Unreported Decisions – ST – December 2019

Unreported Decisions – ST – December 2019

By Vinay Jain & Sachin Mishra, Advocates

1. Whether amount of commission received by Air Travel Agent from General Sales Agents (GSAs) for the bookings done through them is taxable under “Business Auxiliary Service”? Whether the commission amount received by one branch of the Air Travel Agent from another branch, for bookings done through them is taxable under “Business Auxiliary Service?

Facts and Pleading: M/s. Riya Travel & Tours (India) Pvt. Ltd. (hereinafter referred to as “Appellant”) is inter alia, engaged in rendering services as an air travel agent. For booking of air tickets, the airlines appoint General Sales Agents (GSAs), entrusted with the task of soliciting, promoting and selling the tickets for the airlines; the tickets are issued by the GSAs only and other travel agents are not allowed to sell the tickets of such airlines. Any customer intending to book a ticket, approaches the agent i.e., Appellant (other than GSA), who obtains the details such as name of the passenger, etc. and approaches the GSA of the particular airline for booking of ticket, which is issued directly in the name of the passenger. In certain cases, the Appellant is also receiving service tax on the commission amount from the branch offices under “Business Auxiliary Services.”

The department alleged that Appellant is liable to pay service tax on the commission amount received by it from the GSAs under the taxable head of “Business Auxiliary Service” (‘BAS’) as they are promoting the business of the GSA’s. Further, the Department also alleged that the appellant was liable to pay service tax on the commission amount received from the branch offices under BAS.

The appellant submitted that the services provided are in connection with the booking of passage by air, taxable under the category of “Air Travel Agent Service” and not under a general category of BAS. The activities undertaken by the Appellant cannot be equated with the term “promotion” or “marketing” of General Sales Agents. The appellants further submitted commission amount received by one branch from another branch of the same company cannot be subjected to levy of service tax in as much as the branch offices and the head office are belonging to one corporate entity and there is no involvement of two separate persons in the transactions.

Judgment: On the first issue, the Hon’ble CESTAT held that, in order to be classifiable under the head of BAS, all three parties involved in the contract namely GSA, the appellant and the customer must be known to each other. Thus, in absence of any connection between them, the activities cannot be considered as a “Business Auxiliary Service”. It held that both the appellants and the GSAs are classifiable under air travel service on the basis of nature of service provided by them that is booking of tickets for the benefit of both airlines and customers. On the second issue, it further held that the head office and the branch offices of the appellant run their business under one umbrella i.e., the appellant’s. Thus, they cannot be termed as separate persons, one as the service provider and the other as the service receiver. Hence, in absence of any provider-receiver of service relationship, the commission amount shared by the branch office with the head office cannot be subjected to tax under such category of BAS.

M/s. Riya Travel & Tours (I) vs. Commissioner of Service Tax, CESTAT, Mumbai, decided 19-11-2018 in the final order no. A/88533-88534/2018..

M/s. Riya Travel & Tours (I)

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

Facts and Pleading: (i) Max Life Insurance Co. Ltd. (herein referred to as “appellants”) are inter-alia engaged in the business of providing life insurance. The appellants have entered into agreements with individuals/corporates who act as the insurance agents of the appellants for a fixed commission. The appellants are discharging service tax on the same under RCM. As per an understanding with all the agents, the agents are entitled to only net commission (net of service tax) or the aforesaid service tax is recovered from them. (ii) The appellants incur certain business expenditure in relation to its insurance agents such as pre-recruitment training expenses, sales training & other training, refresher/renewal training expenses and business promotion Expenses.

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

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

2. Further, the appellants argued that the pre-recruitment expenses were not liable to be included in the taxable value of the services rendered by the insurance agents on the count that the persons who received such pre-recruitment training were not registered as insurance agents under Insurance Act. Further, on post-licence training expenses, the appellants submitted that these expenses incurred by the appellant in providing training facilities to the insurance agents are in fact used by the appellant itself in furtherance of their own routine insurance business.

Judgment: (i) The Hon’ble Appellate Tribunal accepted the submissions of the appellants and relied upon the decision of HDFC Standard Life Insurance Co. Ltd. vs. Commr. C.E., Mumbai-II 2017 (49) STR 301(Tri-Mum.) and Bajaj Alliance Life Insurance Co. Ltd. vs. CCE & ST, 2019-VIL-322-CESTAT-MUM-ST to grant relief to assessee. The Appellate Tribunal after extensive analysis of Section 73A(1) and (2) of the Finance Act, 1994 held in favour of assessee that once the tax has been discharged, no further liability will arise. (ii) Further, the Hon’ble Appellate Tribunal agreed with the submission of the appellant that expenses incurred in pre-recruitment training and post-license training of insurance agents by the appellants cannot form part of the gross taxable value of commission paid to the insurance agents in determining the service tax liability as reimbursement of expenditure cannot form part of taxable value

M/s. Max Life Insurance Company Ltd. vs. Commissioner of C.E. & S.T., CESTAT, New Delhi, decided on 15-11-2019 in the final order no. A/51498/2019.

M/s. Max Life Insurance Company Ltd.

Unreported Decisions – December 2019

Unreported Decisions – ST – December 2019

By Vinay Jain & Sachin Mishra, Advocates

1. Whether amount of commission received by Air Travel Agent from General Sales Agents (GSAs) for the bookings done through them is taxable under “Business Auxiliary Service”? Whether the commission amount received by one branch of the Air Travel Agent from another branch, for bookings done through them is taxable under “Business Auxiliary Service?

