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2016 (3) TMI 808 - CESTAT MUMBAI

2016 (3) TMI 808 - CESTAT MUMBAI - TMI - Related party transactions - Whether the respondents are associated enterprises in terms of Section 92A of the Income Tax Act, 1961 or not - Held that:- on the basis of the definition of associated enterprises as per Section 92A ibid, the respondent is an associate enterprises of the service recipient. The respondent is managing and controlling the mutual fund. Therefore, it is clearly covered under the definition of associate enterprises. On the issue of .....

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explanation, the moment first time any entry is made irrespective whether it is provisional or final entry the same will be covered under the debit entries as specified under the explanation. Therefore there is no scope in the said explanation to give different treatment to the provisional entries or final entry. So, once debit entries were made even though provisional basis and subsequently final entries are made, it is only the adjustment in the books of account and for this reason the entrie .....

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terest and there is no dispute regarding the payment of service tax. As the issue involved is in the nature of interpretation of valuation section and the penal provisions are invoked only for non-payment or short payment of service tax. Therefore, it is only for demand of interest and the penalties under Section 76 & 77 are not imposable. - Decided partly in favour of the Revenue - Appeal No. ST/89440/2013, ST/CO/91022/2014 - A/85894-85895/16/SMB - Dated:- 19-2-2016 - Ramesh Nair, Member (J) Fo .....

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1994. During the course of audit, it was revealed that the respondent acts as an Investment Manager to M/s. Deutsche Mutual Fund and paid service tax on the fees received from M/s. Deutsche Mutual Fund. The financial accounts revealed that the investment fees were received from M/s. Deutsche Mutual Fund as related party transaction and M/s. Deutsche Bank AG as the ultimate holding Company. The said investment fees were credited/paid to the account of respondent not later than the last day of the .....

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y 2008 onwards on which interest was payable by them. The show cause notice was adjudicated and the adjudicating authority confirmed the demand of interest and imposed the penalties under Section 76 and 77 of the Act. Aggrieved by the adjudication, order the respondents filed appeal before the Commissioner (Appeals), who allowed the appeal on the ground that though the provisional entry was made in the same was not reflected the final amount to be paid. The final entry passed in the subsequent m .....

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#39; as provided in the Explanation to Section 67 of the Finance Act, 1994 does not come into play. Being aggrieved by the order of the Ld. Commissioner (Appeals) Revenue filed this appeal. 3. Shri B. Kumar Iyer, Ld. Superintendent (A.R.) appearing on behalf of the Revenue, reiterating the grounds of appeal submits that as regard the status of Associate Enterprises', the Ld. Commissioner while holding, that the respondent are not Associate Enterprises, has not given any reasoning. He submits .....

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l due according to the date of such entries. As per the respondent's contention the final entry was made in the next month, therefore, service tax becomes due for the next month and not on the date of provisional entries. This does not hold water for the reason that explanation to Section 67 does not make any distinction between the provisional entry or final entry. In this position there is a delay in payment of service tax on the part of the respondent. Hence, interest demanded and the adj .....

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nal and only for the purpose of management information system. The final entries are made in the next month and according to which the invoices were raised. In same transaction, even the amount of final entry and amount of the invoices are varying with the provisional entries. Therefore, there is no significance of provisional entries. The same cannot be considered for point of taxation. 5. I have carefully considered the submissions made by both the sides. The issue to be decided are - (i) Whet .....

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ard to the arm's length price. Explanation.- For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price. (2) Where in an international transaction or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense i .....

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ied domestic transaction shall be computed having regard to the arm's length price. (3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or sub-section (2A) or the determination of the allowance for any expense or interest under sub-section (1) or sub-section (2A), or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2) or sub-section (2A), has the effect of r .....

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hrough one or more intermediaries, in the management or control or capital of the other enterprise; or (b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. (2) For the purposes of sub-section (1), two enterprises shall be .....

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he book value of the total assets of the other enterprise; or (d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or (e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or (f) more than half of the directors or members of the governing board, or one or more of the executive direct .....

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cess, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or (h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or (i) the goods or articles manufa .....

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prise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or (l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or (m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed. On the basis of .....

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regarding their status of associate enterprises. The Ld. Commissioner while holding that the respondent is not on associate enterprises' not given any finding. Therefore I am of the considered view that the respondent is an associate enterprises' of M/s. Deutsche Mutual Fund as the ultimate holding company. On the issue of point of taxation the relevant Section 67 of the Finance Act 1994 is reproduced below: Section 67 "Valuation of taxable services for charging service tax.- (1) Su .....

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ax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. (2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.(3) The gross amount char .....

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sory note, letter of credit, draft, pay order, travellors cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value; (c) "gross amount charged" includes 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 .....

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person liable to pay service tax, where the transaction of taxable service is with any associate enterprise. This explanation has vide scope and it applies to even those transaction which are booked under suspense account' or even any other name. In the present case, the so called provisional entries were made with a specific description of transaction. The explanation does not make any distinction between the provisional entries and the final entries made subsequently. As per the plain rea .....

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ally held that there is no difference between the provisional entry or final entry. The relevant paras of the order of the judgment are reproduced below: 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, .....

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tion of consideration with accuracy should be the criteria for determining the taxable event. The certainty and clarify 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 Explan .....

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month determines the point at which the tax is liable to be paid. 10. The learned Counsel for the appellant would submit 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 .....

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the actual destination of the service and such utilization becomes the taxable point with tax liability to be discharged 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 roya .....

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added for the months where actual payments have not been made. That argument will not suffice in view of the circumstances 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 effec .....

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taxation. The deeming effect of the Explanation has to be applied wherever accounting entries relating to the service 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 inde .....

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as the inclusion of debit and credit is a clear pointer to the intent of not allowing books of accounts to be used for 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 rec .....

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m 1 st April 2012. And since this reference to debit after that date concerns itself exclusively with "reverse charge" 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 th .....

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be taxed by the fifth of the following month. 14. 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 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 "r .....

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ugh belatedly in some months. A test computation for July to September 209 and April to June 2011, relating to which 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. Reven .....

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the learned Counsel to the provisions of the Income Tax Act, 1961 and the decisions of the Hon'ble Supreme Court 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 re Jay Y .....

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