Leviability of Service Tax on the taxable event on which Sales Tax/VAT is paid

PJ/Case Study/2011-12/10

CASE STUDY

Prepared By:

CA Pradeep Jain,

Ankit Singhvi and

Sukhvinder Kaur, LLB [FYIC]

Introduction:

When an assesee is providing services as well as sales then whether a taxable event will chargeable to service tax on the amount of sale element on which sales tax/VAT is also payable. In the case under study, the assessee which is a club providing services to its members and non members was alleged to be liable to pay service tax on room rent, fees and other receipts. Another question involved was whether suppression of facts can be alleged when the information is taken from Balance sheet which is a public document and is available to all.

Relevant Legal Provisions:

Definition of Club or Association Service under Section 65(25a) of the Finance Act, 1994:

Club or association means any person or body of persons providing services, facilities or advantages, for a subscription or any other amount, to its members, but does not include

(i) Anybody established or constituted by or under any law for the time being in force; or

(ii) any person or body of persons engaged in the activities of trade unions, promotion of agriculture, horticulture or animal husbandry; or

(iii) any person or body of persons engaged in any activity having objectives which are in the nature of public service and are of a charitable, religious or political nature; or

(iv) Any person or body of persons associated with press or media.

In the matter of M/s Umed Club, Jodhpur
[Order-in-Original No. 69/CK/JP-II/2011/Additional Commissioner, Dated 28.03.2011]

Brief Facts:-

- Noticee are a club providing services to its members for a subscription fee and are registered under the category of “Club or Association service”.

- On the examination of Balance Sheets of the Noticee for the financial year 2005-06 and 2006-07 while verifying of value of services rendered by the Noticee from the ST-3 return filed, Department noticed that there was huge difference in the value of the services rendered by the Noticee shown in balance sheets and ST-3 returns filed by the Noticee to the department for the same period. It was alleged that the Noticee had short paid service tax leviable on gross value of services like Cottage/room rent, amount collected for the Souvenir Yellow Directory provided to the members and amount collected as coupon charges/entry from its members for get together.

- Department communicated to the Noticee to deposit the differential service tax with the credit.

- Therefore, the Department issued show cause notice to the Noticee demanding service tax along with interest on the said consideration under proviso of Section 75 of the Finance Act, 1994 and proposed to impose penalty under Section 76, 77 and 78 of the Finance Act, 1994.

Noticee’s Contentions:-

- It was contended that the impugned show cause notice had taken the complete Balance Sheet amount and reduced the service tax deposited by them.

- It was contended that the impugned show cause notice had calculated the service tax liability on all the charges shown in the balance sheet. Noticee submitted reconciliation statement showing the complete Balance sheet amount and bi-furcated the same into taxable and non-taxable amount.

- It was contended that the Noticee has sold eatables and liquors of certain amount in year 2005-06 as well as in year 2006-07 and VAT had been paid on sale of food items and therefore service tax cannot be levied on the same. It was contended that liquor was chargeable to state excise duty which was to be paid at the time of purchase of liquor and no VAT is payable on the sale of same. The necessary documents were provided to Department. To strengthen their claim, Noticee had submitted the assessment orders of sales tax Department for the years 2005-06 and 2006-07. The said Assessment orders it was submitted clearly showed that sales tax was paid on the sale of liquors. There was a minor difference which was contended to be insignificant compared to the overall figures. It was submitted that it is well settled rule that the service tax was not payable on the taxable event on which sales tax/VAT had been paid. A transaction can be either sale or service. Imposition of service and sales tax were constitutionally mutually exclusive.