Facts and Pleading: M/s. Riya Travel & Tours (India) Pvt. Ltd. (hereinafter referred to as “Appellant”) is inter alia, engaged in rendering services as an air travel agent. For booking of air tickets, the airlines appoint General Sales Agents (GSAs), entrusted with the task of soliciting, promoting and selling the tickets for the airlines; the tickets are issued by the GSAs only and other travel agents are not allowed to sell the tickets of such airlines. Any customer intending to book a ticket, approaches the agent i.e., Appellant (other than GSA), who obtains the details such as name of the passenger, etc. and approaches the GSA of the particular airline for booking of ticket, which is issued directly in the name of the passenger. In certain cases, the Appellant is also receiving service tax on the commission amount from the branch offices under “Business Auxiliary Services.”

The department alleged that Appellant is liable to pay service tax on the commission amount received by it from the GSAs under the taxable head of “Business Auxiliary Service” (‘BAS’) as they are promoting the business of the GSA’s. Further, the Department also alleged that the appellant was liable to pay service tax on the commission amount received from the branch offices under BAS.

The appellant submitted that the services provided are in connection with the booking of passage by air, taxable under the category of “Air Travel Agent Service” and not under a general category of BAS. The activities undertaken by the Appellant cannot be equated with the term “promotion” or “marketing” of General Sales Agents. The appellants further submitted commission amount received by one branch from another branch of the same company cannot be subjected to levy of service tax in as much as the branch offices and the head office are belonging to one corporate entity and there is no involvement of two separate persons in the transactions.

Judgment: On the first issue, the Hon’ble CESTAT held that, in order to be classifiable under the head of BAS, all three parties involved in the contract namely GSA, the appellant and the customer must be known to each other. Thus, in absence of any connection between them, the activities cannot be considered as a “Business Auxiliary Service”. It held that both the appellants and the GSAs are classifiable under air travel service on the basis of nature of service provided by them that is booking of tickets for the benefit of both airlines and customers. On the second issue, it further held that the head office and the branch offices of the appellant run their business under one umbrella i.e., the appellant’s. Thus, they cannot be termed as separate persons, one as the service provider and the other as the service receiver. Hence, in absence of any provider-receiver of service relationship, the commission amount shared by the branch office with the head office cannot be subjected to tax under such category of BAS.

M/s. Riya Travel & Tours (I) vs. Commissioner of Service Tax, CESTAT, Mumbai, decided 19-11-2018 in the final order no. A/88533-88534/2018..

M/s. Riya Travel & Tours (I)

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

Facts and Pleading: (i) Max Life Insurance Co. Ltd. (herein referred to as “appellants”) are inter-alia engaged in the business of providing life insurance. The appellants have entered into agreements with individuals/corporates who act as the insurance agents of the appellants for a fixed commission. The appellants are discharging service tax on the same under RCM. As per an understanding with all the agents, the agents are entitled to only net commission (net of service tax) or the aforesaid service tax is recovered from them. (ii) The appellants incur certain business expenditure in relation to its insurance agents such as pre-recruitment training expenses, sales training & other training, refresher/renewal training expenses and business promotion Expenses.

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

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

2. Further, the appellants argued that the pre-recruitment expenses were not liable to be included in the taxable value of the services rendered by the insurance agents on the count that the persons who received such pre-recruitment training were not registered as insurance agents under Insurance Act. Further, on post-licence training expenses, the appellants submitted that these expenses incurred by the appellant in providing training facilities to the insurance agents are in fact used by the appellant itself in furtherance of their own routine insurance business.

Judgment: (i) The Hon’ble Appellate Tribunal accepted the submissions of the appellants and relied upon the decision of HDFC Standard Life Insurance Co. Ltd. vs. Commr. C.E., Mumbai-II 2017 (49) STR 301(Tri-Mum.) and Bajaj Alliance Life Insurance Co. Ltd. vs. CCE &

M/s. Max Life Insurance Company Ltd. vs. Commissioner of C.E. & S.T., CESTAT, New Delhi, decided on 15-11-2019 in the final order no. A/51498/2019.

M/s. Max Life Insurance Company Ltd.

Unreported Decisions – December 2019

Unreported Decisions – December 2019

By Ajay R. Singh, Advocate

1. S. 68 : Cash credits – Unsecured loans received – The AO without using the statutory powers vested in him u/s. 133(6) or u/s. 131 of the Act cannot simply make an addition towards the unsecured loans.

The assessee is an individual and had filed his ROI comprising of income from house property, business & profession and other sources. The Id AO observed that the assessee had shown unsecured loan of ₹ 1,18,00,000/- from four parties as Arabian Sea Food – ₹ 78,00,000/- Shatrunjaya Estate Pvt. Ltd. – ₹ 20,00,000/- Nikita M. Sagar – ₹ 10,00,000/- Usha J. Chauhan ₹ 10,00,000/-

The assessee furnished a copy of acknowledgement of return of income and confirmation of said parties etc. The AO concluded that the assessee had failed to prove the genuineness and hence rejected the evidence produced as not having any evidentiary value. The Id AO added the loan as unexplained cash credit u/s. 68 of the Act in the assessment.

The assessee had submitted following documents before A.O. like: a) Name and address of the lenders together with their PAN. b) Copy of loan confirmation duly signed by the assessee as well as the concerned lender from whom the loan has been taken. c) Copy of return of income of the parties from whom loan has been taken. d) Bank pass book of two parties highlighting the relevant loan transactions. e) PAN card copy of lenders. f) Affidavits from Smt Nikita Mahesh Sagar and Smt Usha Chauhan wherein they had affirmed that they were carrying on business of tailoring and embroidery works for the past 15 and 30 years respectively. The said affidavit also contained their income tax assessment particulars and also their respective source for advancing loans to the assessee herein. It was further pleaded that all the loan transactions were carried out through regular banking channels by account payee cheques and that the said loans were also duly repaid by the assessee in subsequent years.

