that the Finance (Amendment) Act, 2020 under Section 140 of the CGST Act, 2017 renders the decision of this court in Brand Equity Treaties Case (supra) no longer valid is incorrect. As per the Hon’ble High Court, the relief granted to the taxpayers in Brand Equity Treaties Case (supra) was not entirely resting on the fact that CGST Act, 2017 did not prescribe for any time limit for availing the transition of the input tax credit, rather the relief was granted on several counts. Hence, Hon’ble High Court held that the decision in Brand Equity Treaties Case (supra) still holds good. The Hon’ble High Court also relied upon the GST Council 32nd Meeting wherein it was recognized that there could be errors apparent on the face of the record that could be non-technical in nature and merit leniency. In line with the spirit of the decision of the GST Council and the blurring thin line between technical and non-technical difficulty, keeping in view that entire filing is electronic, the Hon’ble High Court held that the restrictive applicability of Rule 117 (1A) to be arbitrary. The Hon’ble High Court further held that transitional provisions and the language of Section 140 of the Act in particular, even after amendment, manifests the intention behind the said provision is to save the accrued and vested ITC under the existing law. The Hon’ble High Court further held that both the Act and Rules do not provide any specific consequence on failure to adhere to the timelines. Since the consequences for non-compliance are not indicated, the provision has to be seen as directory. The Hon’ble High Court further held in the present case, the mistake was clerical in nature. Therefore, the revision cannot be treated as a fresh filing. According, Petitioner was permitted to revise TRAN-1 Form on or before 30.06.2020 and transition the entire ITC, subject to verification by the Respondents.

M/s SKH Sheet Metals Components Private Limited vs. U.O.I, High Court of Delhi decided in W.P.(C) 13151/2019 dated 16.06.2020.

M/s SKH Sheet Metals Components Private Limited

2. Whether the banks can avail credit of service tax paid by the banks for the service provided by the Deposit Insurance and Credit Guarantee Corporation (“DICGC”) in relation to insuring banks deposits with DICGC?

Facts and Pleading: The Appellants herein are all banking companies that are inter-alia engaged in the banking business. The Appellants are mandatorily required to insure their deposits with Deposit Insurance and Credit Guarantee Corporation (“DICGC”), a subsidiary of the Reserve Bank of India (“RBI”). DICGC protects small depositors in the event of Appellants’ failure by insuring the deposits up to Rs.1,00,000 per depositor (now amended to Rs.5,00,000). The banks availed Cenvat credit of the service tax charged by DICGC on the insurance premium paid.

The department has denied the said Cenvat credit on the count that as no consideration was charged by the Appellants in relation to acceptance of deposits, it was only a transaction in money and therefore, was outside the scope of service tax under Section 66D(n) of the Finance Act, 1994. The Department also alleged that for any service to be qualified as input service, it should be consumed or used for providing taxable output services. The input service should have direct nexus with the output service. DICGC Insurance is aimed at protecting the interest of the depositors against the failure of the bank i.e. the Appellants and does not provide any protection to the Appellants. Hence, as per department the service provided by DICGC would not qualify as a direct input service for the output services performed by a bank on which service tax is paid.

The Appellants argued that DICGC insurance service was covered under main part of the definition of ‘input service’ and was also mentioned in the ‘inclusive portion’. The Appellants further argued that the activity of accepting deposits was integrally connected to the lending activities of the Appellants under which service tax was discharged under the category of ‘Banking and Other Financial Services’ on various incomes. As per the Banking Regulation Act, 1949 and Deposit Insurance and Credit Guarantee Corporation Act, 1961, the Appellants are statutorily required to insure the deposits. Therefore, it is a statutorily obligation without which the Appellant cannot function at all. The Appellants are engaged in “accepting” deposits and not “extending” deposits and so Section 66D(n) of the Finance Act, 1994 would not be applicable. The Appellants also argued that even if it is assumed that some part of the deposit was not used for provision of output services, Cenvat credit cannot be denied as 50% of the total Cenvat credit was already reversed in view of Rule 6(3B) of the Cenvat Credit Rules, 2004.

Judgment: The Hon’ble Larger Bench of CESTAT held that it is mandatory for all banks to register themselves with the DICGC and failure to pay the premium amount to DICGC may lead to cancellation of its licence with RBI. The Hon’ble Larger Bench of CESTAT the insurance service received by the banks from the DICGC is not only mandatory but was also commercially expedient. The service rendered by the DICGC to the banks would fall in the main part of the definition of ‘input service’ and such Cenvat credit would be eligible. The Hon’ble Larger Bench of CESTAT also held that as per Section 66D(n), the activity of services by way of extending deposits, loans or advances is under negative list and will not include the activity of accepting deposits from the customers for which the banks pay interest to the customers. The Hon’ble Larger Bench of CESTAT further held that when reversal under Rule 6(3B) of the Cenvat Credit Rules, 2004 was done by the Appellants, they were entitled for credit of the entire amount of service tax paid on input service having nexus with the provision of output service.

M/s. South India Bank vs. CC,CE & ST, Calicut, Larger Bench of CESTAT, Bangalore decided in Interim Order Nos. 13 – 31 / 2020 dated 20.03.2020

M/s. South India Bank

3. Whether the services provided by a reinsurance broker to reinsuring company located abroad and insurance company located in India should be considered as export of service or otherwise when the ‘Reinsurance Brokerage’ is received in INR?

Facts and Pleading: M/s. Bharat Reinsurance Brokers Pvt. Ltd. (hereinafter referred to as “the Appellant”) acts as reinsurance broker and arranges for reinsurance of Indian insurance companies with overseas reinsurers. The appellant identifies appropriate reinsurers located abroad for the Indian Insurance companies and negotiates terms of contracts with them. For this service, the Appellant gets a commission called ‘Reinsurance Brokerage’ by deducting his brokerage from the premium received from the insuring company and passing the balance to the reinsuring company.

The department argued that the Appellant provides services to the Indian Insurance companies for which remuneration is received in Indian Rupees from foreign insurance companies and hence, the same does not qualify for export of service. In this regard, the Department also relied upon Suprasesh General Insurance Services & Brokers Pvt. Ltd. [2009(13)S.T.R 641 (Tri.-Chen.)] wherein it was held that reinsurance brokerage received in Indian rupees does not amount to export of services because the amount has not been received in convertible foreign exchange and confirmed the service tax on such amounts.

The Appellant submitted that the aforesaid allegation of the department is not sustainable on the count that the Hon’ble High Court of Madras in the case of Suprasesh General Insurance Services & Brokers Pvt. Ltd. vs. CST, Chennai [2016(41)S.T.R 34 (Mad.)] had reversed the aforesaid decision of Hon’ble CESTAT in Suprasesh General Insurance Services & Brokers Pvt. Ltd. [2009(13)S.T.R 641 (Tri.-Chen.)] and hence, the same is not correct position of law.

Judgment: The Hon’ble CESTAT relied upon the decision of Hon’ble High Court of Madras in the case of Suprasesh General Insurance Services & Brokers Pvt. Ltd. vs. CST, Chennai [2016(41)S.T.R 34 (Mad.)] to held that in the present case, the Appellant is rendering services to foreign reinsurance company rather than the Indian insurance companies. The Hon’ble CESTAT further held that even though the Appellant gets ‘Reinsurance Brokerage’ by deducting his brokerage from the premium received from the insuring company, the same is paid by foreign reinsurer to the Appellant, thus the consideration for such service also flows from foreign reinsurer and not from the Indian insurance companies. Further, the Hon’ble CESTAT also held that such cases amount to export of service and that the ‘Reinsurance Brokerage’ retained as brokerage in Indian Rupees by deducting instead of remitting the entire amount abroad and receiving back foreign currency should be treated as receipts for export in foreign currency.

Bharat Reinsurance Brokers Pvt. Ltd. vs. CCE, CESTAT, Hyderabad, decided in Final Order No. A/30877/2020 dated 10.06.2020.

Bharat Reinsurance Brokers Pvt. Ltd.

4. Whether the service provided by M/s. Karnataka Industrial Areas Development Board under the provisions of Karnataka Industrial Areas Development Act, 1966 shall be considered as statutory functions and hence, not leviable to service tax under the Finance Act, 1994?

Facts and Pleading: M/s. Karnataka Industrial Areas Development Board (KIADB, for short) is established under Karnataka Industrial Areas Development Act, 1966 (“KIAD Act, 1966”). The Appellant performs various statutory/ sovereign functions assigned to it under provisions of KIAD Act. Accordingly, the Appellant has provided various taxable Services such as Renting of Immovable Property Services, Construction of Commercial and Residential Complexes, Business Support Services, Management, Maintenance or Repair Services, Manpower Recruitment and Supply Services, Works Contract Services, etc., to various clients.

The case of the department is that Service Tax is leviable on the said taxable services and payable by the Appellant as per provisions of law, the Appellant did not discharge any service Tax liability thereon. The department alleged that a conjoint reading of the provisions of the KIAD Act clearly indicate that Appellant has its own identity as distinct from the State Government and is a body corporate with perpetual succession and a common seal, and may sue and be sued in its corporate name. The receipts of the appellant are credited to its own fund and do not go to the Consolidated Fund of the State. If that be so, the activities undertaken by it cannot be construed as functions of the State. The department also alleged that leasing of land by the appellant on its own account to private individuals on commercial consideration cannot be said to be a sovereign function at all as normally understood. The department further alleged that the Appellant being an instrumentality of the State is not entitled to claim immunity from payment of service tax. The department also alleged that the appellant does not have the power to acquire the land by itself and hence the appellant is not empowered to exercise the power of ‘eminent domain’ and hence it cannot be regarded as sovereign authority.

