No Service tax liability arise on loans and advances, if it is revealed in the audited balance sheet

[Bimal jain]

Dear Professional Colleague,

No Service tax liability arise on loans and advances, if it is revealed in the audited balance sheet

We are sharing with you an important judgment of Hon’ble CESTAT, Mumbai, in the case of Reliance Infratel Ltd. Vs. Commissioner of Service tax, Mumbai - II [2015 (4) TMI 129 - CESTAT MUMBAI] on the following issue:

Issue:

Whether Service tax liability can be arise on loans and advances, if it is revealed in the audited balance sheet?

Facts and background:

Reliance Infratel Ltd. (“the Appellant” or “the Company”) is a subsidiary of Reliance Communications Limited (“RCM”) (collectively referred to as “parties”) providing taxable service falling under Business Support Services. The Company was formed when RCM demerged the business of Telecom infrastructures and Telecom operating services into different entities and the business of Telecom infrastructure was demerged into the Appellant. ₹ 283/- crore were given by RCM to the Appellant towards the expenditure incurred by RCM even before the Appellant came into existence by way of expenses towards the initial setting up and also by way of payments made to vendors for supply of materials. Further, since the Telecom towers require huge investments the Appellant borrowed ₹ 1210/- crore from RCM during June, 2007 and September, 2007 as interest-free loan which was repaid/ returned by December 31, 2007.

Investigation of the Appellant was initiated on November 26, 2007 by the officers of Directorate General of Central Excise Intelligence (“DGCEI”) and it was alleged that the financial support given to Appellant by RCM in terms of the Master Service Agreement dated April 10, 2007 (“the Agreement”) was in the nature of advance for the taxable services rendered or to be rendered by the Appellant to RCM and is required to be set off against the bills that would be raised later by the Appellant on RCM.

Therefore, DGCEI issued a SCN demanding Service tax liability along with interest and penalty for the period from April 10, 2007 to March 31, 2008 which was confirmed by the Adjudicating Authority.

Being aggrieved the Appellant preferred an appeal before the Hon’ble Tribunal, Mumbai contending that the sum of ₹ 1, 493/- crores (“impugned amount”) received by the Appellant from RCM is a loan by way of Inter Corporate Deposits given to the Appellant.

Held:

The Hon’ble CESTAT, Mumbai held as under:

• The Agreement and the audited balance sheets of the parties does not lead to a conclusion that the impugned amount received by the Appellant was in nature of advances for the services to be rendered;
• Further, repayment of impugned amount is not afterthought as even prior to the investigations, on September 20, 2007 the Appellant had recorded and treated the amount as Inter Corporate Deposits in the half Yearly balance sheet;
• Audited Balance Sheet for the year ending March 31, 2008 of both the parties which are in the public domain show ₹ 1,210/- crore as a loan and not as consideration for any services rendered. Further, there is no dispute that the Appellant had repaid ₹ 1,210/- crore received from RCM during the same financial year;
• Amount of ₹ 283/- crore was given before the Appellant came into existence and the same was repaid during the same financial year, hence ₹ 283/- cannot be treated as a consideration received for the services to be rendered by the Appellant but it is a financial support given by RCM to the Appellant by way of loans. Further, both the parties being Public Limited Companies, have clearly indicated in their balance sheets that the amounts have been shown as received and loans repaid.
• Scrutiny of the balance sheets produced revealed that accounts of the parties do not indicate any co-relation in the repayment of the loan and receipt of the service charges by the Appellant.
• Invoices raised by the Appellant on RCM do not reflect adjustment of impugned amounts and the Appellant has discharged Service tax liability for the consideration received in respect of the invoices raised;
• In terms of Section 67 of the Finance Act, 1994, only payment made towards services provided can be brought under the ambit of consideration received and not any other amount.

Thus, the Hon’ble Tribunal allowed the appeal in favour of the Appellant and held that no Service tax liability arises on loans and advances if it is revealed in the audited balance sheet.

Hope the information will assist you in your Professional endeavors. In case of any query/ information, please do not hesitate to write back to us.

Thanks and Best Regards,

Bimal Jain

FCA, FCS, LLB, B.Com (Hons)

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