The ITAT held that the assessee had furnished the complete details of the loan creditors in the instant case before the ld AO as detailed hereinabove. With regard to Arabian Sea Food and Shatrunjaya Estates Pvt. Ltd., the assessee had not produced the bank statement of the loan creditors as the same was not in the control of the assessee and this fact was also informed to the Ld. AO at the time of assessment proceedings.

The Ld. AO having known that the assessee was not having control over the bank statements of lending entities, could have issued notice u/s. 133(6) of the Act or summons u/s. 131 of the Act to those parties seeking for their bank statements. In the instant case, the Ld. AO had failed to do so. All the primary documents that are in possession of the assessee as a borrower were duly placed on record before the Ld. AO and thereafter the onus shifts to the Ld. AO, which was not discharged by the Ld. AO in the instant case. This would be more so, when the assessee had submitted his bank statements even for the subsequent year to prove that the said loans were duly repaid by him to the concerned lenders. It is not in dispute that these loan creditors are duly assessed to income tax and their income tax assessment particulars together with their addresses were on record. The AO without making even the basic verification with the lenders by using the statutory powers vested in him u/s. 133(6) or u/s. 131 of the Act, cannot simply make an addition towards the unsecured loans as unexplained cash credit merely on surmise and conjecture. Hence deleted the addition made in respect of loans received from Arabian Sea Food and Shatrunjaya Estate Pvt Ltd in the sums of ₹ 78 lacs and ₹ 20 lacs respectively.

With regard to loans received from Smt Nikita Mahesh Sagar and Smt Usha Chauhan, it was held that the Ld AO had merely disregarded the affidavit by stating that the same lacks verification. Even in this case, no verification was carried out by the Ld. AO either u/s. 133(6) or u/s. 131 of the Act to clear the doubts that were in mind of the Ld. AO with regard to the veracity of the loan creditors. Hence the availability of source in their hands stands proved beyond doubt. Hence by mere surmise and conjecture, the Ld. AO had resorted to disbelieve the loan transactions with these two parties, hence the addition was deleted. Accordingly, the grounds raised by the revenue was dismissed.

ACIT-33(3) vs. Mr. Vinodkumar Shyamsingh Yadav, ITA NO.: 4281/M/2015, dated: 18/09/2019 (Mum.)(Trib.)

Mr. Vinodkumar Shyamsingh Yadav

2. S 92D r.w.s 271G: – Transfer pricing – failed to maintain documentation – diamond trade – substantial compliance – no adjustment made in the ALP – penalty u/s. 271G could not be sustained

The assessee being resident corporate assessee is stated to be engaged in the business of manufacturing of cut and polished diamonds studded jewellery. Certain international transactions carried out by the assessee with its Associate Enterprises (AE) during the year under consideration, were referred to Ld. TPO for determination of Arm’s Length Prices. These transactions were in the nature of purchase / sale of rough as well as polished diamonds and sale of diamond studded jewellery. The approximate sale to AE was 23% of assessee’s turnover whereas purchases were approx. 56% of total purchases. The assessee benchmarked the same using entity level TNMM. Although Ld. TPO accepted the transactions to be at Arm’s Length Price, but initiated penalty u/s. 271G in view of the fact that the assessee was unable to submit internal TNMM by working out the profitability of AE and non-AE segment.

The assessee explained that owing to its nature of business, it was not practical to identify and bifurcate the stock, cost and revenue between AE and non-AE segment and work out profitability of the two segments separately. However, concluding that the assessee failed to maintain documentation as required under Clause (g) and (h) of Rule 10D(1), the aforesaid penalty was initiated.

The assessee submitted that the rough diamonds were procured from both AEs and non-AEs. The finished product of cut and polished diamonds would pass through a lengthy manufacturing process including assortment / re-assortment of rough diamonds and at initial stages, it would not be possible to forecast the final outcome of rough diamonds. During the process of manufacturing, a semi-manufactured diamond would be assorted many times and handled by many craftsmen. Various direct and indirect expenditure would be incurred at various stages of manufacturing process and the rough diamond would ultimately lose its identity as to source of purchase due to inherent nature of diamond manufacturing process. Therefore, due to peculiar nature of the product and constant mixing and re-mixing of diamonds obtained from AEs and non-AEs, it would not be feasible to maintain records to determine segmental profitability to work out internal TNMM.

The learned CIT(A), held that in facts of the case, viz., the nature of diamond trade, substantial compliance made by the assessee and the reasonable cause showed by the assessee and above all, when there is no adjustment made in the ALP, the levy of penalty under Section 271G of I.T. Act, 1961 was not justified.

Tribunal held that the only basis of levying impugned penalty against the assessee is the fact that the assessee did not furnish internal TNMM by providing segmental profitability of AE and non-AE transactions. The same stood explained by the inherent nature of business being carried out by the assessee. In course of transfer pricing proceedings, revenue could not point out any specific non-compliance on part of assessee regarding production of documents maintained under section 92D(1), impugned penalty order passed u/s. 271G was to be set aside

In view of the aforesaid position, CIT(A) order in deleting the penalty u/s. 271G is upheld.

DCIT-5(2)(1) vs. M/s. K. Girdharilal International Ltd., ITA No. 6446/Mum/2016, DOH: 03/10/2019 (Mum.)(Trib.)

M/s. K. Girdharilal International Ltd.