The Appellant mainly contended that the appellant is a Government undertaking and being a ‘State’ as defined in Article 12 of the Constitution of India are not liable to pay service tax. The Appellant also relied upon the decision of the Bombay High Court in the case of CCE, Nashik Vs. Maharashtra Industrial Development Corporation [2018(9) GSTL 372 (Bom.)] wherein the Bombay High Court has held that no service tax could be demanded on the charges collected by Maharashtra Industrial Development Corporation in terms of the Maharashtra Industrial Development Act, 1961 towards maintenance of the industrial areas, as the same is in the nature of statutory functions performed in terms of the statute. The Appellant also submitted that all other functions rendered by the appellant being incidental, cannot be brought to tax. Further, the Appellant also stated that it is not carrying out commercial activities for a consideration and the amount of deposit collected by the Appellant is based on principles of rationality and reasonableness.

Judgment: The Hon’ble CESTAT held that a careful reading of the aforesaid provisions of KIAD Act and KIADB Regulations would clearly go to show that the appellant is a State undertaking and creature of a statute to exercise the power of ‘eminent domain’. The appellant is engaged in discharging statutory functions under an act of Legislature viz. KIAD Act, 1966. It is a statutory body performing statutory functions and exercising statutory powers. Once carrying out the objectives of the Act, then it cannot be treated as a service provider under the Finance Act, 1994. Further, Hon’ble CESTAT held that there is no service provider-client relationship so as to warrant the levy of service tax under the provisions of Finance Act, 1994. Appellant has undertaken various activities and functions in the State of Karnataka as per the directions of the State Government given from time to time under the provisions of the Act and hence their activities cannot be considered as taxable service and no service tax can be levied for these activities. Hon’ble CESTAT held that in view of the decision of the Bombay High Court in the case of CCE, Nashik Vs. Maharashtra Industrial Development Corporation [2018(9) GSTL 372 (Bom.)] when the maintenance of industrial area itself is held to be statutory function, then the main function of acquisition of law, development of such land into industrial area and allotment of such land on lease-cum-sale basis by the Appellant would certainly be a statutory function and does not attract levy of service tax. On the same analogy, Hon’ble CESTAT held that other functions being incidental cannot be brought into tax net.

M/s. Karnataka Industrial Areas Development Board vs. CCT, CESTAT Bangalore, decided in Final Order No. 20357/2020 dated 09.06.2020.

M/s. Karnataka Industrial Areas Development Board

5. Whether the preparation of Whole Wheat parota and Malabar parota be classified under Chapter heading 1905, attracting GST at the rate of 5%?

Facts and Pleading: The Applicant is a food products company involved in preparation & supply of wide range of ready to cook, fresh foods including whole wheat parota and Malabar parota. The aforesaid products whole wheat parota and Malabar (refined flour) parota, are made up of whole wheat flour and refined flour (maida), respectively. The other common ingredients are RO purified water, edible vegetable oil or refined oil, edible common salt and edible vegetable fat. The products are not readily consumable (ready to eat), but need to be heated before consumption. The instant application pertains to classification of whole-wheat parota & Malabar parotta.

The Applicant contended that the product merits classification under Chapter heading 1905, under the product description of ‘Khakhra, plain chapatti or roti” and therefore are taxable at 5% GST, in terms of entry No.99A of Schedule I to the Notification No. 1/2017-Central Tax (Rate) dated 28.06.2017. The Applicant relied on the ruling passed by the Advance Ruling Authority, Maharashtra, in the case of M/s Signature International Foods India Private Ltd., wherein it was held that paratha & paratha wraps are covered by the scope of entry 99A of Notification 34/2017-Central Tax (Rate) dated 13.10.2017.

AAR Observations: The AAR observed that the present products having description “parota” cannot be classified under the heading 1905 the products covered under heading 1905 are already prepared or completely cooked products and no further process is required to be done on them for consumption and hence they are ready to use food preparations whereas in the instant case, the impugned products are admittedly not ready for consumption, but need to be heated before consumption. The AAR further observed that the present products having description “parota” is best classifiable under heading 2106 90 which covers Preparations for use, either directly or after processing (such as cooking, dissolving or boiling in water, milk, etc.), for human consumption, provided that they are not covered by any other heading of the Nomenclature. In the instant case, the impugned goods i.e. ‘parota’ are not covered under any other heading and also need to be processed for human consumption. Therefore, the impugned goods are rightly classifiable, more specifically, under heading 2106 90. Further, the AAR also observed that as the present products having description “parota” are neither khakhra, plain chaptatti nor roti, hence, the benefit of 5% GST, in terms of entry No.99A of Schedule I to the Notification No. 1/2017-Central Tax (Rate) dated 28.06.2017 is not applicable.

Judgment: The Hon’ble Larger Bench of CESTAT held that it is mandatory for all banks to register themselves with the DICGC and failure to pay the premium amount to DICGC may lead to cancellation of its licence with RBI. The Hon’ble Larger Bench of CESTAT the insurance service received by the banks from the DICGC is not only mandatory but was also commercially expedient. The service rendered by the DICGC to the banks would fall in the main part of the definition of ‘input service’ and such Cenvat credit would be eligible. The Hon’ble Larger Bench of CESTAT also held that as per Section 66D(n), the activity of services by way of extending deposits, loans or advances is under negative list and will not include the activity of accepting deposits from the customers for which the banks pay interest to the customers. The Hon’ble Larger Bench of CESTAT further held that when reversal under Rule 6(3B) of the Cenvat Credit Rules, 2004 was done by the Appellants, they were entitled for credit of the entire amount of service tax paid on input service having nexus with the provision of output service.

M/s. ID Fresh Food (India) Pvt Ltd, The Authority for Advance Ruling in Karnataka, GST decided in Advance Ruling No. KAR ADRG 38/2020 Dated: 22.05.2020.

M/s. ID Fresh Food (India) Pvt Ltd

Unreported Decisions – ST – May 2020

By Vinay Jain & Sachin Mishra, Advocates

1. Whether after-sale and warranty services provided by a foreign dealer to its customers in relation to the vehicles purchased from an Indian Manufacturer shall be considered as after-sale services on behalf of such Indian Manufacturer? Whether discount by way of price reduction given by such Indian Manufacturer shall be considered as consideration for such after-sale service? Whether Indian Manufacturer shall be liable to pay service tax under the category of ‘Business Auxiliary Service’ under reverse charge mechanism on such transactions?

Facts and Pleading: M/s. MAN Trucks India Pvt. Ltd. (hereinafter referred to as Appellant) is inter alia engaged in the business of manufacture of heavy commercial vehicles. The Appellant had entered into Agreement with M/s Man Trucks & Bus AG, Germany (hereinafter referred to as ‘MAN Germany’) for supply of Heavy Commercial Vehicles bearing the “MAN” trademark for sale outside India. The transaction involved sale of heavy commercial vehicles by the Appellant to MAN Germany and thereafter by MAN Germany to its buyers. For such supply since the after-sale services were to be provided by MAN Germany, the Appellant extended a price reduction to MAN Germany.

The Department alleged that the aforesaid discount by way of price reduction shall be considered as consideration of the obligation of MAN Germany for warranty and after-sale services. Thus, as per the department the said amount is paid to MAN Germany for carrying out the after-sale services on behalf of the Appellant, and hence, would be covered under the ambit of ‘Business Auxiliary Service’. The Appellant contended that the provision of after-sale and warranty services by MAN Germany to the end customers was in pursuance of its own obligations to such end customers and no service was rendered by MAN Germany on behalf of the Appellant.

The Appellant also submitted that the discount offered by the Appellant is merely an adjustment in the price of the goods sold and is not towards provision of any service by MAN Germany. The Appellant further contended that the transaction between the Appellant and MAN Germany is in the nature of a sale transaction and not for provision of ‘Business Auxiliary Service’

Judgment: The Hon’ble CESTAT agreed with the submission of the Respondents and held that the role of the Appellant assigned under the Agreement was limited to sale of trucks including spare parts and the Appellant was not responsible for rendering any after-sale services. The Hon’ble CESTAT held that the fact that the agreement provided that MAN Germany has to provide warranty and after-sale service to its customers, does not in any manner mean that MAN Germany was rendering after-sale service on behalf of the Appellant. The Hon’ble CESTAT was of the view that in fact, the agreement was to the contrary and the discount that was being offered by the Appellant to MAN Germany was merely an adjustment in the price of goods sold. Hence, according to the Hon’ble CESTAT, the service provided by MAN Germany cannot be classified under the category of ‘Business Auxiliary Service’.

M/s. MAN Trucks India Pvt. Ltd. vs. CCE, Indore, CESTAT, New Delhi, decided on 24.02.2020 in the Final Order No. 50461/2020.

M/s. MAN Trucks India Pvt. Ltd.

