By TIOL News Service

MUMBAI, OCT 18, 2013: M/S Reliance Infratel Ltd (RIL), a subsidiary of Reliance Communications Ltd. (RCOM) is providing taxable services falling under ‘Business Support Services'.

The DGCEI received intelligence that M/s. RIL has been providing infrastructural support services to M/s. RCOM since April 2007 and though M/s. RIL were in receipt of sums from their service recipient towards charges for the service so rendered, they were not discharging their service tax liability. Investigation conducted revealed that M/s. RIL had entered into a master service agreement dated 10/04/2007 with M/s. RCOM. In this agreement, apart from the nature of the services to be provided by M/s. RIL and the service charges payable, it was specifically mentioned that financial support also would be provided by the service recipient to M/s. RIL as advances or customer credit which should be settled by way of set-off against the service charges payable to M/s. RIL. It was found that RCOM, the service recipient, had incurred expenditure to the tune of Rs.283 crores in setting up the business of RIL and also payments to the vendors of M/s. RIL towards material cost at the time of inception of M/s. RIL. Further, M/s. RIL had received advance amounting to Rs.1210 crores from RCOM during the period June 2007 to September, 2007.

It, therefore, appeared that even though M/s. RIL did not receive any consideration from the service recipient against the invoices raised by them, they had already recovered considerable sum from the service recipient. Inasmuch as M/s. RIL failed to discharge service tax liability on the financial support received by them from M/s. RCOM, a show cause notice dated 18/08/2011 was issued demanding service tax of Rs.307.71 crores for the period 10/04/2007 to 31/03/2008 along with interest thereon and also proposing to impose penalties under the provisions of Finance Act, 1994.

The appellant contested the demand and submitted that the amounts of Rs.1210 crores and Rs.283crores received by them during 2007-08 had been repaid by them to RCOM during the same financial year, and these were not, therefore, consideration for the services rendered but interest-free loans received from the holding company.

The Commissioner was in no mood to listen to this and confirmed the three hundred odd crores demand with knolls of penalties and interest.

Before the CESTAT with a Stay application, the appellant made similar submissions as made before the adjudicating authority and also added -

"3.5 Even though article 4.3 contemplates adjustment towards service charges, the appellant has not exercised such an option. In fact in the ledger abstracts of the appellants, in the accounting entries made, the transaction has been categorized as ‘interest free loan'. Under the Indian Contracts Act, 1872 vide Section 62 the contracting parties can mutually alter the intention set out in a written contract by way of an oral agreement and the contract can be altered subsequently even through an oral agreement and acted accordingly. Since the appellant has not charged the transaction as service charges to RCOM and has not received the same as advances, the question of payment of service tax before December 2007 does not arise at all. Without admitting, the appellants contends that the maximum that can be considered for liability to service tax is the interest that would have accrued in respect of the transactions and if the interest accrued is taken as the basis for consideration for the services rendered, the liability would be about Rs.12 crore approximately @13% per annum."

For arguing this multi-crore case, the Revenue had appointed a Special Consultant and who drew the attention of the Bench to the Note 3(2) of the Annexure to the Auditor's report dated 31/03/2008 in the Balance Sheet of M/s RCOM. It reads -

"the company has neither granted nor taken any loans, secured or unsecured, to or from companies, firms and other parties covered in the Register maintained under Section 301 of the Companies Act, 1956. Accordingly, Para 4(iii) of the order is not applicable."

So also, in the auditor's report of M/s. RIL for the same period in Note 3(iii) it is stated as follows:

"(a) As informed, that the company has not granted loans, secured or unsecured to companies, firms or other parties and covered in the register maintained under Section 301 of the Act.

(b) As informed, the Company has not taken any loans, secured or unsecured form the companies, firms and other parties covered in the register maintained under Section 301 of the Act."

It is further submitted that since the balance sheets reveal that both the appellant and the recipient of the service have not given or taken any loan, the contention of the appellant that the transactions were one of interest-free loans given by M/s. RCOM to the appellant cannot be accepted and therefore, these transactions have to be considered as "advances" towards service charges which are liable to service tax. Reliance is placed on the decisions in Commissioner of Central Excise, Guntur vs. Sri Chaitanya Education Committee - (2010-TIOL-1306-CESTAT-BANG); Simplex Infrastructure Ltd. vs. Commissioner of Service Tax, Kolkata - (2010-TIOL-899-HC-KOL-ST) and Mayo College General Council vs. Commissioner of Central Excise (Appeals), Jaipur-II - (2012-TIOL-878-HC-RAJ-ST) to submit that the appellant should be put to terms and substantial part of the demand should be ordered as pre-deposit.

The Bench observed -

"5.1 As regards Rs.1210/- crore, it is seen that the appellant had received the said amount from M/s. RCOM during June, 2007 and September, 2007 as interest-free loan and the said amount was returned by the appellant to M/s. RCOM by 31/07/2007.

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5.2 Similarly, in schedule B of the appellant-company's balance sheet for the year 2008, an amount of Rs.1200 crore is shown as unsecured loan taken and the said schedule also shows that the amount has been repaid during the same financial year. Thus, both in the books of accounts of the appellant as also in the books of accounts of M/s. RCOM, the amount of Rs.1,210/- crore is shown as a loan and not as consideration for any services rendered. These books of accounts have been audited and are in the public domain. Therefore, the argument of the Revenue that the amount of Rs.1,210/- crore is a consideration for the services rendered does not flow from the audited books of accounts of the company. There is also no dispute about the fact that the appellant had repaid the amount of Rs.1,210/- crore received from M/s. RCOM during the same financial year, by 31/12/2007.

6. Similarly, in the case of Rs.283/- crore said to have been given by M/s. RCOM to the appellant, the said amount was towards the expenditure incurred by M/s. RCOM even before the appellant-firm came into existence by way of expenses towards the initial setting up and also by way of payments made to vendors for supply of materials. When such payments have been made before the appellant-firm came into existence, we do not understand how this amount can be treated as a consideration received for the services rendered by the appellant. It is also seen from the books of accounts, that the said amount has been repaid by the appellant during the same financial year and these transactions are reflected in the books of accounts of both the parties. Thus, what is coming out form the books of accounts is that the amount of Rs.283/- crore received by the appellant from M/s. RCOM is not towards any consideration towards any services rendered but it is a financial support given by M/s. RCOM to the appellant by way of loans. When advances are received towards services rendered, the same would get adjusted in the bills raised. We have also perused the invoices raised by the appellant on RCOM who is the service-recipient and these invoices do not reflect adjustment of these amounts in any manner. In the invoices raised passive infrastructural charges for a specified period (on a monthly basis) is indicated apart from service tax amounts and there is no dispute in the instant case that for the consideration received in respect of the invoices raised, the appellant has discharged service tax liability. Section 67 of the Finance Act, 1994 provides for payment of service tax on the gross amount charged for the services rendered and consideration includes any amount that is payable for the taxable service provided or to be provided. In other words, only payment made towards services provided can be brought under the ambit of consideration received and not any other amount. At best, the interest saved by the appellant by securing interest-free loans from the holding company can be considered as a consideration for the services rendered and not the loans per se. If service tax liability is computed on such interest amount, it works out to approximately Rs.12 crore. In view of the above factual position we are of the considered view that, at the interim stage, the appellant should be directed to make a pre-deposit of Rs.12 crore only towards the service tax liability, if any."

In fine, the appellant was directed to make a pre-deposit of Rs.12 Crores and report compliance.

In passing: Heads I win, Tail you lose!

(See 2013-TIOL-1540-CESTAT-MUM)