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By CA Vinay Jain & Mr. Sachin Mishra, Advocate

1. Whether services by way of supervision and approvals for ‘construction of railways siding’ from the Railway authorities to the assessee amounts to ‘Business Support Services’ thereby rendering the assessee liable to pay service tax under reverse charge mechanism?

Facts & Pleadings: M/s. Nabha Power Limited (hereinafter referred to as the ‘Appellants’), a wholly owned subsidiary of Larsen and Toubro, has a Thermal Power Plant in Rajpura. The coal required to generate power in the plant is being transported to the power plant through network of railways. However, the last railwaystation was at a considerable distance from the power plant. Therefore, the Appellants required to construct railways siding for transportation of coal from the last station to the power plant. The construction of the siding involved various alterations and modification to the existing station which required mandatory approvals, permits and supervisions of the Railways. Therefore, the Appellants constructed the siding under the mandatory supervision and approval of the Railways and made payment to the Railways in relation to the same.

It is the case of the department that the Appellants have in fact availed ‘Business Support services’ under section 65(105)(zzzq) from the Railways by way of supervision and approvals, and are required to pay service tax under reverse charge mechanism. According to the department, the construction or supervision of ‘private railway sidings’ at hand is not a statutory function. It was also contended that the consideration paid to the Railways for the services at hand does not stem from a statute but is based on the letters issued by the Railways board thereby denying that Railways are rendering statutory functions. The department also relied on the judgment of the Hon’ble High Court of Delhi in the case of Union of India vs. Competition Commission of India to say that the activity undertaken by the Indian Railways amount to ‘Business Support Services’.

The Appellants relied on the Circular dated 10-6-2012 to say that in the present case the supervision services have been provided by Railways (Government) in terms of their sovereign rights to business entities and which are not substitutable in any manner by any private entity. Further, the services at hand cannot be performed by the Appellants themselves. Therefore, these services cannot be termed as Business Support Services. The Appellants also added that the consideration has been paid into the Consolidated Fund of India and has not been retained by the Railways. Additionally, the Appellants contended that services received in relation to construction of siding are exempt from levy of service tax under entry no.14A of the Notification No. 25/2012-ST dated 20-6-2012.

Judgment: The Hon’ble CESTAT held that no service tax is payable by the Appellants considering several grounds. Firstly, ‘siding’ falls within the definition of ‘Railways’ as per the Railways Act. Secondly, the Hon’ble CESTAT noted that the Appellants are making mandatory deposits to the Railways for various approvals and supervisions for construction of siding as per Circular No.1/2012.

The Hon’ble CESTAT also considered the Circular dated 20-6-2012 and held that the supervision services and approvals availed from the Railways cannot be done by the Appellants themselves or any other agency and hence, do not constitute support services. Further, the Hon’ble CESTAT noted that the services by Government or local authority in relation to the transport of goods or passengers are exempt from service tax under the negative list u/s. 66D of Finance Act, 1994 which in turn exempts the services at hand.

The Hon’ble CESTAT also noted that the amount paid by the Appellants to the Railways has gone to the Consolidated Fund of India which shows that the activity undertaken by the Railways are statutory in nature. Therefore, the Appellants are not liable to pay service tax. Lastly, the Hon’ble CESTAT considered the Notification No. 25/2012-ST dated 20-6-2012, Serial No. 14A which exempts the services in relation to ‘construction, erection, commissioning or installation of original works pertaining to railways’ from payment of service tax. It was thus held that since railways include siding and yard, the Appellants are not liable to pay service tax on services (supervision) in relation to construction of railway siding as per the aforementioned Notification.

M/s. Nabha Power Limited vs. Commissioner of Central Excise & ST, Chandigarh decided on 16-8-2018 in Appeal No. ST/52893/2015-DB

M/s. Nabha Power Limited

2. Whether the ‘Dormant Account Charges’ charged by banks for operating an account of a customer which remained inoperative or dormant is leviable to service tax under Finance Act, 1994?

Facts & pleadings: M/s. Karur Vysya Bank Ltd. (hereinafter referred to as the ‘Appellants’) is a banking company which is engaged in providing Banking and other Financial Services. The Appellants were charging ‘Dormant Account Charges’ from its customer for operating their accounts that remained inoperative or dormant for more than 12 months.

It is the case of the department that the Appellants have in fact received the said amount for rendition of ‘Banking and other Financial Services’ as the financial services of ‘operation of bank accounts’ is liable to service tax w.e.f. 19-9-2004. The department further alleged that the ‘Dormant Account Charges’ is directly linked to the services provided by the Appellants to its customers by way of maintaining their inoperative bank accounts and by way of keeping such account in a dormant status in their operating scheme.

The Appellants contended that in a ‘Dormant Account’, there is no ‘operation of bank account’ as such accounts remain inoperative for more than 12 months. Further, the ‘Dormant Account Charge’ is a penalty for a customer who is not operating the bank account on regular basis and the purpose of the implementation of this charge is for regulating the dormant bank account into an operative one (or) to eliminate those accounts from the system for the effective utilisation of the other operative customers.

Judgment:  The Hon’ble CESTAT held that there was no service being provided by the Appellants to its customer in the course of levying ‘Dormant Account Charge’. The Hon’ble CESTAT observed that in any case, the customer was not operating his account for quite some time, only for which reason the account was declared dormant or inoperative by the bank. By levying “dormant account charges” such account holders were not getting any additional services or benefits that they were not getting earlier. Therefore, the Hon’ble CESTAT concluded that levy of such charges are nothing but a penalty imposed on such account holders for keeping their account inoperative. Banks need a constant rolling of money and deposits, and inoperative or dormant account will not help this purpose. The dormant account charges are therefore nothing but a charge in the nature of penalty.

M/s. Karur Vysya Bank Limited vs. Commissioner of Central Excise, Tiruchirappalli, CESTAT Chennai decided on 10-8-2018 in Appeal No. ST/480/2010

M/s. Karur Vysya Bank Limited

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

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