Section 145A not applicable on taxable services

The respondent assessee engaged in the business of real estate consultancy / agency and property management services.  During the course of the assessment proceedings, the Assessing Officer   sought to include the service tax billed by it for rendering services to the service receivers as trading receipts on invocation of Section 145A(ii) of the Act.  Besides, the Assessing Officer also sought to invoke Section 43B of the Act on the ground that the billed amount of service tax had not been paid over  to the Government till the due date of filing the return of income. The Assessing Officer  also sought to recast the respondent’s profit and loss account so as to reflect the receivable service tax as a part of the consideration for the services rendered.   The respondent assessee contended that Section 145A(a)(ii)  of the Act would have no application to the present facts as service tax is not mentioned therein.

In appeals for both the assessment years, the Commissioner of Income Tax (Appeals) [CIT(A)] held that Section 145A(a)(ii) of the Act would apply as it is not restricted only to manufacturing and trading companies.  It was concluded that the service tax stands on the same footing as excise duties, sales tax and other taxes, which are collected to be paid over to the Government.

On further appeal, the Tribunal by the impugned order held that Section 145A(a)(ii) of the Act would have no application in respect of the service tax billed on rendering of services.  This for the reason the  Section 145A(a)(ii) deals with goods and not services.  It also held that Section 43B of the Act would have no application in the present facts as no liability to pay the same to the Government arose before the last date of filing of the Returns.  Besides, it held that no deduction had been claimed on the aforesaid amounts while determining its income. Accordingly, the appeal of the respondent assessee was allowed.

Held by High Court

1. The  grievance  of  the  Revenue  to  the  impugned  order  of  the Tribunal  is  that  Section  145A(a)(ii)  of  the  Act  would  apply  as  the amount  receivable  on  rendering  of  services  would  also  include  the service tax.  This service tax is similar to excise duty, sales tax and other taxes, which have to be collected to be paid over to the Government.

2. It is very clear from the reading of Section 145A(a)(ii) of the Act that it only covers cases where the amount of tax, duty, cess or fee is actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation.

3. In this case, the respondent ­assessee has admittedly not paid or incurred any liability for the purposes of bringing any goods to the lace of its location.  In this case, the respondent­ assessee is rendering services.  Thus, on the plain reading of Section145A(a)(ii) of the Act, it is self evident that the same would not apply to the service tax  billed on rendering of services.  This is so as the service tax billed has no relation to any goods nor does it have anything to do with bringing the goods to a particular location.

4. The Explanation to Section 145A(a) of the Act does not expand its scope.  An Explanation normally does not widen the scope of the main  section.  It  merely  helps  clarifying  an  ambiguity.    (See  Zakiyr Begam v/s. Shanaz Ali & Ors., 2010 (9) SCC 280).  The main part of the Section specifically restrict its ambit only to valuation of purchase and sale of goods and inventory.  Rendering of service is not goods or inventory. Goods would mean movables and   inventory would mean stock   of   goods.   Therefore,   the   Explanation   would   only   apply   for valuation of sales and purchase of goods and stock of goods as provided in the main part. The Explanation in this case clarifies/ explains that any tax, duty, cess or fee paid or incurred will have to be taken into account for valuation of goods even if such payment results in any benefit/ right to the person making the payment. This Explanation was necessary as otherwise in terms of Accounting Standard – (AS­2) issued by the Institute of Chartered Accountants of India provides that cost of goods would include the duties and taxes paid, other then the duties and  taxes  which  give  a  right  to  recover  the  same  from  the  taxing authorities – to illustrate duty draw back etc. Thus, the Explanation only seeks to clarify the fact that notwithstanding any right acquired on payment of taxes to recover the same from the government, for the purpose of Section 145A of the Act, the same cannot be excluded even though the AS­2  provides otherwise. It does not even remotely deal with the issue of service tax.

5. Further, it is to be noted that Service Tax was first introduced in India   by   Finance   Act,   1994.   Section   145A   of   the   Act   was   first introduced into the Act only by Finance (No.2) Act, 1998 w.e.f. 1st  April, 1999.  It was thereafter substituted by Finance (No.2) Act, 2009 which is identical, except for addition  of clause (b), dealing with interest. However, the Parliament did not while substituting it, deem it fit to explicitly include the valuation of Services therein. Thus, it is clear that the legislature never intended to restrict the applicability of Section 145A  of  the  Act  only  to  goods  and  not  extend  it  to  Services.