2021 (4) TMI 15 - AT - Service Tax

Recovery of service tax - Franchise service - amount received against development compensation charges (Development Charges) - extended period of limitation - CENVAT credit on the purchase of towers during the period 2004-05, 2005-06 and 2006-07 - additional demand for liability of service tax on POP (a component of IUC charge) - HELD THAT - It was imperative for the Department to establish that under the Project Agreement, MTNL had conferred a representational right i.e a right available with a Joint Venture Company (franchisee) to represent MTNL (franchisor). However, neither the show cause notice alleged that such a representational right was granted by MTNL to the Joint Venture Company nor any finding has been recorded by the Commissioner in the impugned order in this regard, though this issue was specifically raised by the appellant before the Commissioner. In the absence of such an essential requirement of the charging provision, service tax could not have been imposed. Project Agreement indicates that the developer has not to represent itself as MTNL, nor has its identity as a Joint Venture Company been subsumed in the identity of the appellant. In the present case, the Project Agreement executed between MTNL and the Joint Venture Company is for development of the immovable property and is no manner identified with the appellant. The appellant is popularly known as a telecommunication service provider and not as a developer of immovable property . The essence of the Project Agreement is to grant development rights to the Joint Venture Company and there is nothing in the contract which may even remotely indicate that MTNL intends to do business through the developer - It cannot, therefore, be said that any franchise service was rendered to the appellant - Demand set aside. CENVAT Credit - HELD THAT - It is a fact that out of the total amount of CENVAT credit of ₹ 4,99,32,736/- that has been disallowed claiming it to be for purchase of towers falling under Chapter 73. However, an amount of ₹ 4,90,91,607/- consisted of goods falling under Chapter 84 and 85 and, therefore, the appellant could avail the CENVAT credit. Even in respect of towers, the Delhi High Court in VODAFONE MOBILE SERVICES LIMITED, INDUS TOWERS LIMITED, TOWER VISION INDIA PRIVATE LIMITED, BHARTI INFRATEL LIMITED, VERSUS COMMISSIONER OF SERVICE TAX, DELHI 2018 (11) TMI 713 - DELHI HIGH COURT observed that CENVAT credit is allowed to the telecommunication companies in respect of towers classified under chapter 73. It has been held that the said credit is available by considering the towers as capital goods and also as inputs. POP (a component of IUC charge) - HELD THAT - The appellant very fairly stated that details were not provided by the appellant to the Commissioner - this issue is remitted to the Commissioner for a fresh decision and for this purpose the appellant may submit all the relevant documents within six weeks from today so as to enable the Commissioner to take an appropriate decision within the next three months. Appeal allowed in part and part matter on remand.

Summary

Issues Involved:
1. Whether the appellant provided any service to the franchisee in relation to a franchise when it granted 'land development rights' to the Project Development Company/Joint Venture Company.
2. Whether the appellant was entitled to avail CENVAT credit on the purchase of towers during the period 2004-05, 2005-06, and 2006-07.
3. Whether the additional demand for liability of service tax on "POP" service is justified.

Issue-wise Detailed Analysis:

1. Compensation Received for the 'Right to Develop' the Land:
The Tribunal examined whether the transaction between the appellant and the Project Development Company/Joint Venture Company constituted a franchise service under section 65(105)(zze) of the Finance Act. The Commissioner had concluded that the appellant transferred and assigned its rights and obligations to the Joint Development Partner (JDP) for designing, planning, financing, marketing, development of buildings/developed units, and other related activities, thus considering it a franchise agreement. However, the Tribunal found that the essential requirement of a "representational right" was not established. The Delhi High Court in Delhi International Airport P. Ltd. vs. Union of India clarified that a franchise agreement requires the franchisee to represent the franchisor, effectively losing its individual identity. The Tribunal observed that the Project Development Agreement did not confer any representational right to the Joint Venture Company, and the developer did not represent itself as MTNL. Therefore, the confirmation of the demand for service tax on the compensation amount received for development rights was not sustainable.

2. CENVAT Credit:
The Tribunal addressed the denial of CENVAT credit amounting to ?4,99,32,736/- claimed on the purchase of towers falling under Chapter 73. The appellant argued that the credit also included goods under Chapter 84 and 85, which were not considered by the Commissioner. The Tribunal noted that the appellant provided complete details and duty payment documents, which were not adequately examined. The Delhi High Court in Vodafone Mobile Services Limited vs. Commissioner of Service Tax, Delhi held that towers used in telecom services qualify as capital goods and inputs. The Tribunal concluded that the appellant was entitled to CENVAT credit for goods under Chapter 84 and 85 and even for towers under Chapter 73, following the functional utility test. Thus, the denial of CENVAT credit was set aside.

3. Service Tax on POP Charges:
The show cause notice alleged a service tax liability of ?12,56,342/- on the amount of ?1,01,64,597/- charged by the appellant for POP services to M/s Bharti Airtel. The appellant contended that the service tax liability should be calculated on a pro-rata basis from June 1, 2007, when the service became taxable. The Tribunal noted that the appellant did not provide detailed documentation to the Commissioner. Therefore, the Tribunal remitted the issue back to the Commissioner for a fresh decision, directing the appellant to submit relevant documents within six weeks.

Conclusion:
The Tribunal set aside the impugned order dated August 29, 2014, confirming the demand of service tax on the compensation amount received for development rights and the denial of CENVAT credit. The issue of service tax on POP charges was remitted to the Commissioner for a fresh decision. The appeal was allowed to the extent indicated.