Custom, Excise & Service Tax Tribunal
Hindustan Aeronautics Limited vs Ce & Cgst Lucknow on 2 December, 2024
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
ALLAHABAD
REGIONAL BENCH - COURT NO.I
Service Tax Appeal No.70058 of 2019
(Arising out of Order-in-Original No.02/ADJ./COMMR./2018-19 dated
17/10/2018 passed by Commissioner (Audit) Central Excise & CGST,
Lucknow)
M/s Hindustan Aeronautics Ltd., .....Appellant
(Accessories Division, Faizabad Road, Lucknow)
VERSUS
Commissioner of Central Excise &
CGST, Lucknow ....Respondent
(7 Havelock Road, Lucknow-226001) APPEARANCE:
Shri Rajan Mishra, Advocate & Shri Suryakant Singh, Advocate for the Appellant Shri Santosh Kumar, Authorised Representative for the Respondent CORAM: HON'BLE MR. P.K. CHOUDHARY, MEMBER (JUDICIAL) HON'BLE MR. SANJIV SRIVASTAVA, MEMBER (TECHNICAL) FINAL ORDER NO.70784/2024 DATE OF HEARING : 02 August, 2024 DATE OF PRONOUNCEMENT : 02 December, 2024 SANJIV SRIVASTAVA:
This appeal is directed against Order-in-Original No.02/ADJ./COMMR./2018-19 dated 17/10/2018 passed by Commissioner (Audit) Central Excise & CGST, Lucknow. By the impugned order following has been held:-
"ORDER
a) I confirm the demand of Service tax amounting to Rs.
70,88,44,126/- (Rs. Seventy Crores Eighty Eight Lakhs Forty Four Thousand One Hundred and Twenty Six only) (inclusive of Education Cess & Secondary Education Cess) under Section 73(2) of the Finance Act, 1994;
Service Tax Appeal No.70058 of 2019 2
(b) I order to recover interest on the above confirmed demand of Rs.70.88.44,126/- of the prescribed rate from the Party under Section 75 of the Finance Act, 1994;
(c) I impose penalty 50% of Rs. 70,88,44,126/- i.e. Rs.35,44,22,063/- (Rs. Thirty Five Crores Forty Four Lakhs Twenty Two Thousand and Sixty Three only) on the Party under Section 78 of the Finance Act. 1994 for mis-stating the facts before the department, suppressing the value of taxable services received by them before the department and contravening the provisions of the Finance Act, 1994 with intent to evade payment of Service tax.
Provided further that if service tax and interest is paid within a period of thirty days of receipt of this order, I restrict the penalty to 25% of Rs. 70,88,44,126/- and the benefit of reduced penalty shall be available only if the amount of penalty so determined has also been paid within the period of thirty days of receipt of this order.
Provided also that the benefit of the reduced penalty shall be available only if the amount of Service Tax, applicable interest and amount of such reduced penalty is also paid within such period i.e. within 30 days of receipt of this order."
2.1 Appellant is a Government of India undertaking interalia engaged in providing taxable services under the category of Management, Maintenance or Repair Services, appellant is also availing the facility of Cenvat Credit under Cenvat Credit Rules. Appellant imported technologies on payment of royalty, license fee etc. from foreign vendors.
2.2 During audit of records of the appellant for the year 2011- 12 to 2014-15 on perusal of trial balances, it was noticed that they had paid charges towards documentation fees, computers software and license fee to foreign aircraft manufacturers Service Tax Appeal No.70058 of 2019 3 appellant contended that these expenses were towards purchase of manual and software relating to manufacture, repair and maintenance of aircraft parts from the foreign vendors and hence not taxable. The contention of the appellant was not accepted by the audit team as these manuals and software were essential in course of use/transfer of technology for manufacture/repair and maintenance of aircraft on a license fee. The term license fee is indicative of fact that the transfer was not final as in the case of sale and purchase. Hence, the same are treated as sale and appellant was liable to pay service tax under Section 66B & 68 of the Finance Act, 1994 read with Rule 2(1)(d)(G) of Service Tax Rules, 1994.
