By TIOL News Service

MUMBAI, DEC 22, 2015: THE question before the Bench is whether advances received by the appellant from their customers for contracts executed are leviable to Service Tax.

The appellant undertakes Erection, Installation and Commissioning activity. They raise running bills/invoices on the customers for the services provided. To meet the contractual commitments by both sides, the customer is required to pay a certain amount, generally 10% of the contract value as an advance payment. The appellant are also required to give a counter bank guarantee of equal amount to the customers (referred to as payment security). The customer has lien over the bank guarantee till the completion of the contract. The payments for the services are made in a progressive manner during the execution of the contract. The amount of advance given by the customer is reduced in proportion to the value of work completed as shown in the invoice raised upto any stage of work executed as per the terms of the contract. The amount of bank guarantee provided by the appellant is correspondingly reduced in proportion to the amount of advance adjusted by them. According to the appellant, service tax is paid on the invoice value on accrual basis, that is, on the 5th of the following month. Thus the tax is paid even before the receipt of consideration. Service tax is paid on the gross value including the proportionate advance which is deducted against every invoice raised.

However, a SCN came to be issued and which culminated in the impugned order passed by the CCE, Pune-I and in which it was held that Service Tax of Rs.18,08,18,228/- is payable on the advances received for the period April 2006 to March, 2011. Interest and penalties also made their way into the order.

The appellant submitted that the so-called advance is only in the nature of security deposit to ensure contractual commitments; that the advance is shown as current liability in the books of accounts and not shown as income; it is provisionally transferred to sale / consideration for service as and when proportionate amount is deducted from the invoices raised on the customers. Inasmuch as since the service tax is paid on the advances at the time of raising of invoices and, therefore, there is no liability to pay service tax again on the advances. Furthermore, since the advance is not received towards value of taxable services provided, the same is not includible; that the Commissioner has misinterpreted section 67(3) of FA, 1994 because this Section only requires inclusion of any amount received towards taxable services. Reliance is inter alia placed on the decisions in Commissioner of Income Tax Vs. Bijli Cottons Mills Private Ltd [1979 (1) SSC 496],R.S. Joshi [1977 (4) SCC 98]; that the issue is one of interpretation; that SCN is time barred; penalty not imposable - Flyingman Air Courier (P) Ltd 2004-TIOL-500-CESTAT-DEL & CCE Vs. Gamma Consultancy (P) Limited 2006-TIOL-1180-CESTAT-MUM refers]

The A.R. while reiterating the findings of the Commissioner drew the attention of the Bench to agreement dated 26/4/2010 entered into with M/s. Madras Cements and submitted that the fact of amount of advance being adjusted in the bills establishes the linkage between the advance and the service provided and, therefore, it is clearly leviable to service tax, being part of the gross amount received towards taxable services in terms of Section 65(105) and 67(3).

The Bench referred to the clauses of one typical agreement/contract given in the appeal memo and referred by both sides and inter alia observed -

++ We find from the agreement that it is true that the security payment is to be reduced in proportion to the amount of advance adjusted in the invoices of the contactors i.e. appellant. We also find from para 11.2 of the agreement that the advance payment is made on mobilization of site by the appellant. We note that it is the normal procedure in such contracts to provide advance payment which helps the contractors to mobilize men/material to begin the work.

++ The agreement also provides for payment of service tax before deducting proportionate amount of advance received in terms of para 11.3.

++ The specific invoice No. RAB 001 dated 20/12/2010 clearly indicates that the advance is deducted in each invoice from the value of invoice, which includes the service tax payable. It all goes to show that service tax is periodically paid on the value of service provided upto a particular stage. If tax were also to be demanded separately on the advance received, it would clearly amount to double taxation. The Commissioner has come to a hasty conclusion without examining in right perspective the details of the agreement/ contract, the method of invoicing, the method of paying service tax on the total invoice value, and the adjustment of advance from the total invoice value as we have shown above.

++ Further, the account books of the appellant indicate that the advance received is shown as current liability and not as income towards sale/provision of service. Therefore, it is not towards the value of services provided. The advance is only an amount given as kind of earnest money and for which the appellant gives a bank guarantee to the customers of equal amount. It is more in the nature of a deposit.

++ It is a fact that the customer can invoke the Bank Guarantee at any time and take back the advance. Hence the appellant does not show the advance as an income, not having complete dominion over the amount and therefore the same cannot be treated as a consideration for any service provided. Therefore, the findings lack appreciation of the complete facts and evidences.

++ The Commissioner has not interpreted the law correctly. As per law [67(3) of the Finance Act, 1994], the gross amount charged shall include any amount received towards taxable service. In our considered view, the advance is not received towards taxable service. The advance is the customer's obligation as his part of the mutual commitment between the two parties to honour the terms of the contract. [Paharpur Cooling Towers Ltd. 2015-TIOL-78-CESTAT-DEL, J.R. Industries 2009-TIOL-1030-CESTAT-DEL refers.]

++ Much as we may try to convince ourselves, we are unable to accept AR's suggestion that the verification of accounts be referred to a cost auditor for the simple reason that such necessity does not flow from the Order of the Commissioner. There are no doubts expressed on this account by him in the adjudication order.

The impugned Order was set aside and the Appeal was allowed with consequential relief.

(See 2015-TIOL-2736-CESTAT-MUM)