SERVICE TAX COLLECTED AND KEPT IN ESCROW ACCOUNT – WHETHER SECTION 73A OF FINANCE ACT, 1994 APPLIES?

[Mr. M. GOVINDARAJAN]

Section 73A of Finance Act, 1994 was inserted vide Finance Act, 2006 with effect from 18.04.2006.   The said section provides that the service tax collected from any person is to be deposited with the credit of the Central Government.  Section 73A (1) provides that any person who is liable to pay service tax under the provisions of Chapter V or the rules made there under, and has collected any amount in excess of the service tax assessed or determined and paid on any taxable service under the provisions of Chapter V or the rules made there under from the recipient of taxable service in any manner as representing service tax, shall forthwith pay the amount so collected to the credit of the Central Government.

Section 73A(2) provides that where any person who has collected any amount, which is not required to be collected, from any other person, in any manner as representing service tax, such person shall forthwith pay the amount so collected to the credit of the Central Government.

Section 73A (3) provides that where any amount is required to be paid to the credit of the Central Government under sub-section (1) or sub-section (2) and the same has not been so paid, the Central Excise Officer shall serve, on the person liable to pay such amount, a notice requiring him to show cause why the said amount, as specified in the notice, should not be paid by him to the credit of the Central Government.

Section 73A (4) provides that  the Central Excise Officer shall, after considering the representation, if any, made by the person on whom the notice is served under sub-section (3), determine the amount due from such person, not being in excess of the amount specified in the notice, and thereupon such person shall pay the amount so determined.

Section 73A (5) provides that the amount paid to the credit of the Central Government under sub-section (1) or sub- section (2) or sub-section (4), shall be adjusted against the service tax payable by the person on finalization of assessment or any other proceeding for determination of service tax relating to the taxable service referred to in sub-section (1).

Section 73A (6) provides that where any surplus amount is left after the adjustment under sub-section (5), such amount shall either be credited to the Consumer Welfare Fund referred to in section 12C of the Central Excise Act, 1944 or, as the case may be, refunded to the person who has borne the incidence of such amount, in accordance with the provisions of section 11B of the said  Act and such person may make an application under that section in such cases within six months from the date of the public notice to be issued by the Central Excise Officer for the refund of such surplus amount.

In ‘Sliverline Estates V. Commissioner of Service Tax, Bangalore’ - 2014 (3) TMI 735 - CESTAT BANGALORE, the appellants engaging in the activity of development and construction of residential apartments did not collect service tax during the period from 2006 to 2009.  The completion certificate was obtained on 26.8.2009.  Since the appellant had no clarity on liability of service tax while settling the accounts finally with the buyers of the apartments, they collected certain amount which was in the interest of protecting both the buyers and the appellant from any future exposure to service tax liability if their service falls under the category of ‘works contract’ and the amounts collected were kept in a separate escrow account.  The Department took the view that the collection of amount and deposit of the same in the escrow account, amounts to collection of service tax.  As per Section 73A this amount has to be deposited with the credit of the Central Government.

The Department initiated proceedings against the appellant. The amount of service tax of Rs. 2, 44, 17,471/-, collected from the apartment owners and kept in the escrow account, has been demanded with interest. Penalty of Rs. 5000/- under the provisions of Section 77 of the Finance Act, 1994 has been imposed.  Against this order the appellant filed appeal before the Tribunal.  The Tribunal considered the question whether service tax collected from the customers and kept in the escrow account and not paid to the Government would attract provisions of Section 73A of the Finance Act, 1994 or not.

At that time there are conflicting views to the effect of the liability of the service tax in the construction of buildings.  The appellant in the agreement made with the purchasers of the flats developed a methodology for the purpose of service tax.   According to this methodology in the interest of the appellant and the purchasers a separate escrow account would be opened.   The cheques of all the customers related to service tax would be deposited in the escrow account.  If no service tax liability is established the said amount would be returned to the purchasers along with interest. 

The appellant before the Tribunal contended that they did not collect the amount as ‘service tax’ but under the head of ‘caution deposit’.  The said amount has been deposited in the escrow account.  If the tax liability is established the same would be paid to the credit of the Central Government or it would be returned to the purchasers.   In this case the Adjudicating authority did not consider the liability of service tax.  In the absence of determination of liability of service tax, the only question remains to be answered is whether provisions of Section 73A is attracted or not.

The Tribunal analyzed the provisions of Section 73A of the Finance Act, 1994.  The Tribunal considered that Section 73A (2) is relevant.  It is stated that the amount collected by the appellant was kept in escrow account and he has given an assurance to the buyer that if the amount is not liable to be paid, the same shall be paid with interest. It is only a deposit which is not taken into account of the appellant and kept in a separate account to ensure safety of money and to ensure disbursement to the ultimate customer. Needless to say that if the liability exists and if it is held that the appellant is liable to pay, the amount will have to be paid to the Government since it is in escrow account. Therefore Commissioner should have determined the liability and if there was liability, the amount in escrow account would have been paid to the Government.  The Tribunal held that the amount collected and deposited would not amount to collection of service tax.  Section72A would not attract in this case.  It is not the case of the department that the appellant is liable to pay service tax on the service rendered.  The tribunal allowed the appeal of the appellant.