2.3 The details of transactions made available in the trial balance of the appellant during the said period as ascertained in tables bellow:-
Financial Year 2011-12 SI.No. ACCOUNT Description Amount in Service Tax head of Trial Rs. payable Balance 1 15010101 License Fees 1449537428 149302355 2 15010201 Documentation 195163446 20101835 fees 3 15010301 Computer 7641481 787073 Software 4 19060002 License Fee- 17537624 1806375 ALH 5 19060101 Documentation 125705756 12947693 TOTAL 1795585735 184945331 Financial Year 2012-13 SI.No. ACCOUNT Description Amount in Service Tax head of Trial Rs. payable Balance 1 15010101 License Fees 1298232557 160461544 2 15010201 Documentation fees 196943753 24342248 3 15010301 Computer Software 0 0 4 19060002 License Fee-
ALH 2808785 347166
5 19060101 Documentation 5178351 640044
TOTAL 1503163446 185791002
Financial Year 2013-14
SI.No. ACCOUNT Description Amount in Service Tax
head of Trial Rs. payable
Balance
1 15010101 License Fees 1196888194 147935381
2 15010201 Documentation
fees 195305689 24139783
3 15010301 Computer 0 0
Service Tax Appeal No.70058 of 2019
4
Software
4 19060002 License Fee-
ALH 1193608 147530
5 19060101 Documentation 820754 101445
TOTAL 1394208245 172324139
Financial Year 2014-15
SI.No. ACCOUNT Description Amount in Service Tax
head of Trial Rs. payable
Balance
1 15010101 License Fees 1069410600 132179150
2 15010201 Documentation
fees 269347513 33291353
3 15010301 Computer
Software 2146214 265272
4 19060002 License Fee-
ALH 0 0
5 19060101 Documentation 387377 47880
TOTAL 1341291704 165783655
GRAND TOTAL (2011-12 TO 2014-15) 6034249129 708844126
2.4 After completion of investigations, show cause notice dated
22.09.2016 was issued to the appellant asking them to show cause as to why-
"(i) Service tax amounting to Rs. 70,88,44,126/- (Rs.
Seventy Crores Eighty Eight Lakhs Forty Four Thousand One Hundred and Twenty Six only) inclusive of Education Cess & Secondary Education Cess should not be demanded and recovered from them under Section 73(l) of Chapter V of the Finance Act, 1994 by invoking proviso for extended period thereto.
(ii) Interest due thereon should not be demanded & recovered from them under the provisions of Section 75 of Chapter V of the Finance Act, 1994.
(ii) Penalty should not be imposed upon them under the provisions of Section 78 of Chapter V of the Finance Act, 1994."
2.5 This show cause notice has been adjudicated as per the impugned order referred in para-1 above. Aggrieved appellant filed this appeal before the Tribunal.
3.1 We have heard Shri Rajan Mishra and Shri Suryakant Singh learned Counsel appearing for the appellant and Shri Santosh Kumar learned Authorised Representative appearing for the revenue.
Service Tax Appeal No.70058 of 2019 5 3.2 Arguing for the appellant learned Counsel submits that- The amount against which the demand has been made is in respect of purchase of documentations and manuals and is not in respect of provisions of any service to the appellant, accordingly the same could not have been covered by the definition of services under the Finance Act, 1994.
As per the Indian Accounting Standard (Ind AS) 38, these manuals are in nature of intangible assets which are accounted as such. The said assets are defined as identifiable non-maintainable assets without physical contact.
In terms of this accounting standard every year on amortized basis of the cost of acquisition of these assets is shown as expenses in the financial accounts of the appellant.
The expense is taken from the trial balance which is not the actual expense incurred for acquisition of these assets in that financial year. The same are not in nature of consideration for any services received by them. They are book entries to balance cost of acquisition of the intangible assets in the previous years.
As no services have been received against these expenses under the category of Intellectual Property Services, the demand of service tax is bad in law.
In the following decisions it has been held that transfer of technology from a foreign company to the appellant would not fall within the ambit of intellectual property service defined under Section 65 (55b):-
o Hindustan Aeronautics Ltd. 2020 (38) GSTL 75 (Tri.-
Bang);
o Munjal Showa Ltd. 2017 (5) GSTL 145 (Tri.-Chan.); o Lurgi India International Services Pvt. Ltd. 2020 (34) GSTL 507 (Tri.-Hyd.);
o Technova Imaging Systems Pvt. Ltd. 2019 (31) GSTL 472 (Tri.-Mumbai) Service Tax Appeal No.70058 of 2019 6 o Hindustan Aeronautics Ltd. (Service Tax Appeal No.76328 of 2014).
As appellant is wholly owned Government of India entity, intention to evasion of tax cannot be read in the demand by invoking the extended period. Reliance is placed on the following rulings:-
o Nepa Ltd. 2013 (298) ELT 225 (Tri.-Del.); o Hindustan Insecticides Ltd. 2017 (6) GSTL 218 Tri.-
Del.);
o Indian Oil Corporation Ltd. 2013 (291) ELT 449 (Tri.-
Ahmd.).
For the same issue, in the case of appellant, the demand made by qualifying the services under the category of Consulting Engineering Services has been set aside vide Final Order No.70887-70888/2019 dated 24.04.2019. Appeal be allowed.
