By TIOL News Service

MUMBAI, SEPT 22, 2015: THE appellant, a subsidiary of M.s General Motors Corporation USA, is a manufacturer of vehicles and, for the production of Spark and Beat, has contracted to receive technical know-how under agreement with M/s General Motors Daewoo Automotive Technologies and M/s General Motors Global Technology Operations, both also being subsidiaries of M/s General Motors Corporation. These are, therefore, associated enterprises of the appellant who provide "intellectual property service". As the service-providers are based outside India, it devolves on the appellant to discharge tax liability under “reverse charge mechanism” in accordance with section 66A of Finance Act, 1994.

Vide an o-in-o dated 05.11.2012, the CCE, Pune-I has confirmed tax demands of Rs.3,26,83,401 and Rs.6,87,98,709 respectively for the period from April 2009 to June 2010 and from July 2010 to December 2011 and imposed penalty/interest.

It is the case of the department that there was a short-levy at the end of each month since Explanation to Rule 6 of STR, 1994 required the inclusion of debit/credit of any amount relating to royalty in any account, whether called "suspense" or otherwise, in taxable consideration where the transaction is between two associated enterprises for determining tax liability.

The explanation inserted after the third proviso in rule 6(1) by Notification 19/2008-ST dated 10.05.2008 read -

Explanation .- For the removal of doubts, it is hereby declared that where the transaction of taxable service is with any associated enterprise, any payment received towards the value of taxable service, in such case shall include any amount credited or debited, as the case may be, to any account, whether called 'Suspense account' or by any other name, in the books of account of a person liable to pay service tax.

The appellant submitted that the original authority has chosen to disregard the fundamental fact that the entries in their books are provisional and solely for the purpose of furnishing Management Information System (MIS) reports to the holding company which are reversed at the time of the final entry at the end of each quarter once the net selling price as well as other details relevant to calculation of dues to the suppliers of know-how are made available. It is further contended that the manner and schedule of payment of dues to suppliers of know-how are embodied in the agreements with the said suppliers. Moreover, the appellant is aggrieved that the original authority has not accorded exemption to the extent of R&D cess available to them. In sum, the claim of the appellant is that the tax has been demanded without considering the actual amount paid to service provider, the contracted frequency of payment and the eligibility for exemption.

Furthermore, it is submitted that the intent in the deeming provision of Rule 6 is limited to debiting the account of the supplier in the books of the recipient for services rendered by associated enterprises and that such addition is mandated only in conjunction with actual payment if such accounting entries have been made.

The AR justified the demand by reiterating the findings of the original authority.

The Member (T) writing for the Bench inter alia observed -

+ The certainty and clarity required of taxing statutes cannot leave such a critical aspect as taxable event to the whims of a contract between two entities or to be conditional upon a perfection sought for in such contracted agreement. The delivery of the service at its destination becomes the taxable event subject, by the law as it then stood, to payment for the service. With the insertion of the Explanation in Rule 6 of Service Tax Rules, 1994, effective from 10 th May 2008 such payment was imbued with a more comprehensive meaning insofar as transaction between associated enterprises is concerned. The value was not restricted to payment per se but was liable to supplemented by accounting entries relating to the service transacted between associated concerns.

+ Contention that royalty is payable every quarter and, that till the introduction of Point of Taxation Rules in 2011, valuation was on “receipt basis” and not on “accrual basis” thereby allowing for tax liability only when consideration is actually payable would have been acceptable had not the Explanation been inserted in Rule 6 owing to which the acknowledgement in the books was sufficient to deem the payment for service to have been effected .

+ Argument (that Explanation is not extendable to such deemed payment because it needs to be read in the context of the phrase “any payment to be received” and since the payment is to be received at quarterly intervals by the service provider, such deemed payment cannot be added for the months where actual payments have not been made ) will not suffice in view of the circumstances that led to insertion of the said Explanation as pointed out in circular of Central Board of Excise & Customs (334/1/2008-TRU dated 29 th February 2008).

+ Between associated enterprises, the certainty of receipts is not tested against the enhancement of cash or bank balance; mere book entries have the effect that it may not have between two independent entities. Such book adjustments often serve to delay or defer tax payment without loss of stakeholder value and this deeming provision aims to disincentivize such tendencies.

+ The deeming effect of the Explanation has to be applied wherever accounting entries relating to the service transaction finds a place in the books of the person liable to pay the tax.

+ A debit entry will have a corresponding credit entry and the existence of such entry with respect to royalty on vehicles manufactured by the appellant during a particular month, without an entry in the supplier's ledger, suffices for it to be included in the value of taxable service and liable to be taxed by the fifth of the following month.

+ Tax liability has been discharged by the appellant, albeit in a schedule of their own choosing, relying on the principle of “receipt” of consideration by the service provider. As this happens to be at variance with the provisions of Rule 6 of Service Tax Rule, 1994 and Rule 7 of Point of Taxation Rules, 2011, the tax liability needs to be computed for each month on the amount booked in the “royalty accrued” account with the reversal being taken into account whenever that has occurred.

+ Needless to state, in such month, it would be tantamount to taxes paid in advance and liable to be adjusted against taxes due in the month(s) thereafter. Owing to absence of any definite computation in the impugned order and the claim of reversal, as well as that of tax payment, not having been doubted in the impugned order, it would appear that tax liability has indeed been discharged in full though belatedly in some months.

+ As the taxes have been discharged during the period under dispute, the appellant's liability is limited to interest for the first two months of each quarter to the extent of amount not paid or short-paid. This should have been effected in the impugned order but, not having been done, needs to be remedied.

Conclusion:

We sustain the finding in the impugned order that tax liability of the appellant arises each month for the amount booked, even provisionally, as royalty in their accounts, but with the deductions of amounts paid as R&D cess, (as recorded by us in paragraph no. 14), if any. We set aside the demand for tax in view of findings supra regarding discharge of tax liability and direct the jurisdictional Commissioner to compute and intimate the appellant, within thirty days of the receipt of this order, of any interest that arises from delayed payment of duty.

Penalties u/ss 76, 77 & 78 of FA, 1994 were also set aside.

In passing : An aside -

Adjudicating authorities are not, any longer, required to appropriate taxes paid by assessees. Such appropriation in adjudication orders are a relic of the times that pre-date self-assessment when amounts deposited during investigation and subsequent proceedings, were required to be appropriated in statutory proceedings before being accounted in the Consolidated Fund of India. The provisions of section 73 of Finance Act, 1994 are applicable in, and limited to, short-levy and non-levy; they do not extend to taxes already paid. Tax already paid into the credit of Consolidated Fund of India does not require another appropriation. Adjudication that resort to appropriation, such as the present one, manifest their lack of clarity about the actual dues recoverable; without the convenient cover of appropriation, adjudicating authority would have had to focus on computation of taxes liable to be recovered. Had that been done, the impugned order would have been appropriately precise.[para 17]

(See 2015-TIOL-1993-CESTAT-MUM)