2. Whether Writ Petition is maintainable in cases wherein undue delay in issuing the order by the adjudicating authority after personal hearing has caused prejudice to the Petitioner? Whether relying on the wrong taxable entry while determining the place of provision of service and ignoring the affidavit filed by the Petitioner during the personal hearing shall be considered as gross error on part of the adjudicating authority?

Facts and Pleading: M/s. Infra Dredge Services Pvt. Limited (hereinafter referred to as the ‘Petitioner’) is interalia engaged in providing dredging services. A show cause notice was issued against the Petitioner demanding service tax under the categories of ‘Management Maintenance and Repair Service’, ‘Supply of Tangible Goods for Use Service’ and ‘Dredging Service’ for various periods. The personal hearing in the said matter was undertaken on 3.1.2019, however, the order was passed on 29.7.2019. The Petitioner filed a Writ Petition before Hon’ble High Court of Bombay on the count that there was delay of seven months in passing the Orderin- Original from date of the personal hearing which resulted in gross prejudice to the Petitioner.

The department alleged that all the contentions raised by the Petitioner could be raised by the Petitioner before the Appellate Authority and merely because statutory pre-deposit is mandated, the Petitioner cannot invoke writ jurisdiction.

The Petitioner relied upon the decisions in the case of Shivsagar Veg Restaurant Vs. ACIT, ITXA No.144 of 2006 dated 14.11.2008 and EMCO Ltd. Vs. UOI, Writ Petition No.12124 of 2013 dated 11.2.2014 to submit that that there is not only delay of six months from conclusion of the argument till pronouncement of order but because of this delay, gross errors have occurred in the order which has caused severe prejudice to the Petitioner. The Petitioner submitted that the impugned order has relied upon wrong provisions while confirming the tax liability upon the Petitioner. The Petitioner further submitted that though on record, the impugned order has ignored an affidavit of the Petitioner placing certain factual position on record supported by the decisions of the Tribunal. The Petitioner also submitted that the impugned order has also ignored binding precedents cited before the authorities. The Appellant also contended that in view of this the Writ Petition be entertained without relegating the Petitioner to the appellate remedy.

Judgment: The Hon’ble High Court referred the aforesaid two decisions in Shivsagar Case and EMCO Case to held that the basis of the said two decisions is not the delay alone but the resultant prejudice apparent from such omissions. The Hon’ble High Court observed that the impugned order wrongly relies upon Section 65 (105) (zzzg) of the Finance Act, 1994 related to ‘Mailing List Compilation and Mailing’ while confirming the demand under ‘Management, Maintenance or Repair Service’ by considering it to be covered by Rule 3 (iii) of the Import of Service Rules. However, Section 65 (105) (zzg) of the Finance Act, 1994 which actually deals with ‘Management, Maintenance or Repair Service’ was covered by Rule 3 (ii) of the Import of Service Rules. Similarly, the Hon’ble High Court also observed that the impugned order did not deal with the affidavit of Managing Director of Petitioner through which the Petitioner sought to place relevant facts on record. The Hon’ble High Court relying on the aforesaid EMCO Case held that when the proceedings are disposed of expeditiously by the authorities, it ensures there is an application of mind and litigants are satisfied that their submissions have been considered. In view of the above, the Hon’ble High Court set aside the order on the count that the delay of seven months in passing the order has caused prejudice to the Petitioner.

M/s. Infra Dredge Services Pvt. Limited vs. UOI, High Court of Bombay, decided on 29.01.2020 in the Writ Petition No. 3625 of 2019.

M/s. Infra Dredge Services Pvt. Limited

Unreported Decisions – May 2020

By Ajay R. Singh, Advocate

1. Penalty u/s 271G – Primary books /documents maintained – Non maintenance of segmental profitability of the AE and non–AE transactions- Practical difficulty in maintaining those details considering the nature of business carried on – Penalty deleted.

The assessee is a resident company, is engaged in the business of importing rough diamond, getting them cut & polished and thereafter exporting to various parties outside the Country including the Associated Enterprises (AEs) of the assessee situated abroad. In the transfer pricing study report, the assessee benchmarked the international transaction with the AEs relating to sale of polished diamond amounting to Rs. 27,65,09,328, adopting Transactional Net Margin Method (TNMM) as the most appropriate method with operating profit / sales as the profit level indicator (PLI). Since, the margin shown by the assessee @ 2.70% is within the tolerance range of the average margin of the comparables worked out @ 5.54%, the transaction with the AE was claimed to be at arm’s length. The TPO observed that the entity level margin of the assessee included its combined profit on the transactions with both the AE and the non–AE. Therefore, he called upon the assessee to furnish separate segmental result in respect of transactions with the AE and non–AE along with segmental profitability. The assessee vide letter dated 16th January 2014 expressed its inability to furnish the segmental profitability due to the volume and number of transactions which makes it difficult to provide such details. Thus, after considering the submissions of the assessee the TPO alleged that due to lack of information furnished by the assessee, it is difficult to benchmark the transaction properly. Therefore, ultimately he accepted the benchmarking done by the assessee by holding that the transactions with the AE are at arm’s length. However, alleging non–maintenance of specified documents, he initiated proceedings u/s. 271G of the Act and ultimately, imposed penalty of Rs. 55,30,187.

The Commissioner (Appeals) observed that it is extremely difficult for a diamond trader / manufacturer to identify conversion of a particular rough diamond into a polished diamond. Therefore, it is very difficult for the assessee to identify each rough diamond piece–wise and equally difficult to identify each cut and polished diamond vis–a–vis the original rough diamond from which it was cut and polished. He observed, though, the TPO called for the segment–wise Profit & Loss account in respect of exported as well as all the diamond, however, ultimately, he accepted the arm’s length price declared by the assessee. Therefore Commissioner (Appeals) deleted the penalty.

The ITAT observed that the material on record makes it clear that the assessee has maintained primary books of account / documents in respect of its business activity. The fact that the documents relating to transaction with the AE have also been maintained by the assessee is evident from the transfer pricing study report, wherein, the transaction with the AE has been benchmarked under TNMM. This shows that the assessee has maintained documents / books of account as required under the statute. It is also evident, in the course of proceedings before the TPO, the assessee has made substantial compliance by furnishing transfer pricing study report as well as many other documents. What the assessee has failed to furnish is, the segmental profitability of the AE and non–AE transactions. The inability to furnish the aforesaid details was also well explained by the assessee before the TPO and Commissioner (Appeals) by demonstrating the practical difficulty in maintaining those details considering the nature of business carried on. Notably, though, the TPO has alleged that non–furnishing of segmental profitability makes it difficult for him to correctly ascertain the arm’s length price, however, ultimately the TPO has accepted the transaction with the AE to be at arm’s length. If the TPO was not satisfied with the benchmarking of the assessee under TNMM, nothing prevented him from rejecting assessee benchmarking and determining the arm’s length price of the transaction with the AE independently by applying any one of the prescribed methods. The blame for failure on the part of the TPO to determine the arm’s length price cannot be fastened with the assessee. The ITAT relied on the following decision of the Hon’ble Gujarat High Court in case of D. Navinchandra Exports Pvt. Ltd. [ Tax Appeal no.788/2018, dated 9th July 2018 (Guj.)]; and Mumbai ITAT decision in case of DCIT v/s Ankit Gems Pvt. Ltd., [2019] 106 taxmann.com 243 (Mum.) wherein the deletion of penalty u/s 271G has been upheld. In the result, Revenue appeal was dismissed.

Dy. CIT Circle–5(4), Mumbai v/s. Decent Dia Jewels Pvt. Ltd. [IT(TP)A no.2608/Mum/2017 (AY : 2011–12) ; Dated : 13.03.2020 ; “K” BENCH]   

Decent Dia Jewels Pvt. Ltd.

2. Penalty 271(1)( c) Of the Act – Hawala purchase – estimated addition – Penalty Deleted :

The assessee an individual engaged in the business of “Trade of hardware and electrical items” . Assessment was completed on 23.02.2015 u/s. 143(3) r.w.s 147 of the Act determining the income at ₹ 8,05,340/-. While completing the reassessment the Assessing Officer treated the purchases of ₹ 5,22,838/- made from various dealers as non-genuine on the basis of the information received from Sales Tax Department, Mumbai that assessee has received accommodation entries from those parties without making any purchases but made purchases only in gray market. The AO treated such purchases from various parties as non-genuine as the assessee could not produce the parties and also could not establish the movement of goods. Further, the notices issued to the parties u/s. 133(6) of the Act were also returned unserved . Thus, the Assessing Officer estimated the profit element from the non-genuine purchases at 12.5% and brought to tax. Assessing Officer initiated the penalty proceedings and levied penalty u/s. 271(1)(c) of the Act stating that the assessee has furnished inaccurate particulars of income thereby concealed its true and correct income within the meaning of section 271(1)(c) of the Act. On appeal the Ld.CIT(A) deleted the penalty.

