Real Image Media Technologies Pvt. Ltd. Vs. ACIT (ITAT Chennai)
Facts – Real Image Media Technologies Pvt Ltd (the Assessee), in their books of account, did not route the service tax dues through the profit and loss account. However, the liability towards service tax was reported in the Balance Sheet. During the course of assessment proceedings, the assessing officer (AO) requested the assessee to furnish proof in support of the payment of service tax dues on or before the statutory date for filing the return of income. The service tax amount which was not paid before the due date for filing the return of income was added to the income of the assessee.
Contentions of Assessee – In terms of the Service Tax Legislation, the duty of paying the service tax is on the person providing the service. Service tax is required to be paid only on the value of taxable services received in a particular month/quarter and not on the gross amount charged or invoiced. The assessee company maintains books of accounts on accrual basis. Therefore, the service tax payable account shows the tax payable on the gross amount billed and not the amount payable as per the amount received by the assessee company. The Company has paid the service tax on amounts realized hence no disallowance was warranted.
Held – The rigour of sec.43B may be applicable in the case of Sales-tax or Excise Duty but the same cannot be said to be the position in case of Service-tax because of two reasons. Firstly, the Assessee is never allowed deduction on account of service tax which is collected on behalf of the Govt., and paid to the Govt. accordingly. Therefore, a service provider is merely acting as an agent of the Govt., and is not entitled to claim deduction on account of service tax. Hence, on this account alone addition under sec.43B could not be made and the same has been correctly deleted by the CIT(Appeals). If there is no liability to make the payment to the credit of Central Government because of non receipt of payments from the receiver of the services, then it cannot be said that such service tax has become payable in terms of clause (a) of sec.43B because that clause specifically mentions “sum payable by the Assessee”. Since service tax was not payable by the Assessee, the rigour of sec.43B could not have been applied to the case of the Assessee.
IN THE INCOMETAX APPELLATE TRIBUNAL CHENNAI BENCH ‘B’
BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND
SHRI T.R. SOOD, ACCOUNTANT MEMBER
Asst. Year: 2002-03
|The Asst. Commissioner of Income Tax,|
Media Circle – II, CHENNAI
M/s. Real Image Media Technologies Pvt. Ltd., 78, 3rd Street, Balaji Nagar, CHENNAI – 600 014.
Assessee by : Shri R. Ramakrishnan
Department by : Shri N. Rengaraj
O R D E R
PER T.R. SOOD, A.M :
This appeal by the Revenue is directed against the order of the CIT(Appeals) dated 01.9.2006 for the above Asst. Year. In this appeal, the Revenue has taken the following grounds :-
1. The CIT(Appeals) erred in holding that the disallowance was made u/s. 43B whereas the Assessing Officer has only added as a revenue receipt.
2. The CIT(Appeals) erred in not appreciating the fact that any taxes or levies collected or collectible by the Assessee on behalf of the Government is in the nature of deemed revenue receipt in the hands of the Assessee till it is paid to the Government.
3. The CIT (Appeals) erred in not appreciating the fact that it is only the discretion exercised by the Assessee not to route the receipt of service taxes through the P&L Account.
2. The brief facts of the case are that the Assessee company is engaged in the business of running a recording and dubbing studio, production of advertisement film and TV serials, manufacturing of specialised computers, trading in technical solutions, production of distribution of feature film and software development. During the Assessment proceedings, the Assessing Officer noticed that service tax was not being routed through profit and loss accounts and the Assessee had shown liability towards service tax at Rs.5,72,374/- as on 31.3.2002 in its balance sheet. Upon enquiry to furnish the proof regarding payment of service tax on or before due date for filing of return of income it was submitted as under :-
“Note on the applicability of S. 43B for Service tax payable:
Service tax a Central tax that was introduced by making provisions in Chapter V of the Finance Act 1994 (Section 64 to Section 96). The Act provides the method of levy, the circumstances in which the levy would arise, inter alia, the manner of payment etc. Section 68 of the Act prior to its amendment on 16.10.1998 envisaged that the person providing taxable service must collect service tax and then pay it to the Government account only when such person failed to collect the tax person is liable to pay the tax. However with effect from 16.10.1998 Section 68 was amended by omitting the element of ‘collection’ and it provides that the duty of the paying the service tax is on the person providing the service in the prescribed manner. The manner is prescribed in Rule 6 which prescribes that the service tax is required to be paid only on the value of taxable services received in a particular month or quarter as the case may be and not on the gross amount charged or billed to the client The relevant provisions of the service tax regulations are enclosed for your information and records.
