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2015 (11) TMI 106 - CESTAT MUMBAI

2015 (11) TMI 106 - CESTAT MUMBAI - 2016 (42) S.T.R. 452 (Tri. - Mumbai) - Valuation - Section 67 - Associated enterprises - lease rent equalisation shown in Balance sheet - Held that:- General rule in case of associated enterprises is that even a book adjustment or any credit or debit entry in any account by whatever name called in the books of accounts of the Service Provider is equated with receipt of 'the gross amount charged' by the Service Provider to the service Recipient. This method, ho .....

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lause (a) of the explanation to section 67 to include any amount that is payable for the taxable services provided or to be provided. - Lease rent equalisation is only an entry made in the balance sheet. But the question is whether it is an amount 'payable' for it to constitute 'consideration' for the services rendered by the appellant. For this purpose, the appellants have relied upon Accounting Standards. The appellants justify that there is a specific Accounting Standard for operating lea .....

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elied upon by the Ld. Sp. Counsel and the Commissioner concludes that the lease rent equalisation is an 'income', and chargeable to service tax as the gross amount received by the appellants. - The amount shown in the balance sheet is not an 'income' for the purposes of computing Tax under the Income Tax Act. In the result it is also not a 'payment' actually received or receivable, and therefore neither 'consideration' nor the 'gross amount charged' in terms of clauses (a) and (c) respectfully o .....

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ingh, Spl. Counsel ORDER Per: M V Ravindran: An interesting issue arises in the present case on the meaning of the expression "gross consideration" appearing in section 67 of Chapter 5 of the Finance Act, 1994. By the impugned order the Commissioner has confirmed the demand for ₹ 598,98,62,000/- for the period 1.4.2008 to 31.3.2013 with penalty of the like amount under section 78 of the Act and further penalty of ₹ 5,000/- and ₹ 10,000/- for the Financial Years 2008-1 .....

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assive wireless telecom infrastructure' was transferred to the appellant company. 2.2 On 15.3.2009, RCOM and appellant entered into an MOU whereby the appellant granted RCOM an indefeasible right to use 80% of the total capacity of its optic fibre cable network for 10 years. The charges payable in the form of annual rent, by RCOM to the appellant are given in Schedule-I to the MOU which is reproduced as under:- FINANCIAL YEAR AS PER AGREEMENT 2008-09 10 2009-10 12 2010-11 12 2011-12 12 2012- .....

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appellant that, however, in the books of account maintained as per the Accounting Standards AS-19 relevant to operating leases, what has been recorded as income, is the amount actually received in each of the first 5 years which is the period relevant to the present appeal. The appellant claims that this actual income has been offered for tax and accepted as their income for the purposes of the Income Tax Act, 1961. At the same time, in terms of AS-19, the appellant has shown an amount under th .....

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e Tax on the amount of rent actually received during each financial year from 2008 to 2013 and have continued to pay Service Tax on the higher amounts i.e. ₹ 2,222 Crores actually received/receivable during the years 2013-14 and 2014-15. 2.6 Investigations started on the basis that Service Tax ought to have been paid by the appellant on the average of the total consideration for 10 years under the MOU in each Financial Year and therefore a Show Cause notice was issued calling upon the appe .....

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that as per AS19 the amount shown towards lease rent equalisation was ₹ 903 Crores for the first year and thereafter ₹ 1,141 Crores for each of the nine subsequent years. This is because the asset has a longer life and since the actual expenses in relation to the asset are booked each year, a notional value is shown to balance both sides in the balance sheet regardless of the actual income which is received from the use of the asset which in turn is based on the contract between the .....

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ss on a straight line basis over the lease term, unless another systematic basis is more representative of the time pattern in which benefit derived from the use of the leased asset is diminished. 41. Costs, including depreciation, incurred in earning the lease income are recognized as an expense. Lease income (excluding receipts for services provided such as insurance and maintenance) is recognized in the statement of profit and loss on a straight line basis over the lease term even if the rece .....

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1961. It was submitted that in Collector vs Dai-Ichi Karkaria Ltd., 1999 (112) ELT 353 the Hon'ble Supreme Court accepted the accounting standards and held that the Indian Institute of Chartered Accountants is an authoritative body in the matter of laying down accountancy standards. The same AS19 standards were also followed by the Hon'ble in Association of Leasing and Financial Service Co vs Union of India, 2010 (20) STR 417. While conceding that the decision of Income Tax Appellate Tri .....

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income for the appellants and therefore does not constitute 'gross consideration' within the meaning of section 67(1) of the Act. It was emphasized that before applying the definition of 'gross amount charged' in explanation (c) to Section 67, it is first necessary to ascertain whether the same constitutes consideration under explanation (a). Consequently it is contended that no service tax is payable on the notional lease rent equalisation. It was alternatively submitted that wi .....

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o 14% as against a lower rate of 10%/12% in the previous years. On limitation, it was submitted that there was no suppression, or wilful mis-statement since full disclosure has been made to the department from the beginning and the audit objection/report was erroneous. 6. The ld. Sp. Counsel took us through Rule 6 of the Service Tax Rules and submitted that in terms of explanation to sub-rule (1) where the transaction of taxable service is with any associated enterprise, any payment received tow .....

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, 1993 (66) ELT 37 to show that the words which are not defined must be given a meaning based on commercial parlance or the common understanding and there is no room for intendment. He also relies on the decision of the Hon'ble Tribunal in CCE vs Steel Industries Kerala Ltd., 2005 (188) ELT 33, to support his submission that disclosure in the balance sheet cannot impute knowledge to the department, therefore extended period of limitation can be invoked. 7. We have carefully considered the su .....

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nt included in the definition of 'gross amount charged' contained in clause (c) of the Explanation to section 67 of the Act. The other modes of payment are by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes. To qualify as 'gross amount charged' there must first be a payment. It is this payment which must be in the nature of a consideration for the Service. The word 'consideration' has been defined in clause (a) o .....

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tion' for the services rendered by the appellant. For this purpose, the appellants have relied upon Accounting Standards. The appellants justify that there is a specific Accounting Standard for operating leases, which is AS19. In order to understand the meaning of the lease rent accounting recourse can be had to AS19. Such an approach has also been followed by the Hon'ble Supreme Court in Dai-Ichi Karkaria (supra) and Association of Leasing and Financial Service Co vs Union of India (sup .....

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