3. S. 263 : Commissioner – Revision of orders prejudicial to revenue – AO made detailed enquiry at assessment stage for accommodation entry provided by assessee – CIT found enquiry inadequate – Revision not permissible

The assessee company return was processed u/s. 143(1) of the Act. Later the assessment was reopened u/s. 148 of the Act. In the re-assessment proceedings, the Ld. AO observed that Sales tax authorities, Maharashtra had conducted search operation in the case of assessee company and other group concerns wherein Shri Abhishek Morarka, Director of assessee company had given a statement on 06-01-2010 u/s.14 of the Maharashtra Value Added Tax Act, 2002. In the said statement, the said Director had categorically stated that no purchase or sales activities were actually carried out by his concern and that they are merely accommodation entries provided to various persons. The Ld. AO based on the conduct of the assessee in the past i.e. A. Yrs 2006-07, 2007-08 and 2008-09 and also in the subsequent years i.e., A.Yrs 2011-12 and 2012-13 rejected the book results of the assessee u/s.145(3) of the Act and proceeded to treat the assessee as an accommodation entry provider and taxed the commission income alone on the total value of purchase and sale transactions at 1% thereon.

The Ld. CIT had sought to revise the said assessment order by treating the same as erroneous and prejudicial to the interest of the revenue by invoking his revisionary jurisdiction u/s. 263 of the Act for the limited purpose of examination of bogus purchases.

Tribunal held that the AO had made proper enquiry with regard to the status of the assessee to be an accommodation entry provider in the facts and circumstances of the instant case. For this purpose, the Ld. AO had also placed reliance on the behaviour of the assessee in the past as well as in the subsequent years. The Ld. CIT(A) for the A. Yrs. 2006-07 and 2007-08 vide its order dated 25-01-2017 had recorded a categorical finding that assessee is indeed an accommodation entry provider and had proceeded to estimate net profit i.e. commission income at 0.15% of the total turnover as against 1% adopted by the Ld. AO. Since a categorical finding is recorded by the Ld. CIT(A) in assessee’s own case in earlier years that assessee is merely an accommodation entry provider and that situation had admittedly not been changed during the year under consideration , there is absolutely no need for the ld. CIT to take a divergent stand by directing the ld. AO to examine the veracity of bogus purchases alone.

Now, the law is well-settled that the order of the ld. AO should be both erroneous and as well as prejudicial to the interest of the revenue in order to enable the Ld. CIT to invoke his revisionary jurisdiction u/s. 263 of the Act. In the instant case, certainly one of the conditions is conspicuously absent. Moreover, the conscious decision has been taken by the Ld. AO by considering the past and future behaviour of the assessee while framing the assessment. Hence, the Ld. AO had indeed taken a possible view in the matter. Hence, on this ground also, the Ld. CIT could not invoke revisionary jurisdiction u/s. 263 of the Act. The revision order passed by the Ld. CIT u/s. 263 of the Act is quashed .

Realstone Exports Ltd v. Income Tax Officer 11(1)(2), ITA No. 3580/Mum/2019, DOH: 04/10/2019 (Mum)(Trib)

Realstone Exports Ltd.

Unreported Decisions – ST– November 2019

Unreported Decisions – ST – November 2019

By Vinay Jain & Sachin Mishra, Advocates

1. Whether the provisions of Section 73A is applicable in case the amount is returned to the customer subsequent to issuance of the show cause notice?

Facts and Pleading: RVS Hospitality & Development Private Limited (hereinafter referred to as ‘Appellant) is engaged in providing renting of immovable property service. During the disputed period, the Appellant had rented its property to one of its customers and had issued monthly rental invoices along with service tax. However, while making payment of service tax, the Appellant had claimed the benefit of Notification 24/2007 i.e. reduction of property tax from value of service. Since benefit of said notification was availed and the same was not passed on to the customer, department issued show cause notice under Section 73A for recovery of service tax amount collected from customers.

The department argued that Section 73A is rightly invoked inasmuch as at the time of claiming the benefit of the notification the Appellant had not passed on the benefit of service tax to its customers. Also, there was possibility of availment of excess CENVAT Credit by the customers and under such circumstances, if the amount could not be recovered under Section 73A, the Appellant would be unjustly enriched in context of Section 11D.

The Appellant argued that the benefit claimed was subsequently passed on to the customers and the same was recorded in the adjudicating order as well. Thus, when the Appellant had refunded the amount to its customers, the provisions of Section 73A shall not be applicable for recovery of amount. Reliance was placed on the judgement of Hon’ble Supreme Court in case of Ajit Mills Ltd. [1977 4 SCC 98] and decision of Tribunal in case of Vinayak Agrotech Ltd. [2012 (284) ELT 237].

Judgment: The Hon’ble Tribunal held that in the present case it was not disputed that the amount in question was paid back to the customers subsequent to issuance of the show cause notice. Thus, under such circumstances it cannot be said that the provisions of Section 73A should be applicable considering the same as a collection of excess service tax from the customer. The Hon’ble Tribunal further relied on the decision of Vinayak Agrotech Ltd. (supra).

M/s. RVS Hospitality & Development Private Limited vs. CCE, CESTAT Mumbai decided on 16-9-2019 vide Final Order No. A/86809/2019.

M/s. RVS Hospitality & Development Private Limited

2. Whether the assessee is eligible for refund claim of tax borne on works contract service received from sub-contractors for providing works contract service to JNPT which was subsequently exempted by Notification 9/2016 with retrospective effect. Whether the certificate issued on letterhead of the port and authenticated by Deputy Secretary in Ministry of Shipping suffices as compliance of the condition of exemption?

