Custom, Excise & Service Tax Tribunal
Commissioner Of Service Tax, Mumbai-I vs M/S. Deutsche Asset Management (I) Pvt. ... on 20 November, 2015
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
WEST ZONAL BENCH AT MUMBAI
COURT NO.
Appeal No. ST/89440/2013___
ST/CO/91022/2014
(Arising out of Order-in-Appeal No. 259/BPS/MUM/2013 dated 8.7.2013 passed by the Commissioner of Central Excise & Service Tax (Appeals), Mumbai-IV )
For approval and signature:
Honble Shri Ramesh Nair, Member (Judicial)
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1. Whether Press Reporters may be allowed to see : No
the Order for publication as per Rule 27 of the
CESTAT (Procedure) Rules, 1982?
2. Whether it should be released under Rule 27 of the : No
CESTAT (Procedure) Rules, 1982 for publication
in any authoritative report or not?
3. Whether Their Lordships wish to see the fair copy : Seen
of the Order?
4. Whether Order is to be circulated to the Departmental : Yes
authorities?
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Commissioner of Service Tax, Mumbai-I
:
Appellant
VS
M/s. Deutsche Asset Management (I) Pvt. Ltd.
:
Respondent
Appearance
Shri B.Kumar Iyer Supdt. (A.R.) for Appellant
Shri Abhishek A. Rastogi, C.A. along with
Ms. Rashmi Despande, Manager PWC for respondent
CORAM:
Honble Shri Ramesh Nair, Member (Judicial)
Date of hearing : 20/11/2015
Date of pronouncement : 19/02/2016
ORDER NO.
This appeal is directed against Order-in-Appeal No. 259/BPS/MUM/2013 dated 8.7.2013 passed by Commissioner of Central Excise & Service Tax (Appeals) Mumbai-IV.
2. The fact of the case is that the respondent are engaged in providing services of Banking and other Financial Services falls under Section 65(12) of Chapter V of the Finance Act, 1994. During the course of audit, it was revealed that the respondent acts as an Investment Manager to M/s. Deutsche Mutual Fund and paid service tax on the fees received from M/s. Deutsche Mutual Fund. The financial accounts revealed that the investment fees were received from M/s. Deutsche Mutual Fund as related party transaction and M/s. Deutsche Bank AG as the ultimate holding Company. The said investment fees were credited/paid to the account of respondent not later than the last day of the respective months. The respondent had shown the amount as received in the following month. In the show cause notice, it was alleged by the Revenue that though these were Associate Enterprises transactions the respondent had not accounted for the fees in the respective months itself in their S.T.3 Returns as per provisions of Section 67 of the Act and Rule 6(2) (a) of Service Tax Rules as amended w.e.f. 10.5.2008. Consequently, there was a delay in payment of service tax by one month from May 2008 onwards on which interest was payable by them. The show cause notice was adjudicated and the adjudicating authority confirmed the demand of interest and imposed the penalties under Section 76 and 77 of the Act. Aggrieved by the adjudication, order the respondents filed appeal before the Commissioner (Appeals), who allowed the appeal on the ground that though the provisional entry was made in the month but the same was not reflected the final amount to be paid. The final entry passed in the subsequent month was the amount for which invoice was raised and the payment was received from DMF, should be considered as taxable event. The Ld. Commissioner also held that the respondent cannot be considered as Associate Enterprises as they did not satisfy the criteria of the Associate Enterprises under Section 92A of the Income Tax Act, 1961 along with Chapter X of the Income Tax Act. Therefore, the definition of gross amount charged as provided in the Explanation to Section 67 of the Finance Act, 1994 does not come into play. Being aggrieved by the order of the Ld. Commissioner (Appeals) revenue filed this appeal.
3. Shri B. Kumar Iyer, Ld. Superintendent (A.R.) appearing on behalf of the Revenue, reiterating the grounds of appeal submits that as regard the status of Associate Enterprises, the Ld. Commissioner while holding, that the respondent are not Associate Enterprises, has not given any reasoning. He submits that the respondent is an Associate Enterprises in terms of Section 92A of the Income Tax Act. This has not been disputed by the respondent during the adjudication therefore at this stage the respondent cannot dispute the status of their being an Associate Enterprises. As regard the delay in payment of service tax under Section 67 and its explanation make very clear that if the entry of transaction is made even though on provisional basis shall be taken as point of taxation and service tax shall due according to the date of such entries. As per the respondents contention the final entry was made in the next month, therefore, service tax becomes due for the next month and not on the date of provisional entries. This does not hold water for the reason that explanation to Section 67 does not make any distinction between the provisional entry or final entry. In this position there is a delay in payment of service tax on the part of the respondent. Hence, interest demanded and the adjudication order is legal and correct. Secondly, the respondent are liable for penalties as confirmed by the adjudicating authority.
