Demand based on audit without any further investigation is liable to be set aside

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Innovative and Technological Learning Services Pvt Ltd. Vs Commissioner of CGST (CESTAT Mumbai)

Demand based on audit without any further investigation is liable to be set aside on this count alone

The appellant is a service provider. It provides services to a educational trust. It paid service tax. It suffered huge losses. As result of which, the appellant company got merged with the trust (service recipient). The CERA conducted audit. Show cause notice was based on audit. Order came to be passed on the same basis. Hence, appeal before CESTAT.

The Hon’ble CESTAT, Mumbai set aside the order and allowed the appeal.

It held: (i) demand based on audit without any further investigation is liable to be set aside on this count alone; (ii) independently on merits, it is held that service tax cannot be demanded on expenses incurred by the service provider. Service provider can suffer losses; (iii) there is no allegation, let alone evidence, of suppression of value or undervaluation of services; (iv) Services provided in terms of the agreement have to looked at as such only and subsequent turn of events is not relevant in deciding the issue under the agreement; (v) service tax can be demanded on “value” under section 67 which is the gross amount charged for the service and no addition thereto can be made.

FULL TEXT OF THE JUDGMENT/ORDER OF CESTAT MUMBAI

This appeal is directed against Order-in-Original No. 77/CGST-NM/Commr/KV/2018-19 dated 27.03.2019 of the Commissioner of CGST & Central Tax, Navi Mumbai. Vide the impugned order, following has been held:

“ORDER

I. I confirm the demand and order recovery of Service Tax totally amounting to Rs. 4,13,83,070/- (Rupees Four Crore Thirteen Lacs. Eighty Three Thousand Seventy Only) under Section 73(2) of the Finance Act, 1994.

II. Interest at the appropriate is demanded and ordered to be recovered from them under Section 75 of the Finance Act, 1994.

III. Penalty of Rs. 10000/-(ten thousand) is imposed upon them under the provisions of Section 77 of the Finance Act, 1994.

IV. Penalty of Rs. 4,13,83,070/- (Rupees Four Crore Thirteen Lacs Eighty Three Thousand Seventy Only) is imposed upon them under the provisions of Section 78 of the Finance Act, 1994.”

2.1 Appellant is engaged in providing service under the category of Commercial Training or Coaching Service, Brand Promotion, Marketing, Advertisement, Business Support Services, Business Auxiliary Service, Legal & Professional Services etc

2.2 During the course of audit conducted by CERA (Central Excise Receipt Audit) on the noticee’s records for the period 2013-14 to 2015-16, it was observed that: “M/s. Universita Commerciale “Luigi Bocconi”, Italy, a company of Italy made an arrangement to provide foreign degree courses in India and for this a trust namely ‘Knowledge Revival and Expansion Trust’ (KRT) was formed which is situated at Hiranandani IT Park, Powai, Mumbai. Further, to provide services to KRT, a company namely ‘Innovative and Technological Learning Service Pvt. Ltd.’ (ITLS) was established in the same premises. ITLS entered into an agreement with KRT on 1st October, 2012 for providing various services mentioned in Annexure A of the Agreement. However, the arrangement was made in such a way that entire student fees was shown as income in KRT books of account and entire expenses except a few like rent of the premises and salary of some staffs etc. was booked in the books of ITLS. ITLS in turn charged KRT only for faculty fees and offered service tax on the same. ITLS was not charging any fees for providing other services like brand promotion, marketing, advertisement, business support services, business auxiliary services, security services, housekeeping services legal and professional services, chartered accountant service etc. and this was the reason that even paying service tax through CENVAT account, company had huge closing balance of unutilised CENVAT credit. This arrangement was the main reason that’s why the company was in continuous loss from beginning. In December, 2015, a decision was taken to close the trust and transfer entire asset and liability (only through mutual agreement) of the trust to the company. Since then whole business was run only through company i.e. ITLS. Here, the company was formed to provide services to the Trust only and the company was actually doing the same as seen from annual accounts, however, raising bills / invoices only for faculty fees was nothing but undervaluation of services.”

2.3 Revenue was of the that entire expenses booked in the noticee company were to be considered as value of service provided to the Trust & not only the faculty fees; that omission to consider the entire cost as consideration was contrary to the principles of valuation of taxable service in accordance with Sec 67 of the Finance Act, 1994 r/w Rule 3 of the Service Tax (Determination of Value) Rules, 2006 which resulted in short levy of service tax to the extent of Rs. 4,13,83,070/- (during the period 2012-13 to 2015-16) as indicated in the table below:

PYRevenue from OperationsExpenses debited in P & L AccountUndervaluation of ServiceService Tax @ %Service Tax payable
(a)(b)(c)=(b)-(a)(d)(e)
12-1322820501781436625532316112.366837943
13-1418475956834561206498016412.368031548
14-15465948791209844477438956812.369194551
15-162794304514738461711944157214.5017319028
Total11583438142996884641383070

2.4 It was observed that under the self-assessment regime, it was the duty of the appellant to correctly assess & declare the taxable value & discharge due Service Tax liability thereon as per the provisions of the Act & the Rules made thereunder, despite which the noticee failed to include the value of expenditure incurred for providing taxable service in the taxable value & thus, failed to pay the due Service Tax thereon. The said discrepancy would have gone unnoticed but for the Audit conducted on the noticee’s records. Therefore appellant suppressed and mis-declared the true nature & value of the taxable service, with intent to evade payment of Service Tax, & accordingly, evaded payment of due service tax in complete violation of the provisions of the Act & Rules made thereunder

2.5 A show cause notice dated 29.01.2018 was issued to the appellant alleging contraventions as follows:

i. Sec 67 (1) (iii) of the Act r/w Rule 3 of the Service Tax (Determination of Value) Rules, 2006 in as much as they failed to consider entire expenditure, booked in their accounts as consideration & determine proper taxable value for discharge of Service Tax for the period in question.

ii. Sec 68 of the Act r/w Rule 6 of the Service Tax Rules, 1994 in as much as they failed to pay Service Tax amounting to Rs. 4,13,83,070/- (Rupees Four Crore Thirteen Lacs Eighty Three Thousand Seventy Only) & interest, as applicable on the value of expenditure as discussed above.

iii. Sec 77 of the Act in as much as they failed to file proper ST-3 returns for the period in question by not including the value of expenditure, booked in their accounts, in the taxable value for discharge of Service Tax in the respective returns.

