By TIOL News Service

MUMBAI, OCT 09, 2015: THIS is a whopping 598.98 crores Service Tax case gone kaput.

The Appellant is in the business of providing 'passive wireless telecom infrastructure'. The appellant builds, owns and operates telecommunication towers, optic fibre cable network and related assets. The business of appellant was demerged out of M/s Reliance Communications Ltd. (RCOM). Post the demerger, all the assets in relation to the business of 'passive wireless telecom infrastructure' was transferred to the appellant company.

On 15.3.2009, RCOM and appellant entered into an MOU whereby the appellant granted RCOM an indefeasible right to use 80% of the total capacity of its optic fibre cable network for 10 years.

As per the Schedule-I to the MOU, the total consideration payable over a period of 10 years worked out to Rs. 11,172 Crores, but payable in instalments of the actual amounts mentioned yearwise in the Schedule I; the actual amount payable by RCOM in the first 5 years is comparatively meagre as compared to the amount payable towards the annual rent in the last 5 years of the MOU.

It is claimed by the appellant that, however, in the books of account maintained as per the Accounting Standards AS-19 relevant to operating leases, what has been recorded as income, is the amount actually received in each of the first 5 years which is the period relevant to the present appeal.

The appellant further claims that this actual income has been offered for tax and accepted as their income for the purposes of the Income Tax Act, 1961. At the same time, in terms of AS-19, the appellant has shown an amount under the head “lease rent advance/lease rent equalisation' which is a notional figure to comply with the requirements of double entry book keeping since the cost of the assets is amortized and treated as an expense. Hence, according to the appellant, AS-19 requires reflection of lease rent income on a straight line over the period of the lease which is neither the amount receivable under the MOU, nor actual liability on RCOM to pay the same. In this factual background the appellant paid Service Tax on the amount of rent actually received during each financial year from 2008 to 2013.

Investigations started on the basis that Service Tax ought to have been paid by the appellant on the average of the total consideration for 10 years under the MOU in each Financial Year.

A demand notice was issued.

By the impugned order, the Commissioner confirmed the demand of Rs. 598,98,62,000/- for the period 1.4.2008 to 31.3.2013 with penalty of like amount u/s 78 of FA, 1994 and further penalty of Rs. 5,000/- and Rs. 10,000/- for the FY 2008-11, 2011-13 respectively u/s 77.

Before the CESTAT it is submitted by the appellant that -

+ As per AS19 the amount shown towards lease rent equalisation was Rs. 903 Crores for the first year and thereafter Rs. 1,141 Crores for each of the nine subsequent years. This is because the asset has a longer life and since the actual expenses in relation to the asset are booked each year, a notional value is shown to balance both sides in the balance sheet regardless of the actual income which is received from the use of the asset which in turn is based on the contract between the parties. It was, therefore, explained that there will always be a difference between the amounts shown as per AS19 and the amounts actually received as per agreements.

+ Reliance is also placed on the opinion of the Institute of Chartered Accountants wherein it is clarified that lease rent equalisation cannot be treated as income; that such lease rent equalisation amount is not 'income' for the purposes of the Income Tax Act, 1961. Mention is also made of the decisions in the cases of Dai-Ichi Karkaria Ltd. - 2002-TIOL-79-SC-CX, Association of Leasing and Financial Service Co - 2010-TIOL-87-SC-ST-LB, Nagarjuna Investment Trust Ltd., - 2003-TIOL-97-ITAT-Hyd SB & the apex court decision in Excel Ind. Ltd. - 2013-TIOL-52-SC-IT-LB, where it is held that income cannot be hypothetical and it accrues when the other party incurs a corresponding liability to pay.

+ The ground of the demand being hit by limitation is also pleaded.

The Sp. Counsel for the Revenue adverted to Rule 6 of the STR and submitted that in terms of explanation to sub-rule (1) where the transaction of taxable service is with any associated enterprise, any payment received towards the value of taxable service in such case, shall include any amount debited or credited to any account, whether called 'suspense account' or by any other name, in the books of accounts of the person liable to pay Service Tax. The apex court decision in Oswal Agro Mills Ltd - 2002-TIOL-465-SC-CX is also taken support of to emphasize that the words which are not defined must be given a meaning based on commercial parlance or the common understanding and there is no room for intendment. As for limitation, it is submitted that disclosure in the balance sheet cannot impute knowledge to the department, therefore extended period of limitation can be invoked.

The Bench after considering the submissions observed -

Merits:

+ It is admitted that the appellant and RCOM are associated enterprises. The general rule in case of associated enterprises is that even a book adjustment or any credit or debit entry in any account by whatever name called in the books of accounts of the Service Provider is equated with receipt of 'the gross amount charged' by the Service Provider to the service Recipient. This method, however, is one of the modes of payment included in the definition of 'gross amount charged' contained in clause (c) of the Explanation to section 67 of the Act.

+ The other modes of payment are by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes. To qualify as 'gross amount charged' there must first be a payment. It is this payment which must be in the nature of a consideration for the Service. The word 'consideration' has been defined in clause (a) of the explanation to section 67 to include any amount that is payable for the taxable services provided or to be provided.

+ There is no doubt that lease rent equalisation is only an entry made in the balance sheet. But the question is whether it is an amount 'payable' for it to constitute 'consideration' for the services rendered by the appellant.

+ The appellants justify that there is a specific Accounting Standard for operating leases, which is AS19. The department has not been able to show us any contrary decision or furnish any reasons why we should not follow AS19.

+ We are unable to accept the conclusion of the audit report which is directly in teeth of AS19 and the principle laid down in the decision of Dy. CIT vs. Nagarjuna Investment Trust Ltd. (supra), in which it is held that such a notional amount which is actually a balancing factor since expenses or cost are spread over the tenure of the lease, is not an 'income'. The amount shown in the balance sheet is not an 'income' for the purposes of computing Tax under the Income Tax Act.

+ In the result it is also not a 'payment' actually received or receivable, and, therefore, neither 'consideration' nor the 'gross amount charged' in terms of clauses (a) and (c) respectively of the explanation to Section 67 of the Act. Hence the appellant is not liable to pay Service Tax on the amount of lease rent equalisation shown in the balance sheet.

Limitation:

+ There is no dispute that the records of the appellant were audited by the department. The disclosure in the balance sheet also shows that there was no concealment on the part of the appellant. Therefore, the larger period of limitation cannot be invoked in the instant case.

The order of the Commissioner confirming the Service Tax demand of Rs.598.98 crores was set aside and the appeal was allowed.

(See 2015-TIOL-2160-CESTAT-MUM)