2025 (4) TMI 1326 - AT - Service Tax

Levy of service tax - inter-division unit transfer and Inter Factory Demand (IFD) charges paid by one division of a company to another division within the same legal entity for use of infrastructure facilities - CENVAT credit - liability to pay 5% of the value of exempted goods as per Rule 6(3)(i) of the Cenvat Credit Rules 2004 - non-maintenance of separate accounts for taxable and exempted services. Levy of service tax - inter-division unit transfer and Inter Factory Demand (IFD) charges paid by one division of a company to another division within the same legal entity for use of infrastructure facilities - HELD THAT - It is observed that Helicopter division and the other units of the Appellant who paid IFD charges for use of infrastructure are from same legal entity. Thus we observe that services provided by helicopter division to other units of HAL amounts to self-service and service tax is not applicable on the services provided to self. Therefore the demand of service tax confirmed in the impugned order on the IFD charges received by one division of HAL from another division of HAL is not sustainable and hence we set aside the same. Demand of payment of 5% of the value of exempted goods - HELD THAT - The Appellant has availed Cenvat credit on input services exclusively used in providing taxable service (i.e. Management Maintenance or Repaid Services) and no credit has been availed relating to exempted goods. It is observed that the Appellant has maintained separate records for availing Cenvat credit for provision of taxable services. There is no contrary finding available on record. Thus the Appellant have satisfied the condition of maintenance of separate records as required under Rule 6 of CCR 2004. Therefore the Appellant is not required to pay any amount at rate of 5% on exempted goods under Rule 6(3)(i). Accordingly the demand confirmed on this count in the impugned order is not sustainable and hence the same is set aside. Demand of interest and penalties - HELD THAT - Since the demands confirmed in the impugned order are not sustained the question of demanding interest and imposing penalties does not arise - the entire demand is made on the basis of documents shared by the Appellant/ PSU and therefore there is no suppression with an intent to evade payment of tax established in this case. Accordingly no penalty imposable under section 78 of the Finance Act 1994 and hence the same is set aside. Conclusion - i) Helicopter division and the other units of the Appellant who paid IFD charges for use of infrastructure are part of same legal entity. Thus services provided by helicopter division to other units of HAL amounts to self-service and Service Tax is not applicable. ii) The Appellant has satisfied the condition of maintenance of separate records as required under Rule 6 of CCR 2004. Therefore the Appellant is not required to pay any amount at rate of 5% on exempted goods under Rule 6(3)(i). iii) There is no suppression with an intent to evade payment of tax established in this case. Accordingly no penalty is imposable under section 78. Appeal allowed.

The core legal questions considered in this appeal are:

1. Whether service tax is leviable on inter-division unit transfer and Inter Factory Demand (IFD) charges paid by one division of a company to another division within the same legal entity for use of infrastructure facilities.

2. Whether the appellant is liable to pay 5% of the value of exempted goods as per Rule 6(3)(i) of the Cenvat Credit Rules, 2004, on the ground of non-maintenance of separate accounts for taxable and exempted services.

3. Whether the extended period of limitation can be invoked for confirming the service tax demand, and consequently, whether penalty under Section 78 of the Finance Act, 1994 is imposable.

Issue 1: Applicability of Service Tax on Inter-Division IFD Charges

Legal Framework and Precedents: Service tax under the Finance Act, 1994, applies to taxable services rendered by one person to another. Section 65(105)(zzzzj) and Section 65B(44) define taxable services relevant to infrastructure usage. However, the principle that a legal entity cannot provide service to itself is a fundamental tenet under service tax jurisprudence. The appellant relied on prior adjudication orders, including a favorable order dated 31.01.2016 relating to the Helicopter division, which held that IFD charges between divisions of the same legal entity do not attract service tax.

Court's Interpretation and Reasoning: The Tribunal noted that the charges between divisions are notional, with no actual consideration paid. The charges are accounted as income in the supplying division and as expenditure in the receiving division, nullifying each other upon consolidation at the corporate level. The Tribunal observed that all divisions constitute a single legal entity and thus, the services provided by one division to another amount to self-service, which is not taxable under the Finance Act.

