WHETHER SERVICE TAX IS PAYABLE ON ADVANCE PAYMENT MADE PRIOR TO THE DATE ON WHICH THE SERVICE WAS BROUGHT UNDER THE NET OF SERVICE TAX?

[Mr. M. GOVINDARAJAN]

            Chapter V of the Finance Act, 1994 ('Act' for short) containing the provisions of service tax came into force with effect from 01.07.1994.  The Act started with only three taxable services in the year 1994 and with almost every subsequent Finance Act, the services taxable under the service tax kept increasing and now more than hundred services are under the net of service tax.  The service tax is leviable for a particular service with effect from the date of its implementation.  The question put forth in this article whether service tax is payable on advance payment made prior to the date on which the service was brought under the net of service tax.   The  High Court of Uttarakhand at Nainital gave answer to this question in the case 'Commissioner of Central Excise, Meerut - I V. Indian Institute of Petroleum' - 2008 -TMI - 31202 - HIGH COURT UTTARAKHAND.

                        The facts of the case run as follows.  The respondent assessee Indian Institute of Petroleum, Hardwar Road, Mohkampur, Dehradun ('IIP' for short) is a constituent laboratory under the Council of Scientific and Industrial Research which is engaged, inter alia, in providing Scientific and Technical consultancy to the clients.   The service of 'Scientific and Technical consultancy' was brought under the net of the service tax with effect from 16^th July, 2001.  IIT registered itself with the Central Excise Department for payment of service tax for providing the said service.  A show cause notice was issued by the Central Excise Department to IIT  on 17.1.2003 through the Deputy Commissioner of Central Excise, Dehradun, as to why in respect of the four works detailed in the show cause notice, the service tax be not charged.   The dispute in the appeal relates to item No. 3 i.e., work of laboratory study of Vacuum Gas Oil (VGO), mentioned in the show cause notice, in connection to which the IIT provided its technical service to M/s Numaligarh Refinery Limited ('NRL' for short).   The order value of the said work was Rs.2.20 lakhs.   It appears that IIT submitted its reply and the Authority concerned vide its order dated 16.7.2003 passed order in Order-in-Original directed the respondent assessee to pay service tax in respect of the other items except the item relating to laboratory study of VGO.  The Revenue, aggrieved on this order, filed a revision petition before the Commissioner of Central Excise, Meerut.   The Commissioner of Central Excise reversed the order of Original Authority and directed to pay service tax on VGO.

                        The IIT went in appeal before CESTAT. (2006 (1) STR 45 (Tri. Del).  The tribunal gone through the records and heard both the sides.  The services were brought under the provisions of service tax w.e.f. 16.7.2001.   The service tax for the period in dispute (2000-2001) for rendering the service to the NRL has been demanded from them.   The Adjudicating Authority dropped the demand as the service was provided by the appellants before their services were brought under the Act.  The Commissioner has reversed that order on the ground that the service was provided after16.7.2001 and to support that order the Revenue has heavily leaned on the letter dated 10.8.2000 (in the impugned order the date of this letter has been wrongly given as 10.8.2001) and contended that earlier to this letter the appellants were only given intent letter and the final work was awarded to them only through that letter and that the final report was also submitted by them to the NRL after 16.7.2001.   Therefore they are liable to pay service tax along with penalties as confirmed by the Commissioner.  The tribunal was unable to accept the contention of the Revenue after going through the correspondences made between the IIT and NRL.  The perusal of the record shows that the work of laboratory study of VGO was awarded to the appellants by the NRL much before 16.7.2001.   Letter dated 10.8.2000 which has been wrongly considered as dated 10.8.2001, by the Commissioner, shows that the work was awarded to the IIT on a lump sum of Rs.2,20,000/-  After that appellants sent the draft report to NRL and on receipt of no objection to that, the same  report was given the final shape.  At the time of award of the work, the services of the appellants were not subject to service tax.   Their services, as above were brought within the purview of service tax w.e.f. 16.7.2001.   Therefore the adjudicating authority rightly dropped the demand of service tax against the appellants.   The view taken by the Commissioner to the contrary and confirming the service tax demand cannot be sustained.   The tribunal set aside the order passed by the Commissioner and restored the order passed by the Adjudicating Authority.

                        Aggrieved on the order of the tribunal the Revenue filed this appeal before the High Court.   The question of law involved in this case as framed by the High Court is whether, service tax is not leviable on the service in respect of which draft project report by the scientific and technical expert (service provider) is already prepared prior to the date on which the service was brought under the net of service tax.

                        The contention of the Revenue is that the actual work was placed by NRL to IIP in respect of the service in question on 01.08.2001 and the final project report was given by IIP on 4^th October, 2001.  The respondent assessee's case is that it prepared the report on 10^th July 2001, after completing the project, and as such, no amount of service tax is payable in respect of the service as the work had already been completed before 17.07.2001. 

                        The High Court, after hearing both parties and going through the records, was clear about the fact that the letter of intent was issued by NRL to IIP much before the 'Scientific and Technical Consultancy' was brought under the net of service tax.   Not only this the payment of Rs.1.03 lakhs was paid by the customer to the respondent assessee much before the aforesaid date 16.07.2001 i.e., the date of bringing the service under the net of the service tax.  The final project report, no doubt, may have been submitted by the respondent assessee after 16.07.2001, but that by itself does not make the assessee liable to pay the service tax in respect of the service provided prior to 16.07.2001.  The High Court further held that it is also to be kept in mind that nature of service tax is that of an indirect tax, and if the respondent assessee is made to pay service tax in respect of the service already provided by him prior to 16.07.2001, it is not left with option to charge the indirect tax from the customer, as the payment was to be made by the party to the assessee, as per the contract only.  The High Court dismissed the appeal filed by the Revenue.