2025 (4) TMI 964 - AT - Service Tax

Admissibility of adjustment of the service tax paid - adjusting of the service tax paid in respect of cancelled site mobilization advance against the service contract for erection and commissioning of boilers which were converted into advance by re- negotiation; and subsequent adjustment of service tax paid by them under Rule 6(3) of Rules of 1994 - HELD THAT - The service tax is liable to be paid in respect of taxable services provided by one person i.e. service provider to the other person i.e. service receiver. It is not in dispute that the appellants are the service provider and their customer M/s Jai Prakash Associates Limited is the service receiver in respect of the taxable services. In terms of Section 66 ibid since the service tax is liable to be paid at the rate of 12% of the value of taxable services recourse have to be taken to the provision of Section 67 ibid for determining the value of taxable services. As per the said legal provision the value of services is the gross amount charged by the service provider for such service provided or to be provided by him; and the phrase gross amount includes payment by cheque credit card deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment and any amount credited or debited as the case may be. In the present case in terms of the contract entered into between the appellants and their customer the advance amount has been re-negotiated and the same was adjusted for the initial payment made by the customer towards mobilization advance and subsequently with the total value of the contract. On perusal of the contractual terms and conditions it is seen that the appellants was supposed to charge 10% of the Contract Price as advance within 7 days of singing the Contract and 10% of the Contract Price against mobilisation at site . However subsequently on renegotiation both the parties agreed that appellants will convert the 10% Mobilization Advance also as Normal Advance and thereby increasing the rate of advance to effectively 20%. Accordingly the appellants raised a credit note for the equivalent amount of the invoices raised earlier. The appellants adjusted the invoice value against the invoices raised in subsequent periods and adjusted the excess service tax paid in the subsequent period i.e. July 2010 as per Rule 6(3) ibid. An activity which was not recognised by either of the parties cannot be said to be a service provided by the appellants. Hence the appellants had paid excess service tax in respect of a service which was not provided by it. Therefore the appellants has correctly adjusted the excess service tax paid under Rule 6(3) of Service Tax Rules 1994. It is found that in the case of the appellant s group entity- Thermax Instrumentation Ltd. the Tribunal in Thermax Instrumentation Ltd. v. CCE Pune-I 2015 (12) TMI 1222 - CESTAT MUMBAI has held that service tax is not payable on receipt of advance since the same is in the nature of merely Earnest deposit. The impugned order dated 18.07.2016 is liable to be set aside to the extent it had denied adjustment of service tax and had confirmed the adjudged demands and had imposed penalties on the appellants. Conclusion - The service tax is leviable only on the value of services actually provided and invoiced and advances or mobilization payments treated as advances do not attract service tax until adjusted against invoices. Excess tax paid on cancelled or renegotiated advances can be adjusted under Rule 6(3) by issuing credit notes or refunds. Appeal allowed.

The core legal questions considered in this judgment are:

1. Whether the appellants are entitled to adjust the service tax paid on the amount received as 'mobilization advance' which was subsequently cancelled and converted into a 'normal advance' through renegotiation of the contract;

2. Whether such adjustment of excess service tax paid under Rule 6(3) of the Service Tax Rules, 1994, as it existed during the disputed period, is legally permissible;

3. Whether the advance payments received by the appellants attract service tax liability at the time of receipt or only upon raising invoices for services rendered;

4. The applicability and interpretation of Rule 6(3) of the Service Tax Rules, 1994, including its amendment effective from 01.04.2011, with respect to credit notes and refunds for services not provided;

5. The validity of penalties imposed under Sections 76, 77, and 78 of the Finance Act, 1994, consequent to the alleged irregular adjustment of service tax.

Issue-wise Detailed Analysis

Issue 1 & 2: Entitlement to adjust service tax paid on cancelled mobilization advance under Rule 6(3) of the Service Tax Rules, 1994

The relevant legal framework comprises Section 66 and Section 67 of the Finance Act, 1994, which impose service tax on the gross amount charged for taxable services, and Rule 6(3) of the Service Tax Rules, 1994, which permits adjustment of excess service tax paid where services are not provided wholly or partially. The disputed period is April 2010 to March 2011, prior to the amendment effective 01.04.2011.

