2015 (12) TMI CESTAT MUMBAI. Thermax Instrumentation Ltd. Versus Commissioner of Central Excise, Pune-I

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1 2015 (12) TMI CESTAT MUMBAI Thermax Instrumentation Ltd. Versus Commissioner of Central Excise, Pune-I No.- Application No. ST/S/114/12 Appeal No.ST/22/12 Dated.- December 2, 2015 P S Pruthi, Member (T) And Ramesh Nair, Member (J) For the Appellant : Shri L Badrinarayan, Adv. & Vinay Jain, CA For the Respondent : Shri D Nagvenkar, Addl. 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 Commissioning activity. They raise running bills/invoices on the customers for the services provided. To meet the contractual commitments by both sides, the customer is required to pay a certain amount, generally 10% of the contract value as an advance payment. The appellant are also required to give a counter bank guarantee of equal amount to the customers (referred to as payment security). The customer has lien over the bank guarantee till the completion of the contract. The payments for the services 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 is, on the 5th of the following month. Thus the tax is paid even before the receipt of consideration. Service tax is paid on the gross value including the proportionate advance which is deducted against every invoice raised. However, a show cause notice was issued on 2/5/2011, which culminated in the impugned order, in which it was held by the Ld. Co issio er that Ser i e Ta of 8, 8, 8, 8/- is payable on the advances received for the period April 2006 to March, Interest was also ordered to be paid in terms of

2 Section 75 of the Finance Act, 1994, penalties were also imposed under Sections 77 and 78 of the Finance Act, 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 when proportionate amount is deducted from the invoices raised on the customers. Ultimately the service tax is paid on the advances at the time of raising of invoices and therefore there is no liability to pay service tax again on the advances. According to him, in any case, advance is not received towards value of taxable services provided. He relied on the decisions in the case of Shri. Hanuman Cotton Mills and Ors. Vs. Tata Air Craft Limited [AIR 1970 SC It was also contended that the Commissioner 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 therefore contested imposition of penalties under Sections 77 and 78 relying on the cases offlyingman Air Courier (P) Ltd Vs. CCE, Jaipur [2004 (170) ELT 417 (T)]and CCE Vs. Gamma Consultancy (P) Limited [2006 (4) STR 591 (T)]. 6. Ld. A.R. appearing for Revenue reiterated the findings of the Commissioner. He drew our attention to one agreement dated 26/4/2010 entered into by the appellant with M/s. Madras Cements and stated that the fact of amount of advance being adjusted in the bills establishes 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 agreement/contract given in the appeal memo and referred by both sides during the hearing regarding the payment terms are reproduced below: 11. Payment Terms To facilitate Owner plan the funds allocation efficiently and release payments from time to time, the Contractor shall submit a detailed billing break up to the Owner in due course of time. This billing break up shall be discussed and approved by the

3 Owner and shall form the basis for opening the Letter of Credit and for the Contractor to raise his invoices ADVANCE PAYMENT The Contractor shall deliver to the Owner a payment security in the form of a a k guara tee for % i.e.. la s 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 Ad a e" a ou t to. La s (Rupees Eighty Lacs Fifty Thousand Only) The value of the Payment Security shall be reduced on a quarterly basis in proportion to the amount of advance adjusted in the invoices of the Contractor The payment Security will be reduced by the Bank Guarantee issuing Bank of such payment Security based on a letter that shall be issued by the Owner to Such Bank Guarantee issuing Bank authorizing the reduction of the value of the payment Security. We find from the agreement that it true that the security 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 mobilization of Site by one of the Mechanical Erection Sub-Contractor of the ai Co tra tor, the o er shall pa to the o tra tor a Mile Sto e Pa e t of Lacs (Rupees Eighty Lacs Fifty Thousand only). (Ten percent) of the Contract Price ["Mile Stone Payment"] Payment of the Mile Stone Payment shall be effected directly within three days from the date of submission of following documents. The agreement also provides for payment of service tax before deducting proportionate amount of advance received in terms of para 11.3 which is reproduced below: 11.3 BALANCE PAYMENT

4 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 Letter of Credit to be opened shall be as under: RE Particulars Amount Rs. Lacs 1 Contract Price Estimated Service and Education of Service Tax on the Contract Price 3 Total Contract value including estimated Service Tax and Cess thereon 4 Less: 10% initial advance payment received Less: 10% Mile Stone payment to be received L/C Value to be opened We have seen a sample invoice in the appeal memo as shown below Invoice Bill No. RAB 001 To, M/s. Madras Cements Limited R.R. Nagar Works, Virudhunagar Dist. L/C No.: 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 Value of work completed 3,105, Add: Service 310,516.00