3.3 Learned Authorized Representative reiterates the findings recorded in the orders of the lower authorities.
4.1 We have considered the impugned orders along with the submissions made in appeal and during the course of argument.
4.2 For confirming the demand against the appellant, impugned order records as follows:-
"14.1 Issue No.1 First of all, I come to the point that amount paid for License Fee, Documentation Fee etc. to foreign manufacturers / vendors are taxable service or otherwise. In this regard, I find that the Party has already accepted in their submissions that the amount paid under, the respective heads of P/L account was already included in the SCNs issued from the Divisional office earlier to the Party but they have nor submitted anything in evidence to the claim. Further, the Party also submitted that said expenses were amortized. Therefore, these submissions are self explanatory that said amounts were expensed by the Party on account of License Fees, Documentation Fees, Service Tax Appeal No.70058 of 2019 7 Computer Software etc. whether it was amortized or otherwise. The said amount was paid to foreign manufacturers / vendors for purchasing of computer software, to use / transfer of technology.
As far as the claim of the Party that the service tax computation provided in the SCN has been merely calculated on mere entries appearing in the trial balance but the amounts appearing under the head 1501 are nothing but amounts amortized over the period of the time and declared in the books on the basis of general accounting principles. Therefore, the amounts appearing under the trial balance account head 1501 does not represent an amount being paid to the foreign vendor for receipt of license fees, documentation and computer software, I want to reproduce the definition of word "Amortize" as defined in Merriam-Webster dictionary "amortized; amortizing" means:-
:to reduce (an amount) gradually as a: to pay off (as a loan) gradually usually by periodic payments of principal and interest or payments to a sinking fund b: to gradually reduce the cost of (as an asset) especially for tax purposes by making periodic charges to income over a time span Therefore, I find that the 'amortization' is nothing but an expense made by the Party for respective services procured by the Party from overseas vendors. Prior to Negative List Regime Le, before 01.07.2012 The merit of demand is examined with respect to the items of services mentioned in the Demand cum Show Cause Notice, These expenses borne by the Party are as under:-
License Fees Documentation Fees Computer Software License fee-ALH Documentation Service Tax Appeal No.70058 of 2019 8 These items of services are intricately related to the transfer of technology means transfer of intellectual property right as defined under:-
Section 65 (550) defines the term 'Intellectual Property Right" as "any right to intangible property, namely, trade marks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright"
Now, as per Section 65(55b) 'Intellectual property service' means:-
(a) transferring. [temporarily); or
(b) permitting the use or enjoyment of.
any intellectual property right:) The taxability or taxable service is defined by Section 65(105) "taxable service" means any [service provided or to be provided] (zzr) to any person, by the holder of intellectual property right, in relation to intellectual property service In view of the above definitions, I find that the amount paid for the above said items fall under the definition of "Intellectual Property Service". The Party had received these services from overseas under the category of "Intellectual Property Service".
Now I have to examine whether Service tax liability on the amount paid for different items / heads covered under 'Intellectual Property Service' will be on the service receiver i.e. on the Party or otherwise. For the sake of understanding, I reproduce Section 66 A of the Finance Act, 1994.
SECTION [66A. Charge of service tax on services received from outside India.
(1) Where any service specified in clause (105) of section 65 is, -
(a) provided or to be provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided Service Tax Appeal No.70058 of 2019 9 or has his permanent address or usual place of residence, in a country other than India, and
(b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India such service shall, for the purposes of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provisions of this Chapter shall apply.
Therefore, in view of above discussion, I find that the amount paid under different heads is nothing but the payment made by the Party to overseas for providing taxable service of 'Intellectual Property Service' as defined by Section 65(55b) and 65(105) (zzr) of the Finance Act. 1994 and the Party is liable to pay service fax on the said expenses under reverse charge mechanism as provided by Section 66A of the Finance Act, 1994.
In Negative List Regime i.e. from 01.07.2012 onwards Now, I come to the point whether above said activity is under the purview of service Tax i.e. whether the activity is service in the era of Negative List or not? As per Section 658(44) of the Finance Act, 1994 "service" means any activity carried out by a person for another for consideration, and includes a declared service. The main ingredients of this definition are (i) any activity (ii) carried out by any person for another (i) there is some consideration and (iv) including declared services under Section 66E of the Finance Act, 1994.
Now, as per Section 658(37) of Finance Act, 1994 "person" includes,-
(i) an individual,
(ii) a Hindu Undivided Family,
(iii) a company,
Service Tax Appeal No.70058 of 2019
10
(iv) a society,
(v) a limited liability partnership.
