ST - Rule 6 - Explanation placing restrictions prejudicial to interest of AEs would not apply retrospectively: CESTAT
By TIOL News Service
NEW DELHI, JAN 17, 2017: THE appellant and its holding company are associated enterprises. The appellant provides management consultancy services to the said holding company for undertaking franchise business in India and was registered with the Department under the taxable category of 'Management or Business Consultant's services'.
During the FY 2006-07 and 2007-08, the appellant had booked service fees of Rs.3,28,00,378/- receivable from the holding company in its books of accounts, but did not pay the service tax since the said amount was not received by it during such period.
Vide notification 19/2008-ST, dated 10.05.2008, the following Explanation was inserted in rule 6(1) after the third proviso -
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.";
By citing the aforesaid explanation inserted in Rule 6 of the STR, 1994, proceedings were initiated and in adjudication, the demand of service tax of Rs.40,37,858/- was confirmed along with interest and penalties.
As the Commissioner(A) upheld this order, the appellant is before the Tribunal.
It is submitted that the explanation inserted in Rule 6 ibid on 10.05.2008 would not have any retrospective application and, therefore, the tax has been rightly paid by them as mandated by the law prevailing at that point of time.
Reliance is also placed on the decisions in - Martin Lottery Agencies Ltd. - 2009-TIOL-60-SC-ST and Gecas Services India Pvt. Ltd. - 2014-TIOL-1079-CESTAT-DEL.
The AR reiterated the findings recorded in the impugned order.
The Bench observed -
+ As per Rule 6(1) ibid, as existed prior to 10.05.2008, service tax was required to be paid by the 5th/ 6th day of month immediately following the calendar month in which the payments were received towards taxable services.
+ The effect of amendment of Rule 6 ibid is that service tax would be required to be paid by the person liable to pay service tax on the taxable services provided to associated enterprises, even where the consideration for the taxable services provided, is not actually received. In such cases, service tax is required to be paid immediately upon crediting/debiting of the amount in the books of accounts or receipt of payment, whichever event occurs earlier.
+ In this case, the period of dispute is from 2006-07 to 2007-08. During such period, the appellant did not receive the service fee, but booked such service fee in the books of accounts as receivable from the holding company.
+ Since, the liability for payment of service tax arises upon receipt of payment towards taxable services, which has admittedly not been received by the appellant, there was no scope or occasion to discharge the service tax liability in terms of Rule 6 ibid existed at the relevant disputed period. Thus, confirmation of service tax and interest liability by the authorities below on the ground that amendment of Rule 6 ibid will have retrospective effect, in our view, defeats the legislative intent and also against the principles of legal jurisprudence.
+ The basic principle for ascertaining the retrospectivity of a legislation is the principle of 'fairness'. Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability, have to be treated as prospective, unless the legislative intent is clear to give the enactment a retrospective effect. Further, an explanatory legislation is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous provisions of the legislation.
+ Payment of service tax in respect of transactions between associated enterprises on the basis of book entry was introduced only w.e.f. 10.05.2008 by incorporating the explanation clauses in both Section 67 of the Finance Act, 1994 and Rule 6 ibid.
+ The service tax statute holding the field at the relevant point of time does not contain any provision for demand of service tax by the authorities, prior to realization of the value of taxable services. The legislative intention behind the amendments was explained by the CBEC vide letter dated 29.02.2008, which is for plugging avoidance of tax on the ground of non-realization of money from associated enterprises.
+ Since, by incorporating the explanation in Rule 6 ibid, the restriction was imposed for the first time that in case of transaction between associated enterprises, service tax has to be paid immediately on entry of the transaction in the books of account, the said amendment will be considered as prospective in effect, otherwise the doctrine of 'fairness' would be defeated.
+ Further, Notification No. 19/2008-ST introducing Explanation to Rule 6 ibid, nowhere specifies that the same will have retrospective application to deal with the past transactions. Thus, such Explanation placing restrictions prejudicial to the interest of the associated enterprises would not apply retrospectively.
In fine, the impugned order was set aside and the appeal was allowed.
(See 2017-TIOL-144-CESTAT-DEL)