The Hon. ITAT observed that it is a settled position of law that penalty cannot be levied when an adhoc estimation is made. In this case an adhoc estimation was made by the Assessing Officer restricting the profit element in the purchases @12.5%. On identical situations the Coordinate Bench in the case of Shri Deepak Gogri v. Income Tax Officer [ITA.No. 1396/MUM/2017 dated 23.11.2017] held that no penalty is leviable. Similar view has been taken by the Hon’ble Delhi High Court in the case of CIT v. Aero Traders Pvt. Ltd., [322 ITR 316] wherein the Hon’ble High Court affirmed the order of the Tribunal in holding that estimated rate of profit applied on the turnover of the assessee does not amount to concealment or furnishing inaccurate particulars In the case on hand the Assessing Officer has only estimated the Gross Profit on the alleged non-genuine purchases without there being any conclusive proof of concealment of income or furnishing inaccurate particulars of such income. Thus, the Ld.CIT(A) rightly deleted the penalty u/s. 271(1)(c) of the Act levied by the Assessing Officer. In the result, appeal of the revenue was dismissed.

Income Tax Officer -2(1) v/s. Shri Jignesh Amrutlal Shah [ITA NO. 1267/MUM/2019 ; (A.Y: 2010-11) ; BENCH “SMC; dated :13.03.2020]

Shri Jignesh Amrutlal Shah

3. Penalty – notice without specifying the charge – non striking off of the inappropriate limb – Issue raised as additional ground – admitted – Notice held to be bad.

The assessee submitted that the initiation of penalty proceedings is bad in law as the Assessing Officer has not specified the limb on which the penalty was proposed to be levied. The assessee referring to the notice issued u/s. 274 r.w.s 271(1)(c) of the Act submitted that the Assessing Officer is not clear as to the charge for which the penalty is initiated i.e. either for concealment of income or for furnishing inaccurate particulars. The assessee submitted that the inappropriate limb in the notice was not strike off. The assessee referring to the Assessment Order submitted that the Assessing Officer stated that proceedings u/s. 271(1)(c) are initiated for furnishing inaccurate particulars and concealment of income. Referring to Penalty Order, the assessee submitted that Assessing Officer levied penalty for furnishing inaccurate particulars of income and for concealment of income. Therefore, it was submitted that the initiation of penalty proceedings itself is improper and not valid. The assessee submitted that there is a complete non-application of mind by the Assessing Officer in initiating the penalty proceedings and therefore, levy of penalty is illegal, void, bad in law, initiated by non application of mind and is without jurisdiction as the penalty notice issued by the Assessing Officer does not strike off the irrelevant portion thereon.

The assessee submitted that the additional ground was filed challenging the initiation of penalty proceedings as bad in law. The additional ground raised by the assessee challenging the initiation of penalty proceedings as bad in law for the reason that the Assessing Officer did not strike off irrelevant limbs of the penalty notice is purely a legal ground thus the same was admitted by the ITAT.

The ITAT observed that notice issued u/s. 274 r.w.s 271(1)(c) of the Act for initiation of penalty proceedings, that Assessing Officer did not strike off and specify the charge/limb for which he is proposing to initiate the penalty proceedings. In the assessment order Assessing Officer stated that proceedings u/s. 271(1)(c) are initiated for furnishing inaccurate particulars and concealment of income. However, in the penalty order passed it is stated that penalty is levied for furnishing inaccurate particulars of income and for concealment of income. The ITAT relying on the Coordinate Bench decision and the decisions rendered by Hon’ble Bombay High Court at Goa in the case of Pr.CIT v. Goa Coastal Resorts and Recreation Pvt. Ltd., in Tax Appeal No. 24 of 2019 dated 11.11.2019 ; Pr.CIT v. New Era Sova Mine in Tax Appeal No. 70 of 2018 dated 18.06.2019 And Pr.CIT v. Goa Dourado Promotions Pvt. Ltd., in Tax Appeal No. 18 of 2019 dated 26.11.2019 held that the notice was issued by the Assessing Officer U/s. 274 r.w.s 271(1)(c) of the Act is without specifying the charge for which the notice was issued as was non striking off of the inappropriate limb on account of non-application of mind and therefore the penalty proceedings initiated are bad in law. Thus, the Assessing Officer was directed to delete the penalty levied U/s. 271(1)(c) of the Act.

Shri Jagdish P. Purohit v/s. Income Tax Officer 18(1)(5)

[ITA NO.1322/MUM/2019 ; (A.Y: 2013-14); BENCH “SMC”, dt: 13.03.2020 ]  

Shri Jagdish P. Purohit

Unreported Decisions – ST – April 2020

By Vinay Jain & Sachin Mishra, Advocates

1. Whether offsite IT services wherein such services are rendered from service providers premises was taxable under the category of ‘man-power supply or recruitment services’? Whether services provided to a client through an Offshore Development Centre developed by the service provider exclusively for such client at its premises is taxable under the head of ‘Infrastructural Support Services’ under the category of ‘support services to business or commerce’?

Facts and Pleading: M/s. Cybage Software Pvt. Ltd. (hereinafter referred to as Respondents) are engaged in providing software development services to its clients located both in India and outside India. The Respondents have entered into agreements with various clients for providing Onshore & Offshore IT services. In offsite site IT services, the Respondent was rendering IT services from its own location and in onsite services, the Respondent was rendering IT services at client’s location. The Respondents were paying service tax on onsite services but not on offsite services. Further, the Respondents have also entered into agreement with HSBC to provide IT Services through Offshore Development Centre (ODC) developed by the Respondents.

The Department alleged that in case of the offsite services, the Respondents have rendered ‘man-power supply or recruitment services’ as the Respondents have computed consideration for the said offsite services in terms of the software engineers deployed at the premises of the client and have thus, supplied manpower in the form of Software Engineers with specific skills. In case of services rendered to HSBC, the department has demanded service tax under the category ‘Support Service to Business or Commerce service’ on the allegation that the Respondents have provided infrastructural facilities in the form of Offshore Development Centre (ODC) to HSBC.

The Appellant contended that that in case of the offsite services, the services rendered in all of the agreements concerned was for ownership of work and not for mere supply of manpower. As the risk and obligations undertaken were far greater than those assumed under supply of manpower and hence the same cannot be taxable under the head of ‘man-power supply or recruitment services’. In case of services rendered to HSBC, the Respondents submitted that ‘Infrastructural Support Services’ under ‘support services to business or commerce’ covers only providing passive infrastructure to the client, it would not cover a case where the software company itself uses the ODC to provide software development service to the client.

Judgment: The Hon’ble CESTAT agreed with the submission of the Respondents and relied upon held that the Respondents have the decision of Chennai CESTAT in Cognizant technology – 2010-TIOL-698-CESTAT-Madras to held that the Respondents have entered into agreement with such clients to render IT services and software engineers deployed at the clients’ premises are under the management and supervision of Respondents to provide such IT Services. The Hon’ble CESTAT also held that the deployment of engineers at client’s premises is a normal practice in IT industry and the same cannot be considered as ‘manpower supply or recruitment services’ merely because the Respondents have received consideration by monetising the time spent by such engineers for rendition of IT services under the contract. In case of services rendered to HSBC, the Hon’ble CESTAT held that the services rendered at ODC are mere extension of the offsite service rendered to the clients and hence, ‘information technology software service’ which was not excisable to tax at that point of time.

M/s. CCE vs. M/s. Cybage Software Pvt. Ltd., CESTAT, Mumbai, decided on 21.1.2020 in the Final Order No. A/85484-85485/2020.

M/s. Cybage Software Pvt. Ltd.

2. Whether keeping of gold in the vault of a Bank after importing the gold into India from foreign supplier till the time a domestic customer for the said gold is identified amounts to rendition of Safe Vault Service to such foreign supplier and hence taxable under Banking and other Financial Services? Whether profit earned by the Bank which is a difference between the sale price of gold to their domestic customers and purchase price of gold from foreign suppliers can be considered as consideration for rendition of the aforesaid Banking and other Financial Services? Whether interest charged by the Bank for lending metal to the customers is leviable to service tax?

Facts and Pleading: M/s. Indian Overseas Bank (hereinafter referred to as ‘The Appellant’) is a banking company and is inter alia involved in sale and purchase of gold. The appellant imports gold from Union Bank of Switzerland and MKS Finance, Geneva (‘foreign suppliers’). The Appellant holds the said gold in its vault till such time the Appellant finds a suitable customer. After the customer is identified and the price of the gold is confirmed, the Appellant collects money from such customer. After retaining its mark up, the Appellant sends the money to the suppliers such as foreign suppliers. At this point of time, the Appellant purchases the gold which is already in their physical custody. Immediately on purchase of the gold, the same is delivered to the customers. Further, the Appellant also lends metals to its customers and charges interest as consideration for such lending of metals. Further, eventually such metal is required to be returned to the Appellant by its customers.

The department demanded Service tax on the alleged storage services rendered to the foreign supplier under ‘Banking and Financial service’. Department was of the view that till the time of price fixation the Appellant was holding the stock with them, thus rendering storage services to foreign supplier. The consideration for the storage service was considered as margin i.e. difference between the purchase price and sale price. Further, the Department also demanded services tax on the interest earned by the Appellant for lending of metal to its customers on the count that only if the loan is in the form of Indian rupee and interest is earned on that, then alone under the provisions of Valuation Rules or Section 66D of Finance Act, 1994 interest is not to be treated as part of consideration for determination of service tax.

The Appellant contended that there is no consideration charged by the Appellant for rendition of the alleged safe vault service to foreign suppliers as the profit earned by the Appellant is received from the customer and not the foreign suppliers. The Appellant also contended that there is no allegation in the show cause notice that Appellant had received any consideration from foreign supplier for providing safe vault service. The Appellant also contended that the case of the department that the only interest earned on loans granted in cash is excluded from the ambit of service tax is incorrect on the count that there is no such distinction in the provisions of the law.

