Computer Access Pvt. Ltd. Vs Commissioner of Central (Madras High Court)
The Madras High Court heard a Civil Miscellaneous Appeal under Section 35G of the Central Excise Act challenging the CESTAT’s final order in Appeal S.T. No.28/2011. The appellant had entered into a work contract with WIPRO Limited to provide (i) repair and maintenance of modems and networking equipment, and (ii) maintenance and facilitation of leased lines, including upgrading existing lines and obtaining approvals for Wide Area Networks (WAN).
The appellant contended that, in relation to leased lines, it merely acted as a system integrator’s facilitator by liaising with BSNL, which alone carried out the repair work. It claimed that it had no liability under the Finance Act, 1994, did not collect service tax from WIPRO, and that WIPRO, as the system integrator, had included the consideration paid to the appellant in its taxable turnover and discharged the service tax liability. Nevertheless, a show cause notice dated 13.04.2009 was issued demanding service tax. By Order-in-Original No.17 of 2010 dated 03.11.2010, the Commissioner confirmed a service tax demand of Rs.2,14,65,932 for the period from July 2004 to March 2008.
The appellant’s appeal before the CESTAT resulted in confirmation of the service tax demand, while the penalty was set aside. Aggrieved by that decision, the appellant approached the High Court. The Court framed three substantial questions of law relating to the sustainability of the extended period of limitation after waiver of penalty, invocation of the extended period in the context of revenue neutrality, and whether the burden of proof lay upon the Revenue or upon the appellant where the main contractor had discharged service tax liability.
The appellant submitted that its role was confined to facilitation, internal cabling and modem maintenance. It argued that its work order required it only to identify possible faults, coordinate with BSNL, and facilitate repairs, while BSNL actually performed the maintenance. It contended that the Department had incorrectly treated its activities as “Management, Maintenance and Repair Services.” It further argued that it acted merely as a sub-contractor to WIPRO, which had discharged the service tax liability, and therefore there was no independent tax liability on the appellant. It also contended that, once the Tribunal had waived the penalty by accepting the existence of reasonable cause, the extended period of limitation under Section 73(1) of the Finance Act, 1994, could not be invoked. The appellant relied upon a certificate issued by WIPRO to support its contention that service tax had already been paid on the relevant consideration.
The Department contended that the appellant was not merely a facilitator but actively engaged in the maintenance and management of leased circuits under its contract with WIPRO. It submitted that the appellant independently rendered taxable maintenance and repair services as a sub-contractor and remained liable to pay service tax even if WIPRO or other system integrators had separately discharged their own service tax liabilities.
After examining the work order and the statutory provisions, the High Court observed that Sections 65(64) and 65(105)(zzg) of the Finance Act, as applicable during July 2004 to March 2008, clearly covered the services rendered by the appellant. The Court noted the findings of the Order-in-Original that the matter was revenue neutral because the system integrator could avail CENVAT credit of the service tax paid by the appellant, making it appropriate for the appellant to discharge the tax liability and enable WIPRO to claim the available credit.
The Court observed that the appellant had produced no evidence to establish that it did not receive remuneration for maintenance of leased lines, modem repair and cabling. It further noted that these receipts came to the Department’s notice only during the audit conducted by the Internal Audit Units of the Service Tax Department. The Tribunal had also examined the work order and found that the appellant was responsible for managing and maintaining leased lines for consideration determined on a per-circuit, per-year basis. On a plain reading of the work order and the relevant service tax entry, the High Court held that the appellant’s activities clearly fell within the taxable category of “Management, Maintenance and Repair Service.” It agreed with the Tribunal’s conclusion that the appellant could not avoid service tax merely because it described itself as a sub-contractor or because its clients had paid service tax on their own transactions.
With respect to limitation, the Court held that the Tribunal had rightly sustained invocation of the extended period. Although the Tribunal exercised its discretion under Section 80 of the Finance Act, 1994, to waive the penalty imposed under Section 78 by relying upon the certificate regarding payment of service tax on the overall consideration, the High Court held that such waiver did not automatically invalidate the extended period of limitation or the service tax demand. The Court had granted the appellant an opportunity to produce a detailed breakup of the service tax paid by WIPRO to establish that it covered the appellant’s liability, but no such breakup was produced. Consequently, the Court held that the waiver of penalty could not result in quashing the demand raised during the extended period. Since the non-payment of service tax came to light only during the departmental audit, the Court held that suppression stood established.
Answering the substantial questions of law, the High Court held that the first two questions relating to the extended period of limitation were to be answered in favour of the Department. It observed that the discretionary waiver of penalty did not affect the levy of service tax on the suppressed receipts and that the plea that no revenue neutrality existed was factually incorrect where part of the receipts admittedly related to maintenance and leased line services. Regarding the third question, the Court held that, in the absence of a breakup showing that the service charges for maintenance had already been subjected to tax by the main contractor, it stood established that the appellant had received taxable consideration liable to service tax. The Court therefore upheld the Tribunal’s order dated 25.01.2018 and dismissed the appeal without costs.
