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Case Law Details

Case Name : Mahindra World City Vs Commissioner, Central Excise (CESTAT Delhi)
Appeal Number : Service Tax Appeal No. 50749 of 2017
Date of Judgement/Order : 25/09/2023
Related Assessment Year :
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Mahindra World City (Jaipur) Ltd. Vs Commissioner (CESTAT Delhi)

CESTAT Delhi held that as per rule 4(b)(iii) of the point of Point of Taxation Rules, 2011, in case payment is received before change in effective rate of tax and invoice is issued after change in effective rate of tax, then, point of taxation will be date of payment. Hence, demand set aside on advance receipt.

Facts- The appellant, M/s Mahindra World City (Jaipur) Ltd., has entered into Memorandum of Understanding (MOU) – DTA land on 7.3.2012 to lease land to M/s JCB India Ltd. for setting up a new project for manufacture of earth moving/material handling equipment. Para 2.1 and 2.2 of the said MOU clearly provided that the lease deed shall be executed only after fiscal incentives had been provided by the Government of Rajasthan; failing which the lease deed will not be entered and the amount paid will have to be refunded to the appellant as provided in para 8.1 of MOU.

Thereafter the appellants received Rs. 10,62,33,750/- in March 2012 and the balance amount of Rs. 60,19,91,250/-was received in October, 2012. The lease deed was executed on 23.10.2012. The appellant discharged the service tax of Rs. 7,44,06,119/- and interest of Rs. 23,31,116/- on delay in payment of service tax of Rs. 1,31,31,492/- payable on Rs. 10,62,33,750/- received in March 2012 on 27.11.2012.

The Department initiated investigation and on completion, show cause notice was issued alleging that service tax was payable in March 2012 on the entire amount, and interest on the delayed payment. The show cause notice also alleged that the appellants had collected Rs. 1,45,89,436/- as excess amount. Vide the impugned order-in-original the demand of (i) Rs. 7,29,47,175/- (ii) Rs. 21,88,416/- collected in excess amount of service tax was confirmed and held to be payable under Section 73A and penalty of Rs. 10,000/- under Section 77(2) was imposed.

Conclusion- Held that Rule 4 of the POTR begins with the non­obstante clause clearly stating that where there is a change in the effective rate of tax, the provisions of rule 4 would invariably override the provisions of rule 3.

Held that the service was provided after change in effective rate of tax and the invoice also has been raised after the change in effective rate of tax, though the part payment of Rs 10,62,33,750/- was received before the change in effective rate of Thus, we hold that the case of appellant gets squarely covered under Rule 4(b)(iii) POTR. In the given set of facts and applicability of Rule 4(b)(iii) POTR there remains no service tax liability on advance received by the assessee.

FULL TEXT OF THE CESTAT DELHI ORDER

The present appeal has been filed by M/s Mahindra World City (hereinafter referred to as the appellant) to assail the order-in­original dated 01.02.2017 confirming the demand of Rs.7,29,47,175/- + Rs. 21,88,416/- along with penalty.

2. The brief facts are as follows-M/s Mahindra World City (Jaipur) Ltd. is engaged in providing the services taxable under the category of renting of immovable property and construction services and were registered under both the categories. The appellant entered into Memorandum of Understanding (MOU) – DTA land on 7.3.2012 to lease land to M/s JCB India Ltd. for setting up a new project for manufacture of earth moving/material handling equipment. Para 2.1 and 2.2 of the said MOU clearly provided that the lease deed shall be executed only after fiscal incentives had been provided by the Government of Rajasthan; failing which the lease deed will not be entered and the amount paid will have to be refunded to the appellant as provided in para 8.1 of MOU. Thereafter the appellants received Rs. 10,62,33,750/- in March 2012 and the balance amount of Rs. 60,19,91,250/-was received in October, 2012. The lease deed was executed on 23.10.2012. The appellant discharged the service tax of Rs. 7,44,06,119/- and interest of Rs. 23,31,116/- on delay in payment of service tax of Rs. 1,31,31,492/- payable on Rs. 10,62,33,750/- received in March 2012 on 27.11.2012. The Department initiated investigation and on completion, show cause notice bearing C. No. V(H)/Adj­I/ST/03/2016 dated 31.1.2016 was issued alleging that service tax was payable in March 2012 on the entire amount, and interest on the delayed payment. The show cause notice also alleged that the appellants had collected Rs. 1,45,89,436/- as excess amount. Vide the impugned order-in-original No. JAI-EXCUS-000-COM-25-16-17 dated 1.2.2017 the demand of (i) Rs. 7,29,47,175/- (ii) Rs. 21,88,416/- collected in excess amount of service tax was confirmed and held to be payable under Section 73A and penalty of Rs. 10,000/- under Section 77(2) was imposed.

