Custom, Excise & Service Tax Tribunal
Skf India Ltd vs Cce Pune I on 16 July, 2018
IN THE CUSTOMS, EXCISE & SERVICE TAX
APPELLATE TRIBUNAL
WEST ZONAL BENCH AT MUMBAI
COURT No. I
APPEAL Nos. ST/85005-85006,85951/2015
(Arising out of Orders-in-Appeal No. PUN-EXCUS-001-APP-077-
078-14-15 dated 24.9.2014 and No. PUN-EXCUS-001-APP-170-14-
15 dated 28.1.2015 passed by Commissioner of Central Excise
(Appeals), Pune-I)
SKF India Ltd. Appellant
Vs.
Commissioner of Central Excise, Pune-I Respondent
Appearance:
Shri Mehul Jivani, C.A., for appellant Shri Dilip Shinde, Assistant Commissioner (AR), for respondent CORAM:
Hon'ble Dr. D.M. Misra, Member (Judicial) Hon'ble Mr. Sanjiv Srivastava, Member (Technical) Date of Hearing: 16.7.2018 Date of Decision: 16.7.2018 ORDER No. A/87131-87133/2018 Per: Sanjiv Srivastava These appeals are directed against the order in appeal of Commissioner (Appeal) Central Excise Pune-1 as detailed in table 1- Table 1: Details of Order in Appeal under Challenge Order in Appeal Period Amount No PUN-EXCUS-001- March 2008- March 3549822 APP-077-078-14-15 2011
2 ST/85005-85006,85951/2015 dated 24.09.2014 April 2011-March 768387 2012 PUN-EXCUS-001-APP- April 2012- 124124 170-14-15 dated September 2012 28.01.2015 Total 4442333 2.0 Appellant is a registered Central Excise Assessee engaged in manufacture of Bearing, Lubrication System etc., falling under Chapter 84 of First Schedule to Central Excise Tariff Act, 1985. They are receiving taxable services classifiable under category of "Management Consultancy Services" and "Intellectual Property Services" from their associated companies located outside India. Appellants have to pay the service tax leviable in respect of these services, on reverse charge basis. They pay service tax on the value of the services as soon as it is credited in their book of accounts. It was observed that 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. Thus show cause notices were issued to the Appellants, demanding the service tax short paid by them on account of exchange rate variation. These show cause notices were adjudicated by the jurisdictional officer, confirming the demands of service tax along with interest. Penalties 3 ST/85005-85006,85951/2015 under Section 76, 77 & 78 have also been imposed by the jurisdictional Additional Commissioner. On appeal Commissioner (Appeal) upheld the order of Additional Commissioner to the extent of demand of differential Service Tax and dropped the penalties imposed on the appellants. Against the order of Commissioner (Appeal) confirming the demand with interest Appellants have filed these three Appeals.
3.0 arguing on behalf of Appellant, Shri Mehul Jivani Learned Chartered Accountant submitted- i. When actual remittance is made, the amount paid for the services received, may be more or less than the amount entered in the book of accounts for the reason of exchange rate fluctuations. In some case actual remittances would be more than that has been booked in the book of accounts and in some case it will be less. Revenue has sought to demand service tax only in respect of those payments which were in excess of the amounts booked in their book of accounts. However department has not given any credit were the amounts paid were actually less than the amounts booked in the book of accounts.
ii. Section 67 of the Finance Act, 1994 provides that value shall be gross amount charged for the taxable services rendered. Gross amount shall be determined on 4 ST/85005-85006,85951/2015 the date on which payment of service tax has been made and not subsequently. Commissioner's observation that explanation to Section 67 provides that actual amount of remittances should only be considered as value irrespective of when liability to pay the tax arises is erroneous.
iii. In support of their contentions they rely on the following decisions:
Sify Technologies Ltd. [2011 (21) STR 252 (T-
Chennai)];
General Motors (I) Pvt Ltd. [2015 (40) STR 962 (T-
Mum)].
iv. In case of Paul Merchants [2013 (29) STR 257 (T- Del)] following has been held that the fluctuations made out of foreign exchange rate should not form part of the assessable value. Fluctuations in exchange rate may result in profit or loss to the transaction. Thus if the gain is to form the part of the assessable vale loss is deductible. But such aspect of transactions is beyond the scope of Finance Act, 1994.