4. Shri Abhishek R. Rastogi, Ld. Chartered Accountant along with Ms. Rashmi Despande, appearing on behalf of the respondent submits that firstly the respondent do not fall under the definition of associate enterprises as per the definition provided under Section 92A of the Income Tax Act, 1961. Secondly, the entries of transaction made during the month are provisional and only for the purpose of management information system. The final entries are made in the next month and according to which the invoices were raised. In same transaction, even the amount of final entry and amount of the invoices are varying with the provisional entries. Therefore, there is no significance of provisional entries. The same cannot be considered for point of taxation.
5. I have carefully considered the submissions made by both the sides. The issue to be decided are-
(i) Whether the respondent are associate enterprises in terms of Section 92A of the Income Tax Act, 1961.
(ii) Whether the point of taxation should be decided on the date of provisional entries of the transaction in the books of account or on the date of final entry and invoice made by the respondent.
The definition of associate enterprises is provided in Section 92A of the Income Tax Act which is reproduced below:
92. (1) Any income arising from an international transaction shall be computed having regard to the arm's length price.
Explanation.For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price.
(2) Where in an international transaction or specified domestic transaction, two or more associate enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be.
(2A) Any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction shall be computed having regard to the arm's length price.
(3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or sub-section (2A) or the determination of the allowance for any expense or interest under sub-section (1) or sub-section (2A), or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2) or sub-section (2A), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction or specified domestic transaction was entered into.
92A. (1) For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, "associated enterprise", in relation to another enterprise, means an enterprise
(a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or
(b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.
(2) For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises if, at any time during the previous year,
(a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or
(b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or
(c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or
(d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or
(e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or
(f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or
(g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or
(h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or
(i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or
(j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or
(k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or
(l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or
(m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.
On the basis of above definition, it is observed that the respondent is an associate enterprises of the service recipient i.e. M/s. Deutsche Mutual Fund. The respondent is managing and controlling the mutual fund. Therefore, it is clearly covered under the definition of associate enterprise. More over it is observed that the entire show cause notice is based on the aspect that the respondent is associate enterprises. However, the respondent have not raised any objection before the adjudicating authority regarding their status of associate enterprises. The Ld. Commissioner while holding that the respondent is not on associate enterprises not given any finding. Therefore I am of the considered view that the respondent is an associate enterprises of M/s. Deutsche Mutual Fund as the ultimate holding company. On the issue of point of taxation the relevant Section 67 of the Finance Act 1994 is reproduced below:
Section 67 Valuation of taxable services for charging Service tax (1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall,
(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;
(ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration;
(iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.
(2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. (3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.
(4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed.
Explanation.For the purposes of this section,
(a) consideration includes any amount that is payable for the taxable services provided or to be provided;
(b) agency includes any currency, cheque, promissory note, letter of credit, draft, pay order, travellors cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value;
(c) gross amount charged includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and 2[book adjustment, and 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, where the transaction of taxable service is with any associated enterprise.] As per the Explanation (c) of Section 67 the term gross amount charged amongst other transaction includes any form of payment by issue of credit notes or debit notes and book adjustments and 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, where the transaction of taxable service is with any associate enterprise. This explanation has vide scope and it applies to even those transaction which are booked under suspense account or even any other name. In the present case, the so called provisional entries were made with a specific description of transaction. The explanation does not make any distinction between the provisional entries and the final entries made subsequently. As per the plain reading of the explanation the moment first time any entry is made irrespective whether it is provisional or final entry the same will be covered under the debit entries as specified under the explanation. Therefore there is no scope in the said explanation to give different treatment to the provisional entries or final entry. On the identical issue the Division Bench of this Tribunal in the case of General Motors (I) Pvt. Ltd. Vs. Commissioner of C.Ex., Pune 2015 (40) S.T.R. 962 (Tri.-Mumbai) categorically held that there is no difference between the provisional entry or final entry. The relevant paras of the order of the judgment are reproduced below:
9. From the above, as applied to the circumstances of the service utilized by the appellant, it would appear that the intellectual property is destined to each unit of production which occurs on a daily basis. For each vehicle that rolls off the assembly line, the owner of the intellectual property needs to be recompensed. However, Rule 6 of Service Tax Rules lays down generally that tax shall be discharged every month and hence the occurrence of the taxable event is aggregated in periods of not less than a month. It is not the claim of the appellant that that service is not utilized every month. Instead they draw sustenance from the agreement which prescribes each quarter to be the frequency of discharging the royalty dues to the owner of intellectual property and hence posit that the feasibility of determination of consideration with accuracy should be the criteria for determining the taxable event. The certainty and clarity required of taxing statutes cannot leave such a critical aspect as taxable event to the whims of a contract between two entities or to be conditional upon a perfection sought for in such contracted agreement. The delivery of the service at its destination becomes the taxable event subject, by the law as it then stood, to payment for the service. With the insertion of the Explanation in Rule 6 of Service Tax Rules, 1994, effective from 10th May 2008 such payment was imbued with a more comprehensive meaning in so far as transaction between associated enterprises is concerned. The value was not restricted to payment per se but was liable to be supplemented by accounting entries relating to the service transacted between associated concerns. That is the conclusion arrived at by the original authority before proceeding to hold that the book entries made at the end of each month determines the point at which the tax is liable to be paid.
