2015 (11) TMI 106 - AT - Service Tax

Valuation - Section 67 - Associated enterprises - lease rent equalisation shown in Balance sheet - Held that - 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. This method, however, is one of the modes of payment included in the definition of gross amount charged contained in clause (c) of the Explanation to section 67 of the Act. The other modes of payment are by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes. To qualify as gross amount charged there must first be a payment. It is this payment which must be in the nature of a consideration for the Service. The word consideration has been defined in clause (a) of the explanation to section 67 to include any amount that is payable for the taxable services provided or to be provided. Lease rent equalisation is only an entry made in the balance sheet. But the question is whether it is an amount payable for it to constitute consideration for the services rendered by the appellant. For this purpose, the appellants have relied upon Accounting Standards. The appellants justify that there is a specific Accounting Standard for operating leases, which is AS19. In order to understand the meaning of the lease rent accounting recourse can be had to AS19. Such an approach has also been followed by the Hon ble Supreme Court in Dai-Ichi Karkaria (1999 (8) TMI 920 - SUPREME COURT OF INDIA) and Association of Leasing and Financial Service Co vs Union of India (2010 (10) TMI 4 - SUPREME COURT OF INDIA ). The department has not been able to show us any contrary decision or furnish any reasons why we should not follow AS19. The audit report relied upon by the Ld. Sp. Counsel and the Commissioner concludes that the lease rent equalisation is an income , and chargeable to service tax as the gross amount received by the appellants. - The amount shown in the balance sheet is not an income for the purposes of computing Tax under the Income Tax Act. In the result it is also not a payment actually received or receivable, and therefore neither consideration nor the gross amount charged in terms of clauses (a) and (c) respectfully of the explanation to Section 67 of the Act. Hence the appellant is not liable to pay Service Tax on the amount of lease rent equalisation shown in the balance sheet. - Decided in favour of assessee.

Summary

Issues:
Interpretation of the term "gross consideration" in section 67 of the Finance Act, 1994.

Analysis:
The judgment pertains to a case involving the interpretation of the term "gross consideration" as mentioned in section 67 of the Finance Act, 1994. The appellant, engaged in the business of providing passive wireless telecom infrastructure, entered into an MOU with another entity granting them the right to use a portion of their optic fiber cable network for a specified period. The dispute arose regarding the calculation of Service Tax, with the department arguing that tax should be paid on the average consideration for 10 years, while the appellant contended that tax was only payable on the actual amounts received annually. The appellant followed Accounting Standard AS-19, which required income recognition on a straight-line basis over the lease term. The appellant maintained that the lease rent equalization amount, recorded as per AS-19, was not actual income but a notional figure for accounting purposes.

The appellant relied on various legal precedents and accounting standards to support their argument that the lease rent equalization amount should not be considered as "gross consideration" for the purpose of Service Tax calculation. The appellant highlighted that the income recognized as per AS-19 was in compliance with tax regulations and should not be subject to Service Tax. The appellant emphasized that the lease rent equalization amount was not actual income and did not constitute consideration under section 67 of the Act.

The Tribunal examined the contentions of both parties and delved into the accounting standards and legal principles governing the treatment of lease rent equalization in the balance sheet. The Tribunal noted that the lease rent equalization amount was a balancing factor in the accounts and did not qualify as income for tax purposes. Relying on AS-19 and legal precedents, the Tribunal concluded that the lease rent equalization amount was not a payment received or receivable, and thus, did not fall under the definition of "gross consideration" for Service Tax liability.

Regarding the issue of limitation, the Tribunal found that the appellant had made full disclosures and acted in good faith based on their understanding of tax regulations and accounting standards. Therefore, the Tribunal held that the extended period of limitation could not be invoked in this case. Ultimately, the Tribunal set aside the impugned order and allowed the appeal in favor of the appellant.

In summary, the judgment clarifies the treatment of lease rent equalization amount in the context of Service Tax liability, emphasizing adherence to accounting standards and legal principles to determine the applicability of "gross consideration" under section 67 of the Finance Act, 1994.