Judgment: The Hon’ble CESTAT set aside the demand on the storage services only on the ground that as there is no separate consideration for safe vault service. In absence of any consideration, service tax cannot be levied. The Hon’ble CESTAT also noted that the onus is on revenue to prove there is consideration, which revenue failed to do so in the present case. The Hon’ble CESTAT set aside the demand of Service Tax on interest earned on metal loan on the footing that Rule 6 (2) (iv) of the Determination of Value, Rules 2006 do not make any distinction between the interest on cash loan or metal loan. In other words, all interests are excluded from the value of the service whether it cash loan or any other loan.

M/s Indian Overseas Bank vs. CCE, CESTAT, Chennai, decided on 10.2.2020 in Final Order Final Order Nos. 40243-40249/2020.

M/s Indian Overseas Bank

Unreported Decisions – April 2020

By Ajay R. Singh, Advocate

1. Section 271(1)(c) – Penalty – For concealment of income – the timing difference in offering income to taxes cannot be considered as concealment of particulars of income or furnishing inaccurate particulars of income, thus no penalty was leviable u/s. 271(1)(c) of the Act.

The assessment for was completed u/s 143(3) of the Act, by making additions towards income from other sources being interest received on income tax refund u/s 244A amounting to Rs. 4,91,513/-. Thereafter, A.O imposed the penalty u/s 271(1)(c) of the Act on the basis that the assessee has deliberately concealed particulars of income by not disclosing interest received on income tax refund, though it has received interest on income tax refund during the relevant period and accordingly, levied penalty of Rs.3,03,756/-, being 200% of tax sought to be evaded.

The ld.CIT(A) relied upon various judicial precedents, including the decision of Hon’ble Delhi High Court, in the case of CIT vs Zoom Communication Pvt. Ltd (2010) 327 ITR 510 and confirmed the penalty on the ground that the assessee has failed to explain the accounting of interest on refund on receipt basis, when the details of refund issued were available to it and when, it was following mercantile system of accounting.

The assessee submitted that it has offered interest received of income tax refund u/s 244A of the Act, in the subsequent AY 2013-14, when the actual refund was credited to the account of the assessee. The Assessee, further submitted that interest on income tax refund was very much available with the department in Form No. 26AS and there is no possibility of non disclosure of said interest income for taxation. The assessee has not offered interest income for the year under consideration, because the major portion of interest was credited to assessee account in subsequent financial year and also the fact that when, refund advise was issued to the assessee, there is no breakup, in respect of refund of taxes and interest. In this regard, he relied upon by the decision of Hon’ble Punjab & Haryana High court, in the case of CIT vs SSP Pvt.Ltd. 302 ITR 436.

The Tribunal held that the AO has levied penalty only on the ground that the assessee is following mercantile system of accounting, it has not offered interest income for tax for the year under consideration. Otherwise, there is no dispute with regard to the fact that said interest income has been offered to tax in subsequent financial year. Therefore, once, the fact with regard to taxability of interest income in AY 2013-14 was not disputed by the Ld. AO, then he erred in levying penalty u/s 271(1)(c) of the Act for not offering interest income to tax for the year under consideration, more particularly when, the assessee has explained the reasons for not accounting and considering interest income to tax for the year under consideration. When, the assessee has offered to tax interest income in subsequent financial year, there is no reason for the Ld. AO to levy penalty on the same income for the year under consideration for not offering to tax said income, because the timing difference in offering income to taxes cannot be considered as concealment of particulars of income or furnishing inaccurate particulars of income. Therefore, the Ld. AO, as well as the Ld.CIT(A) erred in levying penalty u/s 271(1)(c) of the Act in respect of additions towards interest on income tax refund. Hence, penalty levied u/s 271(1)(c) of the Act is deletedg.

Steelfab Building System v. ACIT 31(3), ITA No. 6509/ Mum/2018, A.Y. 2012-13, Bench. “SMC”, dt :04/03/2020 (Mum)(Trib)   

Steelfab Building System.

2. Section 68 rws 263 of the Act – Share premium – Where Assessing Officer after making proper and detailed enquiries, took a view that amount received by assessee as share premium was a genuine transaction – revisional order passed by CIT directing Assessing Officer to enquire into in light of proviso inserted to section 68 of the Act and to decide about genuineness of share premium afresh, was not sustainable.

The law as was there at the prevailing time, when the assessment was completed by the Ld. AO was supported by certain judicial precedents – on day when Commissioner passed his order that two views were inherently possible – Revision not justified.

The assessee is engaged in the business of financing, investments, consultancy and share related activities. The assessment has been completed u/s 143(3) of the Act, determining the total income at Rs.29,80,924/- by making additions towards disallowances u/s 14A of the Act.

Subsequently, the Ld.CIT-1, Mumbai, passed the revision order u/s 263 of the Act on the basis that the assessment order passed by the Ld. AO is erroneous insofar as, it is prejudicial to the interest of the revenue, in respect of share premium collected on issue of shares and issue of disallowances of expenditure u/s 14A of the Act, on the ground that although, the Ld. AO has examined both the issues, but failed to appreciate the facts and relevant provision of the Act, even though the assessee has issued shares at huge premium, which is not supported by necessary evidences. Further, although the ld. AO has determined disallowances u/s 4A r.w. Rule 8D, but excluded shares held as stock in trade for the purpose of determination of disallowances, even though shares held as stock in trade needs to be considered for the purpose of computation of average value of investments. Therefore, he opined that the assessment order passed by the Ld. AO is erroneous, insofar as, it is prejudicial to the interest of the revenue and accordingly, set aside the assessment order passed by the Ld. AO with a direction to reframe the assessment afresh taking into account, the observation made in his order.

The Tribunal held that the provisions of section 263 provides an inherent power to the CIT to revise the assessment order, if he is satisfied that the assessment order passed by the Ld. AO is erroneous, insofar as, it is prejudicial to the interest of the revenue. In order to invoke jurisdiction u/s 263, the ld.CIT should satisfy himself that the Ld. AO has passed erroneous order, which caused prejudice to the interest of the revenue. Unless, the Ld. CIT satisfied twin condition provided u/s 263, he cannot assume jurisdiction to revise the assessment order.

The Ld.CIT has questioned two issues in his show cause notice. Insofar as, issue of shares at premium, there is no doubt, the Ld. AO has called for necessary details by issuing a specific notice u/s 142(1), for which the assessee has filed a detailed reply, vide its letter date 29/10/2012, which is part of paper book, where it has furnished complete details, including issue of share at premium. The assessee has also filed necessary details with regard to expenses incurred in relation to exempt income and also claimed that it has made suo-moto disallowances of Rs.7,81,161/-. The Ld. AO has determined disallowances u/s 14A by invoking Rule 8D and made further additions, over and above disallowances made by the assessee. These are undisputed facts. The ld.CIT, although accepted fact that the Ld. AO has examined the issue of shares at premium, but questioned premium collected on issue of shares, in light of provisions of section 68 of the Act.

Further Tribunal find that once necessary ingredients provided u/s 68 i.e identify, genuineness of transactions and creditworthiness of the parties are proved, then the share premium collected on issue of shares cannot be questioned, because the proviso inserted to section 68 of the Act was effective from AY 2013-14 and which is not applicable for the year under consideration as held by the Hon’ble Bombay High Court, in the case of CIT vs Green Infra Ltd. [2017] 392 ITR 7.

Insofar as, disallowances of u/s 14A of the Act, the law as was there at the prevailing time, when the assessment was completed by the Ld. AO was supported by certain judicial precedents, as per which share hold as stock in trade was not necessarily to be included for the purpose of determination of average value of investments. The Ld. AO on the basis of law prevailing at that time has considered the issue and determined disallowances applying the prescribed procedure provided u/s 14A r.w.Rule 8D of act. Therefore, the ld.CIT was erred in, coming to the conclusion that the Ld. AO has not examined the issue, in light of provisions of the Act.

Further, when a issue has been considered by A.O and has taken one of the possible views, then the Ld.CIT cannot assume jurisdiction to revise assessment order, on the ground that the enquiries conducted by the ld. AO is inadequate. This legal principle is supported by the decision of Hon’ble Bombay High court, in the case of CIT vs Neerav Modi (2016) 241 taxmann 245. This legal principle is further supported by the decision of Hon’ble Supreme Court, in the case of CIT vs Max India Ltd.(2007) 295 ITR 282, where it was held that where, two views inherently possible and when, one view had to be taken into account by considering position of law, as it stood on day, when the commissioner passed order in purportedly exercises of his power u/s 263 of the Act, then view taken by the Ld. AO cannot be called erroneous and the Ld.CIT is incorrect in assuming jurisdiction u/s 263 of the Act.

Therefore, the Ld.CIT was incorrect in assuming jurisdiction to revise the assessment order u/s 263 of the Act on both issues.

KSM Securities & Finance Private Limited v CIT-1, ITA NO.: 2980/M/2015, A.Y. 2010-11, Bench. “H”, date : 04/03/2020 (Mum)(Trib)

KSM Securities & Finance Private Limited.