2.6 Show cause notice sought to

a. demand & recover service tax amounting to Rs. 4,13,83,070/- (Rupees Four Crore Thirteen Lacs Eighty Three Thousand Seventy Only) under proviso to Sec 73

(1) of the Finance Act, 1994;

b. levy interest under Section 75 of the Act;

c. impose penalty under Section 75 of the Act for failure to pay Service Tax within the prescribed time as required under Section 58 of the ACT r/w Rule 6 of the Service Tax Rules, 1994;

d. impose penalty under Section 78 of the Act for suppressing and mis- declaring the true nature & value of said taxable service, with intent to evade payment of Service Tax & for contravention of the various provisions of the Finance Act, 1994, and Rules made thereunder;

e. impose penalty under Section 77 of the Act for not filing proper ST-3 returns for the period in question by not including the value of expenses, booked in their accounts, in the taxable value in the respective returns.

2.7 Show cause notice has been adjudicated by the Commissioner as per the impugned order. Aggrieved appellants have filed this appeal.

3.1 We have heard Shri Bharat Raichandani, Advocate for the appellant and Shri Nitin Ranjan, Deputy Commissioner, Authorized Representative for the revenue.

3.2 Arguing for the appellant learned Counsel submits that

> The Appellants submit that the Impugned Order is a nonspeaking one. The Ld. Commissioner has not considered the submissions made by the Appellant and proceeded on the basis of the audit report, extracted the same and concluded that the Appellant is liable to pay service tax. The case laws relied upon by the Appellant have not been considered by the Ld. Commissioner. The application of the same to the facts of the present case has been dismissed without giving any proper reasoning. Hence, the Impugned Order is liable to be set aside on this ground as being passed in violation of principles of natural justice. Reliance is placed on the following decisions

  • Cyril Lasrado (Dead) by Lrs and Others Vs Juliana Maria Lasrado and Another – 2004 (7) SCC 431.
  • Velcord Textiles v. Union of India – 1999 (111) ELT 351 (Bom)
  • Ratlam Wires Private Limited – 2000 (120) ELT 71 (MP).

> Demand is based on CERA audit. The audit has not been conducted by a Chartered Accountant. Hence, demand based on such audit is bad in law It is settled legal position that Show Cause Notice issued solely based on the audit report is not maintainable. Reliance is placed on Swastik Tin Works – 1986 (25) ELT 798, CESTAT

  • “14. We have carefully considered the facts of the case and the submissions made by both sides. At the outset, it is quite clear that both the Show Cause Notices seem to be based only on audit objections. There is no claim that there has been any further inquiry or investigation by the Department which has helped to establish that the actual identity of the impugned goods is other than that claimed by the assessee and earlier approved by the Department itself. After all, the classification lists themselves declared that the items were in the nature of cut-tosize sheets and for years together these were being cleared as such.. It is shown also that during these years, they were held by different Excise Officers as non-excisable sheets cut-to-size. In the absence of any subsequent evidence to the contrary. It is not at all clear as to how the Department could have raised demand merely in view of audit objections holding that the goods were metal containers in unassembled form. In reply to Show Cause Notices, the Appellants have unassailably urged this point of view and this is not answered at the level of either the Assistant Collector or the Collector (Appeals). In this connection, we have seen the two decisions of the Delhi High Court cited by the Appellants in the cases of Poona Bottling Co. Ltd. and another v. Union of India and Others – 1981 E.L.T. 389, and Indian Aluminium Company Ltd. and another v. Union of India and Others -1983 E.L.T. 349, in which it was held that Show Cause Notices issued on the basis of advice or directive by the Central Government of the Central Board of Excise and Customs, were illegal and void, as directives could not be issued to subordinate authorities exercising quasi-judicial functions. In this particular case, there have been no such advice or directives by higher authorities. It would have been perfectly in order if the local Central Excise officers were to undertake further inquiries on the receipt of audit objection; and after further examination and necessary investigation, if they were to come to the conclusion on the basis of evidence collected that the goods in question were liable to duty or further duty, they would be well within their jurisdiction to issue a Show Cause Notice to the assessee, explaining to him the grounds and the evidence on the basis of which the Excise has come to the tentative view that the assessee has not discharged his liability to duty. However, this, in the present matters, the Department has failed to do so. The Show Cause Notices are veritably based on audit objection only and no other reason is given for the Department changing its stand as regards the classification of goods. On this ground, the Show Cause Notice is liable to be quashed.”

> Reliance is also placed on the following decisions

  • Ram Steel Rolling & Forging Mills – 2006 (204) ELT 87,
  • Kirloskar Pneumatic Co Ltd – 2010 (254) ELT 328.

>Personal hearing was held on 06.06.2018. The Impugned Order was passed on 28.02.2019 (issued on 27.03.2019).

  • Citadel Fine Pharmaceuticals, Madras & Ors. – 1989 (42) ELT 515 (SC)
  • Bhagwandas S. Tolani v. B.C. Aggarwal and Ors – 1983 (12) ELT 44 (Bom.)
  • Universal Generics Pvt. Ltd. [1993 (68) ELT 27 (Bom)]
  • Anil Rai vs State of Bihar – 2002 (3) BCR (SC) 360 : 2001 (7) SCC 318
  • Lanvin Synthetics (P) Limited [2015 (322) ELT 429 (Bom)
  • Shirish Harshvardhan Shah [2010 (254) ELT 259 (Bom)]
  • Hindustan Lever Limited [2011 (264) ELT 173 (Bom)]

> Service tax is to be levied only on the value of services provided by the service provider. The term “charged” under Section 67 coupled with “such service” has to be read in context and in tandem with each other. The term “charged” has to be construed having regard to the subject matter and the context in which it is used. M K Kirtikar – AIR 1960 SC 186).

> The term “charge” means any amount demanded as a price for rendering some service or as price for goods. (See: Gajanana Motor Transport Co. Limited [AIR 1977 SC 418]. Thus, the term “charged” under Section 67 means the sum collected or demanded by the service provider for the service provided by him. The said interpretation is obvious, logical and in line with the legislative competence.

> Appellant has incurred expenses for providing output services. This fact is not in dispute. There is no sum charged by the Appellant to the service recipient over and above the faculty fees. This is not even the case of the Department in the Show Cause Notice. In terms of the above statutory provisions, the said charges billed alone would be subject to service tax. The Appellant submits that the expenses incurred by Appellant are such which the service recipient would have otherwise incurred. Reliance is placed on Larger bench decision in the case of Bhayana Builders (P) Ltd 2013 – (32) S.T.R. 49(Tri.-LB) wherein the bench observed that Section 67 of the Act deals with valuation of taxable services and intends to define what constitutes the value received by the service provider as “consideration” from the service recipient for the service provided. Implicit in this legislative architecture is the concept that any consideration whether monetary or otherwise should have flown or should flow from the service recipient to the service provider and should accrue to the benefit of the later.

