2014 (8) TMI 824 - AT - Service Tax

Levy of service tax on services provided to associated companies - book adjustment entries - period from October 2009 to September 2011 - new subsidiary was formed only on 30.3.2011 and is yet to take over the functions - Held that - When the service recipient itself is not there, the question of book adjustment would not arise. Even for subsequent years also there is no evidence to show that appellant did recover this amount. Moreover the notes reproduced by us hereinabove, would show that what was proposed in Note 5 was also a proposal to recover expenses and not to recover consideration for services provided. Even assuming that such recoverable cost proposed to be recovered from the subsidiary are for the services rendered, if such amount is not realized and recovered and no book adjustment is carried out, liability for service tax would not arise. Other than a Note showing proposal to recover the cost from the subsidiary, there is no corresponding evidence either documentary or otherwise to show that there was either a book adjustment or recovery of cost. There is no evidence to show that the appellants have recovered cost for the services rendered from the subsidiary or the public limited company which has been formed subsequently either documentary or otherwise. When the cost of services is not recovered question of levy of service tax also does not arise. Therefore, the demand on this count cannot be sustained and has to be set aside. In view of the above, the matter is remanded to the original adjudicating authority to verify the worksheet submitted by the appellant regarding payment of service tax on the amounts as and when received by the appellant - Decided in favour of assessee.

Summary

Issues:
1. Short payment of service tax as per Revenue's reconciliation of balance sheet and ST3 returns.
2. Alleged non-payment of service tax on 'Management Consultancy Service'.

Analysis:
1. The Appellant, a joint venture company engaged in taxable services, was audited for the period from October 2009 to September 2011. The Revenue claimed short payment of service tax based on the reconciliation of the balance sheet and ST3 returns. A demand of &8377; 12,65,52,066/- with interest was confirmed. The Appellant argued that the balance sheet followed the accrual method, while ST3 returns were filed after receiving consideration. The consultant provided a worksheet showing payment of service tax on the differential amount upon receipt from customers. The matter was remanded for verification by the original adjudicating authority. An additional issue was raised post 10.5.2008 regarding the date for tax payment in associated companies, which was deemed beyond the scope of the show-cause notice. The Commissioner's observations on this aspect were deemed improper, limiting the requantification to verifying the correctness of service tax payment based on the receipt of consideration.

2. A demand of &8377; 20,81,063/- was raised for 'Management Consultancy Service' based on an auditor's note in the annual report. The consultant argued that as no subsidiary existed by the balance sheet date, no income chargeable to service tax was earned. Even after the formation of the subsidiary, the proposed recovery of expenses was dropped by internal management decision. The Tribunal agreed that without evidence of cost recovery for services rendered, the liability for service tax did not arise. The absence of book adjustments or recovery of costs indicated the demand could not be sustained. The matter was remanded for verifying the worksheet submitted by the Appellant on service tax payments.

In conclusion, the Tribunal remanded both issues to the original adjudicating authority for verification and correctness of service tax payments, emphasizing the importance of evidence in determining liability for service tax.