The Court examined the contract between the appellants and their customer, which initially required a 10% mobilization advance and a separate 10% advance within 7 days of contract signing. Upon renegotiation, the mobilization advance was cancelled and converted into a 'normal advance', effectively increasing the advance to 20% of the contract price. The appellants issued credit notes reversing the mobilization invoices and adjusted the service tax accordingly.

The Tribunal noted that Rule 6(3) allowed adjustment of excess service tax paid where the service was not provided and the payment was refunded or a credit note issued. The appellants had complied by issuing credit notes and adjusting the tax in subsequent returns.

The Court reasoned that since the mobilization advance was not a service rendered but an advance payment subsequently reclassified, the service tax paid on it was excess. The appellants' adjustment under Rule 6(3) was therefore valid. The legal provisions under the Finance Act require tax on the gross amount charged, which must be net of any credit notes issued for services not provided. The impugned order denying adjustment was found to be contrary to this legal position.

Issue 3: Whether service tax is payable on advances at the time of receipt or only upon raising invoices for services rendered

The Tribunal relied on its earlier decisions and the Supreme Court judgment in Shri Hanuman Cotton Mills and Ors. v. Tata Aircraft Limited, AIR 1970 SC 1986, which held that advances received as earnest money or security do not attract tax until services are rendered and invoices are raised.

The appellants' advances were shown as current liabilities and not income, supported by bank guarantees issued to customers as security. The advance was treated as earnest money, not consideration for services at the time of receipt. The Tribunal emphasized that service tax liability arises only on the invoiced value of services rendered, not on advances received.

Accordingly, the demand for service tax on advances at the time of receipt was rejected, consistent with prior Tribunal rulings including those involving the appellants' related entities.

Issue 4: Interpretation of Rule 6(3) of the Service Tax Rules, 1994 and its amendment

Rule 6(3) originally allowed adjustment of excess service tax paid where service was not provided and refund made to the service recipient. The amendment effective 01.04.2011 explicitly permitted adjustment by issuance of credit notes or refunds in cases of renegotiated invoices or deficient service provision.

Since the disputed period predated the amendment, the Tribunal interpreted the original Rule 6(3) in light of the amendment, recognizing that the appellants' issuance of credit notes and adjustment of service tax complied with the intended legal framework for correcting excess tax payments. The amendment clarified and expanded the scope but did not restrict the right to adjust under the original rule.

Issue 5: Validity of penalties imposed for alleged irregular adjustment

The penalties under Sections 76, 77, and 78 of the Finance Act, 1994, were imposed on the basis of confirmed service tax demands. Since the Tribunal found that the service tax was not payable on advances at the time of receipt and the adjustment of excess tax under Rule 6(3) was permissible, the foundational demand for service tax was erroneous.

Consequently, penalties predicated on such demands were also unsustainable. The Tribunal set aside the penalties along with the demand.

Significant Holdings

The Tribunal held: "An activity which was not recognised by either of the parties cannot be said to be a 'service provided' by the appellants. Hence, the appellants had paid excess service tax in respect of a service which was not provided by it. Therefore, we are of the prima facie view that the appellants has correctly adjusted the excess service tax paid under Rule 6(3) of Service Tax Rules, 1994."

It was further observed: "The credit notes issued by the appellants shall be taken into account for the purpose of determining the gross value of the service tax on which levy of service tax can be imposed. Therefore, we find that the impugned order confirming the demand of the service tax is contrary to the above legal position under the parent Act of 1994."

Reiterating the principle on advances, the Tribunal quoted: "We find that the advance cum-security bank guarantee to the assessee by the contract awarding party is in the form of earnest money. Thus the same is not liable to tax. 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."

On penalties, the Tribunal concluded: "In view of our findings above, the impugned order is set aside and appeal is allowed with consequential relief if any, in accordance with law."

In sum, the Tribunal established the core principle that service tax is leviable only on the value of services actually provided and invoiced, and advances or mobilization payments treated as advances do not attract service tax until adjusted against invoices. Excess tax paid on cancelled or renegotiated advances can be adjusted under Rule 6(3) by issuing credit notes or refunds. Penalties based on incorrect demands are liable to be set aside.

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