SUBSIDY IS NOT INCLUDIBLE IN GROSS AMOUNT FOR PROVIDING TAXABLE SERVICES.

[Mr. M. GOVINDARAJAN]

                                A subsidy is an assistance paid to a business or economic sector.   Most of the subsidies are made by the Government to producers.  It is a benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy is usually given to remove some type of burden and is often considered to be in the interest of the public.   There are many forms of subsidies given out by the government, including welfare payments, housing loans, student loans and farm subsidies. For example, if a domestic industry, like farming, is struggling to survive in a highly competitive international industry with low prices, a government may give cash subsidies to farms so that they can sell at the low market price but still achieve financial gain.

                                The issue to be discussed in this article whether the receipt of subsidy by a service provider is liable to be included in the gross amount for providing taxable services with reference to decided case laws.

                                The Universal Service Obligation Fund (USFO) has been established by the Department of Telecommunications.  The implementation of USO related activities is carried out by the “eligible operators” as per the aforesaid Indian Telegraph (Amendment) Rules covering Basic Service Operators, Cellular Mobile Service Providers, Unified Access Services Licensees and Infrastructure Providers (IP-I). These Telecom Service providers are both public and private sector companies.

                        BSNL is also receiving USO Fund from Department of Telecom.  As per the National Telecom Policy 1999, the Government of India has to provide Villager Panchayat Telephone (‘VPT’ for short) to each and every village of the country.   As a part of this programme, BSNL has provided a number of VPTs in various part of the country.  Expenditure on maintenance and installation of these VPTs is high compared to telephones connections in urban and semi urban areas.   As such to compensate BSNL towards high maintenance cost incurred by BSNL for maintenance of the own BPTs and initial high capital expenditure Department of Telecom grants subsidy from USO Fund.

                        This reimbursement from the USO Fund is of the nature of compensation being received by BSNL for additional expenditure which the BSNL has to incur for maintenance and installation of VPTs services in rural areas.   The services provided through these VPTs are telephone services for which call charges are recovered along with service tax in case of STDVPTs.   There is no concession in the call charges made from these VPTs.

                        The Revenue was of the opinion to offset the losses by the service provider Department of Telecom is paying from USO Fund and this payment is nothing but income earned by BSNL on taxable services rendered in rural areas.   In Bathinda BSNL, during the course of audit of the records of BSNL, it was observed that BSNL had received subsidy from Central Government under Village Panchayat Scheme amounting to Rs.26,25,348/- for the last five years involving service tax of Rs.3,01,699/-  BSNL has not paid service tax due on the above said amount of subsidy of Rs.26,25,348/-.  The Revenue relied on Section 67(3) of Finance Act, 1994 which provides that the gross amount charged by a service provider shall include any amount received towards the taxable service before, during or after provisions of such service.   Explanation © in Section 67 provides that ‘gross amount charges’ included 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.  From the above definition the Revenue came to the conclusion that an amount of Rs.26,25,348/- received by BSNL as subsidy during the period 2005 – 06 to 2009 -10 appeared to be part of the gross value  and was to be included in taxable value and service tax amounting to Rs.3,01,699/- was payable by BSNL along with interest. 

                        Further the Revenue concluded that it appeared that BSNL had contravened the provisions of Section 67 and 68 of the Act inasmuch as:

1. They failed to credit to the account of the Government of India, the Service Tax (including Education Cess and Secondary & Higher Education Cess) leviable thereon within five days from the close of the month/quarter ion which services were rendered as required under Section 68 of the Act;
2. They also failed to furnish the correct value of the services to the Central Excise Officer, as per Sec. 67 of the Act.

The Revenue also was of the opinion that service tax under Section 73 was recoverable along with interest under Section 76 of the Act.   BSNL had deliberately avoided paying service tax on the gross value despite clear cut legal provisions and had willfully suppressed the said facts from the knowledge of the department with intention to evade payment of service tax on the gross value and the said facts came to the knowledge of the Department only during the audit of the records, otherwise this  could have remain undetected.  Show cause notice was issued to BSNL by the Deputy Commissioner demanding the service tax with interest and penalty under Section 76 and Section 78 of the Finance Act, 1994.  It is reiterated that the amount received from USO Fund is a subsidy received from Central Government of India.   There is no service provided by BSNL to Government of India in this regard.   Therefore question of payment of service tax on subsidy receipts does not arise.   The service tax is leviable only on a taxable service and not merely on an income/receipt of some payment by a service provider.

                        BSNL filed a reply to show cause notice in which it stated that service tax was not applicable on USO claim.  The Deputy Commissioner framed the question whether the subsidy amount received by the service provider from Central Government under Village Panchayat Scheme are part of gross amount charged by the service provider for providing taxable services or not. 

                        The Deputy Commissioner relied on the judgment of P&H High Court in ‘Commissioner of Central Excise, Chandigarh V. Nahar Industrial Enterprises Limited’ – 2010 (1) TMI 400 (HC)  in which the High Court held that the respondent assessee has received subsidy not on account of services rendered to Government of India but has received compensation on account of loss of interest, cost of insurances etc., incurred on account of maintenance of stock.   The Act of respondent cannot be called as rendering of services.  The Deputy Commissioner, in his order-in-original No. 20/ST/DC/SNG/2012, dated 30.03.2012 held that applying the ratio of judgment held by the Honourable P&H High Court, it is evident that the amount received by BSNL as subsidy are in nature of compensation for expenditure which the service provider have to incur for maintenance and installation of VPT services in rural areas and not for providing any taxable services to their ultimate customers.   He further held that the amount received by BSNL as subsidy under USO Fund are not includible in gross amount charged by them for providing taxable services.