The Assessee is maintaining its books of accounts on accrual basis/ the service tax payable shows the tax payable on the gross amount billed and not the amount payable as per the gross amount received by the Assessee. As theirs is also a company the service tax is payable on the 25th of the month immediately following the said calendar month. The company has paid the service tax on amounts realised upto 31st March 2002 in April 2002/ the details of which are enclosed to this note. Hence/ it is most humbly and respectfully submitted that no disallowance is warranted on the service tax payable shown on outstanding as on 31.3.2002.”
3. After considering the submissions, the Assessing Officer observed as under;-
”a. The Assessee follows mercantile system of accounting. But service tax has not been routed through profit and loss account. The fact of showing the service tax payable on the liability side of the Balance Sheet itself proves that the service tax has been collected and has not been paid as on 31.3.2002.
b. Since the service tax has not been routed through profit and loss account the service tax has not been debited and hence it is true that no disallowance can be made u/s 43B. But the service tax collected and not paid to the Government account is revenue receipt in the hands of the Assessee and is accordingly assessable. It can be claimed when it is paid.
c. As per the Service tax payment details provided by the representatives, it nowhere appears that the Service tax payable shown at Rs.5,72,374 has been remitted on or before the due date of filing the return of income.”
4. In the back ground of these observations, a sum of Rs.5,72,374/- being service tax which was not paid before the due date for filing the return of income was added to the income of the Assessee.
5. Before the CIT(Appeals), two fold submissions were made. Firstly it was contended that sec.43B starts with the non-obstante clause and specifies that the deduction “otherwise allowable” under the Act shall not be allowed unless it is actually paid. This means, that the claim should be first preferred by the Assessee and the same could be disallowed under sec.43B only for the reason of failure to make actual payment. If an Assessee had not preferred any claim towards service tax, there was no question of disallowing the same. Secondly, it was argued that sec.67 of the Finance Act which deals with the service tax was amended with effect from 6.10.1998 and provided that the duty of paying service tax is on the person providing the service in the prescribed manner and this manner was prescribed under Rule 6 which further provides that service tax is required to be paid only on the value of taxable service received in a particular month or quarter as the case may be and not on the gross amount charged or billed. The CIT (Appeals) found force in the above submission and deleted the addition. Aggrieved, the Revenue is in appeal before us on this issue.
6. Before us the ld. Departmental Representative while supporting the order of the Assessing Officer, also relied on the grounds of appeal.
7. On the other hand, the learned Counsel for the Assessee referred to Sec.43B of the Act and submitted that any sum of tax, duty, cess or fee etc., can be disallowed if such sum is payable. This means that disallowance under sec.43B would be attracted if the Assessee has failed to make payment towards any tax, duty, cess or fee etc., which the Assessee was obliged to pay According to him the word payable is important and disallowance cannot be made if such duty or tax is not payable at all. He argued that service tax was a Central tax which was introduced by making provisions in Chapter V of the Finance Act, 1994 and provides for the month of levy, circumstances on which the levy would arise and the manner of payment etc. Service Tax was levied under sec.67 of the Finance Act, 1994 on the gross or aggregate amount charged by the service provider on the receiver. Prior to amendment on 16.10.98 it was envisaged that the person providing taxable service must collect Service Tax and then pay it to the Government. On the failure of such person to collect the service tax, such person becomes liable to pay the same. Lot of representations were made to the Govt., that sometimes service providers were not getting the payment and therefore it should not be asked to make the payment of service tax and accordingly, the Act was amended and it was provided by omitting the element of collection.
8. The learned Counsel for the Assessee further relied on the amended sec.68 and invited our attention to the sub sec.(2) thereof which clearly provided that service tax shall be paid in the manner prescribed and rate specified in sec. 68 and all other provisions of Chapter V of Finance Act, 1994. He then referred to Rule 6 of Service Tax Rules 1994 which clearly provides that Service Tax shall be paid by the 5th of the month immediately following the calendar month in which the payments are received. Therefore, the incidence of payment of service tax was related to the receipt of payment mentioned on the billing of the service.
9. The learned Counsel for the Assessee vehemently argued that service tax is basically different from Sales Tax, Provident Fund, ESI, Excise Duty etc., referred to sec.43B of the I.T. Act, because Sales Tax is payable by a dealer as per Central Sales Tax Act and various State Sales Tax Acts on a specified date of the following month in which the sale is completed irrespective of the fact whether the payment is received by the dealer or not The liability would arise as soon as the incidence of sale is completed. Similarly, the liability to Excise Duty is attracted the moment the goods are removed from the Warehouse or Godown. In the case PF & ESI, the liability to pay is on the employer irrespective of the fact whether the employer has recovered the same from its employees or not Whereas in the case of service tax, it becomes payable only when it is received from the client
10. The learned Counsel for the Assessee also referred to sec.145A of the IT. Act and argued that this provision makes it clear that the ST., ED etc., have to be treated as part of the purchase and sale of goods whereas that is not the case with service tax.