Cases Discussed
- Akash Engineering Services vs. Commissioner of Central Tax Visakhapatnam-I (CESTAT Hyderabad), (2024) 20 Centax 262 (Tri.Hyd)
- Vinoth Shipping Services vs. Commissioner of Central Excise & S.T., Tirunelveli (CESTAT Chennai), 2021 (55) G.S.T.L. 313 (Tri-Chennai)
- Commissioner of S.T., New Delhi vs. Melange Developers Pvt Ltd (CESTAT Larger Bench), 2020 (33) G.S.T.L. 116 (Tri.LB)
- Max Logistics Ltd vs. Commissioner of Central Excise, Jaipur (CESTAT Delhi), 2017 (47) S.T.R. 41 (Tri.Del)
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
Civil Miscellaneous Appeal filed under Section 35G of the Central Excise Act is directed against the final order passed by the CESTAT, South Zone, in Appeal S.T.No.28/2011.
2. The appellant, pursuant to work contract with WIPRO Limited, provided the following services to WIPRO Limited.
(i) Repair and maintenance of modems and networking equipment.
(ii) Maintenance/facilitation of leased lines; upgrading of existing lines, obtaining approval for WAN (Wide Area Networks)
3. In respect of maintenance/facilitation of leased lines, the appellant claims that, as the System Integrators, WIPRO had entrusted work to the appellant to liaising with BSNL, which alone carried out the repair work of the leased lines. Therefore, the appellant has no liability under the Service Tax Act and accordingly did not collect service tax from WIPRO. Consequently, the System Integrator, namely WIPRO had included the consideration paid to the appellant in the total taxable turnover and paid the service tax. When the appellant had no direct leased lines with customers, a demand of service tax through a show cause notice dated 13.04.2009 was erroneously issued and objected by the appellant. However, in spite of detailed reply, the adjudicating authority, by Order-in-Original No.17 of 2010 dated 03.11.2010, confirmed the proposal of the Commissioner of Service Tax, claiming Rs.2,14,65,932.00 as service tax payable for the period from July 2004 to March 2008.
4. In the First Appeal preferred by the Assessee/Appellant before the Tribunal, the demand of service tax was confirmed; however, the penalty was set aside. The order of the Tribunal dated 25.01.2018 is hereby challenged in this Civil Miscellaneous Appeal.
5. On considering the grounds of appeal, this Court admitted the appeal to answer the following substantial questions of law:
i. Whether, in the facts and circumstances of the case, the Tribunal is justified in holding that extended period of limitation to demand service tax is sustainable especially when the Tribunal waived the penalty accepting the plea of ‘reasonable cause’ for failure to pay the service tax by the appellant?
ii. Whether the extended period of limitation can be invoked to demand service tax when there is no revenue neutrality? And
iii. Whether the burden of proof lies primarily on the respondent — Revenue to prove the case against the petitioner through the show cause or on the appellant as sub-contractor even though the main contractor had discharged the service tax liability?
6. The Learned Counsel appearing for the appellant contended that the appellant carries out the facilitation, internal cabling and modem maintenance. The work order given by WIPRO which includes leased line testing, line commissioning and submission of documents for the lines but confines to identify, zero-in the possible fault locations and convey the system integrator (BSNL) to carry out the maintenance or repair work on the basis of such inputs given by the appellant. It is argued that the Department had misinterpreted the role of the appellant and assumed that the appellant was providing `Management, Maintenance and Repair Services.’ The assessee is only as a sub-contractor to system integrator, who are responsible for managing the leased lines network and they have discharged the services tax liability. Therefore, the services tax demanded based on the erroneous interpretation of Finance Act, 1994. He further contended that having found there is no suppression of facts to set aside the penalty, the extended period of limitation under Section 73(1) of the Finance Act cannot be applicable to the facts of the case. The payment of the service tax by WIPRO was substantiated by the certificate issued by the system integrator. Accordingly, there is no independent tax liability on the appellant.
7. Per contra, the Learned Counsel appearing for the department submitted that, the appellant is merely a facilitator but actively engaged in maintenance and management of leased circuits under contract with the system Integrator. Further contended that, even if the WIPRO and other integrators have discharged their service tax liability independently, the appellant is liable to pay service tax for providing maintenance and repair services as subcontractor.
8. In support of his submissions, the Learned Counsel appearing for the Department relied on the following judgments:
1. Commissioner of S.T., New Delhi vs. Melange Developers Pvt Ltd reported in 2020 (33) G.S.T.L 116 (Tri.LB).
2. Vinoth Shipping Services vs. Commissioner of Central Excise & S.T., Tirunelveli reported 2021(55) G.S.T.L 313 (Tri-Chennai).
3. Akash Engineering Services vs. Commissioner of Central Tax Visakhapatnam- I, reported (2024) 20 Centax 262 (Tri.Hyd).
4. Max Logistics Ltd vs. Commissioner of Central Excise, Jaipur reported in 2017 (47) S.T.R 41 (Tri.Del).
9. Heard Mr. K. Jayachandran, Learned Counsel for the appellant and Mr. S.R. Sundar, Learned Senior Standing Counsel for the respondent. Records perused.