(vi) a firm,
(vii) an association of persons or body of
individuals, whether incorporated or not,
(viii) Government,
(ix) a local authority, or
(x) every artificial juridical person, not falling within any of the preceding sub-clauses; I find in the instant case that the overseas vendors (persons) are carrying out some activity for another person (the Party le.M/s HAL) for consideration (amount paid to overseas vendors). Above all as per the concept of taxability of services introduced with the introduction of the concept of Negative List w.e.f. 01.07.2012, it was also clarified that all services are taxable except those;
mentioned under Negative list prescribed under Section 66D of the Finance Act. 1994 OR those exempted vide Mega Exemption under Notification No.25/2012-ST dated 20.06.2012 Since in the present case, I find that the nature of services received by the Party does not fall under any of these two exempted categories, therefore, these are liable to be taxed under Section 668 of Finance Act, 1994. Therefore, in view of the above, it is very much clear that the activity is a taxable service under the negative list regime.
As per Rule 3 of Place of Provisions of Service Rules, 2012 "The place of provision of a service shall he the location of the recipient of service: provided that in case [of services other than online information and database access or retrieval services, where] the location of the service receiver is not available in the ordinary course of business, the place of provision shall be the location of the provider of service."
Service Tax Appeal No.70058 of 2019 11 As per definition of "location of the service receiver"
means (provided by Rule 2(i) of Place of Provision of Service Rules 2012):-
a) where the recipient of service has obtained a single registration, whether centralized or otherwise, the premises for which such registration has been obtained;
b) where the recipient of service is not covered under sub-clause (a):
the location of his business establishment; or where services are used at a place other than the business establishment, that is to say, a fixed establishment elsewhere, the location of such establishment; or where services are used at more than one establishment, whether business or fixed, the establishment most directly concerned with the use of the service; and in the absence of such places, the usual place of residence of the recipient of service. Therefore, as per Rule 3 of place of provision of services Rules 2012 read with definition as provided in Rule 2(i) ibid, I find that the services (technology transfer) had been received by the Party in taxable territory from a vendor located overseas in non-taxable territory.
Now, as per Section [668. Charge of service tax on and after Finance Act, 2012-There shall be levied a tax (hereinafter referred to as the service tax) at the rate of [fourteen per cent.] on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed] And also as per Rule 2(1)(d)(G) in relation to any taxable service provided or agreed to be provided by any person which is located in a non-taxable territory and received by any person located in the taxable territory, the recipient of such service:
Service Tax Appeal No.70058 of 2019 12 SECTION 168. Payment of service tax. (1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66 in such manner and within such period as may be prescribed.
(2) Notwithstanding anything contained in sub-section (1), in respect of (such taxable services as may be notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such monner as may be prescribed at the rate specified in section 66 and all the provisions of this Chopter shall apply to such person as if he is the person liable for paying the service tax in relation to such service:] [Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this Chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider].
In view of above discussion, I find that the Party was liable to pay Service Tax for the period prior to 01.07.2012 (before introduction of Negative List) on the amount paid for License Fee, Documentation Fee, and Computer Software etc. under reverse charge mechanism as per provisions discussed above. Therefore, from the discussion, it is obvious that prior to negative list (i.e. upto 30.06.2012) the expense made under different heads is taxable.
As for as, in negative list regime, I find that the activity carried out by the overseas is taxable service under reverse charge mechanism. If any activity is service and the service does not falls either in Negative list (as defined in Section 66D of the Act) or Mega Exemption (as provided by Notification 25/2012-ST dated 20.06.2012), then service will be taxable. In present case since the activity carried out by overseas is service and provided to the Party for some consideration. Therefore, the service provided by overseas is a taxable service and by virtue of Service Tax Appeal No.70058 of 2019 13 reverse charge mechanism, the service tax liability is to be deposited by the recipient i.e. the Party. 14.2 On the issue of interest, I notice that it is an inbuilt provision that in the event of failure of timely payment of the tax amount into the credit of government exchequer, the same has to be paid along with the interest. This view has been confirmed by the Hon'ble CESTAT Chennai in the case of INMA International Security Academy Pvt. Ltd. Vs CCE [2005 STR 31/2005 (180) ELT 107], wherein it has been held that 'The question, now, is whether the Party should be called upon to pay interest on the service tax amount in terms of Section 75 of the Finance Act, 1994. The assessee's plea of ignorance does not appear to be appealing inasmuch as it is common man's knowledge that delayed payment of dues will normally carry interest. The interest charged in this case is in terms of Section 75 ibid. Hence, I find that the law is settled with regard to recovery of interest on the amount of service tax not paid. Therefore, the Party is required to pay Interest at applicable rate under the provision of Section 75 of the Finance Act. 1994 on the amount of Service Tax which they have failed to pay on due date.