Facts and Pleading: Bharat Mumbai Containers Terminals Private Limited (hereinafter referred to as ‘Respondent’) had provided service in the nature of works contract to Jawaharlal Nehru Port Trust (hereinafter referred to as ‘JNPT’). The Appellant had subcontracted the work to two other contractors who had charged service tax on services provided to the Respondent. The works contract service provided to ports was exempted by Notification 25/2012 which was withdrawn by Notification 6/2015 and subsequently restored later by Notification 9/2016. By incorporation of Section 103, the exemption was given a retrospective effect. Since the Appellant was entitled to the retrospective exemption accorded to the activity rendered in a works contract awarded by JNPT, the Appellant filed refund claim on 30.08.2016, of the amount of service tax paid on the invoices of subcontractors as ‘person’ who had borne the incidence of tax. The original authority and the first appellate authority, examined the eligibility for application of retrospective exemption vis-à-vis Section 103 and sanctioned the refund claim. Aggrieved by the decision, the department filed the appeal before the Tribunal.

The department argued that the appellate authority while upholding the refund, failed to examine the existence of claim, if any, filed, or benefit availed, by the subcontractors consequent upon restoration of exemption. Furthermore, the appellate authority failed to ascertain if the Respondent had concurred with JNPT to include the tax component in the capitalization to avail higher depreciation. Also, the Respondent had not complied with the certification requirement under Section 103 and the notification as the certificate was issued on the letterhead of the Port Trust, was attested by the Deputy Secretary in the Ministry of Shipping. Further the department relied on the decision of Hon’ble Supreme Court in case of CC vs. Presto Industries [2001 (128) ELT 321 (SC)] and the Tribunal in case of Mars Plastics & Polymers [2003 (156) ELT 941] to contend that the applicant of refund claim is required to establish eligibility for benefit of any exemption notification.

The Respondent submitted that there was no amortization, or capitalization, of the said amount and on contrary, the amount of refund claim was reflected in the books as ‘dues from government’. It was also clarified that the suggested accounting treatment is nothing but a statement of intent of amortization upon commencement of commercial operation. Commencement of commercial operation took place in March 2018 and hence, in view of refund claim having been filed, the amortization had not taken place. Therefore, the apprehension of amortization, or any other downstream benefit of capitalization will not arise.

Judgment: The Hon’ble Tribunal held that the order cannot be assailed for non-compliance with the certification prescribed in the exemption notification as the certificate furnished, though issued on the letterhead of the Port Trust, has been attested by the Deputy Secretary in the Ministry of Shipping. The exemption notification has not prescribed the form or manner in which the certificate of the Ministry is to be authenticated. Attestation of the certificate signed by Chairman, JNPT by the competent authority in the Ministry of Shipping, therefore suffices as compliance. The issue of whether any claim for refund has been preferred by the two sub-contractors who included the tax in the invoice raised on the Respondent or had availed benefit is too vague and merely based on apprehensions. Also, under the scheme of operation of major ports, it is the tariff authority of ports which determines the contract rates and adequate safeguards exist for excluding amount that are not costs. Thus, the Respondent had clearly borne the incidence of tax and is eligible for refund.

CCGST vs. Bharat Mumbai Container Terminals Private Limited, CESTAT Mumbai decided on 3-9-2019 vide Final Order No. A/86588/2019.

Bharat Mumbai Container Terminals Private Limited

Unreported Decisions – ST– October 2019

Unreported Decisions – ST – October 2019

By Vinay Jain & Sachin Mishra, Advocates

1. Whether the ‘subvention income’ received by vehicle financing companies from the manufacturers/dealers for providing loan to the buyers of vehicles at lesser rate of interest shall be taxable under ‘Business Auxiliary Service’ for promoting the business of such manufacturers/dealers?

Facts and Pleading: HDFC Bank Ltd. (hereinafter referred to as ‘Appellant’) is inter-alia engaged in the business of financing vehicles. During the course of business operations, the Appellant enters into contractual arrangements with the vehicle manufacturers/dealers for agreeing to undertake special finance schemes under which vehicles are made available against loans offered at nil or low rate of interest and differential interest component which is otherwise recoverable from the borrower is paid by the manufacturer/ dealer in the name of ‘subvention income’. Further, the Appellant and vehicle manufacturer/ dealer jointly also agreed to a financing scheme where they jointly promote their own business activities.

The department alleged that the aforesaid ‘subvention income’ received by the Appellant is consideration for promoting the business of such manufacturer/dealers and hence taxable under the category of ‘Business Auxiliary Service’. The department also relied upon Housing Development Corporation Ltd. (HUDCO) [2012 (26) STR 531 (T-Mum)] wherein it was held that the pre-payment charge is in lieu of some value added service and the method of calculation of charges in case of prepayment based on the outstanding loan is not relevant. The department also alleged that the present issue was squarely covered by the decisions in case of Speed Finance Service [2017-TIOL-2548-CESTAT-DEL], Toyota Lakozy Pvt Ltd [2017 (52) STR 299 (T)] & Tata Motors Ltd. [2019 (1) TMI 511].

The Appellant argued that the Appellant had extended credit facility to the purchaser of vehicle for which consideration is received in the form of “interest subvention” from the vehicle dealer in lieu of “interest on loan” receivable from the borrower in normal course. For the Appellant, it is consideration towards lending of money and nothing but the interest income, and not subjected to tax. The Appellant also submitted that Appellant and vehicle manufacturer/dealer jointly agree to a financing scheme where they jointly promote their own business activities. Vehicle manufacturer/dealer promote their sale and the Appellant its lending business. Artificially vivisecting a single transaction to make the Appellant as service provider in one occasion and recipient of service in another is not permissible in law.