3. The learned counsel submitted that the Commissioner had erred in arriving at the point of taxation for Rs. 10,62,33,760/-, to be March, 2012. Consequently, the order-in-original had levied interest for the period April 2012 to November 2012, which was He submitted that the point of taxation for this amount was October 2012 and, therefore, no interest was payable. The learned counsel further submitted that the Point of Taxation needs to be determined in terms of Rule 4 of the Point of Taxation Rules, 2011,according to which the point of taxation, in the present case was October 2012. He contended that as per Rule 6 of Service Tax Rules, 1994, service tax is required to be paid in the month in which the service is deemed to be provided. Hence the liability to pay service tax arises on the point of taxation. The impugned order had erred in computing the Point of Taxation in terms of Rule 3 of the Point of Taxation Rules, 2011 which states that the point of taxation is the earliest of the date of invoice / completion of service or the date of receipt of any advance. The Commissioner had failed to observe that there was change in rate of service tax with effect from 1.4.2012, from 10% to 12%.Thus the point of taxation is required to be determined in terms of Rule 4 of Point of Taxation Rules, 2011.

4. The learned counsel also submitted that the Rule 4 of the Point of Taxation Rules, 2011 starts with a “notwithstanding clause” whereby the said rule overrides the applicability of Rule 3 of the said Rules in cases where there is change in effective rate of tax. He stated that the law with respect to the effect of a non obstante clause has been clearly laid down by Honble Supreme Court in the case of G.M. Kokli and Others – 1984 (Supp) Supreme Court 196 and followed by the Larger Bench of the Tribunal in the case of Das And Company – 2000 (121) ELT 275 (Tribunal – LB).

5. The learned counsel further submitted that in para 35(iv) of the order-in-original the Commissioner had acknowledged that that the appellants had raised two invoices bearing Nos. MWCL/2012- 13/M/06 and MWCL/2012-13/M/07 both dated 23.10.2012 and the lease deed was signed on 27.11.20 12. Further it was also admitted in the impugned order that the service is complete only on signing of the lease agreement. Thus, the two events of raising of invoice and providing of service occurred post the change in the rate of service tax. Therefore, service tax is payable at the revised rate and not at the old rate. He relied on the decision in the case of Paharpur Cooling Towers Ltd. – 2015 (37) STR 550 (Tri. – Del.) and Vistar Construction (P) Ltd. – 2013 (31) STR 129 (Del.) to reiterate his contention that levy of service is on rendition of service and hence service tax is not applicable on the receipt of advances. He further submitted that Section 67A was introduced w.e.f 18.5.2012 and the said section also provides for levy of tax on the services provided or to be provided. Hence the levy of service tax is required to be made based on the rendering of the service.

6. The learned counsel also stated that the demand of interest for the period April 2012 to November 2012 for the amount received in March 2012 was not sustainable as there was no demand for the said interest in the show cause notice. The order in para 44 admits that the show cause notice has not raised the demand for the period April 2012 to November 2012 for the amounts received in the month of March 2012. Therefore, the impugned order had travelled beyond the scope of the show cause notice to confirm the demand of interest for the period April 2012 to November 2012 on the amounts received in the month of March 2012. He submitted that the Commissioner in his order had held that the amount of Rs. 21,88,416/- which was collected in excess of the amount of service tax levied had been worked out on following basis:

(a) Tax payable @ 10.30% on Rs.10,62,33,750 =  Rs.1,09,076
(b) Tax payable @ 12.36% on Rs. 10,62,33,750 =  Rs.1,31,30,492
(c) (b) –(a) =  Rs.21,88,415

This was erroneous as the point of taxation was October 2012, thus there was no excess collection of the taxes by the appellant. Hence, there was no liability under Section 73A.The imposition of penalty under Section 77(2) for violation of Section 70 for improper disclosure in return was also incorrect. The learned counsel submitted that there was no improper disclosure in the returns as point of taxation arose in October 2012 and not in March 2012. The appellants had already disclosed the receipt of the amount of October 2012.

