Whether advances received from customers are leviable to service tax?

Case:-THERMAX INSTRUMENTATION LTD. VERSUS COMMISSIONER OF C. EX., PUNE-I

Citation:- 2016 (42) S.T.R. 19 (Tri. – Mumbai)

Brief Facts: -The appellant undertake Erection, Installation and Commissioning activity. They raise running bills/invoices on the customers for the services provided. To meet the contractual commitments by both sides, the customer is required to pay a certain amount, generally 10% of the contract value as an advance payment. The appellant are also required to give a counter bank guarantee of equal amount to the customers (referred to as payment security). The customer has lien over the bank guarantee till the completion of the contract. The payments for the services are made in a progressive manner during the execution of the contract. The amount of advance given by the customer is reduced in proportion to the value of work completed as shown in the invoice raised up to any stage of work executed as per the terms of the contract. The amount of bank guarantee provided by the appellant is correspondingly reduced in proportion to the amount of advance adjusted by them. According to the appellant, service tax has paid on the invoice value on accrual basis, that is, on the 5th of the following month. Thus the tax is paid even before the receipt of consideration. Service tax is paid on the gross value including the proportionate advance which is deducted against every invoice raised. However, a show cause notice was issued on 2-5-2011, which culminated in the impugned order, in which it was held by the ld. Commissioner that Service Tax of Rs. 18,08,18,228/- is payable on the advances received for the period April, 2006 to March, 2011. Interest was also ordered to be paid in terms of Section 75 of the Finance Act, 1994, penalties were also imposed under Sections 77 and 78 of the Finance Act, 1994.

Appellant’s Contention:- Ld. advocate emphasized that the so called advance is only in the nature of security deposit to ensure contractual commitments. The advance is shown as current liability in the books of accounts and not shown as income. It is provisionally transferred to sale/consideration for service as and when proportionate amount is deducted from the invoices raised on the customers. Ultimately the service tax is paid on the advances at the time of raising of invoices and therefore, there is no liability to pay service tax again on the advances. According to him, in any case, advance is not received towards value of taxable services provided. He relied on the decisions in the case ofShri Hanuman Cotton Mills and Ors. v. Tata Air Craft Limited [AIR 1970 SC 1986]. It was also contended that the Commissioner has misinterpreted Section 67(3) because this Section only requires to include any amount received towards taxable services. He relied on the Hon’ble Supreme Court judgments in cases of Commissioner of Income Taxv. Bijli Cottons Mills Private Ltd. [1979 (1) SSC 496] and R.S. Joshi [1977 (4) SCC 98]. He submitted that the issue is one of interpretation. Therefore, 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. He also therefore, contested imposition of penalties under Sections 77 and 78 relying on the cases of Flyingman Air Courier (P) Ltd. v. CCE, Jaipur [2004 (170) E.L.T. 417 (T) = 2006 (3) S.T.R. 283 (Tribunal)] and CCEv. Gamma Consultancy (P) Limited [2006 (4) S.T.R. 591 (T)].

Respondent’s Contention:- Ld. AR appearing for Revenue reiterated the findings of the Commissioner. He drew attention to one agreement dated 26-4-2010 entered into by the appellant with M/s. Madras Cements and stated that the fact of amount of advance being adjusted in the bills establishes the linkage between the advance and the service provided. Therefore, it is clearly leviable to service tax, being part of the gross amount received towards taxable services in terms of Sections 65(105) and 67(3). He stated that the whole accounting exercise of actual payment of tax on invoice basis should be verified with professional assistance of a cost auditor.

Reasoning of Judgement:-Tribunal have carefully gone through the facts of the case and submissions made by both sides.
The relevant clauses of one typical agreement/contract given in the appeal memo and referred by both sides during the hearing, regarding the payment terms are reproduced below :
11. Payment Terms
To facilitate Owner plan the funds allocation efficiently and release payments from time to time, the Contractor shall submit a detailed billing break up to the Owner in due course of time. This billing break up shall be discussed and approved by the Owner and shall form the basis for opening the Letter of Credit and for the Contractor to raise his invoices.
11.1 ADVANCE PAYMENT
11.1.1 The Contractor shall deliver to the Owner a payment security in the form of a bank guarantee for 10%, i.e., Rs. 80.50 lacs (Rupees Eighty Lacs Fifty Thousand Only) of the Contract price valid until the completion of Scope of Work (“payment security”). Upon receipt of the payment security, the Owner shall pay to the Contractor 10% of the Contract Price as an advance payment (Initial Advance) amount to Rs. 80.50 lacs (Rupees Eighty Lacs Fifty Thousand Only).
11.1.2 The value of the payment security shall be reduced on a quarterly basis in proportion to the amount of advance adjusted in the invoices of the Contractor.
11.1.3 The payment security will be reduced by the Bank Guarantee issuing Bank of such payment security based on a letter that shall be issued by the Owner to Such Bank Guarantee issuing Bank authorizing the reduction of the value of the payment security.
We find from the agreement that it true that the security payment is to be reduced in proportion to the amount of advance adjusted in the invoices of the contractors, i.e., appellant. We also find from Para 11.2 (shown below) of the agreement that the advance payment is made on mobilization of site by the appellant. We note that it is the normal procedure in such contracts to provide advance payment which helps the contractors to mobilize men/material to begin the work. Para 11.2 is reproduced below :
11.2 MILE STONE PAYMENTS FOR PROGRESS WORK :
Upon mobilization of site by one of the Mechanical Erection Sub-Contractor of the main Contractor, the owner shall pay to the contractor a Mile Stone Payment of Rs. 80.50 lacs (Rupees Eighty Lacs Fifty Thousand only). (Ten percent) of the Contract Price (“Mile Stone Payment”).
11.2.1 Payment of the Mile Stone Payment shall be effected directly within three days from the date of submission of following documents.
The agreement also provides for payment of service tax before deducting proportionate amount of advance received in terms of Para 11.3 which is reproduced below :
11.3 BALANCE PAYMENT
11.3.1 The balance payment of 80% (Eighty Per cent) of the Contract Price including all taxes, shall be paid on a pro rata basis as set out in a mutually agreed upon billing break up, through an irrevocable, inland, without recourse letter of credit payable on demand in Pune to be opened by the owner in favour of the Contractor (“Balance Payment Letter of Credit”). The value of Letter of Credit to be opened shall be as under :