11. He vehemently argued that sec.43B starts with a non-obstante clause and specifies that deduction otherwise allowable under the Act shall not be allowed unless it is actually paid. This means that sec.43B would be attracted only in those cases where a deduction has been claimed but payment has not been made. But if no deduction has been claimed at all then there is no question of application of sec.43B of the IT Act.
12. In the case before us, Service Tax was never claimed as deduction because the same was never debited to profit and loss account. Since companies are required to prepare accounts on the accrual basis, service tax had to be shown on accrual basis and reflected as liability directly in the balance sheet. As no deduction was claimed by the Assessee there is no question of disallowing the same under sec.43B of the IT. Act. He also relied on the case of Srikaollu Subbarao & Co & Ors. V. Union of India & Ors (173 ITR 708).
13. We have considered the rival submissions carefully in the light of the relevant provisions of the IT. Act as well as Service Tax Act. We find that relevant portion of sec.43B reads as under:-
“43B. Notwithstanding anything contained in any other provisions of this Act a deduction otherwise allowable under this Act in respect of
(a) any sum payable by the Assessee by way of tax, duty, cess or free by whatever name called, under any law for the time being in force, or]”
From a plain reading of the above provision it becomes clear that the rigour of this provision would be attracted only in a case where an item is allowable as deduction but because of the failure to make payment such deduction will not be allowed. It can be argued that in the case of ST also the Assessee does not claim deduction since it has been held that non-payment of Sales-tax would attract provisions of sec.43B, but that is being done on the basis of the principles laid down by the Hon’ble Supreme Court in the case of Chowranghee Sales Bureau Ltd. v. CIT (110 ITR 385) that Sales-tax is part of the trading receipt. Further, sec.145A clearly provides that for the purpose of determining income under the head profits and gains of business or profession, the amount of purchase and sales i.e., turnover would include any tax, duty, cess or fee. Therefore, the rigour of sec.43B may be applicable in the case of Sales-tax or Excise Duty but the same cannot be said to be the position in case of Service- tax because of two reasons. Firstly, the Assessee is never allowed deduction on account of service tax which is collected on behalf of the Govt., and paid to the Govt. accordingly. Therefore, a service provider is merely acting as an agent of the Govt., and is not entitled to claim deduction on account of service tax. Hence, on this account alone addition under sec.43B could not be made and the same has been correctly deleted by the CIT(Appeals).
14. The second aspect of this issue is also important. Sec.43B(c) uses the expression ‘any sum payable’. For making any disallowance, first of all it has to be established that such sum is payable. The Dictionary meaning of the word ‘payable/in Concise Oxford English Dictionary is
1. required to be paid;
2. able to be paid; and
3. debts owned by a business
The Chambers Dictionary (New Edition) defines the word payable’ as “that may or should be paid; due or profitable”
Black’s Law Dictionary, Sixth Edition defines the term ‘payable’ as under :-
“Capable of being paid; suitable to be paid; admitting or demanding payment· justly due; legally enforceable. A sum of money is said to be payable when a person is under obligation to pay it. Payable signifies an obligation to pay at a future time, but when used without qualification, term normally means that the debt is payable at once, as opposed to ‘owing’ “.
The above definition would show that the word ‘payable’ is used in sec.43B, to our understanding, would mean that there is a kind of obligation on the part of payee to make the payment which is already due. For example, when some body purchases goods then the other person has got the liability to pay the price of the goods and it can be said that price of the goods is payable by the customer. If the customer simply looks at the cost it cannot be said that he has become liable to make the payment. This can be further understood by way of an example. For instance, whenever a Chartered Accountant raises a bill for professional services which are subjected to service tax, it is not necessary that the client will accept the bill as such and make payment accordingly. In that situation, the Chartered Accountant cannot be fastened with the liability to pay the service-tax. But, in any case the Sales-tax situation is different. For example, sec. 6(1) of Central Sales Tax Act, 1956 provides that :-
“6. liability to tax on inter-State sales. – [(1)] Subject to the other provisions contained in this Act, every dealer shall, with effect from such date as the Central Government may by notification in the Official Gazette appoint not being earlier than thirty days from the date of such notification be liable to pay tax under this Act on all sales of goods other than electrical energy] effected by him in the course of inter-State trade or commerce during any year on and from the date so notified:
[Provided that a dealer shall not be liable to pay tax under this Act on any sale of goods which/ in accordance with the provisions of sub-section (3) of section ~ is a sale in the course of export of those goods out of the territory of India.]