v. Commissioner (Appeal) has failed to appreciate that they are maintaining their books of accounts as per Accounting Standard AS-11 and have already discharged their service tax liability in respect of the amount debited to the account of service provider for 5 ST/85005-85006,85951/2015 provision of service. No additional remittance has been made, but the differential amounts are due to exchange rate i.e. for purchase of convertible foreign currency (U S Dollar).
vi. In support of their contentions they rely on the decisions of Apex Court in case of Intercontinental Consultants and Technocrats Pvt Ltd [2018 (10) GSTL 401 (SC)] and Bhayana Builders (P) Ltd [2018 (10) GSTL 118 (SC)] vii. In case of Magarpatta Township Dev & Construction Co Ltd [2016 (43) STR 132 (T-Mum)] and Garware Poyester Ltd [2017 (5) GSTL 274 9T-Mum)] it has been held that as per rule 7 of the valuation rules, for the purpose of discharge of Service Tax for the services provided from outside India, the value is equal to actual consideration charged for services provided or to be provided.
viii. Since the amount which is required to be paid by them as service tax on reverse charge basis is available tro the as CENVAT Credit the issue is totally revenue neutral. Thus in view of the decision of Apex Court in case of Coca-Cola India Pvt Ltd [2007 (213) ELT 490 (SC) demand should not have been raised. ix. Demand upto 2011-12 i.e. of Rs 35,49,822/- is time barred as the show cause notice has been received 6 ST/85005-85006,85951/2015 on 1st January 2012, and extended period is not invokable if there was no intention to evade payment of tax. Commissioner (Appeal) has himself in para 10 of his order held that there was no intention to evade payment of tax abnd has dropped the penalty imposed under section 78. They rely on the decision of the Apex Court in case of Continental Foundation Jt Venture [2007 (216) ELT 177 (SC)] 4.0 Arguing for the revenue Shri Dilip Shinde Learned Authorized Representative submitted that in respect of the transactions under consideration, the amount actually paid in Indian Rupees for the services received and the amounts booked in the book of accounts differ. The amounts actually paid are higher than the amounts shown in the book of accounts. In terms of Section 67 of the Finance Act, 1994, the service tax should have been paid on the actual amounts remitted for the services received. He thus supported the order of Commissioner (Appeal) upholding the demand of service tax along with the interest. He further submitted adjudicating authority and Commissioner (Appeal) have relied upon the decision of Larger Bench of Tribunal in case of Jay Yushin [2000 (119) ELT 718 (T-LB)] to hold that revenue neutrality in case for non payment/ short payment of tax can be a valid defence.
7 ST/85005-85006,85951/2015 5.0 Have heard and considered the submissions made in appeal and during the course of argument. 6.0 Undisputed fact is that demand has been made in respect of the gross amount after taking into account the exchange rate fluctuation less the amounts booked in the book of accounts on the receipt of invoice for the services received. Appellants have paid the service tax on the amounts actually calculated by taking into account the prevalent exchange rate and the gross invoice value, on the date when invoice was received and expenditure booked in the books of account. 7.1 Section 66A, 67 & 68 of the Finance Act, 1994 as they existed at the relevant time reads as follows:
"66A. (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 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
8 ST/85005-85006,85951/2015 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:
Provided that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub- section shall not apply:
Provided further that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.
(2) Where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section.
Explanation 1.-- A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country.
Explanation 2.--Usual place of residence, in relation to a body corporate, means the place where it is incorporated or otherwise legally constituted.
67. (1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall,--
9 ST/85005-85006,85951/2015
(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) "money" includes any currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance and other 10 ST/85005-85006,85951/2015 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 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."
68. 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 prescribed.
Provided that-
i. in relation to services provided by a clearing and forwarding agent, every person who engages a clearing and forwarding agent and by whom remuneration or commission (by whatever name called) is paid for such services to the said agent for the period commencing on and from the 16th day of July, 1997 and ending with the 16th day of October, 1998; or ii. in relation to services provided by goods transport operator, every person who pays or is liable to pay the freight either himself or through his agent for the transportation of goods by road in a goods carriage for the period commencing on and from the 16th day of November, 1997 and ending with the 2nd day of June, 1998, shall be deemed to be a person liable to pay service tax, for such services 11 ST/85005-85006,85951/2015 provided to him, to the credit of the Central Government.
(2) Notwithstanding anything contained in sub-section (1), in respect of any taxable service notified by the Central Govt. in the Official Gazette, the service tax thereon shall paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.
