CESTAT: The beneficiary of the service cannot be subject to any tax obligation


The Customs, Excise and Service Tax Appeals Tribunal (CESTAT) ruled that a recipient of services cannot be required to pay taxes. In addition, the tax will not be paid until the service has been rendered. Experts say this decision will have great relevance in the GST regime.

CESTAT is a quasi-judicial body that hears and adjudicates appeals against orders made by customs, excise and service tax commissioners under the 1962 Customs Law, the Central Excise Law of 1944 and the 1994 finance law.

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

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There is a clause in the agreement that if the machine’s availability is between less than 95.5% and up to the machine’s availability of 92.5%, SGSL will compensate the owner for an amount from recovered service charges. CESTAT noted that the caller is the recipient of the service and SGSL is the service provider.

SGSL issued credit memos to the appellant for claims made by the appellant regarding the availability of the machine due to a failure in the WTGs. As a result, the appellant’s books of accounts showed receipt of approximately 1.33 crore during the 2015-16 year.

However, on the basis of the relevant provisions of the 1944 Finance Act, the Service Tax Department issued an opinion and issued a justification opinion alleging that “the acceptance of the obligation to tolerate the law” in accordance with said clause machine availability is equivalent to declared services.

Thus, it was alleged that the amount received from SGSL was a service liability of the appellant towards said “declared services”. As a result, the demand has been increased to over 19.34 lakh.

Loss protection

After a detailed hearing, the CESTAT Senior Judge with the coram of Judicial Member Rachna Gupta observed that the amount received by the Appellant is simply an amount to protect his loss.

“Said amount cannot be called in return for the service tolerance. provided and some of its shortcomings nor does it make the appellant the service provider, ”the judiciary said while asserting that the concept of“ declared services ”was wrongly invoked by the department.

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In addition, he said that the recipient of the service cannot be bound by any obligation to pay taxes. “I also rely on the decision of the Apex Court in the case of Association of Leasing and Financial Services Companies Vs Union of India in which it was ruled that when no service has been rendered, the service tax cannot be collected, ”said the judiciary and allowed the appeal.

Commenting on the ruling, Harpreet Singh, a partner at KPMG, said tt is well-reasoned case law because it rightly restores the principle that the tax on services should only be levied when there is reciprocity of action between the service provider and the recipient of services.

“The decision reinforces the thin line of difference between the amount paid to protect the loss of the recipient of the service and a credit score from the counterpart paid for the service declared to tolerate an act. This decision may be important for taxation and GST compensation / damages litigation, ”he said.


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