7. The learned Authorized Representative submitted that the Point of Taxation for the advance amounts received by the appellant shall be the date of receipt of the amount. In the present case, the appellant had received the amount of Rs. 10,62,33,750/- in March 2012. Therefore, as per the Point of Taxation Rules, 2011, the point of taxation was March 2012. The appellant never challenged the said date of taxation before the adjudicating authority and have already deposited interest amount for the period (March 2012 to October 2012) along with service tax, even before issuance of the show cause notice.

8. He further submitted that the appellant should have reflected the amount of advance of Rs. 10,62,33,750/- in their return due for the half year ending March 2012 which they failed to do. Therefore, the Commissioner had correctly imposed penalty on the appellant under Section 77(2) of the Finance Act, 1994.

9. We have heard the learned counsel for the appellant and the learned authorized representative of the department. The issue for consideration before us is:

“Whether the appellant became liable to pay the entire service tax of ₹ 7, 44, 06, 119/- in the month of March, 2012 itself when it received the part amount/earnest amount of Rs. 10,62,33,750/-.‟‟

This liability would have to be examined within the contours of the Point of Taxation Rules, 2011 (hereinafter referred to as the POTR).It has been argued before us that the Department has taken recourse to Rule 3 of the POTR, to determine the service tax liability of the appellant, whereas the Rule to be applied in their case is Rule 4 of POTR. In order to appreciate the argument, it would be appropriate to reproduce the relevant rules.

“3. Determination of point of taxation.- For the purposes of these rules, unless otherwise provided, ‘point of taxation’ shall be,-

(a) the time when the invoice for the service provided or agreed to be provided is issued:

Provided that where the invoice is not issued within the time period specified in rule 4A of the Service Tax Rules,1994, the point of taxation shall be the date of completion of provision of the service.

(b) in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment.

Provided that for the purposes of clauses (a) and (b),-

(i) in case of continuous supply of service where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the receiver of service to make any payment to service provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service;

(ii) wherever the provider of taxable service receives a payment up to rupees one thousand in excess of the amount indicated in the invoice, the point of taxation to the extent of such excess amount, at the option of the provider of taxable service, shall be determined in accordance with the provisions of clause (a).

Explanation.- For the purpose of this rule, wherever any advance by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.

4. Determination of point of taxation in case of change in effective rate of tax.- Notwithstanding anything contained in rule 3, the point of taxation in cases where there is a change in effective rate of tax in respect of a service, shall be determined in the following manner, namely:

(a) in case a taxable service has been provided before the change in effective rate of tax,-

(i) where the invoice for the same has been issued and the payment received after the change in effective rate of tax, the point of taxation shall be date of payment or issuing of invoice, whichever is earlier; or

(ii) where the invoice has also been issued prior to change in effective rate of tax but the payment is received after the change in effective rate of tax, the point of taxation shall be the date of issuing of invoice; or

(iii) where the payment is also received before the change in effective rate of tax, but the invoice for the same has been issued after the change in effective rate of tax, the point of taxation shall be the date of payment;

(b) in case a taxable service has been provided after the change in effective rate of tax,-

(i) where the payment for the invoice is also made after the change in effective rate of tax but the invoice has been issued prior to the change in effective rate of tax, the point of taxation shall be the date of payment; or

(ii) where the invoice has been issued and the payment for the invoice received before the change in effective rate of tax, the point of taxation shall be the date of receipt of payment or date of issuance of invoice, whichever is earlier; or

(iii) where the invoice has also been raised after the change in effective rate of tax but the payment has been received before the change in effective rate of tax, the point of taxation shall be date of issuing of invoice.

Explanation.- Omitted”

10. We note that Rule 4 of the POTR begins with the non­obstante clause clearly stating that where there is a change in the effective rate of tax, the provisions of rule 4 would invariably override the provisions of rule 3. Hence it is first to be established as to the appellants case falls within Rule 4 as contended by the learned counsel, or under rule 3 as contended by the Department. It would be appropriate to reproduce the calendar of events as submitted by the appellant.