7.2 Rule 6(1) of the Service Tax Rules, 1994 as it existed at the relevant time is reproduced below:
6. Payment of service tax (1) The service tax shall be paid to the credit of the Central Government,-
(i) by the 6th day of the month, if the duty is deposited electronically through internet banking; and
(ii) by the 5th day of the month, in any other case, immediately following the calendar month in which the service is deemed to be provided as per the rules framed in this regard:
Provided that where the assessee is an individual or proprietary firm or partnership firm the service tax shall be paid to the credit of the Central Government by the 6th day of the month if the duty is deposited electronically through internet banking, or, in any other case, the 5th day of the month, as the case may be, immediately following the quarter in which the service is deemed to be provided as per the rules framed in this regard :
12 ST/85005-85006,85951/2015 Provided further that the service tax on the service deemed to be provided in the month of March, or the quarter ending in March, as the case may be, shall be paid to the credit of the Central Government by the 31st day of March of the calendar year.
Provided also that in case of such individuals and partnership firms whose aggregate value of taxable services provided from one or more premises is fifty lakh rupees or less in the previous financial year, the service provider shall have the option to pay tax on taxable services provided or agreed to be provided by him up to a total of rupees fifty lakhs in the current financial year, by the dates specified in this sub-rule with respect to the month or quarter, as the case may be, in which payment is received. 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" [This explanation was inserted vide Service Tax (Second Amendment) Rule, 2008 wef 10.05.2008 and was omitted by Service Tax (Amendment)Rules, 2011 wef 01.04.2011] 8.0 Accounting Standards issued by the Accounting Standard Board within the Institute of Chartered Accountants of India, provide the manner of accounting 13 ST/85005-85006,85951/2015 and reporting the transactions undertaken by a business entity. Accounting Standard-11 (AS-11) deals with "The Effects of Changes in Foreign Exchange Rates".
"Initial Recognition
8. A foreign currency transaction is a transaction which is denominated in or requires settlement in a foreign currency, including transactions arising when an enterprise either:
(a) buys or sells goods or services whose price is denominated in a foreign currency;
(b) borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency;
(c) becomes a party to an unperformed forward exchange contract; or
(d) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency.
9. A foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.
10. For practical reasons, a rate that approximates the actual rate at the date of the transaction is often used, for example, an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. However, if exchange rates fluctuate significantly, the use of the average rate for a period is unreliable.
Recognition of Exchange Differences
13. Exchange differences arising on the settlement of monetary items or on reporting an enterprise's monetary 14 ST/85005-85006,85951/2015 items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognised as income or as expenses in the period in which they arise, with the exception of exchange differences dealt with in accordance with paragraph 15.
14. An exchange difference results when there is a change in the exchange rate between the transaction date and the date of settlement of any monetary items arising from a foreign currency transaction. When the transaction is settled within the same accounting period as that in which it occurred, all the exchange difference is recognised in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognised in each intervening period up to the period of settlement is determined by the change in exchange rates during that period. Tax Effects of Exchange Differences
35. Gains and losses on foreign currency transactions and exchange differences arising on the translation of the financial statements of foreign operations may have associated tax effects which are accounted for in accordance with AS 22, Accounting for Taxes on Income." 9.0 The service tax is levied on the taxable service at the rate specified under Section 66 of the Finance Act, 1994, and service provider is person responsible for payment of tax. In certain category of transactions in respect of the taxable service tax cannot be paid by/ recovered from the provider of the taxable service Section 66A, provides for payment/ recovery of tax from 15 ST/85005-85006,85951/2015 the recipient of the taxable service. In both the cases whether in case of payment of tax by the provider of the service or by the recipient of the service the taxable event is provision of the taxable service. Till the issuance of the Point of Taxation Rules, 2011, there was no specific manner provided for determining the point of taxation of services, i.e. the date and time on which the assessable value for determination of tax payable would have been determined. The proxy used for such determination were made in case i. were advance payments were received the date of receipt of advance for provision of services; ii. the date of actual provision of service if it was determinable;
iii. the date of issuance of invoice by the service provider in respect of the service provided. Thus the point of determination of value for service provided was sought to be kept closest to the date of provisioning of service. However to facilitate the payment of Service Tax being a new levy, it was provided that tax should be deposited by the service provider upon the receipt of payment from the service recipient, and if the entire payment against the invoice, was not received by the service provider in one go in one 16 ST/85005-85006,85951/2015 tax period, he was allowed to pay service tax only to the extent of payment received during that tax period. 10.1 In case of payment of service tax on reverse charge basis by the service recipient, the tax was required to be paid by him on the services received on the taxable value determined as per the invoice raised by the service provider. He was not receiver of the payment against the service but was required to make the payment of service tax in respect of the taxable services received. However the tax was to be paid on the value of taxable service received as determined by the service provider at the time of providing the service. Thus the condition of making the payment for service, could not have been the condition for payment of service tax. 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 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 17 ST/85005-85006,85951/2015 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"
10.2 At the time of making the amendment it has been clarified vide D O F No 334/1/2008 dated 29.02.2008 (Para ) as follows:
"6. TRANSACTIONS BETWEEN ASSOCIATED ENTERPRISES:
6.1 Service tax is levied at the rate of 12% of the value of taxable services (section 66). Section 67 pertaining to valuation of taxable service for charging service tax states that value shall be the gross amount charged for the service provided or to be provided and includes book adjustment. As per rule 6 of the Service Tax Rules, 1994, service tax is required to be paid only after receipt of the payment.