14.3 Issue No.2 Secondly, I take up the issue that whether extended period of limitation is applicable to the present case. In this regard, I find that the demand in the subject show cause notice is raised under Section 73(1) of the Finance Act, 1994, the contents of which relevant at the time of issuance of show cause notice are as follows:-
"SECTION [73. Recovery of service tax not levied or paid or short- levied or short-paid or erroneously refunded. - (1) Where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, (Central Excise Officer] may, within [thirty months] from the relevant date, serve notice on the person chargeable Service Tax Appeal No.70058 of 2019 14 with the service tax which has not been levied or paid or which has been short-levied or short- paid or the person to whom such tax refund has erroneously been made, requiring him to show cause why he should not pay the amount specified in -the notice:
Provided that where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of -
(a) fraud; or
(b) collusion, or
(c) wilful mis-statement, or
(d) suppression of facts; or
(e) contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax, by the person chargeable with the service tax or his agent, the provisions of this sub-section shall have effect, as, for the words thirty months). The words "Tive years had been substituted."
On plain and precise reading of the above Section, it is explicit that there are 5 elements which may be individualty or collectively present in cases for invoking the extended period of limitation, I hereby further examine all the above elements Individually:-
i. Fraud: The term "fraud' has not been defined in the Finance Act, 1994. As per oxford dictionary, the word "fraud' means wrongful or criminal deception intended to result in financial or personal gain. a person or thing intended to deceive others, typically by unjustifiably claiming or being credited with accomplishments or qualities.
Thus, it can be inferred that for element of 'fraud to be involved in a subject matter it has to be proved Service Tax Appeal No.70058 of 2019 15 that person charged has wrongfully deceived people or government for its financial or personal gain. ii. Collusion: The term 'Collusion' has not been defined in the Finance Act. 1994. As per oxford dictionary, the word 'Collusion means secret or illegal cooperation or conspiracy in order to deceive others.
Thus, it can inferred that for element of Collusion to be involved in a subject matter it has to be proved that person charged set-up an illegal cooperation or conspiracy for deceiving others with or without help of others. It is normally perceived that the Collusion has taken place when a set of people conspire In order to achieve certain goals which are against the law of the land.
iii. Willful Mis-Statement:- For element of
wilful mis-statement to be involved it has
to be proved that the person charged
intentionally rather willfully made wrong
submissions or submitted false documents to avoid the action under the Finance Act. 1994. iv. Suppression of Facts:- For element of suppression of facts to be involved it has to be proved that the person charged suppressed the facts or did not provide the full and correct information to the authorities as was asked / required to be submitted to the authorities for taking necessary action unc Finance Act, 1994, v. Contravention of any provisions of this Chapter or of the rules ma thereunder with intent to evade payment of service tax:- In order to prove t element it has to be proved that the person charged contravened or did n properly followed the provisions of Service Tax Appeal No.70058 of 2019 16 the Finance Act, 1994 intentionally to avc the payment of tax.
In any case if it is proved that any one of the above elements are preser then extended period can be invoked.
In the present case, the Party has contested the invocation of the extended period on the ground that for the purpose of invoking the extended period, the Adjudicating Authority has to first substantiate the demand of service tax, failing which the adjudicating Authority can not hold that the values for the subject item were supposed to be declared in the returns and non-declaration of the same amounts to willful suppression. Therefore, the Party has submitted that demand of service tax on any item appearing in the trial balance and invoking of extended period is not the principle of taxation. Further, the Party has submitted that the Adjudicating Authority has to prove the intention of the Party to evade the payment of Service tax in terms of Section 73(1) of the Finance Act, 1994. In this regard, the Party has placed reliance on the decision in the matter of Naresh Kumar & Co. Pvt.Ltd. vs. Union of India 2014 (36)STR 271 (Cal.) I do not find merit in the contention of the Party that there was no intention to evade payment of Service Tax. In the present case the Party has submitted that the said amount was included in the earlier SCNs issued to them but they could not justify the same. Further, they told the department that the said amount was amortized but I find that amortization is nothing but expenses made by the Party under various heads and was taxable as discussed in para 14.1 supra. Therefore, I find that the Party had contravened the facts to evade payment of Service Tax willfully. The Party had never approached the department till the departmental officers demanded the records in respect of business conducted by them. Therefore the intention of suppressing the transaction and thereby Service Tax Appeal No.70058 of 2019 17 service itself is proved beyond any doubt. The Party supplied certain information only when auditors demanded and because they knew that all their business was with the statuary authorities and they are not in position to hide anything. I find that with effect from the Financial Year 2011-12, the Party contravened the provisions of the Finance Act. 1994, and received taxable services without payment of service tax due thereon. Only when their organization was audited by the department by way of demanding the records from the Party, the contravention of the provisions of the Finance Act. 1994, with intention to evade the payment of service tax surfaced and the demand was raised under the provisions of the Finance Act, 1994.
