CA Bimal Jain
Reliance Infratel Ltd. (“the Appellant”) was engaged in the business of providing ‘passive wireless telecom infrastructure’. The Appellant and its associated enterprise entered into an MOU whereby the Appellant granted Associated enterprise an indefeasible right to use 80% of the total capacity of its optic fibre cable network for 10 years. In terms of AS-19, the Appellant has shown an amount in the Balance Sheet under the head “lease rent advance/lease rent equalisation’ which is a notional figure (writing off operating lease amount on straight line basis). The Department has confirmed demand on the ground that the entry made was towards associated enterprise and as per Rule 6 of the Service Tax Rules, in case of associated enterprises, Service tax is payable at the time of debit/credit entry made in the books of account.
The Hon’ble CESTAT, Mumbai has observed that the general rule in case of associated enterprises is that even a book adjustment or any credit or debit entry in any account by whatever name called in the books of accounts of the service provider is equated with receipt of ‘the gross amount charged’ by the service provider to the service recipient. However, the lease rent equalisation shown as per AS-19 is not an income for the purposes of computing tax under the Income Tax Act. Therefore, it is also not a ‘payment’ actually received or receivable i.e. neither ‘consideration’ nor the ‘gross amount charged’ in terms of clauses (a) and (c) of the Explanation to Section 67 of the Finance Act. Hence, relying upon the plethora of cases, the Hon’ble CESTAT has held that the Appellant was not liable to pay Service tax on the amount of lease rent equalisation shown in the Balance Sheet.