> Second, Rule 5(1) of the Valuation Rules provides that expenses or costs which may be incurred by the service provider in the course of providing taxable service would be included in the value for calculating gross consideration on which service tax is to be charged. Rule 5(1) of the Valuation Rules was challenged before the Hon’ble Delhi High Court in Intercontinental Consultants & Technocrats Pvt. Ltd. [ 2013 (29) STR 9 (Del.)]. Hon’ble Supreme Court has affirmed the decision of Delhi High Court.

> The valuation for service tax under Section 67 of the Finance Act could not be anything more or less than the consideration paid as quid pro quo for rendering such a service and expenses and costs incurred for providing such service could not be included in the consideration for valuation of service tax.

> Reliance is placed on the decision in the case of Premium Real Estate developers [2019 (22) G.S.T.L 373 (Tri. Del)]

> The clauses of the agreement have been misunderstood in the Impugned Order. The entire case of the revenue is built on an erroneous understanding of the arrangement between the Appellant and the service recipient (KRT). The Impugned Order has, at paragraph 5.5, recorded as under: –

“5.5 …..It is forthcoming from the facts of the case that M/s Innovate had no other business than to provide logistics/ services to KRT, therefore, whatever expenses were borne by Innovate was only for that particular purpose. Though it is not the subject issue of this notice, however, spending crores of rupees without any motive of profit indicate some other angle of investigation. No businesses run without keeping an eye on the profit factor. At no point of time it has been brought on records or informed by the notice that they were providing services to some other party also other than KRT.

The services agreement entered between these two parties on 1 October 2012 provides as follows:

“2.2 It is understood that the services agreement is entered into on exclusive basis, and therefore the Trust shall not be entitled to purchase services similar to, or having the same nature and contents of the services, as well as any other services needed for operating MISB Bocconi from any other third party, as hereinafter defined.

2.3 In turn, the Service Provider shall be free to provide the Services, as well as services similar to or having the same nature and contents of the Services, to other third parties, including the Additional Services, as hereinafter defined.”

SERVICE FEE

4.1 As a consideration for the provision of the Services, the Trust hereby undertakes to pay the Service Provider the service fee set out in Annex I to this Service Agreement (the “Service Fee”).

4.2 The Service Provider agrees that the Services Fee shall be the only remuneration payable to it. The parties mutually acknowledge that the Service Fee agreed therein is reasonable and adequate compensation for the Services to be rendered by the Service Provider and transaction contemplated herein is on terms and conditions (taken as a whole) no less favourable to each Party than those which could reasonably be obtained by each party from a third party in an arm’s length transaction. The Service Agreement has been entered into at arm’s length, without duress or caution and it is to be interpreted as an agreement between two parties of equal bargaining strength.

> A perusal of the above clauses of the services agreement would clearly indicate and contemplates that the Appellant was free to provide similar services to third parties while the service recipient was not allowed to procure similar services from any other party. Accordingly, the parties clearly agreed and contemplated that the Appellant would expand its business operations and provide services to other parties as well. It is, therefore, fundamentally incorrect to say that the Appellant has incurred expenditure solely for providing services to KRT and hence the entire amount of expenditure should have been charged to KRT.

> The Appellant was establishing its business of providing similar services to several other parties and in order to expand its business, has incurred business development expenditure. As a new entrant to the Indian market, and in order to familiarize itself with various requirements under the Indian laws for conducting business in India, the Appellant also incurred expenditure in the nature of legal and professional charges. No allegation has been made in the Show Cause Notice or the Impugned Order that such business development expenditure, or legal and professional charges, were in relation to the provision of services by the Appellant solely to KRT, or any evidence adduced to that effect by the Respondent.

> It is therefore submitted that the entire proceedings are based on an erroneous finding that the Appellant was established to provide services solely to KRT. The said finding is clearly erroneous in terms of the express clauses incorporated in the agreement entered into between the Appellant and KRT. Moreover, it is reiterated that no evidence has been adduced by the Respondent in the SCN or the Impugned Order to substantiate the said finding which is not only erroneous and but also contrary to the facts of the case and material available on record. Hence, the Impugned Order is liable to be set aside on this ground alone.

> The findings recorded in the para 5.5 of the order travel beyond the allegations made in the show cause notice. It is well settled that the department cannot travel beyond the allegations leveled in the Show Cause Notice. [Toyo Engineering India Limited [2006 (201) ELT 513 (SC)], Prince Khadi Woollen Handloom Prod Coop Indl Society [1996 (88) ELT 637 (SC)]

> In the present case the entire consideration is received by the Appellant in money which is quantified and thus not amenable to Rule 3. It is also not the case of the Department, in the present Show Cause Notice, that the value of taxable service cannot be ascertained. If that be the case, no resort can be made to the Valuation Rules. The Appellant states and submit that the Rule 3 of Valuation Rules can come into play only in a case where the value of taxable service cannot be ascertained i.e. under Section 67(1)(iii) of the Finance Act. This is the fundamental error committed by the Department.

> In any case, extended period of limitation cannot be invoked as there was no suppression of facts with intent to evade payment of tax. The Appellant was under bona fide belief that service tax was not leviable for the afore stated reasons. The issue is one of interpretation of the exemption notification and purely legal. Reliance is placed on the decisions as follows:

  • Continental Foundation [2007 (216) ELT 177 (SC)]
  • Chemphar Drugs [1989 (40) ELT 276 (SC)]

> The allegation in Show Cause Notice is reproduced below:

“3. From the above, it appears that entire expenses booked in the company were to be considered as value of services provided to the Trust and not only the faculty fees. Omission to consider the entire cost as consideration is contrary to the principles of valuation of taxable in accordance with Section 67 of the Finance Act, 1994 read with Rule 3 of the Service Tax (Determination of value) Rules, 2006 which has resulted in short levy of service tax Undervaluation of services during 2012-13 to 2015-16 and service tax liabilities thereon:

 The above calculation sheet for the period 2012-13 is prepared as per the balance sheet submitted by the assessee vide letter dated 04.08.2017 and for the period 2013-14 to 2015-16 is prepared as per the CERA’s SOF No. 04/ST-VII, Mumbai and the balance sheet submitted by the assessee vide letter dated 04.08.2017.”

3.3 Arguing for the revenue learned authorized representative while reiterating the findings recorded in the impugned order submits:

> The parent company (M/s. Universal Commercial ‘Luigi Bocconi’) had created one trust, ‘Knowledge Revival and Expansion Trust’ (“KRET”) and one company, ‘Innovative and Technological Learning Systems Pvt Ltd’ i.e. the appellant.. The period of dispute is from Financial Year 2012-13 to Financial Year 2015-16.