Key Evidence and Findings: The appellant submitted copies of earlier adjudication orders where similar demands were dropped, and these decisions were accepted by the department. The Tribunal found no allegation or evidence that the divisions were separate legal entities. The notional nature of the charges and accounting treatment further reinforced the conclusion.

Application of Law to Facts: Applying the principle that service tax does not apply on self-provided services, the Tribunal held that the demand of service tax on IFD charges is unsustainable.

Treatment of Competing Arguments: The Revenue reiterated the findings of the impugned order but failed to establish that the divisions were separate entities or that actual consideration was paid. The Tribunal gave precedence to the legal entity principle and prior consistent decisions.

Conclusion: The Tribunal set aside the service tax demand on inter-division IFD charges, holding that such charges do not constitute taxable services.

Issue 2: Liability to Pay 5% on Exempted Goods under Rule 6(3)(i) of CCR, 2004

Legal Framework: Rule 6 of the Cenvat Credit Rules, 2004, mandates maintenance of separate accounts for taxable and exempted services. If separate records are not maintained, a 5% disallowance on exempted goods is applicable.

Court's Interpretation and Reasoning: The appellant contended that it maintained separate records for availing Cenvat credit exclusively on input services used for taxable services such as management, maintenance, or repair services. The Tribunal examined the appellant's submissions and audited financial statements, which showed a significantly lower figure for exempted goods than alleged in the impugned order.

Key Evidence and Findings: The appellant produced audited Balance Sheets and Profit & Loss accounts reflecting the exempted goods value at Rs. 248.40 lakhs for the relevant financial year, contrary to the erroneous figure of Rs. 2774.16 lakhs cited in the show cause notice. There was no contrary evidence on record to dispute the appellant's maintenance of separate records.

Application of Law to Facts: Since the appellant satisfied the conditions under Rule 6 of CCR, 2004, no disallowance of 5% on exempted goods was warranted.

Treatment of Competing Arguments: The Revenue's demand was based on an incorrect figure and absence of proof of non-maintenance of records. The Tribunal favored the appellant's documented evidence.

Conclusion: The Tribunal held that the demand for 5% disallowance on exempted goods was not sustainable and set aside that portion of the impugned order.

Issue 3: Invocation of Extended Period of Limitation and Imposition of Penalty under Section 78

Legal Framework: Extended period of limitation under service tax law applies where there is suppression of facts with intent to evade tax. Section 78 of the Finance Act, 1994, provides for penalty in such cases.

Court's Interpretation and Reasoning: The appellant argued that the demand arose from documents voluntarily shared by the appellant/PSU and that there was no suppression or intent to evade tax. The Tribunal observed that the entire demand was based on information provided by the appellant itself.

Key Evidence and Findings: There was no evidence of concealment or suppression. The appellant's cooperation and submission of documents negated any intent to evade tax.

Application of Law to Facts: Since no suppression with intent to evade was established, invocation of extended limitation and penalty under Section 78 was not justified.

Treatment of Competing Arguments: The Revenue's reliance on extended limitation and penalty was rejected for lack of supporting evidence.

Conclusion: The Tribunal set aside the penalty and held that extended limitation could not be invoked.

Significant Holdings:

"Service provided by one division of HAL to another division of HAL will not be subject to service tax, since no one can provide service to oneself."

"Helicopter division and the other units of the Appellant who paid IFD charges for use of infrastructure are part of same legal entity. Thus, services provided by helicopter division to other units of HAL amounts to self-service and Service Tax is not applicable."

"The Appellant has satisfied the condition of maintenance of separate records as required under Rule 6 of CCR, 2004. Therefore, the Appellant is not required to pay any amount at rate of 5% on exempted goods under Rule 6(3)(i)."

"The entire demand is made on the basis of documents shared by the Appellant/ PSU, and therefore, there is no suppression with an intent to evade payment of tax established in this case. Accordingly, no penalty is imposable under section 78."

The Tribunal conclusively held that the impugned order confirming service tax demand, interest, and penalty was unsustainable in law and set aside the order, allowing the appeal with consequential relief.

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