By TIOL News Service

MUMBAI, APR 02, 2015: 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 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 and confirmed the demand with penalties and interest.

While seeking a stay in the matter the appellant also made the following submission before the CESTAT - "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."

The CESTAT inter alia observed -

"…, 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."

We reported this stay order as 2013-TIOL-1540-CESTAT-MUM.

The appeal was heard recently.

The appellant made submissions as made at the stay stage and the Revenue which was represented by a Special Counsel submitted that on reading of clause 4.1 to 4.4 of the Master Service Agreement, it was clear that the amount of Rs.1,493/- crores is nothing but an advance towards the consideration for the services and, therefore, needs to be considered as an amount on which service tax liability arises as per the provisions of Section 67 of the Finance Act, 1994.

It is further submitted by the counsel that in business it is unusual to provide interest-free loans and that too of huge amounts as is in this case; that for raising such a loan both appellant as well as RCM need to pass a Board resolution; that the repayment started after investigation commenced on 26/11/2007 and the repayment is an afterthought to show that the amount is a loan; the auditor has specifically qualified that the appellant had not taken any loans secured or unsecured from companies, firms or other parties as recorded in the register maintained under Section 301 of the Companies Act and which is a blatant lie; the submission that in RCM's annual report for the period ending 31 st of March 2008 it is stated that the company has neither granted nor taken any loan, secured or unsecured, which is incorrect; that the order of the adjudicating authority does not require interference.

The Member (J) after considering the submissions advanced by both sides negated the arguments raised by the Revenue by inter alia observing -

++ The short point involved in this case is whether the sum of Rs.1,493/- crores received by the appellant from RCM is an advance for the taxable services rendered or to be rendered by the appellant to M/s. RCM or is it a loan by way of Inter Corporate Deposits given to the appellant.

++ In our considered view, provisions of Section 67 of the Finance Act, 1994 refers to gross service charges paid or payable for the services rendered or to be rendered and has to be read as it is. In our view, the entire sum of Rs.1,493/- crores does not qualify as an advance towards the services to be rendered by the appellant to RCM.

The appeal was allowed with consequential relief, if any.

The Member (Technical) agreed with the order but recorded separate findings in this regard.

After extracting the disclosures made in the balance sheet for the year ending 31/03/2008, the Member (T) observed -

++ 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.

++ 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 from 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.

In fine, the appeal was allowed by the Bench with consequential relief, if any.

In passing : Now, for the refund made, if any, as per the order of pre-deposit.

(See 2015-TIOL-602-CESTAT-MUM)