Custom, Excise & Service Tax Tribunal
General Motors (I) Pvt. Ltd vs Pune I on 4 August, 2015
IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
WEST ZONAL BENCH AT MUMBAI
APPEAL NOS: ST/85822 & 85823/2013
[Arising out of Order-in-Original No: 31-32/ST/RKS/P-I/2012 dated 5th November, 2012 passed by the Commissioner of Central Excise, Pune I.]
For approval and signature:
Honble Shri M V Ravindran, Member (Judicial)
Honble Shri C J Mathew, Member (Technical)
1.
Whether Press Reporters may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?
:
No
2.
Whether it should be released under Rule 27 of CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
:
Yes
3.
Whether Their Lordships wish to see the fair copy of the Order?
:
Seen
4.
Whether Order is to be circulated to the Departmental authorities?
:
Yes
General Motors (I) Pvt. Ltd.
Appellant
Vs
Commissioner of Central Excise
Pune I
Respondent
Appearance:
Shri Badri Narayanan, Advocate for the appellant Shri K.S. Mishra, Additional Commissioner (AR) for the respondent CORAM:
Honble Shri M V Ravindran, Member (Judicial) Honble Shri C J Mathew, Member (Technical) Date of hearing: 04/08/2015 Date of decision: 08/09/2015 ORDER NO: ____________________________ Per: C J Mathew:
This proceeding takes up two appeals filed by M/s General Motors (I) Pvt Ltd arising from a common order-in-original relating to two show cause notices for two periods viz., from April 2009 to June 2010 and from July 2010 to December 2011. The impugned order no. 31-32/ST/RKS/P-I/2012 dated 5th November 2012 of Commissioner of Central Excise, Pune I has confirmed tax of ` 3,26,83,401 and ` 6,87,98,709 respectively while imposing penalty under section 78 of Finance Act, 1994 for the first demand and under section 76 of Finance Act, 1994 in the second demand besides imposition of penalty under section 77 of Finance Act, 1994 in both.
2. The appellant, a subsidiary of M.s General Motors Corporation, USA, is a manufacturer of vehicles and, for the production of Spark (M-200) and Beat (M-300), has contracted to receive technical know-how under agreements with M/s General Motors Daewoo Automotive Technologies (now known as General Motors Korea) and M/s General Motors Global Technology Operations, both also being subsidiaries of M/s General Motors Corporation. These are, therefore, associated enterprises of the appellant who provide intellectual property service. As the service-providers are based outside India, it devolves on the appellant to discharge tax liability under reverse charge mechanism in accordance with section 66A of Finance Act, 1994. For the period from April 2009 to June 2010, the appellant paid tax of ` 73,16,277 and Rs 79,03,346 as well as R&D cess of ` 71,30,045 and ` 76,73.150 for the two models. For the period from July 2010 to December 2011 the appellant paid ` 1,23,58,700 and ` 2,22,61,151 as well as R&D cess of ` 1,19,73,073 as ` 2,14,95,302 for the two models. The differential tax demanded in the show cause notice was ` 87,36,601 and ` 87,27,177 for the earlier period and ` 1,25,21,749 and ` 2,16,57,109 for the later period. We would like to note here that the two notices refer to annexures in which the summary table indicates tax recovery to be limited to ` 26,60,583 for the earlier period and ` 7,10,483 for the second period and which is at variance with the specific demands quantified in the body of the show cause notice. Surprisingly, the impugned order also refers to the very same annexures and we observe attendant discordance with the demand crystallized by the original authority. Such glaring inconsistencies are not seemly in adjudication proceedings.
3. The original authority has relied upon the Explanation in Rule 6 of Service Tax Rules, 1994, specifying the manner in which value of taxable service is to be computed when service-provider is an associated enterprise, to arrive at the conclusion that the monthly accounting entries relating to royalty in the books of the appellant are the consideration which is liable to be taxed by the stipulated date of the following month. The original authority had held that there was a short-levy at the end of each month since Explanation to Rule 6 required the inclusion of debit/credit of any amount relating to royalty in any account, whether called suspense or otherwise, in taxable consideration where the transaction is between two associate enterprises for determining tax liability.
4. The appellant contends that, in doing so, the original authority has chosen to disregard the fundamental fact that the entries in their books are provisional and solely for the purpose of furnishing Management Information System (MIS) reports to the holding company which are reversed at the time of the final entry at the end of each quarter once the net selling price as well as other details relevant to calculation of dues to the suppliers of know-how are made available. It is further contended that the manner and schedule of payment of dues to suppliers of know-how are embodied in the agreements with the said suppliers. Moreover, the appellant is aggrieved that the original authority has not accorded exemption to the extent of R&D cess available to them. In sum, the claim of the appellant is that the tax has been demanded without considering the actual amount paid to service provider, the contracted frequency of payment and the eligibility for exemption.