The Appellant entered into an agreement with KRET to provide various services. It is providing no services to any other entity .During CERA Audit, it was discovered that the Appellant had undervalued the services it had provided to the trust. It was found that the Appellant had been providing several services to the trust but had been billing them for only one service ‘faculty services’.

> Appellant has been incurring all the costs in providing the services while the revenue is being collected by the trust. But in December 2015, the Appellant was given all the assets and liabilities of KRET’ and they paid no consideration for the same at that time.

> Appellant has been providing these services to the trust. Also, these services were not explicitly billed at that time but it with the transfer of the assets and liabilities of the trust without any consideration being paid by the Appellant for the same, it is alleged that the consideration of the services provided by the Appellant has been paid by the trust.

> As per Section 67 of the Finance Act, 1994 and Rule 3 of the Service Tax (Determination of Value), Rules 2006, it was alleged that the Appellant had undervalued its services and hence has underpaid a service tax of Rs 4,18,83,070/-.

> This unique business arrangement has only been done to defraud the revenue and not pay service tax on the services actually provided by the Appellant, the consideration of which was paid on a later date.

> Intercontinental Consultants And Technocrats Pvt. Ltd. – 2018 (3) TMI 357-SC relied by the appellant has been distinguished on facts by the Original Adjudicating Authority on facts of this case.

> Reliance is placed on the decisions as follows:

  • Modern Business Solutions [2019(24)GSTL 353 (TriAhmd]
  • Adarsh Agency [2017(96)GSTL 157 (Tri-Mum)]
  • Sri Bhagavathy Traders [2011 (24) S.T.R. 290 (Tribunal-LB)]

4.1 We have considered the impugned order along with the submissions made in appeal and during the Course of arguments.

4.2 Commissioner has in the impugned order recorded as follows for determining the demand of service tax against the appellants

5.1 I have gone through the case records, contents of the show cause notice, party’s written submission dated 14.05.2018 and also the submissions given at the time of Personal Hearing on 06.06.2018. The issue arisen is based on the audit conducted by CERA (Central Excise Receipt Audit) on the records of M/s. Innovative and Technological Learning Services Private Limited for the period from 2013-14 to 2015-16. It was observed by CERA that an Italy based company “M/s. Universita Commerciale “Luigi Bocconi”, intended to provide foreign degree courses in India. Accordingly, a trust namely Knowledge Revival and Expansion Trust’ (KRT) was formed. Thereafter to facilitate KRT, a company namely ‘Innovative and Technological Learning Service Pvt. Ltd.’ (ITLS) was established in the same premises where KRT was operating. ITLS entered into an agreement with KRT for providing various services.

It has been alleged by the Audit that entire student fees received was shown as income in KRT books of account and entire expenses except a few like rent of the premises and salary of some staffs etc. was booked in the books of ITLS. ITLS charged KRT only for faculty fees and offered service tax on the same. ITLS was not charging any fees for providing other services like brand promotion, marketing, advertisement, business support services, business auxiliary services, security services, housekeeping services Legal and professional services, chartered accountant service etc. The result of this arrangement was that even paying service tax through CENVAT account, M/s Innovative & Technological Learning Services Private Limited had huge closing balance of unutilized CENVAT credit. It is the allegation of the department that raising bills/invoices only for faculty fees is nothing but undervaluation of services.”

On the other hand the noticee has contended that the most important words in Section 67 were “the gross amount charged by the service provider for such service”; that unless the service provider charged the service receiver, the provisions of Section 67 will not get attracted.

5.2 The provisions of related provisions of Finance Act 1994 and Valuation read as follows:

“67. Valuation of taxable services for charging Service tax – (1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall,-

i. in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;

ii. in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration;

iii. in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.

Rule 3 of the Service Tax (Determination of Value) Rules, 2006 read as follows:

“Manner of determination of value.- Subject to the provisions of section 67, the value of taxable service, where such value is not ascertainable, shall be determined by the service provider in the following manner:-

(a) the value of such taxable service shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration;

(b) where the value cannot be determined in accordance with clause (a), the service provider shall determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service.”

Rule 4 of the Service Tax (Determination of Value) Rules, 2006 read as follows:

4. Rejection of value.–

(1) Nothing contained in rule 3 shall be construed as restricting or calling into question the power of the Central Excise Officer to satisfy himself as to the accuracy of any information furnished or document presented for valuation.

(2) Where the Central Excise Officer is satisfied that the value so determined by the service provider is not in accordance with the provisions of the Act or these rules, he shall issue a notice to such service provider to show cause why the value of such taxable service for the purpose of charging service tax should not be fixed at the amount specified in the notice.

(3)The Central Excise Officer shall, after providing reasonable opportunity of being heard, determine the value of such taxable service for the purpose of charging service tax in accordance with the provisions of the Act and these rules.

5.3 I find that the noticee has relied upon the case judgment regarding includibility of the cost incurred in the valuation of taxable service and have stated that the same was subject to litigation in the High Court and was settled at first instance by the Delhi High Court in Intercontinental Consultants & Technocrats Pvt Ltd v UOI – 2013] 29 STR 9 vide judgment dated 30-11-2012 which is finally settled by the Hon’ble Supreme Court vide its order dated 07.03.2018 [UOI vs Intercontinental Consultants & Technocrats Pvt. Ltd – 2018- TIOL 76 SC].

I have carefully examined the issued covered under the subject show cause notice vis a vis subject matter of the Intercontinental case. The case covered under Intercontinental was that “M/s. Intercontinental Consultants and Technocrats Pvt. Ltd. was provider of consulting engineering services. Id inside India. In the course of the carrying on of its business, they rendered consultancy services in respect of highway projects to the National Highway Authority of India (NHAI). The petitioner received payments not only for its service but also got reimbursement of expenses incurred by it on air travel, hotel stay, etc. It was paying service tax in respect of amounts received by it for services rendered to its clients. It was not paying any service tax in respect of the expenses incurred by it, which was reimbursed by the client.

5.4 I find that in tt specialized in highways, structures, airports, urban and rural infrastructural projects and is engaged in various road projects outside anhe case of ITLS and Intercontinental are not covering identical subject matters. In Intercontinental case, there were some expenses done by them which they got reimbursed from their clients. Here the case is not so. In M/s Innovative & Technological Learning Services Private Limited case, the expenses done by it are not got reimbursed from their clients namely “Knowledge Revival and Expansion Trust”. I would like to quote the portion of objection raised by CERA audit which is relied upon document in the show cause notice. Though the said findings of CERA have been quoted in the notice, however, on the cost of repetition I would like to re-iterate the said para for clarification in the matter.