6.2 It has been brought to the notice that the provision requiring payment of service tax after receipt of payment are used for tax avoidance especially when the transaction is between associated enterprises. There have been instances wherein service tax has not been paid on the ground of non-receipt of payment even though 12 the transaction has been recognized as revenue/expenditure in the statement of profit and loss account for the purpose of determining corporate tax liability.
6.3 As an anti-avoidance measure, it is proposed to clarify that service tax is leviable on taxable services provided by the person liable to pay service tax even 18 ST/85005-85006,85951/2015 if the amount is not actually received, but the amount is credited or debited in the books of account of the service provider. In other words, service tax is required to be paid after receipt of payment or crediting/debiting of the amount in the books of accounts, whichever is earlier. However, this provision is restricted to transaction between associated enterprises. This provision shall also apply to service tax payable under reverse charge method (Section 66A) as taxable services received from associated enterprises. For this purpose section 67 and rule 6(1) are being amended.
6.4 The term 'associated enterprise' has the same meaning as assigned to it in section 92A of the Income Tax Act, 1961. It is a relative concept i.e. an enterprise is an associated enterprise when it is viewed in relation to other enterprises. This concept is used in the Income Tax Act for applying transfer pricing provisions. An enterprise which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise is considered as associated enterprise. It also covers an enterprise in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.
6.5 Section 92A(2) of the Income Tax Act specifies various situations under which two enterprises shall be deemed to be associated enterprises. Enterprise means a person who is engaged in the provision of any services of any kind. For details, relevant provisions of Income Tax Act may be referred to."
19 ST/85005-85006,85951/2015 10.3 In order in appeal, Commissioner (Appeal) have brushed aside the clarification, stating that the said clarification has been issued as anti avoidance measure. For this he has taken support of the decision in case of SIFY Technologies [2011 (21) STR 252 (T-Chennai)]. 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 is view is also in line with AS-11 issued by the Accounting Standard Board of ICAI. 10.4 Any other view would not be incorrect but also against the basic scheme of Service Tax Law, and would be 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 20 ST/85005-85006,85951/2015 thereby will reduce the tax payable. In our view the such tax arbitrage cannot be 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. 11.1 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."
11.2 Thus by insertion of the said section, intention of legislature for laying down the date for determination of 21 ST/85005-85006,85951/2015 taxable value and tax incidence, on the date of providing the service or when the service has been agreed to be provided has been made crystal clear. In a way the determination of taxable value and tax incidence has been totally delinked from the date of payment of tax. 12.0 During the course of arguments learned Chartered accountant has relied upon number of decisions in his favour. We have no quarrel with any of the prepositions laid down by the said decisions. But we will observe that none of this decision has dealt with the subject in dispute and the said decisions can be clearly distinguished from the facts in hand. Since by analysis of law we do not find the order of Commissioner (Appeal) sustainable on merit we are not dealing with other issues such as limitation raised and other contentions raised by the appellant.
13.0 Appeals filed by the Appellant are allowed.
(Pronounced in court) (Dr. D.M. Misra) (Sanjiv Srivastava) Member (Judicial) Member (Technical) tvu