Sl No. Description of event Date/Amount
1 MOU and Advance amount Rs. 10,62,33,750/-received March 2012
2 Change in Rate of Service Tax from 10.30% to 12.36% May,2012
3 Lease Agreement signed and remaining amount received Rs. 60,19,91,250/-. October 2012
4 Invoice Nos. MWCL/2012-13/M/06 & MWCL/2012-13/M/07 23.10.2012
5 Date of payment of service tax 27.11.20 12

11. As per the calendar of events elucidated above, it is important to note that there was a change in the rate of service tax in May, 2012, which is borne by the fact that the Finance Act, 2012-13 inserted the following section in the Finance Act, 1994. The extract of the Finance Bill is reproduced hereinafter.

“(F) after section 66A, the following sections shall be inserted with effect from such date as the Central Government may, by notification, appoint, namely:

’66B. There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.”

11.1 This very fact that there was a change in the rate of service tax clearly takes the appellants point of taxation from Rule 3 of POTR to Rule 4 of POTR. Further, as per Rule 4(b)(iii), the point of taxation would be the date of issuing of invoice, which in the instant case is October, 2012. We also note that as per section 67A of the Finance Act, 1994, the rate of service tax, the value of a taxable service shall be the rate or value in force or as applicable at the time when the taxable service has been provided or agreed to be provided. It is noted that the appellant and the service recipient had merely entered into a Memorandum of Understanding in March, 2012 for leasing of land, and advance amount was paid to the appellant. However, the actual provision of service of signing of the lease agreement, raising of the invoices and receipt of the bulk of the payment was in October, 2012, which was preceded by change in effective rate of service tax in May, 2012. This squarely supports the appellants contention that the point of taxation would be under Rule 4 of POTR. We agree with this contention.

12. The overriding effect of the non-obstante clause has been discussed by the larger bench of this Tribunal in the case of Das and Company Vs. Collector of Central Excise, Bombay, wherein it was held as follows:

“10. The amendment to note 6 with effect from 1.3.1988 contains a non-obstante clause i.e., notwithstanding anything contained in Note 3 to this chapter. Apex court has held in G.M. Kokil & Others (supra) the non-obstante clause is a legislative device which is usually employed to give overriding effect to certain provisions were some other contrary provisions that may be found either in the same enactment or some other enactment and avoid the operation and effect of all contrary provisions. Effect of a non‑obstante clause is the opposite of provision which states “subject to”. Thus, a non-obstante clause is used where contrary provisions exist. In the instant case, Note3 to chapter 39 specifically states that certain headings in chapter 39 “apply only to goods of a kind produced by chemical synthesis”. While amending note 6 states that conversion from one primary form to another amounts to manufacture. Processes of conversion from one primary form to another mechanical and not chemical processes. Therefore, the provisions of notes 3 and 6 are contrary. The use of the non-­obstante clause,” notwithstanding anything contained in Note3 to this chapter” gives effect to the provision of note 6 by avoiding the operation of the contrary provision in Note3. Such a provision is a new provision and not a clarification of any ambiguity in an existing provision…….. ”.

13. From the calendar of events elucidated in table above, it is also clear that the service of provision of leased land was provided in October, 2012. It is also apparent that the invoices for the said provision of service were raised on 23.10.2012. The above two dates are crucial to determine the date of provision of service in the instant case, that too in terms of Rule 4 POTR. From said two dates, it is clear that the service was provided after change in effective rate of tax and the invoice also has been raised after the change in effective rate of tax, though the part payment of Rs 10,62,33,750/- was received before the change in effective rate of Thus, we hold that the case of appellant gets squarely covered under Rule 4(b)(iii) POTR. In the given set of facts and applicability of Rule 4(b)(iii) POTR there remains no service tax liability on advance received by the assessee. Hence, we hold that the demands and penalties confirmed against the appellant are not sustainable.