“M/s. Universita Commerciale “Luigi Bocconi”, Italy, a company of Italy made an arrangement to provide foreign degree courses in India and for this a trust namely ‘Knowledge Revival and Expansion Trust’ (KRT) was formed which is situated at Hiranandani IT Park, Powai, Mumbai. Further, to provide services to KRT, a company namely ‘Innovative and Technological Learning Service Pvt. Ltd.’ (ITLS) was established in the same premises. ITLS entered into an agreement with KRT on 1st October, 2012 for providing various services mentioned in Annexure A of the Agreement. However, the arrangement was made in such a way that entire student fees was shown as income in KRT books of account and entire expenses except a few like rent of the premises and salary of some staffs etc. was booked in the books of ITLS. ITLS in turn charged KRT only for faculty fees and offered service tax on the same. ITLS was not charging any fees for providing other services like brand promotion, marketing, advertisement, business support services, business auxiliary services, security services, housekeeping services legal and professional services, chartered accountant service etc. and this was the reason that even paying service tax through CENVAT account, company had huge closing balance of unutilised CENVAT credit. This arrangement was the main reason that’s why the company was in continuous loss from beginning. In December, 2015, a decision was taken to close the trust and transfer entire asset and liability (only through mutual agreement) of the trust to the company. Since then whole business was run only through company i.e. ITLS. Here, the company was formed to provide services to the Trust only and the company was actually doing the same as seen from annual accounts, however, raising bills / invoices only for faculty fees was nothing but undervaluation of services.”

5.5 Neither in their written submission nor at the time of personal hearing the noticee have put forth any argument or disclosed that fact that why these expenses were borne by the noticee. It is forthcoming from the facts of the case that M/s Innovative had no other business than to provide logistics/ services to KRT, therefore, whatever, expenses were borne by Innovative was only for that particular purpose. Though it is not the subject. issue of this notice, however, spending crores of Rupees without any motive of profit- indicate some other angle of investigation. No business is run without keeping an eye on the profit factor. At no point of time it has been brought on records or informed by the noticee that they were providing services to some other party also other than KRT. If M/s Innovative & Technological Learning Services Private Limited was availing CENVAT on all types of services (expenses) and utilizing towards payment of their Service Tax liability then all those expenses have to be part of the taxable value. I have gone through the ST-3 filed by the noticee and there is only one service shown to be provided by them that is “Commercial training or coaching”. If no other service provided by Innovative in that case whatever CENVAT has been taken that must be in relation to providing this service only and therefore whatever expenses borne, has to be in relation of providing these services. It is difficult to accept that the noticee was providing services to KRT by bearing all the related expenses on its own. All the cost towards input services have to be part of valuation of output services and that way there is undervaluation of the services provided by Innovative to KRT. If this is not so then there appears to be gross misappropriation of accounts for reasons best known to the related parties.

5.6 Therefore, I hold that charges alleged in the subject show cause notice is proved beyond doubt and cost of all the expenses borne by the noticee has to be added in the valuation of services provided.

5.7 The Noticee has submitted that there was some mistake in figures. quoted in the notice. For example for the FY 2013-14, the revenue from operations was Rs. 1,74,56,423/- and not Rs. 1,84,75,956/- and some other figures mismatch has been quoted by the noticee. However, they have failed to substantiate their arguments by some supportive evidence. Even they have failed to submit the complete Balance Sheet for the period of dispute supported with some CA certificate to substantiate their claim. Therefore, in absence of some concrete evidence their claim is found to be unsustainable.”

4.3 It is interesting to note that in the present case the demand has been confirmed against the appellant who is the service provider, on the basis of the expenses incurred by him without even referring to the relationship of the expenses incurred with the service provided by him. The entire demand has been confirmed only on the basis of the audit objection raised by the CERA (Central Excise Revenue Audit) without any investigation and enquiry either at the time of issuance of the show cause notice or at the time of adjudication. We would have set aside this order on this ground itself in view of the decisions referred by the counsel for appellant to this effect. However we proceed to examine the issue on the merits of the demand made.

4.4 Appellant entered into an service agreement with their client to provide the services as indicated in Annexure A to agreement. The relevant extract of the agreement are reproduced below:

“Executed by and between
INNOVATIVE AND TECHNOLOGICAL LEARNING SERVICES (P)
LIMITED
(SERVICE PROVIDER)
AND
KNOWLEDGE REVIVAL AND EXPANSION TRUST
(TRUST)

—————————————————————
SERVICES AGREEMENT
—————————————————————

THIS AGREEMENT (hereinafter, the “Services Agreement”) is made on this 1st day of October, 2012 by and between:

INNOVATIVE AND TECHNOLOGICAL LEARNING SERVICES PRIVATE LIMITED, a company organized and existing under the laws of India, incorporated under Companies Act 1956, having its registered office at 237/238. Powai Plaza. Hiranandani, Powai, Mumbai – 400 076 (hereinafter referred to as “Service Provider”, which expression shall, unless it be repugnant to the context or meaning thereof, be deemed to mean and include its successorsin-interest and permitted assigns) of the FIRST PART

AND

KNOWLEDGE REVIVAL AND EXPANSION TRUST, a for-profit, irrevocable. private trust organized and existing under the laws of India, having its principal office at 237. Powai Plaza, Hiranandani Gardens. Powai, Mumbai 400076 (hereinafter referred to as the “Trust”, which term or expression, unless excluded by or repugnant to the subject or context hereof, mean and include its successors in interest, nominees, executors and administrators) of the SECOND PART.

(The Service Provider and the Trust shall also be collectively referred to as the “Parties” and, individually, each one of them shall be referred to as the “Party”)

WHEREAS

The Service Provider is engaged, inter alia, in the following business:

1) To carry on the business of providing and/or arranging education services. and to acquire or give franchises of educational institutes, schools, computer educations, colleges and universities of India and abroad to provide services of libraries to students, to conduct training programs and seminar for students and other professionals, to set up other appropriate corporate structures to enable the provision of such services.

2) To carry on the business of teaching services, executive and management development programs, learning methods, recruitment services, human resources bureau and for that purpose to advertise, receive, screen, shortlist applications and resumes, interview, select, train, arrange recruitment and training courses, programs or orientation courses, obtain, maintain data and information, provide other services in relation procuring and placement of skilled and unskilled personnel for industrial and other concerns and to assist persons in seeking jobs in India and abroad.

(A) the Trust, in turn, is a for-profit, irrevocable, private trust in India constituted vide trust deed dated February 15, 2012, and has established an education institute under the name and style of Mumbai International School of Business Bocconi (“MISB Bocconi”);

(B) the Parties are entering into this Service Agreement for purposes of regulating the main terms and conditions for the provisions by the Service Provider to the Trust – against payment of a variety of training related services.