5 3 4 Add: Education 2% Add: S & H 1% Total (1+2+4) 3,424, Less: Advance Amount payable (5-6) 2,803, Less on , Net Amount payable thro LC (7-8) 2,747, (Rupees Twenty Seven lakhs Forty Seven thousand Eight hundred Eight and Twenty Nine Paise only) Net amount to be payable through LC for the work Completed upto the month of Dec'10 is,,. As per LC terms and conditions kindly issue above details on your letter head Service Tax No. AACCT1032OST001 Tamilnadu VAT TIN No Maharashtra VAT TIN No V w.e.f Nature of Service: Erection & Commissioning For Thermax Infrastructure Ltd. Authorised Signatory REGD OFFICE: THERMAX HOUSE, 14 MUMBAI-PUNE ROAD, WAKDEWADI, PUNE , 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 stage. If tax were also to be demanded separately on the advance received, it would clearly amount to double taxation. The Commissioner has come to a hasty conclusion without examining in right perspective the details of the agreement/ contract, the method of invoicing, the method of paying service tax on the total invoice value, and the

6 adjustment of advance from the total invoice value as we have shown above. In fact it had been rightly contended by the appellant that they have paid the tax in advance, 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 raised invoices on the customers. We find that the order of Commissioner is silent in this respect. The advance is only an amount given as kind of earnest money and for which the appellant gives a bank guarantee to the customers of equal amount. It is more in the nature of a deposit. As defined in Borrows, in Words & Phrases, Vol II "An earnest must be a ta gi le thi g That thi ust e gi e at the o e t at which the contract is concluded, because it is something given to bind 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 payment". In the present case the advance is like earnest money for which a Bank Guarantee is given by the appellant. It is a fact that the customer can invoke the Bank Guarantee at any time and take back the advance. Hence the appellant does 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. 8.1 The 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 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. Reliance is placed on the case of Paharpur Cooling Towers Ltd (37) STR 550 (Tri. Del.) held that-

7 . As regard de a d of,, /- confirmed on the advance received by the appellant, we find that the show cause notice itself concedes that service tax on the advance was paid (adjusted) subsequently and the appellants are also not contesting the said de a d. As regards the i terest of,, /- 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 service tax was paid as and when the service relating to advance received was rendered. In this view of the matter, it is not possible to sustain the order relating to recovery of impugned interest. It was only on that Section 67A was introduced which provided that the rate of service tax, value of taxable service and the rate of exchange, if any shall be the rate of service tax or value of taxable service or rate of exchange in force as applicable at the time when the taxable service has 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 the case of CCE, Ludhiana V. J.R. Industries, 2009 (16) STR 51 (Tri. - Del.) 5. It appears that levy was pre-mature without the service being provided. The authority below has proceeded on the conception that 33% of the advance received shall be value of taxable service. When the work order relied by the Ld. DR does not demonstrate that the receipt was the consideration for service provided, this does not provide a basis to appreciate that taxable event had arisen and levy was made properly. Once it is demonstrated by SCN that the levy was arrived treating advance re eipt as easure of ta atio resulti g a le of,, /- 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 includes value of services provided. 9. It is also alleged in the show cause notice that in respect of some customers, the invoices are not issued for periods ranging upto two years after receipt of advances. The defence of the appellant is that these amounts are shown as current liability in their books of accounts and no services have been provided as yet by them. The Commissioner neither refers to these details nor gives any findings on this issue. Therefore we find no reason to disbelieve

8 the statement 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 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 by him in the adjudication order. Therefore, in our considered view, the impugned order has no merits and is liable to be set aside. Having decided the issue on merits, question of interest and imposition of penalties does not arise. 11. Although we have decided the issue on merits, we may recall the chequered history of this case at the stay stage. We find that the matter went to the High Court. The appellant had take the sta d that ser i e ta of lakhs as paid o the ad a es re ei ed from the customers during April 2006 to Mar 2011 in the manner we have discussed above. A d ser i e ta of 6. 4 rores agai st u adjusted ad a es as paid i Jul e ause 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 appellant to produce cogent documentary evidence to the Commissioner to establish this fact and the Commissioner would verify the same and submit a report to the Tribunal. The Tribunal in its order dated observed that the appellant produced GAR-7 challans and relevant extracts of Cenvat Register to the Commissioner. They also produced before the department copies of invoices raised, amount of advances adjusted, service tax paid on the adjusted amount of advances and copies of the ST-3 returns filed showing payment during the relevant time. The appellants also produced acknowledgement of the same. However no verification was caused to be made by the Commissioner as directed by the Hon'ble High Court showing payment of service tax towards the impugned advance. Instead of causing such verification, the Commissioner directed the appellant to produce records of payment of service tax paid subsequent to the impugned adjudication Order. The Tribunal in its Order specifically records that the Commissioner devised his own proforma to show payment of service tax paid after the adjudication order instead of complying with the directions of the High Court. It also records that su h erifi atio ould sho pa e t of 6. 4 rores o l e ause the rest of the payment is shown in the invoices in which the advances were adjusted. Later the Commissioner was even summoned by the Tribunal but no proper verification could be shown in terms of High Court directions. However this proceeding was only in the context of the Stay Application. 12. As regards the main Appeal, we find that the 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 required to be

9 paid on the advances and further when the amounts of advance were adjusted proportionately in the invoices and service tax was paid on the invoice value. 13 In view of our findings above, the impugned Order is set aside and Appeal is allowed with consequential relief if any, in accordance with law. Stay petition also stands disposed of. ( Order pronounced in court on )