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Thermax Instrumentation Ltd. Versus Commissioner of Central Excise, Pune-I

2015 (12) TMI 1222 - CESTAT MUMBAI

Demand of service tax on advances received - whether advances received by the appellant from their customers for contracts executed for customers are leviable to Service Tax - Held that:- Account books of the appellant indicate that the advance received is shown as current liability and not as income towards sale/provision of service. Therefore it is not towards value of services provided. The advance is proportionately transferred to sale/confiscation of service in the books as and when the app .....

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s not show the advance as an income, not having complete dominion over the amount and therefore the same cannot be treated as a consideration for any service provided. Therefore the findings lack appreciation of the complete facts and evidences. - advance is not received towards taxable service. The advance is the customer's obligation as his part of the mutual commitment between the two parties to honour the terms of the contract.

In respect of some customers, the invoices are not is .....

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ant have paid service tax on the unadjusted advances in July 2011. - impugned order has no merits and is liable to be set aside - Commissioner, in the adjudication order, did not dispute the fact that the service tax was paid periodically on invoice value and that the advance was adjusted in each invoice reducing the outstanding amount correspondingly. The Commissioner only determined that service tax is payable on the advances. We have already expressed our view that the service tax was not req .....

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Dy. Commissioner (AR) ORDER Per P S Pruthi Stay application and Appeal are taken up together in terms of Tribunal order No. M/1685/13/CSTB/C-I dated 12/11/2013. They arise from Order-in-Original dated 26/9/2011 passed by the Commissioner of Customs, Pune. 2. The issue which arises for our consideration is whether advances received by the appellant from their customers for contracts executed for customers are leviable to Service Tax. 3. The appellant undertake Erection, Installation and Commissi .....

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are made in a progressive manner during the execution of the contract. The amount of advance given by the customer is reduced in proportion to the value of work completed as shown in the invoice raised upto any stage of work executed as per the terms of the contract. The amount of bank guarantee provided by the appellant is correspondingly reduced in proportion to the amount of advance adjusted by them. According to the appellant, service tax is paid on the invoice value on accrual basis, that i .....

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ordered to be paid in terms of Section 75 of the Finance Act, 1994, penalties were also imposed under Sections 77 and 78 of the Finance Act, 1994. 4. Heard both sides and considered their submissions. 5. Ld. Advocate emphasized that the so called advance is only in the nature of security deposit to ensure contractual commitments. The advance is shown as current liability in the books of accounts and not shown as income. It is provisionally transferred to sale / consideration for service as and .....

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ommissioner has misinterpreted Section 67 (3) because this Section only requires to include any amount received towards taxable services. He relied on the Hon'ble Supreme Court Judgments in case of Commissioner of Income Tax Vs. Bijli Cottons Mills Private Ltd [1979 (1) SSC 496] and R.S. Joshi [1977 (4) SCC 98]. He submitted that the issue is one of interpretation. Therefore the show cause notice issued on 2/5/2011 is largely time barred as it covers the period 1/4/2006 to 31/3/2011. He also .....

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hes the linkage between the advance and the service provided. Therefore it is clearly leviable to service tax, being part of the gross amount received towards taxable services in terms of Section 65(105) and 67(3). He stated that the whole accounting exercise of actual payment of tax on invoice basis should be verified with professional assistance of a cost auditor. 7. We have carefully gone through the facts of the case and submissions made by both sides. The relevant clauses of one typical agr .....

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e his invoices. 11.1 ADVANCE PAYMENT 11.1.1 The Contractor shall deliver to the Owner a payment security in the form of a bank guarantee for 10% i.e. ₹ 80.50 lacs (Rupees Eighty Lacs Fifty Thousand Only) of the Contract price valid until the completion of Scope of Work ("payment security"). Upon receipt of the payment security, the Owner shall pay to the Contractor 10% of the Contract Price as an advance payment (Initial Advance") amount to ₹ 80.50 Lacs (Rupees Eighty .....

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ty payment is to be reduced in proportion to the amount of advance adjusted in the invoices of the contactors i.e. appellant. We also find from para 11.2 (shown below) of the agreement that the advance payment is made on mobilization of site by the appellant. We note that it is the normal procedure in such contracts to provide advance payment which helps the contractors to mobilize men/material to begin the work. Para 11.2 is reproduced below: 11.2 MILE STONE PAYMENTS FOR PROGRESS WORK: Upon mob .....