5. According to the learned Counsel for the appellant, it would appear that the intent in the deeming provision of Rule 6 is limited to debiting the account of the supplier in the books of the recipient for services rendered by associated enterprises and that such addition is mandated only in conjunction with actual payment if such accounting entries have been made. It is his submission that such inclusion is not contemplated except as a supplement to payments made. Other submissions in the appeal memorandum were also elaborated upon. The learned Departmental Representative reiterated the provisions of the statute relied upon by the original authority.
6. We have given careful consideration to the grounds of appeal and the submissions made by the two sides. The issue in dispute, as we see it, are (i) the point at which the tax liability crystallizes in the peculiar circumstances of the service provided to the appellant and (ii) the relevance of the entries made in the books of accounts of the appellant in valuation of taxable service. Before we proceed to record our findings on these two issues, the nature of the service and the accounting system needs to be articulated for a proper appreciation of the dispute.
7. The appellant being a manufacturer of vehicles is partially dependent on technical know-how from abroad for the production of Spark and Beat models as embodied in the agreements with the two foreign subsidiaries of M/s General Motors Corporation. It is unarguable that, without the entirety of the technical know-how, the very first vehicle cannot roll out of the assembly line. Hence the intellectual property is made available to the appellant in totality before commencement of manufacture. That service, however, cannot be attributed entirely to the first vehicle because the production of all subsequent vehicles too depend on the very same technical know-how. The appellant will cease to be entitled to produce vehicles using that know-how with the termination of the agreement. Therefore, the service can be said to subsist as long as the owner of the technical know-how allows it be used in the production of the specified models. Though the know-how is continuously available to the appellant, its usage is limited to each unit of production; the consideration thereof is relatable to the production and sale of each unit so produced. This is the special circumstance that is critical for determining the taxable event as laid down in Finance Act, 1994 neither is it a one-time supply nor a continuous supply but utilized every time a vehicle is on the assembly line.
8. The learned Counsel for the appellant has made a lengthy submission to present the case relating to computation of value of taxable service in terms of Explanation to Rule 6. Before we take up that in detail, we feel that the resolution of the dispute can be furthered only with a clearer understanding of accounting principles and systems. This is unavoidable because the statutory definition relevant to specific situations such as that of the appellant explicitly refers to inclusion of book entries for valuation of the taxable service effective from 10th May 2008 with insertion of Explanation to Rule 6 of Service Tax Rules, 1994. Double-entry book-keeping is based on three principles that require each and every commercial transaction to have a debit and credit effect in the journal. In the long run, every commercial transaction should culminate in enhancement or depletion of the cash or bank balance but as accounting periods are of limited length, owing to statutory or investor requirements, such enhancement or depletion could impact debtors or creditors balances too in the short-term. Consequently, every contracted transaction may well comprise a series of such double entries with their own distinct debits and credits. The aspect to be borne in mind is that accounting entries are mere reflections of the stages that the prudent accountant considers to be important enough to be recorded at any given point in time with the financial impact of the transaction revealing itself at a much later point in time. To label the last entry as the only one intended by the legislature without a specific articulation to that effect would not be a proper interpretation of the provisions. The booking of royalty every month has a credit and debit entry just as the reversal at the end of each quarter, as well as the fresh booking at the end of the quarter, does there are, thus, three debits and three credits for the royalty over a quarter. The existence of both debit and credit entry for royalty dues for each month is, therefore, unquestionable. Simply put, debit and credit are mutually exclusive terms but used in conjunction by the accountant.
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.
17. Adjudicating authorities are not, any longer, required to appropriate taxes paid by assessees. Such appropriation in adjudication orders are a relic of the times that pre-date self-assessment when amounts deposited during investigation and subsequent proceedings, were required to be appropriated in statutory proceedings before being accounted in the Consolidated Fund of India. The provisions of section 73 of Finance Act, 1994 are applicable in, and limited to, short-levy and non-levy; they do not extend to taxes already paid. Tax already paid into the credit of Consolidated Fund of India does not require another appropriation. Adjudication that resort to appropriation, such as the present one, manifest their lack of clarity about the actual dues recoverable; without the convenient cover of appropriation, adjudicating authority would have had to focus on computation of taxes liable to be recovered. Had that been done, the impugned order would have been appropriately precise.
18. Consequently, we sustain the finding in the impugned order that tax liability of the appellant arises each month for the amount booked, even provisionally, as royalty in their accounts, but with the deductions of amounts paid as R&D cess, (as recorded by us in paragraph no. 14), if any. We set aside the demand for tax in view of findings supra regarding discharge of tax liability and direct the jurisdictional Commissioner to compute and intimate the appellant, within thirty days of the receipt of this order, of any interest that arises from delayed payment of duty. In the circumstances of discharge of tax liability by the appellant, there is no justification to invoke the extended period and consequent penal provisions under section 78 of Finance Act, 1994. Penalty under section 77 of Finance Act, 1994 is also set aside. The penalty under section 76 of Finance Act, 1994 is set aside as there is no tax due on the date of notice. These appeals are accordingly disposed off.
(Pronounced in Court on 08/09/2015) (M V Ravindran) Member (Judicial) (C J Mathew) Member (Technical) */as 17