NOW THEREFORE, IN CONSIDERATION OF THE

FOREGOING,

IT IS HEREBY AGREED AS FOLLOWS

1. DEFINITIONS AND INTERPRETATION

1.1 In this Services Agreement, the following terms, to the extent not inconsistent with the context thereof, shall have the meanings assigned to them herein below:

“Applicable Law(s)” means all applicable laws, by-laws, rules, regulations, orders, ordinances, codes, guidelines, policies, notices, directions, judgments, decrees or other requirements or official directive of any Government Authority or Person acting under the authority of any Government Authority and/ or of any statutory authority in India and/ or Italy, as the case maybe;

“Service Fee” shall have the meaning ascribed to it in Annex 1 at the voice “Price Range”;

“Services” shall have the meaning ascribed to in Annex 1;

1.2 In this Services Agreement, unless otherwise specified, Premises and Annexes are and constitute an integral and essential part of this Services Agreement, with full binding effects and any reference to this Services Agreement shall include the schedules and appendices.

1.3 The descriptive headings of sections are inserted for solely for convenience of reference and are not intended as complete or accurate descriptions of the content thereof and shall not be used to interpret the provisions of this Services Agreement

2. SUBJECT

2.1 At the terms and conditions hereinafter set forth, the Service Provider hereby undertakes to provide the Trust, and the Trust in turn hereby undertakes to purchase from and pay to the Service Provider for, the services listed and regulated in Annex 1 to this Services Agreement (collectively, the “Services”) for the purposes only and solely of running the MISB Bocconi. It is understood that this Services Agreement is entered into an exclusive basis. and therefore the Trust shall not be entitled to purchase services similar to, or having the same nature and contents of the Services, as well as any other services needed for operating MISB Bocconi from any other third party,, as hereinafter defined.

2.2 In turn, the Service Provider shall be free to provide the Services, as well as services similar to or having the same nature and contents of the Services, to other third parties, including the Additional Services, as hereinafter defined.

3. FURTHER UNDERSTANDING OF THE PARTIES ON THE SCOPE OF SERVICES

3.1 Without prejudice to what provided under following Section

3.2., the Service Provider shall retain the right of control over the means, manners and methods by which the Services are provided to the Trust and the right to provide the Services at the times the Service Provider independently determines. The Service Provider shall be responsible for providing all equipments, materials and the like that it determines are needed for timely providing the Services.

3.2 It is agreed that upon execution of this Service Agreement and before the beginning of each contractual semester, the Service Provider shall circulate to the Trust a written plan confirming the Services that will be rendered for that contractual semester and the estimated Services Fees (as hereinafter defined), which shall, in turn, be approved by the Trust. In case of failure by the Parties to reach an agreement, the provisions set out in following Annex 1 shall find application.

4. SERVICE FEE

4.1 As a consideration for the provision of the Services, the Trust hereby undertakes to pay to the Service Provider the service fees set out in Annex 1 to this Services Agreement (the “Service Fee”).

4.2 The Service Provider agrees that the Services Fee shall be the only remuneration payable to it. The Parties mutually acknowledge that the Service Fee agreed herein is reasonable and adequate compensation for the Services to be rendered by the Service Provider and the transaction contemplated herein is on terms and conditions (taken as a whole) no less favourable to each Party than those which could reasonably be obtained by each party from a third party in an arm’s length transaction. This Services Agreement has been entered into at arm’s length, without duress or coercion and is to be interpreted as an agreement between two parties of equal bargaining strength.

5. INVOICING

5.1 At the end of each calendar month, the Service Provider shall invoice the Trust for the Services provided in the relevant month. The parties may eventually agree to issue a unique invoice that describes the overall services provided by the Service Provider through the inter edition of the course run by the Trust.

5.2 The Trust shall pay to the Service Provider the invoiced Services Fees within 180 (a hundred and eighty) days of receipt of relevant invoice by means of wire transfer at the bank account indicated in writing by the Service Provider.

6. TAXES & STAMP DUTY

6.1 Any payment made under this Service Agreement by the Trust shall be subject to withholding tax.

6.2 In case Service Tax is applicable / payable in respect of the Fee, the same shall be charged to the Trust separately.

6.3 Any taxes or income to be paid by a Party will be to the account of that Party.

6.4 The charges towards Stamp Duty payable on this Services Agreement shall be borne by the Service Provider.

7. ACCOUNT AND RECORDS

7.1 The Service Provider shall keep true and accurate records in such details as it is necessary to clearly identify the Service Fee related to the rendering of each of the Services under this Service Agreement. The Service Provider shall keep such records for a period of not less than 3 years from the date when the Services are rendered

7.2 The Trust, upon request, may have access to such records and accounts.

8. ESCALATION PROCESS

It is agreed between the Parties that, in case any dispute arise with regard to the Services to be provided and, in general, with regard to any matter related to the subject matter of this Service Agreement and its terms and conditions (the “Dispute”), representatives of the Parties shall promptly meet in an effort to try and find in good faith a mutually agreed position on such disputed matters; failing an agreement between the Parties within the following 15 (fifteen) days, the disputed matter shall be referred to chief executive officers of the Service Provider and the Trust, in order to assess whether a mutually acceptable solution can be reached. Failing an agreement between the Parties past 15 (fifteen) days after the dispute has been referred to the chief executive officers of the Parties as per above (hereinafter. the “Final Escalation Term”), the Service Provider shall have the right to immediately terminate this Service Agreement in accordance with following Section 11.

9. ADDITIONAL SERVICES AND RELATED FEES

9.1 The Parties will jointly evaluate the opportunity to extend the provision of services under this Services Agreement, so to include also the services that might eventually be needed by the Trust.

9.2 It is understood that should the Additional Services be required by the Trust, the Parties will meet and negotiate in good faith the service fee to be paid for the Additional Services.