Further, I find that payments made under various heads such as License fee. documentation fee, computer software etc are essential in course of use / transfer of technology and on the basis of mere heads of trail balance, it could not be ascertained that for which reasons these expenses were bome by the Party. The department got the knowledge when the auditors had gone through essential character / nature of the expenses incurred and found that these expenses were well within the service tax ambit and the liability of payment of service tax on these expenses were on the Party. This could not have been disclosed to the departmental officer had the audit of the Party would not have been conducted by the department. Accordingly. I hold that the extended period of limitation is applicable to the present case."
4.3 From the above paras of the impugned order, it is evident that the fact of actual amounts paid by the appellant have not been considered. It is specific stand of the party before the Commissioner that the entries against which the current demands are being made in the book entries as per the Indian Accounting Standard have not been considered. The impugned order itself records that these amounts would already subject to Service Tax Appeal No.70058 of 2019 18 matter of show cause notice issued by the divisional office earlier to the appellant. This fact could have been verified by the adjudicating authority and the findings recorded rather than observing non-submission of any evidence in this regard. 4.4 Indian Accounting Standard (Ind AS) 38 provides as follows:-
9. Entities frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes or systems, licences, intellectual property, market knowledge and trademarks (including brand names and publishing titles). Common examples of items encompassed by these broad headings are computer software, patents, copyrights, motion picture films, customer lists, mortgage servicing rights, fishing licences, import quotas, franchises, customer or supplier relationships, customer loyalty, market share and marketing rights.
10. Not all the items described in paragraph 9 meet the definition of an intangible asset, ie identifiability, control over a resource and existence of future economic benefits.
If an item within the scope of this Standard does not meet the definition of an intangible asset, expenditure to acquire it or generate it internally is recognized as an expense when it is incurred. However, if the item is acquired in a business combination, it forms part of the goodwill recognized at the acquisition date (see paragraph 68)."
"Intangible assets with finite useful lives Amortisation period and amortisation method 97 The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life. Amortisation shall begin when the asset is available for use, ie when it is in the location and condition necessary for it to be Service Tax Appeal No.70058 of 2019 19 capable of operating in the manner intended by management. Amortisation shall cease at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with Ind AS 105 and the date that the asset is derecognised. The amortisation method used shall reflect the pattern in which the asset's future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straightline method shall be used. The amortisation charge for each period shall be recognised in profit or loss unless this or another Standard permits or requires it to be included in the carrying amount of another asset.
98 A variety of amortisation methods can be used to allocate the depreciable amount of an asset on a systematic basis over its useful life. These methods include the straight-line method, the diminishing balance method and the units of production method. The method used is selected on the basis of the expected pattern of consumption of the expected future economic benefits embodied in the asset and is applied consistently from period to period, unless there is a change in the expected pattern of consumption of those future economic benefits."
Disclosure General 118 An entity shall disclose the following for each class of intangible assets, distinguishing between internally generated intangible assets and other intangible assets:
(a) whether the useful lives are indefinite or finite and, if finite, the useful lives or the amortisation rates used;
(b) the amortisation methods used for intangible assets with finite useful lives;
Service Tax Appeal No.70058 of 2019 20
(c) the gross carrying amount and any accumulated amortisation (aggregated with accumulated impairment losses) at the beginning and end of the period;
(d) the line item(s) of the statement of profit and loss in which any amortisation of intangible assets is included;
(e) a reconciliation of the carrying amount at the beginning and end of the period showing:
6Substituted vide Notification No. G.S.R. 365(E) dated 30th March, 2016 and, thereafter, substituted vide Notification No. G.S.R. 310(E) dated 28th March, 2018. Prior to substitution in 2016, the paragraph read as under:
116 The amount of consideration to be included in the gain or loss arising from the derecognition of an intangible asset is determined in accordance with the requirements for determining the transaction price in paragraphs 47-72 of Ind AS 115. Subsequent changes to the estimated amount of the consideration included in the gain or loss shall be accounted for in accordance with the requirements for changes in the transaction price in Ind AS 115. Prior to substitution in 2018, the paragraph read as under: 116 The consideration receivable on disposal of an intangible asset is recognised initially at its fair value. If payment for the intangible asset is deferred, the consideration received is recognised initially at the cash price equivalent. The difference between the nominal amount of the consideration and the cash price equivalent is recognised as interest revenue in accordance with Ind AS 18 reflecting the effective yield on the receivable.
(i) additions, indicating separately those from internal development, those Service Tax Appeal No.70058 of 2019 21 acquired separately, and those acquired through business combinations;
(ii) assets classified as held for sale or included in a disposal group classified as held for sale in accordance with Ind AS 105 and other disposals;
(iii) increases or decreases during the period resulting from revaluations under paragraphs 75, 85 and 86 and from impairment losses recognised or reversed in other comprehensive income in accordance with Ind AS 36 (if any);
(iv) impairment losses recognised in profit or loss during the period in accordance with Ind AS 36 (if any);
(v) impairment losses reversed in profit or loss during the period in accordance with Ind AS 36 (if any);
(vi) any amortisation recognised during the period;
(vii) net exchange differences arising on the translation of the financial statements into the presentation currency, and on the translation of a foreign operation into the presentation currency of the entity; and
(viii) other changes in the carrying amount during the period.
