CA Bimal Jain
Thermax Instrumentation Ltd. (“the Appellant”) was providing services in relation to Erection, Installation and Commissioning activity. To meet the contractual commitments, the Appellant use to receive 10% as an advance payment from the customers, for which counter bank guarantee of equal amount was provided to the customers. The amount of advance given by the customer was reduced in proportion to the value of work completed as shown in the invoices raised upto any stage of work executed as per the terms of the contract. The amount of bank guarantee provided by the Appellant was correspondingly reduced in proportion to the amount of advance adjusted by them. Accordingly, Service tax was paid on the invoice value on accrual basis even before the receipt of consideration.
The Department alleged that the advance payment received by the Appellant is liable to Service tax while the Appellant contended that the advance received was only in the nature of security deposit which were shown as current liability in their books of accounts and not shown as income towards consideration for services rendered.
Period involved: April 2006 to March, 2011
The Hon’ble CESTAT, Mumbai relying upon the judgments in the case of Paharpur Cooling Towers Ltd. Vs. Commissioner of Central Excise and Custom, Raipur [2015 (1) TMI 727 – CESTAT New Delhi] and Commissioner of Central Excise, Ludhiana Vs. JR. Industries [2009 (5) TMI 521 – CESTAT New Delhi], held that in the present case, the advance is like earnest money for which a Bank Guarantee is given by the Appellant. It is a fact that the customer can invoke the Bank Guarantee at any time and take back the advance. Hence, the Appellant does not show the advance as an income, not having complete dominion over the amount and therefore the same cannot be treated as a consideration for any service provided.
The Appellant has rightly paid the taxes that are at the time of issue of invoices on accrual basis even when tax was to be paid on receipt of payment basis as per law existing during the relevant period.
It is to be noted that w.e.f. April, 2011, the Central Government has introduced the POT Rules which shifted the tax incidence from receipt of payment (Receipt basis) to earliest of issuance of invoice or receipt of payment. The general Rule 3 of the POT Rules stipulates that POT shall be the earlier of the following:
- Date of Receipt of Money;
- Date of Invoice provided it is raised within the stipulated time period prescribed under Rule 4A of the Service Tax Rules i.e. 30 days (45 days for financial sector) from the date of completion of service,
- Further, if the invoice is not raised within 30 days/ 45 days from the date of completion of service, then, POT shall be the date of completion of service.
However, the stated judgment may be applicable even in present scenario also when advance received from service receiver is in the form of a deposit against which bank guarantee of equal amount is provided by service receiver.
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