Judgment: The Hon’ble Appellate Tribunal held that by providing or agreeing to provide the loans at lower rate/nil rate to the customers of vehicle manufacturer/dealers, the Appellant has promoted the sale of the vehicle in the hands of such vehicle manufacturer/dealer. Hence, as per the Appellate Tribunal, the facility of nil/ low interest rate provided by the Appellant to the customers of vehicle manufacturer is service classifiable under the category of “Business Auxiliary Service” as defined by Section 65(19) of the Finance Act, 1994 and the amount paid by the vehicle manufacturer/dealer and accounted by the Appellant as subvention income is the consideration for the provision of such service. Rejecting the submission of the Appellant that subvention income is part of the interest recovered from such customers, the Hon’ble Appellate Tribunal relied on HUDCO [2012 (26) STR 531 (T)] to held that the method of calculating the charges has no bearing on the nature of service provided. The Hon’ble Appellate Tribunal also upheld the invocation of extended period and imposition of penalty.

M/s. HDFC Bank Ltd. vs. CCE, CESTAT, Mumbai, decided on 13-09-2019 in Final Order No. A/86593/2019.

M/s. HDFC Bank Ltd.

2. Whether the pre-payment/foreclosure charge collected by Housing Financing Companies from borrowers for premature termination of loan agreements by such borrowers is part of the consideration for the taxable service of “Banking and other Financial Services’ and hence liable to be taxed under the provision of Finance Act, 1994?

Facts and Pleading: LIC Housing Finance Limited (hereinafter referred to as ‘Appellant’) is inter-alia engaged in providing housing finance to individuals. After following the due procedure housing loan is sanctioned to the individual and agreement entered into with the borrower laying down the terms and conditions for grant of loan. The loan advanced is to be serviced by the borrower as per the equated monthly installments mentioned in the agreement. The loan agreement extends the facility of prepayment of the loan amount to the borrower against a prepayment penalty of 2% whenever the borrower intends to make early prepayment.

The department placed reliance upon the Circular of TRU date 11-06-2008 which states that any amount collected by the service provider on account of lending is either interest or service charges. Pre-closure / foreclosure charges are not collected for delayed payment. Thus, according to the department, these charges not being interest, are therefore liable to be treated as consideration for the service provided and accordingly leviable to tax. In this regard, the department also relied upon HUDCO [2012 (26) STR 531 (T)].

The Appellant submitted that the pre-payment charges are not for any activities carried out at the time of prepayment, permitting the borrower to pay the amount. It is for the damages recovered by the Appellant. Foreclosure and prepayment charges are levied for ending the service and not for providing the service as held by tribunal in case of SIDBI [2011 (23) STR 392 (T-Del)]. The Appellant also submitted that decision of HUDCO [2012 (26) STR 531 (T)] will not be applicable to the present facts as in this case, the Appellant did not carry out any activity and the amount is levied as per the agreement entered into the parties. Therefore, the said amount does not form the part of value of taxable service. The Appellant submitted that the pre-payment charges, charged by them from borrower are in nature of liquidated damages to recover the loss suffered by them, for the reason that this amount could not have been lended against the interest to other borrowers. The Appellant further submitted that Prepayment penalty have no nexus with the service of lending and thus are not subject to service tax in view of the decision of Apex Court in case of Intercontinental Consultants and Technocrats Pvt Ltd [2018 (10) GSTL 401 (SC)]. The Appellant also submitted that the pre-payment charges are in the nature of interest.

Judgment: The Hon’ble Appellate Tribunal held that the facility of pre-payment has been extended at the time of entering into the loan agreement and agreement itself allows against payment of certain “levy charges”. These charges are not towards any default on the behalf of customer. As per the Appellate Tribunal, since the pre-payment charge are in nature of charges towards the exercise of an option extended by the loan agreement, Appellants submission that these charges are penalty cannot be acceded to. Hence, the Appellate Tribunal held that the pre-payment charges cannot be held as penalty. The Appellate Tribunal further held that in the case of foreclosure the customer is not holding any money of the Appellant, but is returning back the same much before the appointed date. Hence the return of money cannot be subject to interest charge as claimed by the Appellant, nor can it be the damages as claimed by them. The Appellate Tribunal further relied upon HUDCO [2012 (26) STR 531 (T)] to held that pre-payment charges not being interest, are therefore liable to be treated as consideration for the service provided and accordingly leviable to tax. The Hon’ble Appellate Tribunal also upheld the invocation of extended period, however, set aside the imposition of penalty in lieu of Section 80 of the Finance Act, 1994.

M/s. LIC Housing Finance Ltd. vs. CST, CESTAT, Mumbai, decided on 21-08-2019 in Final Order No. A/86425-86428/2019

M/s. LIC Housing Finance Ltd.

Unreported Decisions – October 2019

Unreported Decisions – October 2019

By Ajay R. Singh

1. S. 40A(2) : Expenses or payments not deductible – Excessive or unreasonable – Disallowance cannot be made in respect of interest payment made to related parties as interest rate is not in excess of the prevailing interest rate in the market. [S. 40A(2)(a)]

The assessee being resident individual stated to be dealing in gold ornaments and coins under proprietorship concern namely M/s. Shelaji Asaji & Co. During assessment proceedings, it transpired that the assessee paid interest on loans to certain persons as specified u/s. 40A(2)(b) at the rate of 18% as against the rate of 12% paid to other parties. Consequently, invoking the provisions of Section 40A, the AO disallowed differential interest of 6% which gave rise to addition of ₹ 8.41 Lakh in the hands of the assessee.