3. Section 50C – Capital gains – Reference to DVO – Assessing Officer computed long-term capital gain on basis of valuation made by Stamp valuation authority without reference to DVO – It is irrespective of the fact whether the assessee objects to the stamp duty valuation or not, the A.O has to get the valuation done through the DVO in terms of section 50C(2) of the Act.

The assessee is an individual. In the course of assessment proceedings, the A.O noticing that the assessee has declared long term capital gain of Rs. 2,23,544, on sale of flat called upon the assessee to furnish the working of long term capital gain as well as the sale deed. On perusing the sale deed, he found that the stamp duty authority has valued the property for stamp duty purpose at Rs. 37,80,000, as against the declared sale consideration of Rs. 30 lakh. Though, the assessee objected to the proposed addition, however, the A.O rejecting the submissions of the assessee
proceeded to treat the value determined for stamp duty purpose as the deemed
sale consideration and computed long term capital gain accordingly.

The CIT(A) upheld the A.O order. The assessee submitted that the A.O without referring the valuation of the property to the District Valuation Officer (DVO) has straight away adopted stamp duty value for determining the long term capital gain. As per section 50C(2) of the Act, the A.O has to refer valuation of the property to DVO irrespective of the fact whether the assessee objects or not to the stamp duty valuation.

The Tribunal held that, the A.O has invoked the provisions of section 50C(1) of the Act to determine the long term capital gain by adopting the value determined by the stamp valuation authority as the deemed sale consideration. However, before doing so, he has not made any reference to the DVO to determine the value of the property in terms of section 50C(2) of the Act. The Hon’ble Calcutta High Court in Sunil Kumar Agarwal v/s CIT, [2014] 225 taxman 211 (Cal.) has held that irrespective of the fact whether the assessee objects to the stamp duty valuation or not, the A.O has to get the valuation done through the DVO in terms of section 50C(2) of the Act. The assessee has filed the valuation report obtained from a registered valuer valuing the property at Rs. 27,20,000/-. Admittedly, the aforesaid valuation was not before the Departmental Authorities. Therefore, admitting the valuation report as additional evidence, matter was restore to the file of the A.O for fresh adjudication after complying to the provisions of section 50C(2) of the Act by referring the valuation of the property to the DVO.

Nafisa Abizar Banatwala v. I.T.O Ward – 17(2)(4), ITA No.974/Mum/2019, A.Y. 2013-14, Bench. “SMC”, DOH: 04/03/2020 (Mum)(Trib)   

Nafisa Abizar Banatwala

Unreported Decisions – ST – February 2020

By Vinay Jain & Sachin Mishra, Advocates

1. Whether the formula prescribed under Rule 6(3) and (3A) w.e.f. 01-04-2011 for calculation of value of exempted service of trading shall be made applicable for the past period as well, otherwise how the value of such exempted service of trading will be calculated? Whether the rigours of reversal of CENVAT credit under Rule 6 of the CENVAT Credit Rules, 2004 will apply to the input services specified under Rule 6(5) of the CENVAT Credit Rules, 2004 attributable to trading activity?

Facts and Pleading: M/s. Mercedes Benz India Pvt. Ltd. (hereinafter referred to as the ‘appellants’) are inter alia engaged in the manufacture of motor vehicles and parts. The appellants were paying central excise duty on the said final products, manufactured and sold by them. The appellants also render taxable output service under applicable sub-clauses of Section 65(105) of Finance Act, 1994. The appellants were duly paying the applicable output service tax under said Finance Act, 1994. The appellants also import cars in fully manufactured condition (also called completely built unit (CBU)). The said vehicles are sold by the appellants through the dealer network to the ultimate customers. Since no manufacturing activity is undertaken in respect of these imported cars, no excise duty is paid on them at the time of their sale. No service tax is also paid or payable on their sale. The appellants were, taking credit of entire service tax paid on common input services used (a) in relation to manufacture and sale of cars and parts thereof, (b) provision of taxable output service and (c) those used commonly in its business of import and sale of completely built units (car).

According to the revenue, the appellants are not eligible for CENVAT credit of entire service tax paid on common input service, but is eligible only to the extent of common input services that are relatable to manufacture and sale of car and parts thereof or provision of taxable services. The Revenue alleged that if the CENVAT Credit is not used in providing taxable output services, credit availed on such services cannot be allowed in view of Rule 3 of the CENVAT Credit Rules, 2004, hence, Rule 6 (5) is not applicable. The revenue also contended that in absence of the meaning of ‘value’ of traded goods for the period prior to 01-4-2011, it should be the gross value of traded goods for the purpose of determination of the quantum of credit attributable to the exempted or nontaxable services.

The appellants submitted that the input services enumerated under Rule 6(5) of CENVAT Credit Rules, 2004 on which CENVAT credit has been availed by the appellants would be admissible, even if the same are used for both exempted services as well as taxable output service. The appellants further submitted that the formula provided w.e.f. from 01- 04-2011 is a well-known method of attribution and since the said formula being procedural in nature, needs to be applied for the past assessment years also. The appellant also submitted that as the common input services merely contributes to margin hence the in value of numerator as well as denominator, only margin should be considered including the manufacturing turnover. The appellants also submitted that the invocation of extended period and imposition of penalties is not sustainable in the present facts on the count that same relates to interpretation of law.

Judgment: The Hon’ble CESTAT has not considered the issue whether formula prescribed under Rule 6(3) and (3A) w.e.f. 01-04-2011 for calculation of value of exempted service of trading shall be made applicable for the past period. The Hon’ble CESTAT observed that for the period prior to 01- 04-2011, the value of exempt service of trading shall include the value of both trade/profit margin earned from the trading activity as well as the value of incidental and ancillary services incurred in the said activity. Further, the Hon’ble CESTAT agreeing with the submissions of the Appellants held that Rule 6 (5) of the CENVAT Credit Rules, 2004 lays down a fiction whereby services mentioned under the said Rule are deemed to have been used in providing only taxable service, and consequently the rigour of Sub-Rule (1), (2), (3) of CENVAT Credit Rules, 2004 has been made inapplicable. Thus, as per Hon’ble CESTAT the input services enumerated under Rule 6(5) of CENVAT Credit Rules, 2004 on which CENVAT credit has been availed by the Appellants would be admissible, even if the same are used for exempted service of trading. The Hon’ble CESTAT set aside the invocation of extended period and imposition of penalties including personal penalty on the count that the issue relates to pure question of interpretation of law and there is neither suppression nor misdeclaration on part of the appellants.

M/s. Mercedes Benz India Pvt. Ltd. vs. CCE, CESTAT, Mumbai decided on 31.01.2020 in the Final Order No. A/85162-85165/2020.

M/s. Mercedes Benz India Pvt. Ltd.

2. Whether refund under Rule 5 of CENVAT Credit Rules, 2004 can be rejected on the count that the same has been carried forward and has not been debited to TRAN-1 GST Regime and not debited the refund amount as required under condition 2(h) of the Notification No. 27/2012-CE (NT)?

Facts and Pleading: M/s. Zamil Steel Engineering India Pvt. Limited (hereinafter referred to as the appellants) was registered with the service tax department under Information Technology Software Services and were also engaged in the business of providing Consulting Engineering Service. They filed a refund claim of ` 6,42,299/- on 18-4-2018 being the unutilised CENVAT credit on services consumed in the export of services during the period from April 2017 to June 2017.

The department proceeded to reject the aforesaid claim for the reasons that on perusal of ST-3 returns for the relevant period, the appellant has not debited the amount claimed as refund in their CENVAT credit account. Secondly that they have carried forward the balance CENVAT account to TRAN- 1 GST Regime as on 30-6-2017; that in terms of Section 142 (4) of CGST Act, 2017, the refund claim is not admissible.

The appellant submitted that when the refund claim was filed, there was no existence of any facility for the appellant to file ST-3 returns. Since it was not possible for the appellant to file ST-3 returns showing the debit of the refund amount, they carried forward the refund amount to the GST TRAN-1 and thereafter filed refund claim. The appellant further submitted that the department does not have a case that the appellant is not eligible for the credit. However, the same is only rejected by technical reasons stating that appellant has carried forward the credit and therefore not eligible for refund. The appellant also submitted that they debited the amount claimed as refund in the input ledger in June 2018 reflecting the same in the GST TRAN-3. Therefore, the credit amount of which refund is claimed gets debited.

Judgment: The Hon’ble CESTAT agreed with the submissions of the appellant and observed that after introduction of GST, it was not possible for the assessee to file ST-3 returns. The Hon’ble CESTAT held that it was not required for the appellant to deduct the amount in the ST-3 returns as and when credit is availed, only if they intend to file refund claim they were required to debit the same. Therefore, the Hon’ble CESTAT negated the contention of department that assessee ought to have debited the amount during the existence of Finance Act, 1994 itself. Accordingly, the impugned order was set aside and appeal was allowed.

M/s. Zamil Steel Engineering India Pvt. Limited vs. Commissioner of CGST & Central Excise, Chennai, decided on 23-01-2020 in the Final Order No. 40077/2020.

M/s. Zamil Steel Engineering India Pvt. Limited

Unreported Decisions – March 2020

By Ajay R. Singh, Advocate

1. Section 145 – Method of accounting – change in accounting method – bona fide reason for change in method adopted by assessee – change justified.