10. The learned Counsel for the appellant would submit that the agreement specifies that the royalty is payable every quarter and, that till the introduction of Point of Taxation Rules in 2011, valuation was on receipts basis and not on accrual basis thereby allowing for tax liability only when consideration is actually payable. That contention would have been acceptable had not the Explanation been inserted in Rule 6 owing to which the acknowledgement in the books was sufficient to deem the payment for service to have been effected. Much as the appellant would like to alienate the book-keeping entry from the deeming provision on the ground that such entry is merely for internal management reporting, it cannot be denied that the transaction has found a place in the books. Such an attempt to alienate is also not acceptable when the production of each unit utilizing the provided technical know-how is the actual destination of the service and such utilization becomes the taxable point with tax liability to be discharged at the moment most proximate to booking of compensation as laid down in Rule 6 of Service Tax Rules, 1994. Royalty may be paid by appellant to providers of know-how at frequencies scheduled in the contract but the deemed payment by passing of book entries overrides the relevance of actual payment. That the management reporting system placed emphasis on monthly booking of royalty accruing is also indicative of the importance of such monthly entries from the stake-holders perception even if the contracted moment of compensation was later.
11. The learned Counsel for appellant contends that the scope of the Explanation is not extendable to such deemed payment because it needs to be read in the context of the phrase any payment to be received and since the payment is to be received at quarterly intervals by the service provider, such deemed payment cannot be added for the months where actual payments have not been made. That argument will not suffice in view of the circumstances that led to insertion of the said Explanation as pointed out in circular of Central Board of Excise & Customs (334/1/2008-TRU dated 29th February 2008) attention to which has been drawn by the learned Counsel himself. Between associated enterprises, the certainty of receipts is not tested against the enhancement of cash or bank balances; mere book entries have the effect that it may not have between two independent entities. Such book adjustments often serve to delay or defer tax payment without loss of stakeholder value and this deeming provision aims to disincentivize such tendencies. It is quite probable that the intent of the appellant and the associated concerns may not have been so but such a distinction based on intent, as the learned Counsel would have us accept, does not only not find a place in the provision but is also anathema to non-discriminatory taxation. The deeming effect of the Explanation has to be applied wherever accounting entries relating to the service transaction finds a place in the books of the person liable to pay the tax.
12. The learned Counsel for the appellant has attempted to lay emphasis on the debit entry in the books of the person liable to pay tax as the due date intended in Explanation in Rule 6. This restrictive interpretation of legislative intent has drawn upon the assumption that the debit and credit are independent unconnected entries in books of accounts and that, for the purposes of the Explanation, debit entry is all that is relevant when tax liability devolves on the recipient of service. In this attempt it has been overlooked that the Explanation is unambiguous about the circumstances intended to be covered, viz., the passing of entries in less obvious heads with no apparent connection to the account of the provider of the service. The broad reference to the nomenclature of the account as well as the inclusion of debit and credit is a clear pointer to the intent of not allowing books of accounts to be used for attributing the liability while deferring tax payment in relation to transactions with associated enterprises. A plain reading of the Explanation does not lend credence to the claim canvassed on behalf the appellant any debit or credit entry that can be linked to the service is sufficient.