4.5 From the perusal of the above, we are inclined to accept the submissions made by the appellant that these amounts indicated in the trial balance of the appellant were towards the amortization disclosure required to be made by them as per Indian Accounting Standard (Ind AS) 38A and not consideration for receipt of any service during the period of dispute. In fact appellant have not received any service from foreign vendor during this period for which they were required to pay service tax on reverse charge basis against this expense. Further in case Service Tax Appeal No.70058 of 2019 22 of Firm Foundations & Housing Pvt. Ltd [2018 (16) G.S.T.L. 209 (Mad.)] Hon'ble Madras High Court has observed as follows "15. AS 7 thus provides for a detailed methodology for the reporting and determination of the percentage of income from the contract over the term of the project and sets out the mode of computation for arriving at the same. The basis of such recognition and reporting is the apportionment of the income earned and expenditure incurred over the tenure of the project. This is entirely different and distinct from the scope, object and application of the Point of Taxation Rules that seeks to set out a methodology for determination of when the service was rendered and consequently when the receipt of income from such rendition be taxed.
16. The emphasis and thrust of each methodology is in alignment with the different purposes that they bear reference to - AS 7, in the context of the preparation of financials, addresses the „how much‟ of the transaction over the term of contract whereas Rule 3 of the Rules addresses the „when‟ in relation to the rendition of service for computing taxability under the Finance Act, 1994.
17. The basis of the addition by the respondent is clear from the SCN wherein he states that „further, on verification of the profit and loss account of the assessee for the financial years 2012-13, 2013-14 and 2014-15 along with Service Tax Payment shown in the ST3 returns, it appears that the assessee have not paid the appropriate Service Tax.‟ Despite the explanation offered by the petitioner to the effect that it is the Point of Taxation Rules that would govern the determination of time of rendition of service and consequent accrual of receipt and liability to tax thereof, and not the P and L accounts of the petitioner, the respondent persists in adopting the financials for the determination of service tax liability as well.
17. The basis of the addition by the respondent is clear from the SCN wherein he states that „further, on verification Service Tax Appeal No.70058 of 2019 23 of the profit and loss account of the assessee for the financial years 2012-13, 2013-14 and 2014-15 along with Service Tax Payment shown in the ST3 returns, it appears that the assessee have not paid the appropriate Service Tax.‟ Despite the explanation offered by the petitioner to the effect that it is the Point of Taxation Rules that would govern the determination of time of rendition of service and consequent accrual of receipt and liability to tax thereof, and not the P and L accounts of the petitioner, the respondent persists in adopting the financials for the determination of service tax liability as well.
18. The foundation of the assessment is thus, in my view, flawed. The SCN calls upon the assessee to produce material in support of its stand and, at paragraph No. 11, states that the audited balance sheets for the financial years 2012-13, 2013-14 and 2015-16, statement recorded from the VP of the petitioner, worksheet and written submissions are the basis of issuance of the SCN. By way of replies, the petitioner on 22-9-2016, 28-2-2017 and 11-4-2017 explains yet again that the P and L account cannot be the basis of the assessment. The impugned order is passed notwithstanding the objections raised, and negating the same.
19. Clause (i) of the proviso to Rule 3 specifically provides for determination of the point of taxation in cases of continuous supply as in the case of the petitioner herein.
22. Rule 3(a) provides for a situation where the accrual of service is predicated upon the raising of an invoice. In the present case, the admitted position is that the petitioner does not raise invoices as and when a particular landmark is reached and the accrual of the consideration stage-wise is occasioned automatically upon completion of the stage of construction set out in the agreement itself.
23. It is the specific case of Mr. Prabhakar that the customers have remitted, in advance, the consideration Service Tax Appeal No.70058 of 2019 24 relating to several of the initial landmarks as a lump sum and that the said amount has been offered to tax. It was then incumbent upon the respondent to have, in the light of the stand adopted by the petitioner in its Service Tax Returns, to have examined whether the receipts offered to tax correspond and cover the stages in respect of which consideration has accrued as per the agreement with the customer.
24. Rule 3(a) and (b) provides for the point of taxation to be either the point of raising of invoice [Rule 3(a)] or in a case where the service provider has received the payment even prior to the time stipulated in the invoice, upon receipt of such payment [Rule 3(b)]. In the present case, no invoice is said to have been raised. However, the petitioner confirms that it has, in fact, received lump sum advances corresponding to several initial landmarks in the contract, even prior to the achievement of such landmarks. As per the provisions of Rule 3(b), the entire sum received thus becomes taxable upon receipt and according to Mr. Prabhakar, has been offered to tax.