10. The specific contention of the appellant is that, as a sub-contractor to system integrator for the maintenance of leased lines, they were provided only an insignificant portion of the work when compared to the overall contract work of the Management, Maintenance or Repair services undertaken by the system integrators from the customers. Hence, there is no privity of contract between the customers and the appellant to render the appellant as a service provider to the customers for the purposes of the Finance Act, 1994.
11. The appellant has no direct access to the leased lines provided by the line providers in the name of the customers. Therefore, the question of the appellant providing Management, Maintenance or repair services in respect of leased line of the customers by the assessee would not at all arise.
12. Per contra, the contention of the Department’s Counsel is that WIPRO limited had authorised the assessee to carry out the Maintenance, Management and repair services of the equipments i.e., Modems and cabling. This cannot be considered as an insignificant portion of the work to evade payment of service tax. The nature of work carried by the assessee clearly show that they have been providing Maintenance, Management and Repair Services in respect of the leased lines as well as the equipments used in relation to leased lines.
13. On reading of Section 65(64) with Section 65(105)(zzg) of the Finance Act, as it stood from July 2004 to March 2008, there can be no doubt that the appellant had been effectively carrying on taxable service to WIPRO. The order-in-original passed by the Commissioner has clearly narrated that the issue is revenue neutral, since the system integrator could avail of CENVAT credit of the service tax paid by the assessee, it is only appropriate that the assessee discharged the service tax demand in the show cause notice and facilitate M/s. WIPRO Limited and others to avail the CENVAT credit as per the Rules.
14. Regarding waiver of penalty by the Appellate Authority, the Learned Counsel for the Department submitted that the imposition of penalty is at the discretion of the authority. Mere waiver of penalty will not exonerate the assessee from suppression and the tax liability demanded during the extended period. He further contended that the order from WIPRO given to the assessee/appellant is the work order for Maintenance, Management and Repair services of the leased line and the equipment used in relation to the leased line.
15. Though it is contended by the appellant that the contract is only a general contract and not for Maintenance, Management and Repair Services, there is no evidence to show that the appellant did not receive remuneration for the services of line Maintenance, modem repair and cabling to the department. These receipts have come to light only during the visit of the Internal Audit Units of the Service Tax Department.
16. The Tribunal, on examining the terms of the work order given by the WIPRO, found that the assessee was to manage and maintain the leased lines for a consideration identified on per-circuit, per-year basis.
17. On a plain reading of the work order as well as the tax entry under Section 65(105)(zzg), it is clear that “Management, Maintenance and Repair service” falls within the ambit of levy of service tax. Thus, the activity of the assessee is clearly covered by the tax entry, as they are involved in management, maintenance and repair services. Having held so, the Tribunal had declined to accept the plea of the appellant that, as a sub-contractor, they were not liable for any service tax since the customers had paid tax. WIPRO and other clients of the appellant are engaged in multifarious services to their clients. In order to render such services, they have given some work orders to the appellant/assessee, who in turn rendered the service to execute the work of the system integrator.
18. In such circumstances, the Tribunal has rightly held that the appellant cannot be considered as a sub-contractor and having failed to pay the tax for the disputed activity, the extended period for demand is sustainable. The Tribunal, exercising its discretion under Section 80 of the Finance Act, 1994, had waived the penalty imposed on the assessee under Section 78 of the Finance Act, 1994. For granting such waiver, the Tribunal relied upon the certificate of payment of service tax on the entire consideration, which is inclusive of consideration paid to the appellant.
19. This Court to know the breakup of the service tax paid by WIPRO and to ascertain whether it covers the service tax payable by the assessee gave time to the Learned Counsel for the appellant to produce the break up of service tax paid. However, the break up from WIPRO was not produced despite sufficient opportunity and time. Therefore, the benefit of extending waiver of penalty can by no stretch of imagination lead to automatically quashing of the demand raised during the extended period. Since the non-payment of service tax for the Maintenance, Management and Repair services came to light only during the course of audit of account of the assessee by the Officers of the Internal Audit Units of the Service Tax Department, suppression is proved.
20. In fine,
The first and second substantial questions of law framed regarding the extended period of limitation for demand of service tax, are answered in positive in favour of the department. The waiver of penalty in exercise of the discretionary power by assigning reasons in no way affects the levy of service tax on the suppressed receipt. In the Appellate Authority’s order, availability of revenue neutrality is well explained. When part of receipt admittedly for services rendered on Maintenance, Management and leased lines, the plea of the appellant that no revenue neutrality exist in the transaction is factually incorrect.
Insofar as the third substantial question of law, regarding the payment of service tax by the main contractor. We find in the absence of breakup in respect of the receipt of service charges for maintenance being reflected in the documents, it is proved that the assessee has received consideration which is liable to be taxed under Service Tax Act. Hence, the third substantial question of law is held against the assessee.
21. For the aforesaid reasons, this Court upholds the order of the Tribunal dated 25.01.2018. Accordingly, this Civil Miscellaneous Appeal stands dismissed. There shall be no order as to costs.
