2014 (6) TMI 590 - AT - Service Tax

Waiver of pre-deposit - Valuation - inclusion of discount offered to dealers as part of consideration - sale of Recharge Voucher (RCVs) - RCVs are sold at MRP - Penalty u/s 78 - from April, 2008 to March, 2009 - telecommunication service - Held that - period involved in this case is from April, 2008 to March, 2009 and Section 67 was amended w.e.f. 18/4/2006 and simultaneously service tax (Determination of Value) Rules, 2006.So far as the reliance placed by the applicant on the case laws cited by the applicant is concerned they relate to period prior to the amendment of the provisions of law. Admittedly, the explanation was added to Rule 5 (1) of Service Tax Rule vide which it was clarified that service specified in sub-section (zzzx) of clause 65 of section 105 of the Finance Act, 1994, the value of the taxable service shall be the gross amount paid by the person to whom telecom service is provided by the telegraphic authority which goes to show that the intention of Registration has always been to levy the tax on the value received from the person to whom the telecom service is provided by the telecom authority. In this case the service is provided to the consumer and not to the distributor. Hon ble High Court of Kerala in the case of Vodafone Essar Cellular Limited 2010 (8) TMI 691 - KERALA HIGH COURT has held that So much so, there is no sale of any goods involved as claimed by the assessee and the entire charges collected by the assessee at the time of delivery of Sim Cards or Recharge coupons is only for rendering services to ultimate subscribers and the distributor is only the middleman arranging customers or subscribers for the assessee. Once it is established that the charges collected from the customer in lieu of the RCVs is a service charge, not a sell, it is automatically established that the amount deducted by the dealer is nothing but commission which should be included to the taxable income of the noticee . The above case relates to applicability of certain income tax provisions but the decisions support the Department s case. Prime facie case is against the assessee - directed to make pre-deposit of 25% of duty involved - stay granted partly.

Summary

Issues:
- Waiver of pre-deposit of Service Tax and penalty under section 78 of Finance Act, 1994
- Interpretation of taxable value under Section 67 of the Finance Act, 1994
- Application of Rule 5(1) of Valuation Rules
- Relationship between the Appellant and distributors
- Applicability of case laws and circulars
- Financial hardship and balance of convenience

Analysis:

Waiver of Pre-Deposit:
The applicant sought a waiver of pre-deposit of Service Tax and penalty under section 78 of the Finance Act, 1994 amounting to Rs. 2,96,36,292. The Department initiated proceedings against the applicant for alleged suppression of value, resulting in the imposition of Service Tax and penalty. The applicant contended that they received payments in advance from distributors for Recharge Vouchers (RCVs) and had appropriately paid Service Tax on the amounts received. The applicant claimed a principal-to-principal relationship with distributors, emphasizing that the sale of RCVs by distributors to end-users was independent of the Appellant's pricing. However, the Department argued for the inclusion of discounts given to distributors in the assessable value, asserting that the taxable value should encompass any amount received towards the taxable service. The Tribunal found the applicant's case insufficient for a total waiver of pre-deposit, citing the absence of financial hardship and balancing the convenience in favor of the Revenue.

Interpretation of Taxable Value under Section 67:
The crux of the dispute lay in the interpretation of taxable value under Section 67 of the Finance Act, 1994. The Tribunal analyzed the legislative intent behind the provision, emphasizing that the taxable value is the gross amount charged by the service provider for the service provided. The Tribunal noted the amendment to Section 67 in 2006 and the introduction of Service Tax (Determination of Value) Rules in 2006, underscoring the relevance of the explanation added to Rule 5(1) of Service Tax Rules. The Tribunal referenced a High Court decision emphasizing that charges collected from customers for RCVs constituted service charges, not a sale, thereby supporting the inclusion of distributor discounts in the taxable income of the Appellant.

Application of Rule 5(1) of Valuation Rules:
The Tribunal addressed the application of Rule 5(1) of Valuation Rules, highlighting that all expenditure or costs incurred by the service provider in providing taxable services should be treated as consideration for the service provided. The Department argued against treating the discount to distributors as a separate entity, contending that it constituted an expenditure or cost incurred by the Appellant to render mobile services to customers.

Relationship between Appellant and Distributors:
The Tribunal examined the relationship between the Appellant and distributors, emphasizing the principal-to-principal nature of their dealings. The Appellant asserted that the distributors operated independently in selling RCVs to end-users, with pricing decisions solely at the discretion of distributors. This autonomy in pricing underscored the Appellant's stance that the discounts given to distributors should not factor into the assessable value for Service Tax purposes.

Applicability of Case Laws and Circulars:
Both parties relied on case laws and circulars to support their arguments. The Appellant cited precedents to justify their position on taxable value, while the Department contested the relevance of certain circulars withdrawn in later years. The Tribunal scrutinized these references, ultimately basing its decision on the legislative framework and the specific circumstances of the case.

Financial Hardship and Balance of Convenience:
In evaluating the request for a waiver of pre-deposit, the Tribunal considered the absence of financial hardship pleaded by the Appellant. Additionally, the Tribunal referenced a previous case emphasizing that the balance of convenience, not just financial hardship, should guide such decisions. Given the lack of financial hardship and the balance of convenience favoring the Revenue, the Tribunal directed the Appellant to make a pre-deposit of 25% of the duty involved within a specified timeframe, failing which the appeals would be dismissed.

This comprehensive analysis of the judgment delves into the core issues surrounding the waiver of pre-deposit, interpretation of taxable value, application of relevant rules, the relationship between parties, legal precedents, and considerations of financial hardship and convenience.