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PJ-Case law-2013/14-1587

Whether discount given on recharge vouchers by the telecom company to its distributors deductible from the assessable value?

Case:-RELIANCE TELECOM LTD. VERSUS COMMISSIONER OF SERVICE TAX, KOLKATA

Citation:-2013(30) S.T.R. 402 (Tri.- Kolkata)

Brief Fact:Applicant filed this application for waiver of pre-deposit of Service Tax Rs. 2,96,36,292/- and equal amount of penalty under Section 78 of Finance Act, 1994.

The applicant is providing service under the category of telecommunication service under Section 65 & 109A of Finance Act, 1994. The applicant used to charge their customers (end-user) for the service to be provided by way of pre-paid re-charge voucher of different denomination which was available in the open market through their distributors and retailers. The applicant were charging their customers for the service to be provided by them as per the value of the voucher purchased by the customer.  Applicant, however, at the time of payment of service tax were deducting the discount offered to their distributors from the value of the voucher to arrive at the assessable value. As per the provision of Section 67, if the provision of service is for a consideration in money, then the taxable value is the gross amount charged by the service provider for such service provided or to be provided by him. The gross amount charged is defined as an amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service. The department initiated proceeding against the applicant that they have suppressed the value and ld. Commissioner confirmed the Service Tax of Rs. 2,96,36,292/- and equal amount of penalty under Section 78 of Finance Act, 1994.

           

Appellant Contentions:-The Appellant submitted that they receive payments in ad­vance from the distributors by selling the Recharge Vouchers (RCVs) which, in turn are obtained by the end-user/customers for availing pre-paid Telecommu­nication Services provided by the Appellant. The Appellant sells the RCVs to the distributors at a discount on the MRP printed on the RCVs. The price at which the distributors are selling the RCVs to the end-user/customers is independent of amount charged by the Appellant and is completely at the discretion of the distributors to charge any amount not exceeding the MRP. The distributors are not bound to sell the goods at the MRP to treat the discount as charges or com­mission received by the distributor. The contention is that the Appellant has appropriately paid Service tax on the said amount received by them from the distributors. They have not received any additional consideration from the distributors and hence Service tax liability is only to the extent of the amount received by the Appellant towards the sale of the RCVs. They and their distributors are acting on a principal-to-­principal basis. The sale of RCVs by the distributors to the end-user/customers is at the sole discretion of the distributor and is no way controlled by the appel­lant.

The contention is that as per Section 67 of the Act, the value of any taxable service ought to be the gross amount charged by the service provider for such service provided or to be provided by him. Therefore, Service tax is payable on the amount charged or consideration received by the Appellant, from the dis­tributor, for providing the Telecommunication Services. In support of their con­tention they have placed reliance in the case of Commissioner of Service Tax, Mum­bai v. Reliance Communications Ltd. reported in 2008 (11) S.T.R. 258 (Tri. - Mumbai) and BPL Mobile Cellular Ltd. v. CCE (ST), Coimbatore reported in 2007 (8) S.T.R. 546 (Tri-Chennai).

The ld. Counsel for the appellant also contended that the Commissioner while passing the im­pugned order has assumed that the distributors are the agents of the appellant. Such an assumption is clearly contradictory to the present factual matrix, wherein the Appellant and the distributors share a clear principal-to-principal relationship.The RCVs are sold to the distributors who independently sell the same to the customers. Clearly, in terms of the aforesaid, Service tax is payable only on the discounted price and not on the MRP printed on the RCVs. The contention is that the explanation of Rule 5(1) of Valuation Rules has been inserted w.e.f. 1-3-2011 and that same cannot be made applicable retrospectively. In support of their contention they have placed reliance on Board Circular No. 93/4/2007-S.T., dated 10-5-2007, Letter of TRU D.O.F. No. 334/3/2011-TRU, dated 28th February, 2011 and decision in the case of Martin Lottery Agency Ltd. reported in 2009 (14) S.T.R. 593 (S.C.).

 

Respondent Contentions:-The contention of ld. A.R. is that as it is seen in reality that the RCVs are sold on MRP. Moreover RCVs are treated as OTC (over the counter) goods in the market and issuance of receipt for OTC goods are rarely practiced in the mar­ket. So production of document in support of the allegation that RCVs were sold on MRP is not feasible. On the other hand the notice could not establish in a single instance that they sold the RCVs to the end-user at a price lower than the MRP.

The contention is that a plain reading of Section 67 of Finance Act, 1994 gives the findings that taxable value can be monetary or non-monetary. If the provision of service is for a consideration in money, then the taxable value is the gross amount charged by the service provider for such service provided or to be provided by him. Again the gross amount charged is defined as an amount charged for the taxable service which shall include any amount received towards the taxable service before, during or after provision of such service. On the other hand Rule 5(1) of Service Tax (Determination of Value) Rules states that where any expenditure or costs are incurred by the service provider in course of provid­ing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service. He submits that the above law position do not support the contention of the noticee that the amount deducted from the gross value of taxable income has to be treated as dis­count to the distributor. The provision of statute provides the said amount is the expenditure or cost incurred by the noticee to render the mobile service to the customers.