25. Instead of such determination by application of the provisions of Rule 3, the respondent relies upon the P and L accounts to conclude that the amounts reflected therein have not been offered for service tax. The reporting of income in the P and L being irrelevant for the purposes of determination of service tax payable, the basis of the impugned assessment is erroneous.
26. It is a well settled position that when a statutory provision or rule addresses a specific scenario, such rule/provision is liable to be interpreted on its own strength and context and one need look no further to alternate sources to seek clarity in regard to the issue that has been addressed by the aforesaid rule/provision."
In view of the above decision of Hon'ble Madras High Court the demand made by just picking certain amount from the trial Service Tax Appeal No.70058 of 2019 25 balance which is book entry as per the Accounting Standard, the demand made in show cause notice itself is flawed and the impugned order upholding the said demand is bad in law. 4.6 We also find that in the case of appellant himself, Bangalore Bench of this Tribunal has held as follows:-
"4. Heard both sides and perused the records of the case. On going through the issue involved, the following emerges :
Appellants received similar services by virtue of Inter-governmental agreements in the manufacture of Sukoyi aircraft at different locations in the country. The Department has viewed the services received in a different manner at different places while it has been viewed as Consulting Engineer Services in respect of the units in U.K. it was viewed as Scientific and Technical Consultancy Services in respect of the unit at Nashik and in the instant appeal, the Department seeks to categorize the services as Intellectual Property Rights Services. Ongoing through the agreement and Board‟s circular issued in this regard, it is clear that there is a certain transfer of know-how involved it is not coming from the records of the case that such technical know-how, design, copy right etc have been patented in India in view of the clarification given by the Board unless such technical know-how etc. are listed under the law for time being in force in the country and the services cannot be held to be a taxable service. Also we find that Tribunal Mumbai has gone into the issue of such contracts in an elaborate manner and have observed as follows :
"4. Learned Chartered Accountant appearing on behalf of the appellant-assessee takes us through the entire case records. It is his submission that addendum issued by the Revenue is incorrect inasmuch as that the said addendum was issued Service Tax Appeal No.70058 of 2019 26 after considering the written submissions made by the appellant-assessee. It is his submission that Revenue is trying to improve upon that case after considering the defence raised by the assessee. On merits, it is his submission that the contract entered by the appellant-assessee is on behalf of the Republic of India for the supply and transfer of licence for production of fighter aircraft, engines, air borne equipments. The said agreement was entered on 28 December, 2000 accordingly, appellant-
assessee paid the amounts to the foreign-based firm. He would take us through the agreement which was produced for perusal of the bench and submits that the findings do not indicate as to how the services can be construed as scientific or technical consultancy services. Learned Counsel would submit that there is no basis to hold that it would fall under the definition of the services "scientific and technical consultancy service" as provided under Section 65(60) of the Finance Act, 1994. He would submit that said definition would be applicable only in the case of consultation, advice or technical assistance provided by the scientist or a technocrat or science or technology institution. It is his submission that M/s. Rosobornexport is not a science or technology institution. In support of such a submission he produces a copy of the registration of said supplier with the authorities which indicates that M/s. Rosobornexport is registered as joint-stock company. He would rely upon the ratio of the decision of the Tribunal in the case of Kopran Ltd. - 2011 (23) S.T.R. 627 (Tri. - Mum.), for the proposition that an amount paid for transfer of technical know-how for manufacture will not be covered under scientific or technical consultancy services."
Service Tax Appeal No.70058 of 2019 27 4.7 In view of the above discussions also the demand made by treating these services under the category of Transfer of Intellectual Property Rights Service cannot be sustained. 4.8 We also find that the findings recorded by the impugned order to the effect that overseas vendors are carrying out some activities for the appellant for consideration, do not stand in the test of law, as no activity has been done by any overseas vendors for these amounts during the period of dispute these amortization cost are only towards account entries towards certain license for license fees, Documentation Fees, Computer Software, License Fee-ALH, Documentation etc. As these amounts are not in respect of any services received by the appellant during the period after 01.07.2012 are book entries, we do not find any merits in the said findings. 4.9 Thus on merits of demand, we are not in position to agree with the findings recorded in the manufacture and set aside the same.
4.10 As the demand is being set aside on merits, we do not find it necessary to record separate findings on the ground of limitation or the penalty imposed. As the demand is set aside, we set aside the impugned order along with penalties imposed on the appellant.
5.1 Appeal is allowed.
(Pronounced in open court on-02 December, 2024) (P.K. CHOUDHARY) MEMBER (JUDICIAL) (SANJIV SRIVASTAVA) MEMBER (TECHNICAL) akp