TOTALLY ILLEGAL ATTEMPT OF REVENUE TO IMPOSE TAX ON INTER UNIT SERVICES OF THE SAME OWNER

[C.A. DEV KUMAR KOTHARI]

Taxpayer

In context of Service tax the  taxpayer  is generally the service provider who renders taxable services and gets registered and is liable to pay service tax. In some cases of  receiver of services of specified taxable services they are  made liable to pay service tax on the taxable services availed by them e.g. in case of some receiver of goods transport services by road and some importer of services. In both situation service provider and service receiver are different persons.

Two separate persons is a must:

From general common sense as well as all the provisions it is clear that  there must be two persons, one person renders the service and the other receives or avails the service.  A person cannot render himself a taxable service, for example, suppose a Chartered Accountant is carrying his professional activities in personal name Mr. CA as well as in name of his proprietory concern M/s. CA  & Co. In both cases, it is the same person, Mr. CA  himself and Mr.CA as proprietor or M/s CA & Co.  Suppose for ascertaining profitability of M/s. X & Co. as an organization or profit center, Mr. X raises bill or debit note on M/s CA & Co. for time devoted by him it can not be said that Mr. CA  has rendered service to M/s CA  & Co as a separate person. because M/s CA  & Co. is not a separate legal entity and it is not separately owned by any other person.  There cannot be relationship of practicing Chartered Accountant and a client between Mr.CA  and M/s CA & Co.  However, we may not be surprised if the Chartered Accountant also receives demand for tax on services rendered by one unit or branch to the other unit of branch of the same C.A. firm or the same C.A. as has happened in cases of other manufacturers or service providers.

A brief review of relevant provision

Taxable service means, any service provided or to be provided by one person to other person in different capacities according to nature of service as enumerated in various clauses of section 65(105).  Few examples are given below: -

            to any person, by a stock-broker in connection with the sale or purchase of securities listed on a recognised stock exchange; - in this case the stock-broker and his client will be different persons. Suppose stockbroker also trades on his own account, it will neither be subject to charge of brokerage and service tax thereon. Suppose broker debits his personal account for notional brokerage, still expenses in his personal account will cross it.

            to a subscriber, by the telegraph authority in relation to a telephone connection- telegraph authority uses own phones for own business purpose - the subscriber (if it is recorded as subscriber e.g. officers of authority), the service provider as service user are same person.

to a client, by an advertising agency in relation to advertisement, in any manner - suppose advertising agency makes own advertisements - the service receiver will be the advertising agency itself and not its client.

to a customer, by a courier agency in relation to door-to-door transportation of time sensitive documents, goods or articles- the courier agency also sends its own documents to head office, branches, and business relations etc. there is in house service and no service is provided to a customer in such cases.

to a client, by a consulting engineer in relation to advice, consultancy or technical assistance in any manner in one or more disciplines of engineering but not in the discipline of computer hardware engineering or computer software engineering; - suppose a consulting engineering concern also have a manufacturing facility and its teams of consulting engineers are deputed on the site of its own factory. The service receiver is not a client.

To a client by a practicing CA/CWA/ CS

            To a client, by a manpower recruitment or supply agency in relation to the recruitment or supply of manpower, temporarily or otherwise, in any manner; - suppose a CA has a recruitment cell, this cell provides manpower to clients as well as arranges temporary manpower for audit assignments during peak period. Arrangement of such manpower for own work is not a service to any client.

The above examples, as well as all other provisions clearly show that in every case, there should be two persons, one who renders service and other who receives service. If the service provider uses his own services for own business the service provider is no related to a customer, client, subscriber, or any other person.

As per section 68 under the heading, payment of service tax, also every person providing taxable services to any person shall pay tax. As per sub-section (2) thereof, some service availers are required to pay service tax for taxable services availed by them.  However, in both situations, we find that there are two different persons. in first case service provider is required to pay service tax in second case service receiver is required to pay service tax.

