2010 (12) TMI 1269 - HC - Service Tax

Court rules lump sum payment by Own Your Telephone scheme subscriber as payment towards rentals, reducing service tax.

The court ruled in favor of the petitioner, a subscriber under the Own Your Telephone scheme, in a dispute regarding service tax on bi-monthly rental ... - Issues:Interpretation of service tax on bi-monthly rental bills under the Indian Telegraphs Act, 1885 and Rules framed thereunder.Analysis:The petitioner, a subscriber under the Own Your Telephone scheme, challenged the service tax charged on bi-monthly rental bills. The dispute revolved around whether the bi-monthly rental amount should be considered as Rs. 340/- or Rs. 380/- for the purpose of service tax calculation under Section 66 of the Finance Act, 1994. The petitioner argued that due to an advance lump sum payment of Rs. 5,000/- made at the time of connection, a deduction of Rs. 40/- should be applied to the bi-monthly rental of Rs. 380/-. This would result in the petitioner's actual rental being Rs. 340/-, on which service tax of 5% should be charged, amounting to Rs. 17/-. However, the respondents contended that the rental should be considered as Rs. 380/-, with a Rs. 40/- rebate due to the initial deposit, resulting in a service tax of Rs. 19/-.The Own Your Telephone scheme, as defined by the Circular issued by the Telegraph Department and Indian Telegraph Rules, entails a subscriber making an initial lump sum payment towards rental, allowing for a reduction in the annual rental payable for a specified period. Section IV of the Indian Telegraph Rules specifies the charges for connection under this scheme, indicating that a subscriber making an initial lump sum payment is entitled to a reduction in rental for a fixed period, such as 20 years, based on the amount paid. In this case, a payment of Rs. 5,000/- would result in a reduction of Rs. 40/- from bi-monthly rentals.Regarding service tax, Section 66 of the Finance Act, 1994 mandates a 5% tax on the value of taxable services. Section 67 defines the valuation of taxable services, stating that for telephone connections, it is the gross total amount received by the telegraph authority from subscribers. The debate in this case centered on whether the Rs. 5,000/- initial payment should be considered a deposit or payment. If treated as a deposit, the reduction in rentals would need to be factored in, affecting the total amount payable by the petitioner.The court concluded that as per the Own Your Telephone scheme definition and relevant rules, the initial payment made by the subscriber is not a deposit but a payment towards rentals, entitling them to a specified reduction in annual rentals for a set period. Therefore, the petitioner's contention that the bi-monthly rental should be considered as Rs. 340/- for service tax calculation was upheld. Consequently, the petition succeeded, and the rule was made absolute in favor of the petitioner.