2018 (4) TMI 613 - HC - Service Tax

Liability of service tax - Point of Taxation - continuous supply of services - invoices are not raised - assessment based on Profit and Loss account - business of promotion and construction of residential apartments and complexes - projects are undertaken on a joint venture basis, the petitioner being the builder, along with land owners - case of petitioner is that the customers have remitted, in advance, the consideration relating to several of the initial landmarks as a lump-sum and that the said amount has been offered to tax and it is incumbent upon the respondent to check whether the receipts offered to tax correspond and cover the stages in respect of which consideration has accrued as per the agreement with the customer. Held that - AS 7 deals with the recognition of income from building projects on the basis of the Project Completion Method - The emphasis and thrust of each methodology is in alignment with the different purposes that they bear reference to AS 7, in the context of the preparation of financials, addresses the how much of the transaction over the term of contract whereas Rule 3 of the Rules addresses the when in relation to the rendition of service for computing taxability under the Finance Tax Act 1994. The foundation of the assessment is flawed. Rule 3(a) provides for a situation where the accrual of service is predicated upon the raising of an invoice. In the present case, the admitted position is that the petitioner does not raise invoices as and when a particular landmark is reached and the accrual of the consideration stage-wise is occasioned automatically upon completion of the stage of construction set out in the agreement itself - It is a well settled position that when a statutory provision or Rule addresses a specific scenario, such rule/provision is liable to be interpreted on its own strength and context and one need look no further to alternate sources to seek clarity in regard to the issue that has been addressed by the aforesaid rule/provision. Insofar as Rule 3 sets out a specific modus operandi in this regard, it assumes priority and is the only relevant factor to be taken into account in the determination of point of rendition and accrual of services for the purpose of imposition of service tax. The matter remitted to the file of the Respondent to be re-done de novo strictly in accordance with the provisions of Rule 3 of the Rules - petition allowed by way of remand.

Summary

Issues Involved:
1. Relevance of Profit and Loss accounts in determining the point of rendition of service and quantification of receipts.
2. Application of Rule 3 of the Point of Taxation Rules, 2011.

Issue-wise Detailed Analysis:

1. Relevance of Profit and Loss Accounts in Determining the Point of Rendition of Service and Quantification of Receipts:

The petitioner, a company engaged in the promotion and construction of residential apartments, challenged the service tax liability imposed by the respondent. The respondent issued a show cause notice demanding differential service tax based on the Profit and Loss (P&L) account entries of the petitioner. The petitioner argued that the entire amount demanded had already been remitted and that the P&L account should not be the basis for determining service tax liability. The court noted that the P&L accounts were prepared based on the Accounting Standards (AS-7) issued by the Institute of Chartered Accountants of India (ICAI), which recognizes income from building projects based on the 'Project Completion Method.' This method is distinct from the Point of Taxation Rules, which determine when the service was rendered and when the income should be taxed. The court found that the respondent's reliance on the P&L accounts for assessing service tax was flawed and contrary to the provisions of the Finance Act and Service Tax Rules.

2. Application of Rule 3 of the Point of Taxation Rules, 2011:

Rule 3 of the Point of Taxation Rules, 2011, provides clarity on determining the point of taxation for services. The court emphasized that Rule 3 should have been applied to determine the taxability of the services rendered by the petitioner. The petitioner entered into agreements with customers for the construction of apartments, with payments released upon the completion of specific stages (landmarks) of construction. The petitioner argued that advances received for initial landmarks had been offered to tax. The court noted that the respondent should have examined whether the receipts offered to tax corresponded with the stages of construction as per the agreements. Instead, the respondent relied on the P&L accounts, which was erroneous. The court concluded that the respondent should have applied Rule 3 to assess the receipts and determine the service tax liability.

Conclusion:

The court set aside the impugned order of assessment and remitted the matter to the respondent for a de novo assessment strictly in accordance with Rule 3 of the Point of Taxation Rules, 2011. The court directed the respondent to afford due opportunity to the petitioner and complete the reassessment within three months. The writ petition was allowed, and the connected miscellaneous petition was closed. No costs were awarded.