SERVICE AGREEEMENT

Annex A ServicesPrice range (in euro) (*)
Teaching services for Post Graduate Program in Business (PGPB):> Pre courses> Standard courses> Elective courses(price per course)7.500 – 9.00012.500 – 15.0007.500 12.500
Teaching services for executive education and management development programs:1.000 – 4.000(per man-day)
Top level Workshops4.000 10.000 (per man-day)
Research activities, production of reports, case studies, teaching notes and sets of slides:Price to be defined based on output requested.
Design of executive education courses500 -4.000 (per man-day)
Preparation of teaching videos and elearning tools and programs500 – 1.000 (per man-day)
Marketing & communication services:Including design and update of marketing and communication tools, management of databases, management of communication and marketing activities (including online), institutional communication, digital communication, institutional events/initiatives, PR relations, etc.Recruitment & guidance services: Including management of recruitment activities in colleges and with relevant stakeholders; prospective students counseling and information sessions, prospective students nurturing, etc.500 (per man-day)Application & admission services: Including design of application tools, screening of candidates, interviews, test management, admission activities, admitted students services, etc.500 (per man-day)Support services to teaching activities:300 (per man-day)Including organization of teaching activities and office hours, delivery of teaching materials, management of elearning platform, support to faculty travel and stay, support to participants, front office activities, etc.Registrar services and academic affairs:Including management of participants academic records, classes timetables, enrollment, exams, transcript, scholarships, international experiences, graduation, etc.300 (per man-day)Alumni services500 (per man-day)Corporate relations services:Including management of relations with employers, donors and corporations interested in research and executive education courses; provision of Career Development Services to students and employers, including career counseling and recruitment initiatives, etc.1.000 (per man day)Support to Advisory Board activity1.000 (per man-day)Students/participants services: Including organization of extracurricular activities, workshops, cultural events on campus, support to students’ clubs, housing services, catering services, etc.200 (per man-day)IT’ services to participants1.000 (per man-da

(*) prices set for 2012-2013, an increase of 2% per year to be considered for the following years.

4.5 from the plane reading of the agreement it is quite evident that the agreement is for the provision of services specified in the annexure to the agreement and at the rates specified in the said Annexure A. Appellants have provided these services to the Trust, as per the agreement above. It is not the case of the department in the show cause notice that for provision of these services service provider has received any other consideration other than those specified in the agreement. The case of revenue is that Appellant-service provider has received certain services for which they have incurred some expenditure, and this expenditure needs to be added to the value of the service provided to the trust. It is not even the case of the revenue in the show cause notice that the appellants were receiving the amounts against any of these services from the service recipient trust. Even in the balance sheet/ Profit & Loss Account of the appellant these were show as expenses and the revenues case is that if these amounts were recovered from the trust then they would have not suffered the huge losses which are shown in the balance sheet of the appellant. The manner of calculation of the demand is as indicated in table in para 2.3, which is part of the show cause notice.

4.6 Audit observed as follows while auditing the records of the appellant-

“However, the arrangement was made in such a way that entire student fees was shown as income in KRT books of account and entire expenses except a few like rent of the premises and salary of some staffs etc. was booked in the books of ITLS. ITLS in turn charged KRT only for faculty fees and offered service tax on the same. ITLS was not charging any fees for providing other services like brand promotion, marketing, advertisement, business support services, business auxiliary services, security services, housekeeping services legal and professional services, chartered accountant service etc. and this was the reason that even paying service tax through CENVAT account, company had huge closing balance of unutilised CENVAT credit. This arrangement was the main reason that’s why the company was in continuous loss from beginning. In December, 2015, a decision was taken to close the trust and transfer entire asset and liability (only through mutual agreement) of the trust to the company. Since then whole business was run only through company i.e. ITLS. Here, the company was formed to provide services to the Trust only and the company was actually doing the same as seen from annual accounts, however, raising bills / invoices only for faculty fees was nothing but undervaluation of services.”

The observation made by the audit cannot be held to be tenable for the reason that if the merger of the trust with the appellant was the reason for concluding that the these services were being provided by the appellant to the trust during the period of demand then in fact no services were being provided as the services were being provided by the appellant to themselves and in absence of any service recipient there could not have been any service. However can subsequent turn of events determine the value of services provided under an contractual agreement. Audit has not even whispered about undervaluation of services being provided by the appellant to the trust. Their only case is that these expenses, against which the appellant have taken the CENVAT credit should be levied to service tax. In absence of any evidence to the effect that the value of output services provided by the appellant to trust was suppressed there cannot be addition made to the value of the output service. If he services as stated by the audit were being provided by the appellant to the trust then the same would have to be levied to service tax in accordance with the agreement to provide these services. These services could not have been levied to service tax indirectly by way of adding to the value of the services provided under this contract. Further future events could not have determined the value of the services provided.

4.7 In case of Premium Real Estate Developers [2019 (22) GSTL 323 (T-Del)], Delhi bench has observed:

27. Having considered the rival contentions and on perusal of record, we find that there is no consideration defined and/or provided for the alleged service. In absence of any defined consideration for the alleged service, there is no contract of service at all, and hence the transaction is not liable to service tax. Under the facts and circumstances we find that the appellant entered into an agreement of trading in land, wherein they agreed to transfer, a measurement or area of land, in a particular area in favour of the Sahara India. Such land was to be arranged by them by way of procurement from the land owners. The appellant was also obligated to examine the title of the prospective land owner and to further ensure the availability of land owner at the office of the Registrar for execution of the sale deed. In fact Sahara India instead of paying the price directly to the land owner, paid lump sum amount to the appellant. Thereafter the appellant identified the land, the seller, and after being satisfied with the title of the seller, entered into agreement with the seller and obtained power of attorney, in their favour. Thereafter the appellant transferred the land in favour of Sahara India. Thus we find that the transaction is one of trading in land. In such transactions the appellant could either incur a loss or have a surplus (profit).

4.8 A larger bench of tribunal has in the case of Bhayana Builders [2013 (32) STR 49 (T-LB)] observed as follows:

“11. Etymologically the words supplied and provided are closely associated words. Provided also means to supply; furnish. Supply bears a similar connotation. The word used is structurally associated (in the Explanation) with the earlier two words and the three words are employed to define the meaning of the expression gross amount charged, an expression that occurs in the preamble to Notification No. 15/2004-S.T. The word use variously means cause to act or serve for a purpose; avail oneself of; exploit for one’s own ends; the right of power of using.

The word use therefore has multiple connotation and bears different meanings depending upon the context. The word used is therefore per se ambiguous or obscure. Since in its preambular context, the expression gross amount charged (as our analysis has concluded) means an amount charged on the service recipient, received by the provider and accruing to the benefit of the later in relation to the taxable service provided and the Explanation seeks to define gross amount charged, an expression occurring in the preamble, by employing three words to contextualise the definition – supplied, provided, used, we are satisfied that application of the noscitur principle could be gainfully employed to identify the legal meaning of the word used from several grammatical/literal meanings of the said word, by employing the associational context. It is true, as contended by Revenue, that even if one of the literal meanings of the expression used, namely free supplies used is considered as the legal meaning as well, construction service providers may not be handicapped as they may seek benefits under Notification No. 12/2003-S.T. In our view however the fact that the assessee have an alternative recourse to avoiding the rigour cannot be the criterion for interpreting the Explanation. This contention by Revenue proceeds on a fallacious comprehension of Notification No. 12/2003-S.T. The benefits under this Notification are only in respect of the value of goods and materials sold by a service provider to the recipient of a taxable service. In the case of free supplies by the recipient there is no sale or transfer of title in the goods and materials in favour of the service provider, at any point of time. Therefore when free supplied goods and materials are incorporated into the construction would be no sale by the provider to the recipient either. Notification No. 12/2003-S.T. would therefore be inapplicable.

