2013 (11) TMI 1073 - AT - Service Tax

Stay application - valuation - Business Support Service - Section 65 (104c) r.w. Section 65(105)(zzzq) - Held that - Received amount was towards the expenditure incurred by M/s. RCOM even before the appellant-firm came into existence by way of expenses towards the initial setting up and also by way of payments made to vendors for supply of materials. When such payments have been made before the appellant-firm came into existence, we do not understand how this amount can be treated as a consideration received for the services rendered by the appellant. It is also seen from the books of accounts, that the said amount has been repaid by the appellant during the same financial year and these transactions are reflected in the books of accounts of both the parties. Thus, what is coming out form the books of accounts is that the amount of Rs. 283/- crore received by the appellant from M/s. RCOM is not towards any consideration towards any services rendered but it is a financial support given by M/s. RCOM to the appellant by way of loans. When advances are received towards services rendered, the same would get adjusted in the bills raised - only payment made towards services provided can be brought under the ambit of consideration received and not any other amount. At best, the interest saved by the appellant by securing interest-free loans from the holding company can be considered as a consideration for the services rendered and not the loans per se - Prima facie case not in favour of assessee - Stay granted partly.

Summary

Issues Involved:
1. Whether the amounts received by the appellant from RCOM were interest-free loans or consideration for services rendered.
2. Applicability of service tax on the amounts received by the appellant.
3. Interpretation of contractual terms regarding financial support and service charges.
4. Requirement of pre-deposit for the appeal.

Detailed Analysis:

1. Interest-Free Loans vs. Consideration for Services Rendered:
The appellant, M/s. RIL, argued that the amounts of Rs. 1,210 crore and Rs. 283 crore received from RCOM were interest-free loans and not consideration for services rendered. The appellant contended that these amounts were repaid within the same financial year and were reflected as loans in the balance sheets of both companies. The Revenue, however, argued that these amounts should be considered as advances towards service charges liable to service tax. The Tribunal found that the amounts were indeed treated as loans in the audited books of accounts and were repaid within the same financial year, supporting the appellant's contention.

2. Applicability of Service Tax:
The appellant started paying service tax from January 2008 based on the receipt of service charges from RCOM. The Tribunal noted that the service tax liability arises on the gross amount charged for the taxable service, which includes any amount received towards the service. However, since the amounts in question were repaid and recorded as loans, they did not constitute consideration for services rendered. The Tribunal concluded that the interest saved by the appellant from these interest-free loans could be considered as a basis for service tax liability, which would amount to approximately Rs. 12 crore.

3. Interpretation of Contractual Terms:
The Tribunal analyzed the Master Service Agreement (MSA) between RIL and RCOM, particularly Articles 4.2 and 4.3. Article 4.2 used the term "may" for the option of setting off financial support against service charges, indicating discretion, while Article 4.3 used "shall," indicating an obligation. The Tribunal held that these terms have different meanings and cannot be construed similarly. Since the appellant did not exercise the option to set off the amounts as service charges, the transactions were treated as loans.

4. Requirement of Pre-Deposit:
The Tribunal directed the appellant to make a pre-deposit of Rs. 12 crore within eight weeks, considering the interest that would have accrued on the interest-free loans as the basis for service tax liability. Compliance with this direction would result in the waiver of the balance dues and stay of recovery during the appeal's pendency.

Conclusion:
The Tribunal concluded that the amounts received by the appellant were interest-free loans and not consideration for services rendered. Consequently, the service tax liability, if any, should be based on the interest saved from these loans, amounting to approximately Rs. 12 crore. The appellant was directed to make a pre-deposit of this amount to proceed with the appeal.