2015 (12) TMI 1222 - AT - Service Tax

Demand of service tax on advances received - whether advances received by the appellant from their customers for contracts executed for customers are leviable to Service Tax - Held that - Account books of the appellant indicate that the advance received is shown as current liability and not as income towards sale/provision of service. Therefore it is not towards value of services provided. The advance is proportionately transferred to sale/confiscation of service in the books as and when the appellant raised invoices on the customers. We find that the order of Commissioner is silent in this respect. The advance is only an amount given as kind of earnest money and for which the appellant gives a bank guarantee to the customers of equal amount. It is more in the nature of a deposit - advance is like earnest money for which a Bank Guarantee is given by the appellant. It is a fact that the customer can invoke the Bank Guarantee at any time and take back the advance. Hence the appellant does not show the advance as an income, not having complete dominion over the amount and therefore the same cannot be treated as a consideration for any service provided. Therefore the findings lack appreciation of the complete facts and evidences. - advance is not received towards taxable service. The advance is the customer s obligation as his part of the mutual commitment between the two parties to honour the terms of the contract. In respect of some customers, the invoices are not issued for periods ranging upto two years after receipt of advances. The defence of the appellant is that these amounts are shown as current liability in their books of accounts and no services have been provided as yet by them. The Commissioner neither refers to these details nor gives any findings on this issue. Therefore we find no reason to disbelieve the statement of the appellant and take it that the Commissioner too does not dispute this fact. In any case it is on record now that the appellant have paid service tax on the unadjusted advances in July 2011. - impugned order has no merits and is liable to be set aside - Commissioner, in the adjudication order, did not dispute the fact that the service tax was paid periodically on invoice value and that the advance was adjusted in each invoice reducing the outstanding amount correspondingly. The Commissioner only determined that service tax is payable on the advances. We have already expressed our view that the service tax was not required to be paid on the advances and further when the amounts of advance were adjusted proportionately in the invoices and service tax was paid on the invoice value. - impugned Order is set aside - Decided in favour of assessee.

Issues Involved:
1. Whether advances received by the appellant from their customers for contracts executed are leviable to Service Tax.
2. Interpretation of Section 67(3) of the Finance Act, 1994.
3. Timeliness of the show cause notice and imposition of penalties under Sections 77 and 78 of the Finance Act, 1994.

Detailed Analysis:

1. Whether advances received by the appellant from their customers for contracts executed are leviable to Service Tax:
The appellant undertakes Erection, Installation, and Commissioning activities and raises running bills/invoices for services provided. Customers pay an advance, typically 10% of the contract value, which is secured by a bank guarantee of equal amount from the appellant. The advance is reduced proportionately as work progresses and invoices are raised. The appellant contends that service tax is paid on the invoice value on an accrual basis, including the proportionate advance deducted from each invoice. The Commissioner, however, held that service tax of Rs. 18,08,18,228/- is payable on advances received for the period April 2006 to March 2011, along with interest and penalties.

The Tribunal found that the advances are shown as current liabilities and not income in the appellant's books. Service tax is paid on the total invoice value, which includes the proportionate advance. The Tribunal concluded that demanding service tax separately on the advance would amount to double taxation. The advance is considered a security deposit, not a payment for taxable services, and is adjusted against the invoice value when services are rendered.

2. Interpretation of Section 67(3) of the Finance Act, 1994:
The Commissioner based his findings on Section 67(3), which states that the gross amount charged for taxable service shall include any amount received towards taxable service. The Tribunal, however, interpreted that the advance is not received towards taxable service but as a mutual commitment to honor the contract terms. The Tribunal relied on case law, including Paharpur Cooling Towers Ltd. and J.R. Industries, which supported the view that service tax should be paid when services are rendered, not on advances received.

3. Timeliness of the show cause notice and imposition of penalties under Sections 77 and 78 of the Finance Act, 1994:
The appellant argued that the show cause notice issued on 2/5/2011 is largely time-barred as it covers the period 1/4/2006 to 31/3/2011. The Tribunal noted that the Commissioner did not dispute the fact that service tax was periodically paid on the invoice value and that advances were adjusted in each invoice. The Tribunal found no merit in imposing penalties under Sections 77 and 78, given that the service tax was not required to be paid on advances and was already paid on the total invoice value.

Conclusion:
The Tribunal set aside the impugned order, concluding that service tax was not leviable on advances received as they are in the nature of security deposits and not payments for taxable services. The Tribunal also found that the Commissioner failed to properly verify the appellant's records and did not comply with the High Court's directions. Consequently, the appeal was allowed with consequential relief, and the stay petition was disposed of.

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