- Reliance was placed on the judgment given in M/s LSG Sky Chefs (India) Pvt Ltd v/s CC, CCE& ST, Hyderabad [2010-TIOL-56-CESTAT-BANG]; M/s Daspalla Hotels Ltd v/s CCE, Vishakhapatnam [2010-TIOL-219-CESTAT-BANG]; Grand Ashok v/s CST, Bangalore [2009 (92) RLT 73 (CESTAT-Bang)]; Sky Gourmet (P) Ltd v/s Commissioner of Service Tax, Bangalore {[2009] 22 STT 422 (Bang-CESTAT)]; JR Communications & Power Controls v/s Comr of C Ex, Trichy [2009 (14) STR 379]; Karakkattu Communications v/s Commissioner of C. Ex, Cochin [2007 (8) STR 164]; Hutchinson Max Telecom Pvt Ltd v/s Commissioner of C. Ex., Mumbai [2008 (12) STR 373]; Vallamattam Communications v/s Commissioner of C. Ex, Cochin [2008 (12) STR 267]; IDEA Mobile Communications Ltd v/s Commr of C Ex, Trivandrum [2006 (4) STR (132)]; GERB Vibration Control Systems (P) Ltd v/s Commr of ST, Bangalore [2007 (7) STR 403]; Allengers Medical Systems Ltd v/s Commr of C Ex, Chandigarh [2009 (14) STR 235];

- Noticee submitted that the Department had taken into consideration only 4 canteen bills and has alleged that the said bills pertains to only service rendered by waiter on behalf of the Noticee to their members and there is no existence of purchaser. It was alleged Noticee-club had charged only for services of waiter. It was submitted that this means that they have not charged anything for the item sold. It was contended that in the impugned notice it was said that name of purchaser is not written. It was submitted in this regard that it is common practice hat when the goods are sold for cash then name of purchaser is not mentioned. All the hotel bills are raised in the same fashion. Then the service tax should be charged from them. Since they are supplying the services of waiter and no sales of goods has taken place. This is totally wrong and SCN issued on such a wrong analysis is liable to be quashed. Moreover, the sales tax department has treated these transactions as sales only which are evident from the assessment orders.

- Cottage Rent: It was contended that noticee has charged certain amount as cottage rent in year 2005-06 and year 2006-07 respectively. The amount charged was towards room rent. The same was not chargeable to service tax. Even the hotel providing the rooms to their guests are not charging the service tax on room rent. Following the same, the room rent will not be chargeable to service tax under club or association also.

It was further submitted that the service tax is chargeable when service is provided to members. Generally members are local persons and hence they do not require room. The rooms are provided to guests of members or members of others club. The service provided to non members is not chargeable to service tax. In this scenario also, it does not fall under definition of club or association. The services provided to members are leviable to service tax. But the rooms are provided mostly to non members. As such, service tax is not payable on the same.

- Fees: It was contended that with regard to fees, specified amount as per annexure was collected as fees for the year 2005-06. The noticee has bifurcated the amount into 3 categories namely Guest charges, sports and Annual fees and subscription in their reconciliation statement. Guest charges are charged form person who are not members but are allowed with members only. Although service tax is not chargeable from non members but the noticee has paid the same on receipt basis from 16.6.2005 onwards, the date from which service of club and association was made taxable. Secondly, under the head sports noticee had sold playing cards, which is not a service but sale. Service tax has been paid for the service element from the 16.6.2005 onwards and on sale element there is no service tax involved. Lastly under the head annual fee and subscription service tax had been paid on receipt basis. And service tax is paid only on realized amount and not on unrealized amount.

- Noticee also submitted with regard to annual fee and subscription that the total amount billed can only be treated as taxable income only. They have not bifurcated it in taxable and non-taxable as it was annual fee. They could have proportionately not paid the tax for the period from 01.04.2005 to 16.06.2005 but they did not want the dispute with the department and have paid service tax on the whole realized amount.

- It was further contended that figure under the other receipts in year 2005-06 includes sale of waste material from club is not covered under service tax. On the rest of amount as pointed out by the audit assessee has paid the service tax on the same.

- It is contended that noticee is a member’s club which is based on principal of mutuality and there is no objective to earn profit. Therefore no service tax can be levied on the assesse club providing service to one self. Service tax was levied relying upon the judgment of the case of Saturday Club Ltd. v/s Asstt Commr. Service Tax Cell Calcutta [2006 (003) STR 0305 (Cal)].