In house service cannot be taxed:

Thus it is beyond any doubt that captive services, or in-house services generated and used for own business are not subject to service tax. If a contrary view is taken the result would be that service of most of employees of the taxpayer will have to be valued and service tax will be payable. For example, suppose a large construction company (LCC) has separate divisions for architects services, civil engineering services and electrical engineering services. LCC has employed architects and engineers for work for the construction company itself as well as for providing services to others. As a profit centre Architect division, civil engineering division, electrical engineering division and property development divisions are considered as separate divisions of LCC. Therefore, for interdepartmental services debit notes/ credit notes are issued.

Now suppose service tax is demanded from LCC merely because they have issued debit notes or credit notes for interdepartmental services it  will not be correct and justified.

Suppose other Mega Construction Company (MCC) also has similar departments, but they do not raise debit notes or credit notes or makes any accounting adjustments to ascertain profits of each department. They are not asked to pay service tax.     

Therefore, for interdepartmental / inter branch services debit notes/ credit notes or accounting treatment for ascertaining profits of each department should not make any difference because service provider and service receiver remains the same person.

However, we find that the Service Tax authorities are trying to levy service tax on such debit notes for services rendered by one arm to other arm of the same owner.

Certain judicial pronouncements

In Saturday Club Limited v. Assistant Commissioner, Service tax Cell, (2005) 1 STT 64(Cal.), the Hon'ble Calcutta High Court held that a club and its members are not different entities, club is an association of persons and therefore, services rendered by the club to its members are not taxable.  Here the point to be noted is that there should be two different entities, one rendering service and the other receiving service.  This is subject to exceptions, if any, provided under law.  For example, in case of clubs, now amendment has been made to tax services rendered by the Club to its members also.  However, this amendment is also not free from doubt about its validity.

Recent case of demand for inter unit Debit note for service:

In case cited as SENIOR TERMINAL MANAGER INDIAN OIL  CORPORATIONLTD. Versus CCE, TIRUNELVELI 2008 -TMI - 31925 - CESTAT CHENNAI   vide  order No. - 1010/2008  Dated - 18 September 2008 the CESTAT decided that service tax cannot be levied when one unit of  IOL rendered some service to other unit under any type of service as there are no different persons as service provider and service receiver.. The revenue has attempted to levy service tax on the basis of BAS rendered by one unit to the other unit of the same owner (IOL). 

To expedite rendering of justice and to avoid unnecessary demands being piled up the Tribunal adopted  very pragmatic approach and at the stage of consideration of requirement of pre deposit itself decided the appeal itself in its finality. The Tribunal observed, opined and held on the following lines: 

a.      After examining the records and hearing both sides, we are of the view that the appeal itself requires to be finally disposed of at this stage.

b.      Pre deposit  dispensed with.

c.       The appeal was taken up for final disposal.

d.      The appeal is  against demand of service tax under the head "Business Auxiliary Service" (BAS, for short) for the period August 2003 to September 2006 and also . penalties imposed on the appellants are also under challenge.

e.       The disputed demand is on an amount collected by the appellants from their own refinery towards the cost of additives used in what is called "extra-mile diesel".

f.        The appellants that they did not render any service to anybody while undertaking the above activity.

g.      The appellant  were only rendering a service to themselves and, therefore, the demand of service tax under any category whatsoever in relation to the amount collected by the appellants from their own refinery is not sustainable.

h.       Contextually, it is pointed out that, for a subsequent period, a similar demand of service tax was vacated by the Commissioner of Central Excise, Tirunelveli. However, it is also pointed out that the said order of the Commissioner is under challenge by the department.

i.        The ld; Counsel has also relied on the Tribunal's decision in their favour, viz. IOCL Vs. Commissioner of Central Excise, Patna, (2007 -TMI - 2316 - CESTAT, KOLKATA) wherein it was held that no service tax was payable in respect of any service rendered by one unit of the company to another. However , it is not submitted by the SDR that this order is challenged furtherDecision:

a.        The ratio of the cited decision of this Tribunal is squarely applicable to this case.