Ld. AR contended that Clause IV & V of the C.B.E. & C. Circular No. 23/3/97-S.T., dated 13-10-1997 on which the noticee relied on, was with­drawn vide C.B.E. & C. Circular No. 93/4/2007-S.T., dated 10-5-2007 and hence the same is not relevant in the present case.

Ld. AR also contended that it is a settled theory in law that the 'Ex­planation' inserted to a statute confirms the intention of the legislation. It is a tool to interpret the statute, which already exists. It cannot introduce or extend any­thing which is not provided by law. Hence, noticee's view that consequent to introduction of new explanation, the service tax on total value of the RCVs are payable only from 1-3-2011 is not tenable.

Ld. AR. also contended that Section 67 of the Finance Act, 1994 was changed and amended with suitable alteration in it's wordings and expression by the Finance Act, 2006 w.e.f. 18-4-2006; and simultaneously a new Rule has been introduced in the name of Service Tax (Determination of Value) Rules, 2006 vide Notification No. 12/2006-ST., dated 19-4-2006, to construe and explain the proceedings taken under Section 67 of the said Act. The judgments as referred by the noticee to support their argument are being considered as cases belonged to the periods before the introduction of changes in the statues, hence the said re­ferred judgments stand irrelevant in the present case. Ld. AR also placed reliance on the decision of Hon'ble High Court of Kerala in the case of Vodafone Essar Cel­lular Limited v. The Assistant Commissioner of Income Tax [(2010) 7 (Ker HCDB)].

 

Reasoning of Judgment:-We have considered the submissions made from both the parties and perused the record. We find that the RCVs are sold at MRP and the applicant were charging their customers on MRP. However, while paying service tax, they were deducting discount offered to their Distributors from the value of the RCVs to arrive at assessable value. The Department's case is to add the discount deducted from the Recharge Voucher to the assessable value. As per the provisions of Section 67, if the provision of ser­vice is for a consideration in money, then the taxable value is the gross amount charged by the service provider for such service provided or to be provided by him. The gross amount charged is defined as an amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service. The applicant is contesting the inclu­sion of the discount given by them to their distributor, in the assessable value on the ground that from their distributor they are charging the amount after deduction of the discount only. We find that period involved in this case is from April, 2008 to March, 2009 and Section 67 was amended w.e.f. 18-4-2006 and simultane­ously Service Tax (Determination of Value) Rules, 2006. So far as the reliance placed by the applicant on the case laws cited by the applicant is concerned, they relate to period prior to the amendment of the provisions of law. Admittedly, the explanation was added to Rule 5(1) of Service Tax Rules vide which it was clari­fied that service specified in sub-section (zzzx) of Clause 65 of Section 105 of the Finance Act, 1994, the value of the taxable service shall be the gross amount paid by the person to whom telecom service is provided by the telegraphic authority which goes to show that the intention of legislation has always been to levy the tax on the value received from the person to whom the telecom service is pro­vided by the telecom authority. In this case the service is provided to the con­sumer and not to the distributor. Hon'ble High Court of Kerala in the case of Vodafone Essar Cellular Limited has held that "So much so, there is no sale of any goods involved as claimed by the assessee and the entire charges collected by the assessee at the time of delivery of Sim Cards or Recharge coupons is only for ren­dering services to ultimate subscribers and the distributor is only the middleman arranging customers or subscribers for the assessee." Once it is established that the charges collected from the customer in lieu of the RCVs is a service charge, not a sell, it is automatically established that the amount deducted by the dealer is nothing but commission which should be included to the taxable income of the noticee". The above case relates to applicability of certain income tax provisions but the decisions support the Department's case. In these circumstances, prima facie we find that the applicant are not able to make out a case for total waiver of pre-deposit. The applicant did not plead financial hardship. We find that in the case of Commissioner of Central Excise, Guntur v. Sri Chaitanya Educational Committee - 2011 (22) S.T.R 135 (AP), it has been decided that not only financial hardship but balance of convenience has also to be seen. The balance of convenience is in favour of the Revenue in this case.

The applicant is directed to make pre-deposit of 25% of duty involved within 8 weeks and report compliance on 6-2-2013. In case of failure, the appeals of the appellant would be dismissed without further no­tice.

Decision:-Part pre-deposit ordered.

Comment:-  The crux of this case is that for the purpose of determination of taxable value of service provided by the telecom company, the discount given to the distributors for the recharge coupons will be included in the assessable value because the telecom company is providing service to its ultimate consumers and not the distributors and so the amount of consideration would be the amount that is received from the ultimate customers which is nothing but MRP.

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