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tionate amount of advance received in terms of para 11.3 which is reproduced below: 11.3 BALANCE PAYMENT 11.3.1 The balance payment of 80% (Eighty Percent) of the Contract Price including all taxes, shall be paid on a pro rata basis as set out in a mutually agreed upon billing break up, through an irrevocable, inland, without recourse letter of credit payable on demand in Pune to be opened by the owner in favour of the Contractor ("Balance Payment Letter of Credit"). The value of Lette .....

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01 To, M/s. Madras Cements Limited R.R. Nagar Works, Virudhunagar Dist. L/C No.: 462030101300001 dated 10th May'10 Erection & Commissioning Work for the Captive Thermal Power Plant of 1X25 MW capacity at Madras Cements Ltd., R.R. Nagar Works. S.No. Descriptioin This Bills Amount (Rs.) 1 2 3 4 5 6 7 8 Value of work completed Add: Service Tax @10% Add: Education Cess @ 2% Add: S & H Cess @ 1% Total (1+2+4) Less: Advance Amount payable (5-6) Less TDS @2% on 2803959.48 3,105,160.00 310,5 .....

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8V w.e.f. 01.04.2006 Nature of Service: Erection & Commissioning For Thermax Infrastructure Ltd. Authorised Signatory REGD OFFICE: THERMAX HOUSE, 14 MUMBAI-PUNE ROAD, WAKDEWADI, PUNE 411 003, INDIA This specific invoice No. RAB 001 dated 20/12/2010 clearly indicates that the advance is deducted in each invoice from the value of invoice, which includes the service tax payable. It all goes goes to show that service tax is periodically paid on the value of service provided upto a particular sta .....

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vance, that is at the time of issue invoices on accrual basis whereas tax was to be paid on receipt of payment basis as per law existing during the relevant period. 8. Further, the account books of the appellant indicate that the advance received is shown as current liability and not as income towards sale/provision of service. Therefore it is not towards value of services provided. The advance is proportionately transferred to sale/confiscation of service in the books as and when the appellant .....

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the contract, and, therefore, it must come into existence at the making or conclusion of the contract. The thing given in that way must be given by the contracting party who gives it, as an earnest or token of goods faith, and as a guarantee that he will fulfill his contract, and subject to the terms that if, owing to his default, the contract goes off, it will be forfeited. K, on the other hand, the contract is fulfilled, an earnest may still serve a further purpose and operate by way of party .....

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Commissioner's findings seem to be based solely on the provisions of Section 67(3) of the Finance Act, 1994 which is as under: "The Gross amount charged for taxable service shall include any amount received towards taxable service before, during or after the provision of such service". The Commissioner has not interpreted the law correctly. As per above law, the gross amount charged shall include any amount received towards taxable service. In our considered view, the advance is n .....

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the appellants are also not contesting the said demand. As regards the interest of ₹ 2,76,359/- ordered to be recovered by the impugned order on delayed payment of service relating to the advance received, it is to be noted that during the relevant period the rate to tax applicable was rate of tax prevailing on the date of providing the service. Therefore, before the service was provided the appellants would have been in no position to know as to at what rate to pay the service tax. The se .....

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as been provided or agreed to be provided. Obviously, Section 67A would only have prospective applicability. Thus, to reiterate, as the advance received by the appellants has been adjusted in due course as and when the service was provided coupled with the fact that unless the service was provided the rate at which the service tax was to be paid would not be known, it is not possible difficult to sustain the order with regard to confirmation of the impugned interest. Reliance is also placed on t .....

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it is demonstrated by SCN that the levy was arrived treating advance receipt as measure of taxation resulting a levy of ₹ 3,15,253/- that shall not be approved to be taxed without service being provided. On the above reasoning, we dismiss the appeal of Revenue without accepting the reasoning given by the Ld. Commissioner (Appeals). We have shown above that service tax is paid on the total value of services provided periodically. And the advances are deducted from the total value which inc .....

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tatement of the appellant and take it that the Commissioner too does not dispute this fact. In any case it is on record now that the appellant have paid service tax on the unadjusted advances in July 2011. 10. Much as we may try to convince ourselves, we are unable to accept Ld AR's suggestion that the verification of accounts be referred to a cost auditor for the simple reason that such necessity does not flow from the Order of the Commissioner. There are no doubts expressed on this account .....

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s received from the customers during April 2006 to Mar 2011 in the manner we have discussed above. And service tax of ₹ 6.24 crores against unadjusted advances was paid in July 2011 because with the introduction of The Point of Taxation Rules 2011 with effect from June 2011, the method of payment of service tax on receipt basis was done away with and liability was fixed on accrual basis. The appellant paid this amount. Thus the entire demand had been paid. The High Court ordered the appell .....

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