The assesse company is engaged in the business of development, operation and maintenance of industrial park at Mysore. For the above purpose, it was allotted lease of industrial land by KIADB. The assessee has entered into an agreement with Shapoorji Pallonji & Co.Ltd., for development of industrial park, for which it has paid project management and office management service charges. The assessee has capitalized said expenditure into capital work in progress account up to 30/06/2011. But, from 01/07/2011, it has changed its accounting method for accounting project management expenses and accordingly, debited said expenses into the profit and loss account as revenue in nature. The assessee has explained the reasons for change in method of accounting of particular expenditure from capital in nature to revenue in nature. According to the assessee, the change in accounting method for accounting project management expenses is due to temporarily suspension of construction activities for non allotment of entire parcel of land by the KIADB, as per agreement for more than three years. As a result, the project was temporarily suspended and all construction activities are suspended from 01/07/2011. Therefore, it has debited said project management expense into the profit and loss account and claimed deduction u/s 37(1) of the Act.

The Ld. A.O & CIT(A) held that there is no justification for adopting a different method of accounting from a certain date, during the relevant period. There is no change in the nature or status of the business activity at that point. Denial of renewal of lease of land by KIADB or any other reason for temporarily lull in business is not important for following consistent accounting principles. Accordingly, disallowed project management expenditure claimed as revenue in the profit and loss account and added back to capital work in progress account.

Tribunal observed that there is no dispute with regards to the nature of expenditure incurred by the assessee and the genuineness of said expenditure. In fact, the Ld. AO has not doubted expenditure incurred under the head project management services charges. There is no dispute that the business was temporarily suspended from 01/07/2011, due to certain legal hurdles in the project, as per which the KIADB was not able to handover the land allotted for the project. In view of the above, the company has temporarily suspended its business activity w.e.f. 01/07/2011. Therefore, in view of the changed circumstance, the assessee had to rethink its accounting policies, in order to give a fair and better treatment in its financial statements, in respect of various expenditure incurred for the project. The assessee has changed its method of accounting to give better treatment to said expenditure and accordingly, it has debited project management expenses into profit and loss account, because the particular expenses cannot be capitalized, when the construction work has been temporarily suspended during the relevant period. Therefore, the change in method of accounting was necessary in the given facts and circumstances of the case and was also bonafide. Therefore, the Ld. AO, as well as the Ld.CIT(A) erred in coming to the conclusion that the assessee has changed its method of accounting without there being any changes in facts and circumstances and such changes was not bonafide.

Accordingly, project management expenses was allowed as deductions as claimed by the assessee.

Highstreet Developers Pvt. Ltd v. Income Tax Officer 3 (1)(4), ITA No. 92/Mum/2018, A.Y. 2012-13, Bench. “H”, DOH: 29/01/2020 (Mum)(Trib)

Highstreet Developers Pvt. Ltd

2. S.194H : Deduction of tax at source – Commission – (Discount) – distribution/sale of Set-top Boxes by service provider to distributor – relationship between assessee THE CTC NEWS | March 2020 18 www.ctconline.org and distributor would be that of principal and principal and not principal and agent – hence, TDS under section 194H was not attracted.

S. 194C : Deduction at source – Contractors – distribution/sale of Set-top Boxes by service provider to distributor — Not technical or managerial services — Provisions of S.194C is applicable and not S.194J [S.194J]

The assessee company is engaged in the business of providing Direct to Home (DTH) services in the name of Videocon d2h, for which the license is given by Ministry of Information & Broadcasting, Government of India. The assessee has entered into agreements with various distributors for distribution/sale of Set-top Boxes (STB), prepaid vouchers, recharge vouchers, top-up vouchers etc. The assessee has also entered into agreements with various service providers at various locations for carrying out the work of installations of STB and dish antenna. As per the terms of agreement between the parties, the distributors/dealers are allowed discounts on sale of STB and recharge voucher from their maximum Retail Price (MRP). The distributor/dealer can sell these items to the customers at a price not exceeding the MRP. As regards, the installation charges paid for installation of STB and dish antenna, the assessee has paid service charges to service providers and has deducted tax at source u/s 194C of the Act, whereas no tax has been deducted, in respect of discount offered on sale of STB and recharge vouchers to distributors/dealers.

The AO computed short deduction of TDS u/s 194H, in respect of commission offered to distributors/dealers, for sale of STB and recharge coupons. The AO has also computed short deduction of TDS u/s. 201(1) and 201(1A), in respect of service charges paid to service providers for installation of STB and dish antenna u/s. 194J, as against the assessee application of provisions of section 194C of the Act.

The assessee carried the matter in appeal before the first appellate authority. The assessee submission before the Ld.CIT(A) are that the provision of section 194H has no
application, in respect of discount offered to distributors/dealers for sale of STB and recharge coupons, because the said agreement is on principal to principal basis and the title and ownership in goods has been transferred to distributors/dealers. Insofar as, service charges paid to service providers for installation of STB and dish antenna, the contract between the parties is in the nature of works contract, which comes under the provisions of section 194C of the Act and accordingly, it has rightly deducted TDS, as per section 194C of the Act.

The Ld.CIT(A) after considering relevant submissions of the assessee, deleted additions made by the Ld. AO towards short computation of TDS and interest u/s. 201(1) and 201(1A) of the Act. In respect of discount offered to distributors/dealers, on the ground that the arrangement between the parties is on principal to principal basis. Similarly, the Ld.CIT(A) deleted additions made by the Ld. AO towards short deduction of TDS, in respect of payment made to service providers for installation of STB and dish antenna.

The Tribunal held that an identical issue has been considered by the co-ordinate bench of ‘B’ bench Mumbai, in the case of M/s. Videocon d2h Ltd. vs. DCIT in ITA No. 7200/Mum/2012 and 7201/Mum/2012 for AY 2010-11 and 2011-12, where under identical set of facts and on basis of similar agreement between the parties, the Tribunal held that discount offered to distributors/dealers is on the principal to principal basis which does not come under the definition of commission, as defined u/s. 194H of the Act. Therefore, discount offered to distributor/dealers is not in the nature of commission, as defined u/s 194H of the Act, and the assessee shall not required to deduct tax at source on said payment.

The next issue that, in respect of service charges paid to service providers for installation of STB and dish antenna. This issue is also covered in favour of the assessee by the decision of ITAT, Mumbai ‘B’ bench in the case of M/s. Videocon d2h Ltd vs. DCIT in ITA No. 7200/Mum/2012 and 7201/Mum/2012 for AY 2010-11 and 2011- 12, wherein it is held that that the work of installation of Set-Top Boxes and Antenna at the premises of the end-user is given as per the contract with Installation Service Providers (ISPs). The job of the Installation Service Provider is to go to the premises of the subscriber, to install Dish Antenna and Set-Top Box and connect them to the Television of the subscriber. The Installation Service Provider has to connect the Set-top Box to the Television by making few basic wiring connections. It does not require any special technical expertise or any technical degree and it can be done by any sound person on reading through the installation manual. Also, there is no specific qualification or recognized course required for Installation Service Provider to become eligible for installation of Dish and Set-Top Box. They are given basic training/instructions for a short period to make them understand the process of Installation so that they can apply the same at the place of the subscriber.

Therefore, the services charges paid to service providers is in the nature of works contracts and hence, the assessee has rightly deducted TDS u/s. 194C of the Act.

In this view of the above the service charges paid to service providers for installation of STB and dish antenna is in the nature of works contract and accordingly, the assessee has rightly deducted TDS u/s. 194 C of the Act. The Ld.CIT(A) after considering relevant facts has rightly deleted additions made by the Ld. AO towards short deduction of TDS on service charges u/s. 201(1) and 201(1A) of the Act. In the result, appeal filed by the revenue was dismissed

DCIT(IT)-1(2) v Dish TV India Ltd. (Formerly known as Videocon D2H Ltd.), ITA NO.: 7403/M/2018, A.Y. 2012- 13, Bench. “D”, date : 29/01/2020 (Mum)(Trib)

Dish TV India Ltd.

3. S. 68 : Cash credits – Unsecured loans received – Repaid the loan along with interest to the party – Assessee proved the identity, creditworthiness and genuineness of transactions by providing Confirmation, balance sheet and bank accounts –basic verification u/s 133(6) or u/s 131 of the Act not carried out – cannot make an addition.

The assessee being resident individual was assessed for year under consideration u/s. 143(3) r.w.s. 147 on 17/03/2016 at ₹ 60.30 Lacs after certain additions of ₹ 30 Lacs as against returned income of ₹ 30.30 Lacs filed by the assessee on 31/07/2012. The reassessment proceedings were triggered pursuant to search and survey action carried out by the department in the case of Shri Praveen Kumar Jain group on 01/10/2013. It was noted that the assessee was in receipt of unsecured loans of ₹ 30 Lacs from one of the entities namely M/s. Atharv Business Pvt. Ltd. belonging to said group. Accordingly, the case was reopened by issuance of notice u/s. 148 on 09/02/2015. Although the assessee defended the same, however, not convinced, Ld. AO rejected assessee’s submissions and added the amount of ₹ 30 Lacs to the income of the assessee.

Aggrieved the assessee contested the same before Ld. CIT(A), however without any success wherein Ld. CIT(A) not only confirmed the addition of ₹ 30 Lacs but enhanced the addition by ₹ 10 Lacs since it transpired that the assessee was in receipt of another unsecured loan of ₹ 10 Lacs from another group entity namely M/s. Sumukh Commercial Pvt. Ltd.