The ITAT held that as per the provisions of Section 40A(2)(a), any expenditure would not be allowable as deduction, if the same, in the opinion of Ld. AO, was excessive or unreasonable having regard to the fair market value of goods / services for which the payment was made by the assessee. Upon perusal of rate of interest chart as placed before us, it is seen that the assessee has paid interest at the rates ranging between 15% to 18% to unrelated parties whereas it has paid interest of 18% to related parties. Therefore, this being the case, the interest paid to related parties could not be said to be excessive or unreasonable. Nothing has been brought on record by lower authorities to demonstrate that the said rate was excessive or unreasonable, in any manner, having regard to the market rates. Therefore, the assessee appeal was allowed.

Surendrakumar P. Jain vs. ACIT-17(3), ITA NO.: 4993/M/2018, Bench : SMC; AY 2013-14; dated: 11/09/2019 (Mum.)(Trib.)

Surendrakumar P. Jain

2. S. 28(i) : Business loss – Embezzlement – Loss due to misappropriation of funds by the ex-director of the company has to be allowed in the year of detection. [S. 37(1)]

The assessee company was owned and managed by Advani group. In 2004, the assessee company was taken over by Centrum group and name was changed to Centrum Broking Pvt. Ltd. However, Mr. Advani continued as a director of the assessee company till June, 2005. In 2005, due to differences and disputes between Mr. Advani and the Centrum group, Mr. Advani was removed as a director of the company. After the exit of Mr. Advani, the assessee company on perusal of its books of account realised that a sum of ₹ 95,44,693/- was misappropriated by Mr. Advani by debiting the assessee company’s accounts on account of his various personal expenses or non-business expenses. The assessee company recovered a sum of ₹ 40,26,087/- and the balance amount of ₹ 55,18,606/- was written off and claimed as business loss. The A. O. has disallowed the same on the ground that these are personal expenses of the director and hence not allowable. By the impugned order, the LD. CIT(A) has confirmed the action of the A. O.

The assessee in arbitration proceedings initiated by Advani group before NSE made a claim of the said amount as evident from the said Award dated 13th December 2011. However, the Tribunal held that since the assessee company has not made a counter claim or filed a separate arbitration for the said amount no relief was granted to the assessee company. The said order became final on 28th August, 2012 whereby consent terms were agreed between the Advani group and the assessee company. As per material placed on record, we found that the claim is made on account of misappropriation of funds by the ex-director of the company. The said director misused his authority while holding the position and incurred various expenses from the company’s funds which were of personal in nature. The fact that out of ₹ 95.44 lakhs, the assessee company is claiming only ₹ 55.18 lakh proves the bonafideness of the assessee in recovering part of the money and writing off the balance.

The Tribunal found that the aforesaid loss has incurred in the course of business of the company and therefore should be allowed as a business loss. Reliance is placed on following decisions: Sassoon J. David & Co. Pvt Ltd. – 98 ITR 50 (Bom), Badridas Daga – 34 ITR 10 (SC). , Harshad Choksi – 349 ITR 250 (Bom), Boots Piramal Health Care Ltd – 3213/ Mum/2009 (now known as M/s Nicholas Piramal Consumer Products Pvt. Ltd). The Hon’ble Supreme Court in the case of Associated Banking Corporation of India Limited vs. CIT reported in 56 ITR 1(SC) has held that “the loss by embezzlement must be deemed to have occurred when the assessee came to know about the embezzlement and realised that the amount embezzled could not be recovered”. In view of the above discussion, the claim was allowed as business loss.

Centrum Broking Ltd DCIT-4(1)(1), ITA No. 4120/Mum/2018, Bench : C; AY 2013-14; DOH: 06/09/2019 (Mum.)(Trib.)

Centrum Broking Ltd.

3. S.147: Reassessment–After the expiry of four years –Reopening of assessment was based on re-appreciation of material already available on record at time of scrutiny assessment which amounted to mere change of opinion hence bad in law.

The assessee company is engaged in providing Engineering and related services. The assessment has been completed u/s. 143(3) of the Act, vide order dated 29/12/2008. Thereafter, the assessment has been reopened u/s. 147 of the Act and the assessment have been completed by making additions towards disallowance on warranty expenses on the ground that warranty provisions has been created on estimation basis, rather than on any scientific basis.

The Ld. CIT(A), observed that in the reasons for reopening, the Ld. AO has mentioned that on review of the assessment, it is observed that there is under assessment of income. This statement shows that after reviewing the case records, he found that certain income had escaped assessment. But, fact of the matter is that the assesee has submitted a letter dated 13/12/2018, during the course of assessment proceedings u/s 143(3), where the issue on which the AO has reopened was already discussed and all the details were submitted before the AO. Therefore, he opined that it is a case of change of opinion, which is not permissible u/s. 147 of the Act. In so far as, second arguments of the assessee, in light of proviso to section 147 of the Act, the Ld. CIT(A) observed that on examination of reasons recorded, it is seen that nowhere, the Ld. AO had stated that there was failure on the part of assessee to disclose fully and truly, all the material facts necessary for reopening assessment. Accordingly, held that reopening of assessment u/s. 147 is invalid.

On appeal by the Revenue, the Tribunal held that the original assessment has been completed u/s. 143(3) of the Act, on 29/12/2018 and the assessment has been reopened after four years from the end of relevant assessment years without making any allegation as to failure on the part of assessee to disclose fully and truly all material facts necessary for assessment. Therefore, reopening of assessment, in this case was made on change of opinion without there being any tangible material in the position of the AO, which suggest escapement of income and also without making any allegation as to failure on the part of assessee to disclose fully and truly all the material facts necessary for assessment. In this view of the matter the Ld. CIT(A) has rightly quashed reassessment proceedings. The appeal filed by the revenue was dismissed.

DCIT-2(2)(1) vs. M/s. Larsen & Toubro Ltd., ITA No. 262/ Mum/2016, AY 2005-06; Bench : A; dated: 06/09/2019 (Mum.) (Trib.)