The above provision clearly shows that the dealer would become liable to make Sales-tax payment the moment he effects the sales in the course of an inter-State trade or commerce. This shows that the liability to make payment of Sales-tax is not depending on the fact whether such dealer has received the payment from the customer of the goods or not. The liability is fastened to the transaction in sales and once such sale is effected, the dealer becomes liable to pay.
15. Now, in the case of Service tax, when and how the amount becomes payable has been provided in sec.68 of Finance Act, 1994 as well as Rule 6 of Service Tax Rules which read as under :-
“68. Payment of service tax
(1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66 in such manner and within such period as may be prescribed.
(2) Notwithstanding anything contained in sub-section (1), in respect of any taxable service notified by the Central Government in the official Gazette/ the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.”
Rule 6 of Service Tax Rules:
“6. Payment of Service Tax [(1) The service tax shall be paid to the credit of the Central Government by the .1h of the month immediately following the calendar month in which the payments are received, towards the value of taxable service.
PROVIDED that where the Assessee is an individual or proprietary firm or partnership firm/ the service tax shall be paid to the crdit of the Central Government by the 5th of the month immediately following the quarter in which the payments are received., towards the value of taxable services:
PROVIDED FURTHER that notwithstanding the time of receipt of payment towards the value of services, no service tax shall be payable for the part or whole of the value of services, which is attributable to services provided during the period when such services were not taxable:
PROVIDED also that the service tax on the value of taxable services received during the month of March, or the quarter ending in March as the case may be, shall be paid to the credit of the Central Government by the 31st day of March of the calendar year.]”
From the above sec.68 it becomes clear that service tax has to be paid in the manner which may be prescribed and this has been prescribed in Rule 6 of Service Tax Rules. A plain reading of Rule 6 would show that service provider becomes liable to make the payment of service tax by the 5th of the month immediately following the calendar month in which the payments are received towards the value of taxable service. The first proviso gives an exception in case of individual or proprietary firms or partnership firms, and in such cases, service tax has to be paid to the credit of Central Government by the 5th of the month immediately following the quarter in which the payments are received. The only difference is that in case of individual or proprietary or partnership firm, payment has to be made on 5th of the following month after the following the quarter whereas in the case of other organisations it has to be paid on the 5th of the month immediately following the calendar month. But in both the cases, the liability arises to make the payment only after the service provider has received the payments.
16. If there is no liability to make the payment to the credit of Central Government because of non receipt of payments from the receiver of the services, then it cannot be said that such service tax has become payable in terms of clause (a) of sec.43B because that clause specifically mentions “sum payable by the Assessee”. In this regard, the Hon’ble Andhra Pradesh High Court in the case of Srikakollu Subba Rao & Co. & Ors v. Union of India & Ors. (supra) has made the following observations :-
“17. One other contention addressed to us is that the liability to pay sales-tax for the month of March 18=984 was disallowed in terms of s. 438 in all the cases before us. Shri Swamy learned counsel pointed out that the petitioners filed A2 monthly returns according to which they pay the taxes. Our attention has been invited to r.17 of the A.P. Sales-tax Rules 1957 which in terms provides that the tax in relation to the return shall be paid before the 25th day of the succeeding month. It is argued that where the statute itself prescribes the date of payment no exception could be taken acting under s.43B, that the amount was not paid rendering justification for its disallowance. It is urged that s.43B can have no application to cases where the statutory liability which was incurred in the accounting year is also not payable according to the statute in the same accounting year. We find considerable force in the contention of Shri Swamy. In order to apply the provisions of s.43B, it seems to us that not only should the liability to pay the tax or duty be incurred in the accounting year but the amount also should be statutorily “payable” in the accounting year. Sec.43B itself is clear to this extent. It refers to the “sum payable in cl.(a) as well as in cl.(b). If the Legislature intended, it should have so provided that any sum for the payment of which liability was incurred but he Assessee would not be allowed unless such sum is actually paid. Keeping in mind the object for which s.43B was enacted, it is difficult to subscribe to the view that a routine application of that provision is called for in cases where the “taxes and duties” for the payment of which liability was incurred in the accounting year were not statutorily payable in that accounting year. If, under the provisions of any statute, a tax or duty is payable after the close of the accounting yea0 different consideration would prevail and it may not be open to the ITO to disallow tax or duty which is statutorily payable after the accounting year. In fact the amendment brought about which is coming into force on pt April 1988 permitting the deduction of taxes and duties paid before the filing of the IT returns clearly supports the view that “taxes and duties” not statutorily payable during the accounting year do not fall to be disallowed under s.438.”
17. In view of the above observations, we are of the view that since service tax was not payable by the Assessee, the rigour of sec.43B could not have been applied to the case of the Assessee. Under these circumstances, we find nothing wrong with the order of the CIT(Appeals) on this issue and the same is confirmed.
18. In the result, the appeal filed by the Revenue is dismissed.