RE	*Particulars*	*Amount Rs. Lacs*
1	Contract Price	805.00
2	Estimated Service Tax @ 10% and Education Cess @ 3% of Service Tax on the Contract Price	82.91500
3	Total Contract value including estimated Service Tax and Cess thereon	887.915
4	Less : 10% initial advance payment received	80.50
5	Less : 10% mile stone payment to be received	80.50
6	L/C Value to be opened	726.9150

We have seen a sample invoice in the appeal memo as shown below
Invoice
Bill No. RAB 001
To,
M/s. Madras Cements Limited
R.R. Nagar Works,
Virudhunagar Dist.
L/C No. : 462030101300001 dated 10th May ‘10
Erection & Commissioning Work for the Captive Thermal Power Plant of 1X25 MW capacity at Madras Cements Ltd., R.R. Nagar Works.

S. *No.*	*Description*	*This Bill Amount (Rs.)*
1	Value of work completed	31,05,160.00
2	Add : Service Tax @ 10%	310,516.00
3	Add : Education Cess @ 2%	6,210.32
4	Add : S&H Cess @ 1%	3,105.16
5	Total (1+2+4)	3,424,991.48
6	Less : Advance	6,21,032.00
7	Amount payable (5-6)	2,803,959.48
8	Less TDS @ 2% on 2803959.48	56,079.19
	Net Amount payable thro LC (7-8)	27,47,880.29

(Rupees Twenty Seven Lakhs Forty Seven Thousand Eight Hundred Eight and Twenty Nine Paise only)
Net amount to be payable through LC for the work completed up to the month of Dec ‘10 is Rs. 27,47,880.29
As per LC terms and conditions kindly issue above details on your letter head

Service Tax No. AACCT1032OST001

Tamilnadu VAT TIN

No. 33140821265
Maharashtra VAT TIN No. 2763000038V w.e.f. 1-4-2006
Nature of Service : Erection & Commissioning

For Thermax Infrastructure Ltd.
Authorised Signatory
REGD OFFICE : THERMAX HOUSE, 14 MUMBAI-PUNE ROAD, WAKDEWADI, PUNE 411 003, INDIA