M/s. Larsen & Toubro Ltd.

Unreported Decisions – September 2019

Unreported Decisions – September 2019

By Ajay R. Singh

1. SECTION 43 READ WITH SECTION 32 – LIQUIDATED DAMAGES RECEIVED FOR DELAY IN DELIVERY BY THE VENDOR, WHETHER LIABLE TO BE REDUCED FROM COST OF ASSETS – SUCH LIQUIDATED DAMAGES ARE NOT TO BE REDUCED FROM THE COST OF ASSETS

The assessee for purchase of buses placed order worth ₹ 654,62,81,543/- with the condition that for delay in delivery, the supplier would be liable for penalty/ liquidated damages and on that account the assessee received a sum of ₹ 120,11,78,279/- from M/s. Ashok Leyland Ltd. According to the assessee, this amount has to be reduced from the purchase of the business to calculate the depreciation. On this premise. AO held that the value of the bus was only ₹ 534,51,03,270/- and the assessee is entitled for depreciation on this amount only and, therefore, disallowed the balance of depreciation to the tune of ₹ 18,01,76,741/- and added it to the income of the assessee. The. CIT(A) considered the case of the assessee in the light of the decision of the Hon’ble Gujarat High Court in the light of the decision of the Hon’ble Gujarat High Court in the case of Digvijay Cement Co. Ltd. vs. CIT (1982) 138 ITR 45 (Guj) wherein it was held by the Hon’ble High Court that having regard to the nature of the business of the assessee in the light of the terms of contract in respect of the provision for compensation for a delay in delivery, the sum received through compensation was not made with the intention of reducing the cost of machinery but to compensate the loss of profits which the assessee would suffer on account of delay in delivery of the machinery. Admittedly, the assessee in the case in hand is the transport corporation earning income by plying the buses. In case of delay in delivery the assessee would suffer loss on profits and that is the reason there was a stipulation in the agreement for purchase of buses to the effect that delay in delivery shall result in levy of penalty/liquidated damages . On this account, assessee received a sum of ₹ 120,11,78,279/- and having regard to the business of the assessee, this compensation received is not to reduce the cost of the buses but to compensate the loss of income/profits the assessee would have earned had the buses been supplied in time. Therefore, the decision of the Gujarat High Court in the case of Digvijay Cement Co. Ltd. (supra) is applicable to the facts of this case on all fours and the ld. CIT(A) had rightly deleted the addition by following the binding precedent. In the result, appeal of the revenue is dismissed

DCIT vs. Delhi Transport Corporation (ITA No. 6658/D/15) (Dated 16/07/2019)

Delhi Transport Corporation

2. S. 56(2)(viib) – THAT AS PER CLAUSE (b) AND CLAUSE (j) OF RULE 11UA FOR COMPUTING FAIR MARKET VALUE OF THE SHARES THE VALUE OF THE ASSETS AND LIABILITIES AS STATED IN THE AUDITED BALANCE SHEET IMMEDIATELY PRIOR TO THE RECEIPT OF CONSIDERATION SHOULD BE ADOPTED.

A perusal of the Rule 11U(b) as reproduced by CIT(A) at para 5.6 of his order makes it clear that the balance sheet means the balance sheet as drawn up on the balance sheet date which has been audited by the auditor of the company and where the balance sheet on the valuation date has not been drawn up the balance sheet drawn up as on a date immediately preceding the valuation date which has been approved and adopted in the AGM of the shareholders of the company.

We find in the instant case, on the date of receipt of the consideration the balance sheet of the assessee company was not drawn up as the same was drawn up only on 31st July, 2014 which is evident from the audited balance sheet filed. Clause (b) and clause (j) of Rule 11UA makes it clear that for computing fair market value of the shares the value of the assets and liabilities as stated in the audited balance sheet immediately prior to the receipt of consideration should be adopted. If, on the date of receipt of the consideration, the balance sheet was not drawn up, then, the balance sheet drawn up as on a date immediately preceding the valuation date should be adopted i.e., the balance sheet of the immediately preceding year should be adopted. We find, in the instant case, on the valuation date i.e., on 31.03.2004, the balance sheet was not drawn up by the auditor as audited financials were drawn up only on 31st July, 2014 and, therefore, the valuation of assets and liabilities in the balance sheet of the immediately preceding year i.e., 31.03.2013 should have been adopted. Since the valuation done by the assessee was not in accordance with the Rule framed for valuation of unquoted shares i.e., the assessee has not taken the value of assets before introduction of share capital received through fresh allotment and since the Assessing Officer has correctly determined the valuation of the unquoted equity shares which has been upheld by the CIT(A), therefore, the same is upheld and the grounds raised by the assessee are dismissed.

Sadhvi Securities P. Ltd vs. ACIT (ITA No.1047/Del/2019) (Dated : 16.07.2019)

Sadhvi Securities P. Ltd

Unreported Decisions – ST– September 2019

Unreported Decisions – ST – September 2019

By Vinay Jain & Sachin Mishra, Advocates

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

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

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

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

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

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

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

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

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

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

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

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

M/s. Rajasthan State Mines & Minerals Limited

Unreported Decisions – ST – August 2019

Unreported Decisions – ST – August 2019

By Vinay Jain & Sachin Mishra, Advocates

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

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

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

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

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

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

M/s. SAB Miller Breweries Pvt. Ltd.

M/s. SAB Miller Breweries Pvt. Ltd.

Unreported Decisions – August 2019

Unreported Decisions – August 2019

By Ajay R. Singh

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

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

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

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

A-1 FENCE PRODUCT CO.

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

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

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

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

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

Dilip R. Shringarpure

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

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

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

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

M/s. Flender Limited