13. Taking this argument forward, learned Counsel would have us agree with him that receipts-based valuation has always been the intent in taxation on reverse charge basis because of the special treatment accorded in Rule 7 of Point of Taxation Rules, 2011 even after taxation in all other situations was, by these Rules, transformed to accrual basis. Accordingly, it is contended that the word credit which erroneously insinuated itself in second proviso of Rule 7 of Point of Taxation Rules, 2011 was substituted by debit with effect from 1st April 2012. And since this reference to debit after that date concerns itself exclusively with reverse charge taxability of associated enterprises, that is how it should be read in its former avatar in Rule 6 of Service Tax Rules, 1994. We find ourselves unable to subscribe to this view as the alteration made in 2012 has not been officially attributed to any error in the Rules as it stood on 1st April 2011. It would be consistent with the proposition made supra that the use of debit, credit or both is not critical to the valuation mechanism as either of these does not exist in isolation while making an entry in the books of accounts. A debit entry will have a corresponding credit entry and the existence of such entry with respect to royalty on vehicles manufactured by the appellant during a particular month, without an entry in the suppliers ledger, suffices for it to be included in the value of taxable service and liable to be taxed by the fifth of the following month.
14. This is not a dispute about taxability. Tax liability has been discharged by the appellant, albeit in a schedule of their own choosing, relying on the principle of receipt of consideration by the service provider. As this happens to be at variance with the provisions of Rule 6 of Service Tax Rule, 1994 and Rule 7 of Point of Taxation Rules, 2011, the tax liability needs to be computed for each month on the amount booked in the royalty accrued account with the reversal being taken into account whenever that has occurred. Needless to state, in such months, it would be tantamount to taxes paid in advance and liable to be adjusted against taxes due in the month(s) thereafter. Owing to absence of any definite computation in the impugned order and the claim of reversal, as well as that of tax payment, not having been doubted in the impugned order, it would appear that tax liability has indeed been discharged in full though belatedly in some months. A test computation for July to September 2009 and April to June 2011, relating to which extracts of ledger have been furnished in these proceedings, after allowing exemption of service tax on related intellectual property service to the extent of Research & Development cess paid as per notification 17/2004-ST dated 10th September 2004, has confirmed it to be so. There being no alternative finding in the impugned order, we find no reason not to conclude so. Revenue neutrality arising from availment of CENVAT credit and the contention that the demand is barred by limitation are rendered irrelevant in the circumstances.
15. As the taxes have been discharged during the period under dispute, the appellants liability is limited to interest for the first two months of each quarter to the extent of amount not paid or short-paid. This should have been effected in the impugned order but, not having been done, needs to be remedied.
16. The references made by the learned Counsel to the provisions of the Income Tax Act, 1961 and the decisions of the Honble Supreme Court in re Commissioner of Income Tax v Ashokbhai Chimanbhai [(1965)56ITR42(SC)], Commissioner of Income Tax v Birla Gwalior (P) Ltd [(1973)89ITR266(SC)], International Auto Ltd v Commissioner of Central Excise [2005(183)ELT239(SC)] and Commissioner of Central Excise &Customs (Appeals) v Narayan Polyplast [2005(179) ELT 20 (SC)] and that of the Tribunal in re Jay Yuhshin v Commissioner of Central Excise [2000(119)ELT718(T-LB)] do not come to the direct assistance of the appellant whose liability arises from a plain reading of the deeming provision relating to associated enterprise in the law relating to service tax and the system of acknowledging royalty in their books of accounts. The Explanation in Rule 6 of Service Tax Rules, 2004 lends itself to literal construction without having to look elsewhere for clarity. The observation of the Honble Supreme Court in re Commissioner of Income Tax v Keshab Chandra Mandal [AIR 1950 SC 265] that hardship or inconvenience cannot alter the meaning of the language employed by the legislature if such meaning is clear on the face of the statute flowing from this primary rule for interpretation of statutes strikes at the base of the appellants contention.
In view of the above judgment, the conclusion is that once debit entries were made even though provisional basis and subsequently final entries are made. It is only adjustment in the books of account and for this reason the entries made at the first time cannot be said to be irrelevant for deciding the point of taxation. I am therefore of the considered view that the service tax became due in accordance with the date of provisional entries made first time by the respondent in their books of account. Therefore, there is a delay in payment of service tax which attracts interest hence the demand of interest is sustainable. As regard penalties imposed under Section 76 & 77 of the Customs Act, I find that the show cause notice was issued for demand of interest and there is no dispute regarding the payment of service tax. More over the issue involved is in the nature of interpretation of valuation section. The penal provisions are invoked only for non-payment or short payment of service tax. In the present case, it is only for demand of interest. I, therefore, hold that penalties under Section 76 & 77 are not imposable. The impugned order is modified in the above terms and the Revenues appeal is partly allowed. Cross-objection is also disposed of.
(Pronounced in court on 19/02/2016)
(Ramesh Nair)
Member (Judicial)
SM.
17
Appeal No. ST/89440/2013___
ST/CO/91022/2014