CESTAT: Service recipient cannot be fastened with any liability to pay tax

The Customs Excise and Service Tax Appellate Tribunal (CESTAT) has held that a service recipient cannot be fastened with any liability to pay tax. Also, tax will be paid only when the service has been rendered. Experts say that this ruling will have great relevance in the GST regime.

CESTAT is a quasi-judicial body which hears and disposes appeals against orders passed by the Commissioners of Customs and Excise and Service Tax under the Customs Act, 1962, Central Excise Act, 1944 and Finance Act 1994.

The case under discussion is one in which Ruchi Soya is the appellant. Ruchi set up a wind energy project with Wind Turbine Generators (WTG), manufactured by Suzlon. It entered into contract with Suzlon Global Services Ltd. (SGSL) for maintenance.

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There is a clause in the agreement that in case Machine Availability falls between below 95.5 per cent and up to the machine availability of 92.5 per cent, then the SGSL shall compensate the owner an amount from the service charges recovered. CESTAT noted that the appellant is the service receiver and SGSL is the service provider.

SGSL issued credit notes on the appellant for the claims raised by the appellant towards Machine availability due to break down in WTGs. Accordingly, books of accounts of appellant showed the receipt of ₹1.33 crore approximately in the year 2015-16.

However, based on relevant provisions of Finance Act 1944, the Service Tax Department formed an opinion and issued a show cause notice alleging that “agreeing to the obligation to tolerate the Act” as per said Machine Availability clause amounts to declared services.

Thus, amount received from SGSL was alleged to be service liability of the appellant towards said ‘Declared Services’. Accordingly, demand was raised for over ₹19.34 lakh.

Safeguarding loss

After detailed hearing, Principal Bench of CESTAT with the coram of Judicial Member Rachna Gupta observed that amount received by the appellant is merely an amount to safeguard its loss.

“The said amount cannot be called as consideration for the tolerance of service. provided and some lacunae thereof nor it makes the appellant the service provider,” the bench said while saying that the concept of ‘Declared Services’ has been wrongly invoked by the Department.

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Further, it said that the service recipient cannot be fastened with any liability to pay tax. “I also rely upon the decision of Apex Court in the case of Association of Leasing and Financial Service Companies Vs Union of India wherein it has been held that when no service has been rendered, service tax cannot be levied,” the bench said and allowed the appeal.

Commenting on the ruling, Harpreet Singh, partner in KPMG said that tt is a well-reasoned case law as it aptly re-established the principle that service tax should be levied only when there is reciprocity of act between service provider and service receiver.

“The decision reinforces the thin line of difference between amount paid to safeguard the loss of service recipient vide a credit note from consideration paid for declared service of tolerating an act. This ruling may prove to be significant for taxability and litigation around compensation/ liquidated damages under GST,” he said.