ST – Associated Enterprises - Explanation to Rule 6 of ST Rules corresponding to the amended Explanation (c) to Section 67 of the FA, 1994 cannot operate retrospectively: High Court
By TIOL News Service
NEW DELHI, OCT 14, 2017: THE appellant and its holding company are associated enterprises. The appellant provides management consultancy services to the said holding company for undertaking franchise business in India and was registered with the Department under the taxable category of 'Management or Business Consultant's services'.
During the FY 2006-07 and 2007-08, the appellant had booked service fees of Rs.3,28,00,378/- receivable from the holding company in its books of accounts, but did not pay the service tax since the said amount was not received by it during such period.
Vide notification 19/2008-ST, dated 10.05.2008, the following Explanation was inserted in rule 6(1) of STR, 1994 after the third proviso -
Explanation. - For the removal of doubts, it is hereby declared that 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 credited or debited, as the case may be, to any account, whether called 'Suspense account' or by any other name, in the books of account of a person liable to pay service tax.";
By citing the aforesaid explanation inserted in Rule 6 of the STR, 1994, proceedings were initiated and in adjudication, the demand of service tax of Rs.40,37,858/- was confirmed along with interest and penalties.
The CESTAT while allowing the appeal of the assessee inter alia observed -
+ Payment of service tax in respect of transactions between associated enterprises on the basis of book entry was introduced only w.e.f. 10.05.2008 by incorporating the explanation clauses in both Section 67 of the Finance Act, 1994 and Rule 6 ibid.
+ The service tax statute holding the field at the relevant point of time does not contain any provision for demand of service tax by the authorities, prior to realization of the value of taxable services. The legislative intention behind the amendments was explained by the CBEC vide letter dated 29.02.2008, which is for plugging avoidance of tax on the ground of non-realization of money from associated enterprises.
+ Since, by incorporating the explanation in Rule 6 ibid, the restriction was imposed for the first time that in case of transaction between associated enterprises, service tax has to be paid immediately on entry of the transaction in the books of account, the said amendment will be considered as prospective in effect, otherwise the doctrine of 'fairness' would be defeated.
+ Notification No. 19/2008-ST introducing Explanation to Rule 6 ibid, nowhere specifies that the same will have retrospective application to deal with the past transactions. Thus, such Explanation placing restrictions prejudicial to the interest of the associated enterprises would not apply retrospectively.
We reported this order as 2017-TIOL-144-CESTAT-DEL.
Aggrieved, the department preferred an appeal before the Delhi High Court.
The counsel for the department urged that the explanation is merely a clarification and did not change the position that existed even prior to 10th May 2008; that service tax liability always arose and the added Explanation to Rule 6 of the ST Rules only made the position even more explicit particularly since it opens with the words "for the removal of doubts"; that since the amounts are being carried forward even post the amendment to Section 67 and Rule 6, the Assessee was liable to pay service tax.
The High Court observed that a similarly worded explanation to Section 65(19) of the FA 1994, in the context of service tax payable on rendering service of promotion and marketing of lottery tickets, was held by the Supreme Court in Union of India v. Martin Lottery Agencies Limited = 2009-TIOL-60-SC-ST [para 34 and 52 refers] to be not merely clarificatory.
It was further observed –
"12. In the present case, the Court finds that although the intention behind the insertion of the above Explanation to Rule 6 of ST Rules corresponding to the amended Explanation (c) to Section 67 of the FA was to bring amounts receivable from the AEs of the Assessees to tax, the intention was not to make it retrospective, i.e. to tax the transactions that have taken place prior to 10th May 2008. Admittedly, the amount shown outstanding in the books of accounts of the Assessee pertained to the transactions that had taken place prior to 10th May 2008. As per Rule 6, it is the date when the amount is credited/debited that is relevant and not the fact that the amount remains in the books. Any contrary interpretation would result in the provision being made retrospective, which was not the intention."
Concluding that no error had been committed by the CESTAT, the appeal was dismissed.
(See 2017-TIOL-2157-HC-DEL-ST)