14. We draw our support from the decision of this Tribunal the case of Paharpur Cooling Towers Ltd. Vs Commissioner of Central Excise and Customs, Raipur [2015 (37) STR 550 (Tri-Del)], has held as follows:

“3. As regards demand of Rs. 18,54,468/- confirmed on the advance receipt by the appellant, we find that the show cause notice itself concedes that service tax on the advance was paid (adjusted) subsequently and the appellant are also not contesting the said demand. As regards the interest of ₹ 2, 76, 359/-ordered to be recovered by the impugned order on delayed payment of service tax relating to the advance receipt, it is to be noted that during the relevant period rate of tax applicable was rate prevailing on the date of providing the service. Therefore, before the service was provided the appellant would have been no position to know as to what will pay the service tax. Service tax was paid as and when the service relating to the advance receipt was rendered. In this view of the matter, it is not possible to sustain the order relating to recovery of impugned interest. It was only on 18.5.2012 that section 67A was introduced with provided that the rate of service tax, value of taxable service and the rate of exchange, if any shall be the rate of service tax or value of taxable service, rate of exchange in force as applicable at the time when the taxable service has been provided or agreed to be provided. Obviously, Section 67A would only have prospective applicability. Thus, reiterated as the advance receipt by the appellant has been adjusted in due course as and when the service was provided coupled the fact that unless the service was provided, the rate of which the service tax was repaid would not be known, it is difficult to sustain the owner with regard to confirmation of the impugned interest.”

15. This view was upheld in the case of Commissioner of Central Excise, Pune Vs Thermax Engineering Construction Co Ltd [2019(22) GSTL 80 (Tri-Mum)]. The relevant paras are reproduced hereinafter;

“6. We have carefully considered the submissions made by both the sides. In case of Advance receipt from the customers we find that amount was received by the assessee as security/guarantee amount. It is obvious that for big contract which spread over years, the service provider needs to have specific performance guarantee from their customer. The assessee in turn of such security amount has issued Bank Guarantee amount to their customer. We find from the contract with Chettin and Cement Corporation Ltd., produced by the Appellant that it provides for Advance cum-security and in turn the assessee is liable for equal amount of performance security Bank Guarantee. Thus, the amount is guarantee from both the sides. Such amount cannot be considered as advance receipt since it is normal feature of contracts. Even the Honble Supreme Court in case of Shri Hanuman Cotton Mills and Ors. v. Tata Aircraft Limited, AIR 1970 SC 1986 held that the amount is to be considered as earnest money if following principles are followed:

(i) It must be given at the moment at which the contract is concluded.

(ii) It represents the guaranteethat the contract will be fulfilled or, in other words, “earnest” is given to bind the contract.

(iii) It is a part of purchase price when the transaction is carried out.

(iv) It is forfeited when the transaction fall through by reason of failure of the purchaser.

(v) Unless there is anything to the contrary in the terms of the contract, on default committed by the buyer, the seller is entitled to forfeit the earnest.

7. We find that in the appellants case the above principles are equally applicable and hence there is no doubt to our mind that the advance cum-security bank guarantee to the assessee by the contract awarding party is in the form of earnest money. Thus, the same is not liable to tax. It is also found from the certificate issued by the Chartered Accountant that the assessee has discharged service tax liability on the entire amount of such advances. We thus find no reason to hold that the said amount is liable to be taxed at the time of receipt. It became the part of consideration only when it was proportionately included in the stage-wise completion of work for which invoices were raised and service tax was paid by the assessee. Even if it is assumed that the said amount was not in the form of earnest money but was received as Advance in that case also no service tax could have been demanded at the time of receipt as the same was not taxable. In case of M/s. Thermax Instrumentation Ltd. v. CCE, 2015-TlOL-2736-CESTAT-MUM = 2016 (42) S.T.R.. 19 (Tri.-Mumbai) the Tribunal held that advance cannot be considered as receipt towards taxable service as it is an obligation on the part of the customer of the mutual commitment between the two parties to honour the contract. Similarly in case of CCE, Ludhiana v. J.R. Industries, 2009 (16) S.T.R.. 51 (Tri.-Del.) it was held that when service was not provided the advance receipt cannot be taxed. We thus hold that there is no service tax liability on advance received by the assessee and set aside the demands and penalties confirmed against M/s. Thermax.”

16. In view of the above discussions, we hold that the impugned order cannot be upheld and is therefore set-aside. Consequently, the appeal is allowed with consequential relief, if any, to the appellant.

(Pronounced in open Court on 25.09.2023)

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