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ST - Ultimate ownership remained with appellant who paid ST on Sale of space for ads - CENVAT admissible on DCE: CESTAT

By TIOL News Service

MUMBAI, SEPT 14, 2017: THE Appellant is engaged in conversion of analog cinema content into digital format. The movies so converted are again converted into encoded compressed file in MPEG 4 format. These compressed files (movies) are stored in Appellant's dedicated servers and delivered to theaters using satellite links. The movies so delivered are exhibited in theatres using Digital Cinema Equipment (DCE) leased by the Appellant to theatre owners for which he is charging /paying VAT on lease rent. The Appellant is also charging fee known as "Content Delivery charges (CDC)" from distributors/producers and claiming exemption from service tax on aforesaid services in terms of Notification No. 12/2007-ST dt. 01.03.2007.

During screening of movies, advertisements are also screened which are procured by the Appellant from various advertising companies and revenue generated through such advertisements were being shared between the Appellant and cinema owners.

Based upon audit observation, the Appellants were issued show cause notice dt 27.11.2012 demanding service tax for the period 2008-09 to 2012-13 on the ground that from the content of the agreement of Appellant with the clients it appeared that the legal right of possession and effective control of equipment of the Digital Cinema Equipment (DCE) had not been transferred to the lessee and total control over the equipment remained with Appellant and as such the activity undertaken by the Appellant fell under the category of "supply of tangible goods for use" (SOTG) and the one-time registration fees collected by the Appellant from the theatre owner is nothing but a part of the consideration for providing the above said taxable service and has to be included in the gross amount for providing services.

On going through the agreement between the Appellant and Theatre owner it was found that the Theater owner is providing space and time for advertisement and the assessee is only acting as agent and the service provided by them is correctly classifiable under "Advertising agency service". That the credit availed on digital Cinema Equipment is inadmissible as the said capital goods are not used for providing any taxable service by the assessee but used by the theatre owner for providing service to the Appellant. Even otherwise, in terms of rule 6 (4) of CCR, credit is not allowed on capital goods used exclusively in providing exempted service.

A total Service Tax demand of Rs.24,64,32,207/- was confirmed against the Appellant and CENVAT credit of Rs.22,01,11,033/- on capital goods was disallowed along with interest and equivalent penalty.

The appellant is before the CESTAT.

After considering the elaborate submissions made by both sides, the CESTAT inter alia observed thus -

Demand on Lease Rentals under SOTG:

+ We find that the adjudicating authority has held that since as per contract the equipment will remain sole property of equipment provider and he shall bear the cost of normal wear and tear and repairs, it is clear that the legal right and effective controls rests with the Appellant. We find that except the above findings the Commissioner has not dwelled upon any of the submission and facts made by the Appellant. The terms and condition of the agreement are its essence and is deciding factor for determination of nature of contract / agreement. The findings of the impugned order nowhere leads to the conclusion on the basis of this vital aspect.

+ For bringing any service under the category of "supply of tangible goods service" in terms of Section 65 (105) (zzzj) it is imperative to see that such service is in respect of services towards supply of tangible goods for use "without transferring right of possession and effective control". In the present case once the DCE were transferred to Theatre owner the Appellant had no control over running of such equipments which are to be operated by the persons employed /deputed by the Theatre owner. The Theatre owner had contractual control over such equipments which was in their possession. All these factors are to be taken into consideration while determining the nature of service.

+ It is observed that the Appellant has been paying VAT on such leasing of DCE since year 2006. Further the fact remains that in 2008 they approached the authority for determination of disputed question which ruled that the services are liable for VAT. The adjudicating authority has not given any findings on this aspect when brought before him. We also find that DOF NO. 334/1/2008-TRU dt. 29.02.2008 Circular in Para 4.4 also states that "Supply of tangible goods for use and leviable to VAT/Sales tax as deemed sale of goods, is not covered under the scope of the proposed service.

+ From these facts, it prima facie appears that the Theatre were having absolute authority to run the Cinema Equipment as per their liking with no right of the Appellant to interfere or to be forced by the Appellant to run the Equipment as per their directions or control.


+ The DGCEI also investigated the issue in 2008-2009 and after response by the Appellant vide their letter dt. 17.06.2009 no further action was taken which shows that even the revenue appears to have satisfied regarding non-applicability of tax on activities of the Appellant. Further it is also not in dispute that the Appellant had been paying VAT even before the levy of service tax which is being demanded in the instant case. Even the circular issued in 2008 referred above clearly states that VAT and Service Tax are mutually exclusive.

+ Considering all above factors it appears there is no suppression of fact on appellant's part. It is also observed that the appellant obtained DDQ (Determination of Disputed Question) dt. 26.6.2008 from Commissioner of Sales Tax, who held that lease rental is liable for VAT. The appellant accordingly was discharging the VAT liability even before the taxability on ‘Supply of Tangible goods for use'. With the above undisputed facts we are of the clear view that there is no suppression of facts with intent to evade payment of Service Tax on lease rentals on DCE, on the part of the appellant. Therefore, we hold that the demand for extended period is clearly time barred.

+ We remand the case relating to lease rentals & registration fees for the normal period.

CENVAT Credit:

+ In this case the capital goods are specified capital goods and has been used for providing the output services of the Appellant namely content delivery services and sale of space for advertisement service. It is not in dispute that equipment are used for providing the output services of the Appellant. We also find that there was no contract or agreement between the Theatre owners and the persons whose advertisements were exhibited in cinema theaters. Only the Appellant had an agreement with such persons to exhibit the advertisements. Thus there is no ground to hold that the Appellant were providing any business support service to Theater owner.

+ The DCE equipment, at the most, can be said to have been jointly used by the Appellant and the Theater owner to provide the services of Sale of Space for Advertisement. The DCE Equipment being specified Capital goods as defined under Rule 2(a) and having been used for providing output service are eligible for availment of credit. In terms of Rule 3 (1) of Cenvat Credit Rules and proviso to Rule 3 (5) it transpires that the credit is available even if the Capital goods are removed outside the premises of the provider of output service for providing the output service.

+ The appellant paid service tax on service of sale of space for advertisement which was provided through the said DCE. It, therefore, leaves no doubt that credit on Capital goods is available even if they are removed outside from the premises of the Appellant for providing output service. We are, therefore, of the view that there is no ground for denial of cenvat credit on Capital goods to the Appellant.

+ In para 33 of the order in original Adjudicating Authority has admitted that the Appellants have disclosed CENVAT Credit on Capital goods in the return, despite recording this, he has given adverse finding on limitation. Considering the fact that Appellants have been paying VAT from 2006 that too at higher rate than the service tax rate, even before SOTGU Services became taxable service, no malafide can be attributed to invoke extended period for denying cenvat credit.

The appeal was disposed of.

(See 2017-TIOL-3338-CESTAT-MUM)