By TIOL News Service

MUMBAI, SEPT 10, 2018: APPELLANT is engaged in manufacture of Bearing, Lubrication System etc. and are receiving taxable services classifiable under category of "Management Consultancy Services" and "Intellectual Property Services" from their associated companies located outside India.

They pay service tax on these services on "reverse charge" basis and on the value of the services as soon as it is credited in their book of accounts.

Due to fluctuation in the exchange rate, there was variation in the value posted in Appellant's books of accounts and actual amounts remitted to the service providers.

SCNs were issued demanding the service tax short paid on account of exchange rate variation.

The demands were confirmed along with imposition of penalties galore. However, the Commissioner(A) dropped these penalties while upholding the confirmation of the service tax demands.

Appeals have been filed before CESTAT.

The Bench considered the submissions made by both sides and inter alia observed thus -

+ Recognizing the fact that in case of Associated Companies/ Enterprises, this provision of linking the payment of service tax to the date of payment for services, was being mis-utilized to delay the payment of service tax, law was amended in 2008 [Service Tax (Second Amendment) Rules, 2008 w.e.f 10.05.2008 and omitted w.e.f 01.04.2011] by insertion of following explanation in Rule 6 of the Service Tax Rules, 1994, to provide that in such cases service tax needs to be paid on recognition of the receipt of service in book of accounts.

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.

+ Commissioner (Appeal) has brushed aside the clarification [D.O.F.No. 334/1/2008 dated 29.02.2008], stating that the said clarification has been issued as anti avoidance measure.

+ The clarification issued by the Board may be for the purpose, as suggested by the Commissioner, but cannot lay down two principles for determination of time of determination of taxable value. The said clarification clearly lays down that in case of the Associated Enterprises, service tax is to be determined and paid immediately when the documents in relation to supply of service, i.e. invoice etc., is entered into the books of account irrespective of the date when payment is made against the said invoice.

+ Thus the service tax in all such cases is required to be determined, immediately when the transaction between the Associated Enterprises get reflected in the books of account and not when the payment is made. This view is also in line with AS-11 issued by the Accounting Standard Board of ICAI.

+ Any other view would not only be incorrect but also against the basic scheme of Service Tax Law, and would only lead to arbitrage of tax, because any person will like to determine the taxable value in such transactions on the date when the exchange rate is minimum and thereby will reduce the tax payable. In our view, such tax arbitrage cannot be a sound principle of taxation in any tax system.

+ Commissioner has, in his order, himself admitted that on number of occasions the exchange rate on date of payment was lower than the date of recognition of the expense in the book of accounts. However, in such cases he has suggested that Appellants should have claimed the refund by following the provisions of section 11B of Central Excise Act, 1944 read with section 83 of the Finance Act, 1994.

+ To take care of any such interpretations which may give rise to tax arbitrage, w.e.f. 28.05.2012, section 67A has been inserted by the Finance Act, 2012 which provides as under:

"The rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.

Explanation - For the purposes of this section, "rate of exchange" means the rate of exchange referred to in the explanation to section 14 of the Customs Act, 1962."

+ In a way, the determination of taxable value and tax incidence has been totally delinked from the date of payment of tax.

The appeals were allowed.

(See 2018-TIOL-2769-CESTAT-MUM)