2015 (9) TMI 1097 - AT - Service Tax

Valuation of taxable service - associated enterprise - booking of royalty every month has a credit and debit entry just as the reversal at the end of each quarter - Intellectual property service - payment of royalty towards receipt of technical know-how service for manufacturing of Motor Vehicle - reverse charge mechanism - Held that - This is not a dispute about taxability. Tax liability has been discharged by the appellant, albeit in a schedule of their own choosing, relying on the principle of receipt of consideration by the service provider. As this happens to be at variance with the provisions of Rule 6 of Service Tax Rule, 1994 and Rule 7 of Point of Taxation Rules, 2011, the tax liability needs to be computed for each month on the amount booked in the royalty accrued account with the reversal being taken into account whenever that has occurred. As the taxes have been discharged during the period under dispute, the appellant s liability is limited to interest for the first two months of each quarter to the extent of amount not paid or short-paid. This should have been effected in the impugned order but, not having been done, needs to be remedied. In the circumstances of discharge of tax liability by the appellant, there is no justification to invoke the extended period and consequent penal provisions under section 78 of Finance Act, 1994. Penalty under section 77 of Finance Act, 1994 is also set aside. The penalty under section 76 of Finance Act, 1994 is set aside as there is no tax due on the date of notice. - Decided partly in favor of assessee.

Summary

Issues Involved:

1. Point at which the tax liability crystallizes.
2. Relevance of the entries made in the books of accounts in valuation of taxable service.

Issue-wise Detailed Analysis:

1. Point at which the tax liability crystallizes:

The appellant, a subsidiary of General Motors Corporation USA, received technical know-how from associated enterprises based outside India for vehicle production. Under the reverse charge mechanism, the appellant was liable to discharge tax. The original authority relied on the Explanation in Rule 6 of Service Tax Rules, 1994, to conclude that monthly accounting entries relating to royalty were taxable. The appellant argued that these entries were provisional for MIS reports and reversed at the end of each quarter when actual dues were calculated. The Tribunal noted that the intellectual property service subsisted as long as the technical know-how was used in production, and the taxable event occurred each time a vehicle was produced. The Tribunal held that the tax liability was aggregated monthly, as per Rule 6, and the appellant's reliance on quarterly payments was not acceptable. The Tribunal concluded that the acknowledgment in the books was sufficient to deem the payment for service to have been effected.

2. Relevance of the entries made in the books of accounts in valuation of taxable service:

The Tribunal emphasized the importance of understanding accounting principles, noting that double-entry bookkeeping requires each transaction to have a debit and credit effect. The Tribunal rejected the appellant's argument that only the final entry should be considered for tax purposes, stating that all relevant entries must be included in the taxable consideration. The Tribunal found that the intellectual property was utilized daily in production, and the taxable event was the delivery of the service, with tax liability discharged monthly. The Tribunal held that the Explanation in Rule 6 required the inclusion of book entries for transactions between associated enterprises, and the appellant's attempt to alienate book-keeping entries from the deeming provision was not acceptable. The Tribunal concluded that any debit or credit entry linked to the service was sufficient for tax liability.

The Tribunal also addressed the appellant's argument that receipts-based valuation should apply, noting that the insertion of the Explanation in Rule 6 aimed to disincentivize deferred tax payments between associated enterprises. The Tribunal found that the appellant's liability arose from a plain reading of the deeming provision and that the legislative intent was clear. The Tribunal sustained the finding that tax liability arose each month for the amount booked as royalty, with deductions for R&D cess paid.

Conclusion:

The Tribunal set aside the demand for tax, noting that the appellant had discharged tax liability, albeit belatedly. The Tribunal directed the jurisdictional Commissioner to compute and intimate any interest arising from delayed payment within thirty days. The Tribunal also set aside penalties under sections 77 and 78 of the Finance Act, 1994, as there was no justification for invoking the extended period and consequent penal provisions. The appeals were disposed of accordingly.