2024 (7) TMI 423 - AT - Service Tax

Levy of service tax - advanced payments received from their prospective clients - no personal hearing has been accorded to the appellant and the impugned order has been passed ex-parte - violation of principles of natural justice - HELD THAT - The entire amount of advance was received by the appellant in the nature of a loan for purchasing of necessary capital goods, which were required for execution of the service contract obtaining such advance/loan. Same was backed by the appellant by providing bank guarantee of equal amount to the provider of such advance. i.e. service recipient. It is found that subsequently, as per the contract between the appellants and its customers, the advances so received were adjusted towards supply of service charges. It is agreed with the submissions of the appellant that the advances are adjusted against the bills received on completion of stages of the contract and therefore same are in the nature of earnest money and not liable to tax at the time of receipt. This tribunal in case of Commissioner of Central Excise Pune Vs. Thermax Engineering Construction Company Ltd 2017 (12) TMI 1191 - CESTAT MUMBAI as held similar view on the similar facts that ' It is also found from the certificate issued by the Chartered Accountant that the of such advances We thus find no reason to hold that the asseessee has discharged service tax liability on the entire amount said amount is liable to be taxed at the time of receipt. It became the part of consideration only when it was proportionately included in the stage-wise completion of work for which invoices were raised and service tax was paid by the assessee. Even if it is assumed that the said amount was not in the form of earnest money but was received as Advance. in that case also no service tax could have been demanded at the time of receipt as the same was not taxable.' The facts of the matter at hand are similar to the one which has been decided by this tribunal, following the same it is held that the impugned order in original is without any merit and therefore the same is set aside - appeal allowed.

Summary

Issues Involved:
1. Leviability of service tax on advance payments received by the appellant.
2. Violation of principles of natural justice due to lack of personal hearing.
3. Legitimacy of invoking the extended time proviso under Section 73(1) of the Finance Act, 1994.

Detailed Analysis:

1. Leviability of Service Tax on Advance Payments:
The primary issue was whether the advance payments received by the appellant for execution of contracts could be considered as advance payments towards rendering the service and thus liable to service tax. The Tribunal found that the entire amount of advance was received by the appellant in the nature of a loan for purchasing necessary capital goods, backed by a bank guarantee of equal amount. The advances were adjusted against the bills raised on completion of various stages of the contract, and if the contract did not materialize, the advance had to be returned to the customer. Therefore, no event of rendition of service took place at the time of receipt of the advance, and no service tax could be levied on such amounts.

The Tribunal relied on previous decisions, including:
- CCE vs. Thermax Engineering Construction Company Ltd. (2019 (92) G.S.T.L. 80 (Tri. Mumbai)), where it was held that advance receipts as security/guarantee amounts are not liable to tax.
- Gammon India Ltd. vs. Commissioner of Service Tax V, Mumbai (2021 (44) G.S.T.L. 373 (Tri. Mumbai)), which reiterated that mobilization advances are not taxable at the time of receipt but only when included in the stage-wise completion of work.

2. Violation of Principles of Natural Justice:
The appellant contended that the impugned order was issued in violation of the principles of natural justice as no personal hearing was accorded. This argument was noted but not elaborated upon in the final judgment, as the primary focus was on the substantive issue of tax liability on advance payments.

3. Legitimacy of Invoking the Extended Time Proviso:
The appellant argued that the demand for the period 2010-11 to 2011-12 was issued by invoking the extended time proviso under Section 73(1) of the Finance Act, 1994, despite regular audits and complete transparency in their books of accounts. The Tribunal found no elements of fraud, collusion, misstatement, or suppression of facts with an intent to evade service tax. Therefore, the invocation of the extended time proviso was not justified.

Conclusion:
The Tribunal concluded that the impugned order lacked merit and set it aside, allowing the appeal. The judgment emphasized that advance payments received as loans or security for capital goods, adjusted against future bills, do not constitute a taxable event under the Finance Act, 1994. The principles established in previous Tribunal decisions were applied to hold that no service tax could be levied on such advances.

(Order pronounced in the open Court on 05.07.2024)