Aggrieved, the assessee was under further appeal before ITAT. The Assessee submitted that the assessee had furnished sufficient documentary evidences to prove the genuineness of the transaction carried out with M/s. Atharv Business Pvt. Ltd. These evidences were in the shape of relevant bank statements as well as loan confirmations of the lender, Copy of Income Tax Return Acknowledgement & Audited Accounts of the lender. The Ld. AO completely ignored the same and failed to carry out any independent investigation to bring on record any corroborative evidences to support the conclusions that the transactions were not genuine.

Tribunal held that the documents placed in the paper-book establish that the assessee has placed on record confirmation of account statement & respective bank statements relating to transaction done with M/s. Atharv Business Pvt. Ltd. The perusal of the same reveal that the assessee has obtained loan of ₹ 30 Lacs from the said entity on 03/03/2012 through banking channels. The assessee has paid interest of ₹ 27,616/- against the same on 31/03/2012. Further, this loan has subsequently been squared off on 16/05/2012 with interest of ₹ 44,384/-. There are no immediate cash deposits in the bank account of said entity before transfer of funds to the assessee. The assessee has also placed on record the Income Tax Acknowledgement of the said entity as well as its audited financial statements, wherein the stated transactions have duly been reflected. Similar are the documents with respect to second entity namely M/s. Sumukh Commercial Pvt. Ltd. The perusal of these documents would lead to a conclusion that the assessee had proved the identity of the lender, their creditworthiness and genuineness of the transactions. The onus was on revenue to rebut the same. However, except for relying upon the findings of investigation wing, no independent inquiries were conducted by Ld. AO to rebut the assessee’s documentary evidences and corroborate the conclusion that the transactions were fictitious transactions. In fact, the assessee had repaid the unsecured loans to the lenders within a short span of time even before the search proceedings were carried out against the said group on 01/10/2013. Nothing was brought on record to demonstrate that any cash was exchanged between the assessee and the lenders. Therefore, the impugned addition of ₹ 40 Lacs was deleted .

Bharat Kumar Ludhani v. ACIT-Central Circle – 2(4), ITA No.829/Mum/2018, A.Y. 2012-13, Bench. “B”, DOH: 05/02/2020 (Mum)(Trib)

Bharat Kumar Ludhani

Unreported Decisions – ST – February 2020

By Vinay Jain & Sachin Mishra, Advocates

1. Whether supply of packaged Antivirus Software with licence key to the end user by charging licence fee as per End User Licence Agreement amounts to provision of service or sale?

Facts and Pleading: M/s. Quick Heal Technologies Ltd. (hereinafter referred to as the ‘Appellant’) is inter alia engaged in the business of Research and Development of Antivirus Software under the brand name ‘Quick Heal’. The Software eliminates existing viruses and provides continuous updates as a virus surveillance measure. Appellant gets Master CD replicated by replicators and then undertakes supply of Antivirus Software in CD to end users with a Licence key. The software is supplied in CD form as a Canned Software. End user is provided with a temporary/non-exclusive right to use the Antivirus Software as per the conditions contained in the End User Licence Agreement (hereinafter referred to as EULA). Appellants are paying Sales Tax/VAT on sale of the software.

The Department alleged that Appellant has supplied Antivirus Software with Licence key to the end users through dealers/ distributors without discharging the service tax liability on such transactions. It alleged that the dominant nature of EULA is only grant of licence to use the software and not sale of the software. It further alleged that appellant providing end users with CD along with the licence key (i.e., temporary/ non-exclusive right to use the software supplied electronically in the form of updates) is in nature of service and should not be treated as deemed sale. It alleged that appellant is providing ‘information technology software’ service to the customers as the software is interactive in nature. Department further alleged that appellant is liable to discharge service tax under item no. (vi) of clause (zzzze) of subsection (105) of Section 65 of the Finance Act, 1994 (Prior to 01-07-2012) and w.e.f. 01-07-2012, under Section 66E(d) of the Finance Act, 1994.

The appellant submitted that providing software to customers would not mean that appellant is providing ‘information technology software’ service. It further submitted that for providing ‘information technology software’ service, such software must be capable of being manipulated for providing interactivity and Appellant’s software provides none of these features. Appellant further submitted that Quick Heal Antivirus Software, supplied in CD form is goods and, therefore, not leviable to service tax. Appellant claims that they had been discharging sales tax/VAT on sale of such software. Appellant submitted that license Key which is supplied along with the Antivirus Software CD to End users is not a software in itself and generation of such License key is neither manufacturing activity nor service. It further submitted that end user is entitled for the updates and updates were for free, therefore, not a service. It also submitted that retention of title and ownership over the software does not mean that it interferes with the right of the licensee to use the software and would not be transfer of ‘right to use’ merely for this reason. It submitted that providing software with licence key to the end user is deemed sale.

Judgment: The Hon’ble CESTAT observed that to fall under the definition of “Information Technology Software” service, Antivirus software needs to be capable of being manipulated for providing interactivity to a user. The Hon’ble CESTAT agreed with the appellant’ submission that antivirus software developed by the appellant is not interactive as the software does not involve the user in the exchange of information and is complete in itself to prevent virus. The Hon’ble CESTAT held that such software is not covered under the definition information technology software and therefore no service tax is leviable. The Hon’ble CESTAT examined the issue from another angle and noted that to conclude that whether licence to use the packaged software is sale or service, the terms and conditions of the licence to use such software has to be seen. It noted that in case a licence to use pre-packaged software imposes restrictions on the usage of such licences and the conditions are such as to restrain the right to free enjoyment, then a licence would not result in transfer of ‘Right to Use’. The Hon’ble CESTAT perused EULA and held that free enjoyment of the software by the end user is not affected merely because appellant retains title and ownership of the software. It noted that the agreement provides licence with right to use the software during the activation period provides for updates and technical support. It observed that transfer is of the ‘Right to Use’ an identified and identifiable version of the software and through the purchase of the license, user has ‘purchased’ only the ‘Right to Use’ the software but, it will still be a ‘Sale’. The Hon’ble CESTAT held that the transaction in question is right to use the software and would amount to ‘deemed sale’.

Quick Heal Technologies Limited vs. Commissioner of Service Tax, Delhi, decided on 09-1-2020 in the Final Order No. 50022/2020.

Quick Heal Technologies Limited.

2. Whether VSAT (Very Small Aperture Terminal) fee (both one-time fee for supply of goods and actual usage charges) charged for supply of VSAT equipment is liable for service tax under “franchise service’ under Sections 65(105)(zze) read with Sections 65(47) & (48) of the Finance Act, 1994?

Facts and Pleading: M/s. Manipal University Learning Pvt. Limited (hereinafter referred to as the ‘appellant’) is inter alia engaged in the activity of providing education through distance education program for Universities. The appellant entered into an Memorandum of Agreement (MOA) with Sikkim Manipal University of Health, Medical and Technological Sciences (SMU), for (i) promotion of distance education program of SMU and (ii) to provide infrastructure and services. The appellant has inturn entered into an agreement called Learning Centre Agreement (LCA) with various parties granting licence to set up an authorised Learning Centre of the appellant with respect to distance education programmes of universities with whom the appellant has entered into contracts. In terms of this LCA, the party has agreed to provide infrastructure and facilities for the purpose of providing distance education programme of SMU/other universities. Since the entire activity was a “distance education programme”, the appellant supplied VSAT (Very Small Aperture Terminal) equipment to the contracting party. In terms of LCA, the appellant received one-time VSAT Management Fee and actual VSAT user costs/reimbursements.

The department alleged that the Appellant is liable to pay service tax on the VSAT charges received (both onetime fee and usage charges), under “franchise service” for the period July 2003 to August 2007.

The appellant submitted that both agreements with SMU and the parties running Learning Centres did not involve any kind of “franchise” but were in the nature of “auxiliary education services”. The appellant submitted that VSAT equipment hire charges related to chattel hire and the same was a transfer of property and right to use falling within the ambit of the definition of sale in terms of Article 366 of the Constitution and not a service as contemplated by law during the relevant period.

Judgment: The Hon’ble CESTAT observed that nothing in the agreement indicated that the learning centres were given a franchise by providing the VSAT at the learning Centres. The Hon’ble CESTAT held that nothing was forthcoming from the contracts that appellant gave permission to use their name by providing the VSAT facility. The Hon’ble CESTAT held that as the Appellant was not receiving any royalty towards the alleged franchise, it was incorrect to classify the same as ‘Franchise’ service. The Hon’ble CESTAT relied upon IMA Mental Arithmetic Academy Pvt. Ltd. vs. CST, 2019 (22) GSTL 234 (Tri-Che.) wherein it was held that only those amounts directly relatable to ‘representational right’ granted by the franchisor to franchisee and royalty/franchise fee towards that right alone be part of taxable value under ‘franchise’ service; admission fee, tuition fee, competition fee and course instructor fee was not liable for service tax under “franchise service”. Accordingly, the demand was set aside.

M/s. Manipal University Learning Pvt. Limited vs. CCE, Karnataka, CESTAT, Bangalore decided on 20-12-2020 in the Final Order No. 21295/2019.

M/s. Manipal University Learning Pvt. Limited