TELEPHONE DEPOSITS ARE NOT LIABLE TO SERVICE TAXM.

[Mr. M. GOVINDARAJAN]

The service tax provisions bring many services under the service tax net. In addition to this, by interpretation of the provisions the Department pulls many services in the service tax net. Telecommunication service is one of the three services introduced for the first time for implementation of service tax during the year 1994. At that time itself the provisions of service tax exempted the initial deposits made by the subscribers. The service providers may collect various types of deposits that may be refunded or adjusted against the outstanding bills at the time of closure of the connection. The erstwhile Department of Telecom has collected various types of after connection deposits.

The Department tried to bring these deposits for service tax net as they are the amount received in advance. The issue taken for this article is whether the deposits paid by the subscribers to the telephone service are liable to service tax or not with reference to the decided case law in 'In re BSNL' - 2010 (17) STR 322 (Commr. Appeals).

In the above said case, during the course of audit of the accounts of the assessee by the Internal Audit Branch of Central Excise Headquarters, Bhopal the Internal audit examined the collection of deposits by the assessee. The assessee collected initial deposits as well as after connection deposits from the subscribers under various categories. The Department has taken the view that the after connection deposits are liable for service tax.

As per proviso (i) to explanation (1) of section 67 of Finance Act, 1994 the value of taxable service does not include initial deposit made by the subscriber at the time of application for telephone connection or pager or facsimile or telex or leased circuit. Explanation 3 of Section 67 of Finance Act, 1994, inserted with effect from13.5.2005 gives removal of doubts. The said explanation declared that the gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service. Explanation 1 of Rule 6 of Service Tax Rules clarified that in case the value of taxable service is received before providing the said service, service tax shall be paid on the value of service attributable to the relevant month or quarter as the case may be.

From the above said rulings the Department came to the conclusion that the initial deposit made by the subscriber of telephone at the time of application for telephone connection etc., are not liable to be included in the taxable value for the purpose to determine the service tax liability for the relevant period. At the same time any amount received from the subscriber of telephone before providing service and completion of telephone connection are liable to be included to the taxable value and chargeable to service tax on the value of service attributed to the relevant month or quarter as the case me be treating the service provider service which can be adjusted in the subsequent period when bill is raised for providing service.

The Audit scrutinized the trial balance of the assessee for the period ending 28.02.2006 and noticed that the assessee had shown closing balance of the various deposit received from the subscriber of telephone under the head of 'After connection deposit'. The Department took the plea that these amounts were received by the service provider from the subscriber of telephone who had made the said deposit after completion of the process of connection, initial deposit for the purpose of exclusion from taxable value. The details of the closing balance of various types of deposit under the head 'After connection deposit' are as follows:

Sl. No.	Name of the Deposit	Closing Balance
1	OYT	Rs.5,07,92,370
2	Non OYT deposit	Rs.19,46,00,401
3	WLL deposit	Rs.26,68,089
4	Tatkal deposit	Rs.12,038
5	Deposit from STDPT franchisees	Rs.3,85,643
6	Voluntary Deposit	Rs.19,70,764
7	Security Deposit	Rs.1,21,41,871
8	Other	Rs.2,20,558
	TOTAL	Rs.26,27,91,734

 

The Department considered that the assessee suppressed the above taxable value from the department by way of non declaration of the same in ST-3 return filed by them during the said period with an intention to evade the payment of service tax. Thus the Department invoked the provisions of Section 73 for extended period.

The Department issued show cause notice to the assessee as to why-

* Service tax not paid by them amounting to Rs.2,68,04,767/- should not be recovered from them with interest in terms of Sections 73 and 75 of the Act;

* Penalty should not be imposed upon them under Section 76 of the Act for non payment of service tax;

* Penalty should not be imposed upon them under Section 78 of the Act for suppression of taxable value from the Department.

The assessee replied to the show cause notice that the deposit which happens to be the liability of BSNL does not come within the purview of the gross amount charged for taxable services. The deposit does not create generation of services. It is an assurance given by the subscriber to ensure the payment of the bills. It is also adjustable and refundable in case the subscriber is found to be defaulter. The assessee further submitted that after providing connection amount equivalent to six bi-monthly billing periods is transferred to advance rental deposit which is for all practical purpose is an liability towards BSNL And which does not help in creation of service. Hence the question of payment of service tax does not arise. 

The Assessing Officer confirmed the service tax demanded, interest and penalty. The assessee filed an appeal before Commissioner of Central Excise (Appeals).   Before the Commissioner (Appeals) the Department submitted that the initial deposit made by the subscriber under different head represent the amount of deposit which are to be refunded to the subscriber when the subscriber disconnect or opt to exit the connection or the deposit made by the subscriber would be adjusted against any future liability if arises hence this does not form to be included in the taxable value and chargeable to service tax in terms of Section 67 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994. Under Section 67 of the Finance Act as amended it has been provided that the value of taxable service will not include the initial deposit made by the subscribers and the telephone authorities have been clarified that even interest earned on such deposits will not attract service tax. Again as per clause (b) of the inclusive part of the explanation to Section 67 the value of taxable service shall include any adjustment made from the initial deposit made by the subscriber. The amount stand as deposit does not bear any service provided by the assessee. 

The Commissioner (Appeals) found force in the submission of the assessee and logically it would be appropriate that any type of security deposit/initial deposit cannot be charged to service tax since these amounts are liable to be refunded to the customers if so desired for not availing the services or can be adjusted towards the default charges made by the customers during any period. Rule 6(1) (ii) of Service Tax (Determination of Value) Rules, 2006 provides that the subject to the provisions of Section 67, the value of taxable services shall include - the adjustment made by telegraph authority from any deposit made by the subscriber at the time of application for telephone connection or pager or facsimile or telegraph or telex or for leased circuit. The Commissioner (Appeals) found that the charges framed in respect of non payment of service tax on security deposit/initial deposit cannot be sustained.