12. In any event, provisions of the Explanation must be interpreted and the true meaning of the problematic expressions therein ascertained, independent of a cost-benefit analysis.

13. Board Circular dated 16-2-2006 (a circular issued subsequent to the introduction of the Explanation in Notification No. 15/2004-S.T.) and in the context of an identical Explanation introduced in Notification No. 18/2005-S.T., clarified that gross amount charged shall include the value of goods and materials supplied. This circular constitutes contemporanea expositio of the meaning of the Explanation in Notification No. 18/2005-S.T.

14. From the several aids to interpretation, referred to (supra) we are compelled to conclude that goods and materials, supplied/provided/used by the service provider for incorporation in the construction, which belong to the provider and for which the service recipient is charged towards the value of such supply/provision/use and the corresponding value whereof was received by the service provider, to accrue to his benefit, whether independently specified as attributable to the specific material/goods incorporated or otherwise, would alone constitute the gross amount charged. This is not to say that an exemption Notification cannot enjoin a condition that the value of free supplies must also go into the gross amount charged for valuation of the taxable service. If such intention is to be effectuated the phraseology must be specific and denuded of ambiguity.

15. In conclusion we answer the reference as follows :

a) The value of goods and materials supplied free of cost by a service recipient to the provider of the taxable construction service, being neither monetary or non-monetary consideration paid by or flowing from the service recipient, accruing to the benefit of service provider, would be outside the taxable value or the gross amount charged, within the meaning of the later expression in Section 67 of the Finance Act, 1994; and

b) Value of free supplies by service recipient do not comprise the gross amount charged under Notification No. 15/2004-S.T., including the Explanation thereto as introduced by Notification No. 4/2005-S.T.”

4.10 In case of Repco Home Finance Ltd. [2020 (42) GSTL 104 (T-LB)] larger bench has observed as follows:

“23. The Supreme Court in Commissioner of Service Tax v. M/s. Bhayana Builders [2018 (10) G.S.T.L. 118 (S.C.)], while deciding the appeal filed by the Department against the aforesaid decision of the Tribunal, also explained the scope of Section 67 of the Act, both before and after the amendment, in the following words :

“The amount charged should be for “for such service provided”: Section 67 clearly indicates that the gross amount charged by the service provider has to be for the service provided. Therefore, it is not any amount charged which can become the basis of value on which service tax becomes payable but the amount charged has to be necessarily a consideration for the service provided which is taxable under the Act. By using the words “for such service provided” the Act has provided for a nexus between the amount charged and the service provided. Therefore, any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. The cost of free supply goods provided by the service recipient to the service provider is neither an amount “charged” by the service provider nor can it be regarded as a consideration for the service provided by the service provider. In fact, it has no nexus whatsoever with the taxable services for which value is sought to be determined.”

(emphasis supplied)

24. The aforesaid view was reiterated by the Supreme Court in Union of India v. Intercontinental Consultants and Technocrafts 2018 (10) G.S.T.L. 401 (S.C.)] and it was observed :

“23. Obviously, this Section refers to service tax, i.e., in respect of those services which are taxable and specifically referred to in various sub-clauses of Section 65. Further, it also specifically mentions that the service tax will be @ 12% of the “value of taxable services”. Thus, service tax is reference to the value of service. As a necessary corollary, it is the value of the services which are actually rendered, the value whereof is to be ascertained for the purpose of calculating the service tax payable thereupon.

24. In this hue, the expression “such” occurring in Section 67 of the Act assumes importance. In other words, valuation of taxable services for charging service tax, the authorities are to find what is the gross amount charged for providing “such” taxable services. As a fortiori, any other amount which is calculated not for providing such taxable service cannot a part of that valuation as that amount is not calculated for providing such “taxable service”. That according to us is the plain meaning which is to be attached to Section 67 (unamended, i.e., prior to May 1, 2006) or after its amendment, with effect from, May 1, 2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasised that Rule 5 of the Rules went much beyond the mandate of Section 67. We, therefore, find that High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable service shall be the gross amount charged by the service provider “for such service” and the valuation of tax service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service.

25. This position did not change even in the amended Section 67 which was inserted on May 1, 2006. Subsection (4) of Section 67 empowers the rule making authority to lay down the manner in which value of taxable service is to be determined. However, Section 67(4) is expressly made subject to the provisions of sub-section (1). Mandate of sub-section (1) of Section 67 is manifest, as noted above, viz., the service tax is to be paid only on the services actually provided by the service provider.”

25. It would also be pertinent to refer to the judgment of the European Court of Justice (First Chamber) in Case C-277/2005, in Societe Thermale d’Eugenic-les-Bains v. Ministere de I’Economie, des Finances et de I’Industrie. Under Article 2(1) of the Sixth Directive, ‘the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such’ is subjected to VAT. Article 6(1) of the Sixth Directive provides that “Supply of services” shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5 and that such transactions may include inter alia an obligation to refrain from an act or to tolerate an act or situation. Under Article 11A(1)(a) of the Sixth Directive, the taxable amount in respect of supplies of services is to be ‘everything which constituted the consideration which has been or is to be obtained by the supplier from the customer or a third party for such supplies…’

27. What follows from the aforesaid decisions is that “consideration” must flow from the service recipient to the service provider and should accrue to the benefit of the service provider and that the amount charged has necessarily to be a consideration for the taxable service provided under the Act. It should also be remembered that there is marked distinction between “conditions to a contract” and “considerations for the contract”. A service recipient may be required to fulfil certain conditions contained in the contract but that would not necessarily mean that this value would form part of the value of taxable services that are provided.

32. What needs to be noted from the aforesaid definition of consideration under Section 2(d) of the Contract Act is that consideration should flow at the desire of the promisor. Thus, if the consideration is not at the desire of the promisor, it ceases to be a consideration. …..”

4.11 In the present case what is sought to be added to the value of the services provided is the value of the services which were never provided by the appellant to the recipient of services for a consideration. Even the demand which has been raised is not based on the consideration received by the appellant service provider from the service recipient, but on the basis of expenses incurred by the appellant for receiving these services from third party service provider against payment of applicable service tax.

4.12 Since we are not in position to uphold the demand on merits itself we do not find it necessary to consider the issue of limitation, demand for interest and imposition of penalty on the appellant.

4.13 In view of the observations as above we do not find any merits in the impugned order.

5.1 Impugned order is set aside and appeal is allowed. (Order pronounced in the open court)

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