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General Motors (I) Pvt. Ltd. Versus Commissioner of Central Excise Pune-I

2015 (9) TMI 1097 - CESTAT MUMBAI

Valuation of taxable service - associated enterprise - booking of royalty every month has a credit and debit entry just as the reversal at the end of each quarter - Intellectual property service - payment of royalty towards receipt of technical know-how service for manufacturing of Motor Vehicle - reverse charge mechanism - Held that:- 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 o .....

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he 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.

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 Ac .....

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ordcer-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 5 th 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 p .....

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re, 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 ₹ 79,03,346 as well as R&D cess of ₹ 71,30,045 and ₹ 76,73.150 for the two models. F .....

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recover 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 Explana .....

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e 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) repo .....

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&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 .....

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s. 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 manufactu .....

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nnot 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 lim .....

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ce 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 cleaner 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 10 th May 2008 with insertion of Explanation to Rule 6 of Service Tax Rules, 1994. .....

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tracted 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 articulati .....

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ed 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 .....

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ty 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 10 th May 2008 such payment was imbued with a more compreh .....

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it 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 "receipt 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 .....

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ged 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 th .....

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ances that led to insertion of the said Explanation as pointed out in circular of Central Board of Excise & Customs (334/1/2008-TRU dated 29 th 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 balance; 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 payme .....

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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 tha .....

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r 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 specia .....

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arge" 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 1 st 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 th .....

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arged 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, .....

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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 10 th 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 .....

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in re Commissioner of Income Tax v Ashokbhai Chimanbhai [(1965) 561 ITR 42 (SC)], Commissioner of Income Tax v Birla Gwalior (P) Ltd [ (1973) 89 ITR 266 (SC)], International Auto Ltd v Commissioner of Central Excise [2005 (183) ELT 239 (SC)] and Commissioner of Central Excise & Customs (Appeals) v Narayan Polyplast [2005 (179) ELT 20 (SC)] and that of the Tribunal in reJay Yuhshin v Commissioner of Central Excise [2000 (119) ELT 18 (T-LB)] do not come to the direct assistance of the appella .....

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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 appellant's 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 investigatio .....

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