‘Debit notes’ representing materials supplied by customers, imposition of penalties u/s 78 would not be appropriate: CESTAT, Mumbai

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Facts: M/s. DYP Constructions Pvt Ltd (“the Appellant”) filed an appeal for setting aside of penalty imposed under section 76,77, 78 of the Finance Act, 1994 with respect to confirmation of service tax demand for the period in dispute. The demand was confirmed as Revenue Department took a view that the Appellant was liable to payment of tax under the heading ‘commercial or industrial construction service’.

Applicant’s Contention of law: Appellant claimed that tax should be restricted to actual receipts on services rendered after incorporation of Section 65(105)(zzq) of Finance Act, 1994 on June 16, 2005 and that the ‘written off dues’ be excluded, for non-compliance with the terms thereof. According to the assessee, dispute in second round of proceedings was limited to the recovery of Rs. 10,09,725 representing tax on amounts, not received from customers and on bad debts. Assessee appealed for setting aside of penalties under section 76, 77 and 78 of Finance Act, 1994.

Held: The Hon’ble CESTAT of Mumbai Bench vide its ORDER NO: A/85112 / 2019 dated January 17, 2019 referred to the ratio laid down in the case of Commissioner of Central Excise & Customs Kerala v. Larsen & Toubro Ltd which has distinguished the scope of services mentioned in section 65(105)(zzq) from works contract for levy of tax. The CESTAT stated that the assessee, being service provider against contract, involving supply of goods, would take the activity beyond the extent of tax under the provisions that have been held to be service simplicitor.

CESTAT opined that as debit notes imply the intent to withhold the value therein from the monetary consideration and the issue of materials, in lieu for subsuming in an asset, vesting with the issuer, cannot be any stretch of imagination be deemed to be consideration. CESTAT thus held that it was not the ‘non- monetary consideration’ referred to in Section 67 and relevant Rules. Moreover, it stated that it would appear that the ultra vires of rule 5(1) of Service Tax (Determination of Value) Rules, 2006 had been settled by the SC in Intercontinental Consultants and Technocrats Pvt. Ltd.

Further, prior to the introduction of Point of Taxation Rules, 2011, the levy of tax, except in relation to transactions between associated entities, crystallized only on receipt, therefore, tax on disputed amount of Rs. 30,767 was not leviable on the date of issue of SCN. Therefore, CESTAT opined that imposition of penalties u/s 78 would not be appropriate.

Citation: [ TS-99-CESTAT-2019-ST ]