b.        It is not the case of the Revenue that the appellants rendered any service to anybody else, nor has any service recipient been identified in the impugned order.

c.       Obviously, the so-called service is one rendered by the appellants to themselves.

d.      Such service cannot be subjected to levy of service tax, which is the view taken by this Tribunal in the cited case.

e.       The impugned order is set aside and this appeal is allowed;

Earlier Decision of CESTAT, Bangalore:

Precot Mills Ltd. v. CCE, Tirupati, 2006 -TMI - 479 - Appellate Tribunal, Bangalore

In this case the assessee is a limited company having different divisions treated as different profit centers. As is well known, all such divisions, branches or departments are owned by the same person - Precot Mills Ltd a corporate entity.  However, for ascertaining profitability of each division, inter-unit transfer of services were charged by the department rendering service to the department receiving service.

Such accounting treatment was only for the purpose of ascertaining accountability and profitability of the division / branch and these debits and credits become counter-entries in the context of the owner of the business - the assessee company.  This is just like the simple example given earlier for Mr. CA and his proprietary concern M/s CA & Co.  However, in such a simple case also the service tax department assessed the assessee and raised demand for services rendered by one department of the assessee to the other departments of the assessee and such demands were confirmed by the Commissioner (Appeals).  Therefore, the assessee had to approach the CESTAT, Bangalore and the Tribunal on consideration of all the factual aspects that the assessee was a corporate entity, the assessee functioned through different profit centers.  Service rendered by one unit or profit center to other unit or profit center was adjusted by way of debit notes raised by the service providing profit center to evaluate the performance of particular unit.  Ultimately there was only one balance sheet for the legal entity and not for separate unit. In another words, the appellant did not receive any valuable consideration for services rendered by one unit of the appellant to the other unit.  Each unit was part of the same legal entity. The Tribunal placed this differently in the following wordings.

"when one rendered service to oneself, as in the present case, there was no question of leviability of service tax.  Hence, there was no merit in the impugned orders of the Commissioner which ignored the main point that there was no client relationship in the present transactions,".

Conclusion:

There must be separate persons - one providing service and another receiving service, otherwise there cannot be levy of service tax because there is no service rendered by one person to another person. A person cannot provide service to himself. "person" in this context shall mean the person who  is owner of different units. In case there is one owner of the tow units, a service provided by one unit to other unit cannot be considered as service provider by one person to other person because both units are owned by the same person.

What can we hope?

It is not clear or sure whether the revenue has challenged the above orders of CESTAT  in further appeal because the Tribunal has simply stated as follows: 

"We have heard ld. SDR also, who has not claimed that the above decision of the Tribunal (dt. 4.5.2007) was appealed against.

We can hope that Revenue have not/ will not challenge the above orders of the CESTAT and accept the same because it is very clear and correct legal position.  We can also merely hope that the Revenue will not make improper amendment in an attempt to levy tax on services rendered by oneself to himself because if such attempt is made and is encouraged, one day we may find that services rendered in a family to different family members may also be taxable.  The services provided by wife to husband and their children may be made taxable. Therefore, there must be once for all stoppage on such demands being raised by service tax department.

Thanks on behalf of professionals with demand for protest by professionals:

On behalf of professional friends we must thank the revenue authorities by indulging into frivolous litigation, like the above cases, which result into heavy demands, and litigation creating new tax worries and new assignments for professionals. However,  on the other hand we must leave aside greed and personal interest and keep in mind national interest and interest of humanity at large therefore, we must not appreciate such attitude of revenue officers and protest such demands on moral grounds also.

We must ask ourselves are professionals made to do such unproductive work? If not then why there is no protest from professionals and the institutes of professionals fro such illegal actions of the revenue officers.