- It was further contended that there was no suppression of facts and all the facts have been shown in the balance sheet which is a public document, then extended period of limitation cannot be invoked against us. Even the show cause notice does not give a specific allegation that there is suppression of things. It is settled principal that there has to be specific allegation about the proviso to section 11A and simple intention to evade payment of duty is not sustainable. Since Balance sheet is a public document and available to all, it cannot be said that there is suppression of facts. Hence no penalty under various section of finance act, 1994 is imposable.

- Lastly it was contended that they have acted under bona fide belief that no service tax was leviable on the said charges and therefore, no penalty can be imposed on them as they have not acted with intent to evade payment of service tax. It was further submitted that they are a trust and a nonprofit organization; hence no penalty and interest can be imposed.

Thereafter the appellant submitted a rejoinder that budget 2011 has proposed the service tax on AC restaurant and room rent. It specifically says about the service tax on room rent of clubs. Hence the service tax is payable from this budget. This implies it is not payable from earlier period.

Reasoning of Order:-

The learned Adjudicating Authority held as under:

- Sale of food/beverages: It was held that the bifurcation of amount given in reconciliation statement matched the figures shown in the balance sheet and it was clear that VAT was paid on the sale of foods and beverages. Therefore, it was held that these services provided by the assessee do not fall under the purview of “club or association” services as VAT has been paid on sale value of canteen bills, therefore, service tax is not chargeable. As Service tax is not chargeable on sales element. The small amount which assessee has failed to prove that VAT has been charged on the same, is subject to service tax and assessee is liable to pay the amount demanded in this regard under Section 73(1) of the Act along with interest under Section 75 of Act

- Cottage Rent: It was held that the Finance Act, 1994 clearly defines the ‘taxable service’ under the category of “club or association” means ‘as any service provided or to be provided to its members, by any club or association in relation to provision of service, facilities or advantages for subscription or any other amount’ but in this case the services provided by the assessee to the guest of members or to the members of other clubs therefore these services provided by the assessee do not fall under the category of “club or association” , accordingly the assessee is not liable to pay the service tax on such amount collected by them on account of rent charges.

- Fees: Amount realized by assessee on account of issuance of playing cards to their members, as the services provided by the assessee by issuing the playing cards to their members and use of playing card is for enlightenment in club, is covered under the category of club or association services and is chargeable to service tax and coverable under section 73(1) of Act from them along with interest under Section 75 of the Act.

- Other Receipts: It was held that the amount received from sale of waste material does not cover under service tax hence no service tax is payable on the same. But on other receipts on which the appellant has contended that they have paid the service tax on being pointing out by audit. They are failed to give evidence of such deposit. Hence the service tax is payable on the same.

- Invocation of extended limitation period: It was held that since the short levy was detected by the department on the basis of gathered information and examination of balance sheet instead of required particulars to be provided by the assessee at their own. Hence there is no doubt that assessee has willfully suppressed the fact of rendering the said services and contravened the provisions of the act with intention to evade payment of service tax. Therefore extended period of 5 years prescribed under the proviso to Section 73(1) of the Act is correctly invokable in this case and as assessee has not paid service tax amount on the service amount received by them, the same is recoverable from them along with interest under Section 73(1) and 75 of the Act and is liable for imposition of penalty under (i) Section 76 of the Act for failure to pay the appropriate service tax liability, in accordance with provision of Section 68 of the act of the rules prescribed there under, (ii) Section 77 of the Act for failure to follow the statutory provisions in the manner prescribed under Section 70 of the act and (iii) Section 78 of the act for suppression of acts and contravention of provisions of the act/rule with intent to evade payment of service tax.

Conclusion:-

Service Tax cannot be levied on element of sale and when there is service provided than sales tax/VAT is not leviable on the same. This has also been well settled in various judgments. Further, when the service tax on room rent is proposed from this budget then it is not payable on earlier period. It is to be noted that as per amendments in the Finance Bill 2011 service provided by a club to any other person will also be liable to payment of service tax from applicable from May 1st, 2011.

However, the department has dropped the major demand but has confirmed the demand on many issues. The appellant is again in appeal for the rest of demand. The litigation never ends………….

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PJ/CASE STUDY/2011-12/10
08 June 2011

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PJ/CASE STUDY/2011-12/10 08 June 2011

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PJ/CASE STUDY/2011-12/10
08 June 2011