This specific Invoice No. RAB 001, dated 20-12-2010 clearly indicates that the advance is deducted in each invoice from the value of invoice, which includes the service tax payable. It all goes to show that service tax is periodically paid on the value of service provided up to a particular stage. If tax were also to be demanded separately on the advance received, it would clearly amount to double taxation. The Commissioner has come to a hasty conclusion without examining in right perspective the details of the agreement/contract, the method of invoicing, the method of paying service tax on the total invoice value, and the adjustment of advance from the total invoice value as we have shown above. In fact it has been rightly contended by the appellant that they have paid the tax in advance; that is at the time of issue of invoices on accrual basis whereas tax was to be paid on receipt of payment basis as per law existing during the relevant period.
Further, the 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/consideration 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 customer of equal amount. It is more in the nature of a deposit. As defined in Borrows, in Words and Phrases, Vol. II
“An earnest must be a tangible thing... That thing must be given at the moment at which the contract is concluded, because it is something given to bind the contract, and, therefore, it must come into existence at the making or conclusion of the contract. The thing given in that way must be given by the contracting party who gives it, as an earnest or token of good faith, and as a guarantee that he will fulfil his contract, and subject to the terms that if, owing to his default, the contract goes off, it will be forfeited. K, on the other hand, the contract is fulfilled, an earnest may still serve a further purpose and operate by way of part payment”.
In the present case the 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.
The Commissioner’s findings seem to be based solely on the provisions of Section 67(3) of the Finance Act, 1994 which is as under :
“The Gross amount charged for taxable service shall include any amount received towards taxable service before, during or after the provision of such service.”
The Commissioner has not interpreted the law correctly. As per above law, the gross amount charged shall include any amount received towards taxable service. In Tribunal’s considered view, the 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. Reliance is placed on the case of Pharpur Cooling Towers Ltd.- 2015 (37) S.T.R. 550 (Tri.-Del.) held that -
3. As regard demand of Rs. 18,54,468/- confirmed on the advance received by the appellant, we find that the show cause notice itself concedes that Service Tax on the advance was paid (adjusted) subsequently and the appellants are also not contesting the said demand. As regards the interest of Rs. 2,76,359/- ordered to be recovered by the impugned order on delayed payment of service relating to the advance received, it is to be noted that during the relevant period the rate of tax applicable was rate of tax prevailing on the date of providing the service. Therefore, before the service was provided the appellants would have been in no position to know as to at what rate to pay the Service Tax. The Service Tax was paid as and when the service relating to advance received was rendered. In this view of the matter, it is not possible to sustain the order relating to recovery of impugned interest. It was only on 18-5-2012 that Section 67A was introduced which provided that the rate of Service Tax, value of taxable service and the rate of exchange, if any, shall be the rate of Service Tax or value of taxable service or rate of exchange in force as applicable at the time when the taxable service has been provided or agreed to be provided. Obviously, Section 67A would only have prospective applicability. Thus, to reiterate, as the advance received by the appellants has been adjusted in due course as and when the service was provided coupled with the fact that unless the service was provided the rate at which the Service Tax was to be paid would not be known, it is not possible difficult to sustain the order with regard to confirmation of the impugned interest”.
Reliance is also placed on the case of CCE, Ludhianav. J.R. Industries, 2009 (16) S.T.R. 51 (Tri.-Del.).
It appears that levy was premature without the service being provided. The authority below has proceeded on the conception that 33% of the advance received shall be value of taxable service. When the work order relied by the ld. DR does not demonstrate that the receipt was the consideration for service provided, this does not provide a basis to appreciate that taxable event had arisen and levy was made properly. Once it is demonstrated by SCN that the levy was arrived treating advance receipt as measure of taxation. Resulting a levy of Rs. 3,15,253/-, that shall not be approved to be taxed without service being provided. On the above reasoning, we dismiss the appeal of Revenue without accepting the reasoning given by the ld. Commissioner (Appeals).
We have shown above that service tax is paid on the total value of services provided periodically. And the advances are deducted from the total value which includes value of services provided.
It is also alleged in the show cause notice that in respect of some customers, the invoices are not issued for periods ranging up to two years after receipt of advances. The defence of the appellant is that these amounts are shown as current liability in their books of account 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.
Much as we may try to convince ourselves, we are unable to accept ld. AR’s suggestion that the verification of accounts be referred to a cost auditor for the simple reason that such necessity does not flow from the Order of the Commissioner. There are no doubts expressed on this account by him in the adjudication order. Therefore, in Tribunal’s considered view, the impugned order has no merits and is liable to be set aside. Having decided the issue on merits, question of interest and imposition of penalties does not arise.
Although we have decided the issue on merits, we may recall the chequered history of this case at the stay stage. We find that the matter went to the High Court. The appellant had taken the stand that service tax of Rs. 1460.18 lakhs was paid on the advances received from the customers during April, 2006 to Mar. 2011 in the manner we have discussed above. And service tax of Rs. 6.24 crores against unadjusted advances was paid in July, 2011 because with the introduction of the Point of Taxation Rules, 2011 with effect from June, 2011, the method of payment of service tax on receipt basis was done away with and liability was fixed on accrual basis. The appellant paid this amount. Thus the entire demand had been paid. The High Court ordered the appellant to produce cogent documentary evidence to the Commissioner to establish this fact and the Commissioner would verify the same and submit a report to the Tribunal. The Tribunal in its Order dated 4-4-2013 observed that the appellant produced GAR-7 challans and relevant extracts of Cenvat Register to the Commissioner. They also produced before the department copies of invoices raised, amount of advances adjusted, service tax paid on the adjusted amount of advances and copies of the ST-3 returns filed showing payment during the relevant time. The appellants also produced acknowledgement of the same. However no verification was caused to be made by the Commissioner as directed by the Hon’ble High Court showing payment of service tax towards the impugned advance. Instead of causing such verification, the Commissioner directed the appellant to produce records of payment of service tax paid subsequent to the impugned adjudication order. The Tribunal in its order specifically records that the Commissioner devised his own proforma to show payment of service tax paid after the adjudication order instead of complying with the directions of the High Court. It also records that such verification would show payment of Rs. 6.24 crores only because the rest of the payment is shown in the invoices in which the advances were adjusted. Later the Commissioner was even summoned by the Tribunal but no proper verification could be shown in terms of High Court directions. However this proceeding was only in the context of the stay application.
As regards the main appeal, we find that the 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.
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.

Decision:-Appeal allowed

Comment:- The ratio of this decision is that since during the material period of time, service tax was payable on receipt basis, but the appellant paid service tax on accrual basis, when the invoices were issued by them, the same was proper because the amount of advance received by the appellant was reflected as liability and not booked as income or consideration for provision of service in future. The amount received was in the nature of security deposit which was adjusted when the service was actually provided.

Prepared By:- Alakh Bhandari

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