TaxTMI 
TaxTMI 
2018 (4) TMI 613
X X X X Extracts X X X X
X X X X Extracts X X X X
....learned counsel for the petitioner and Mr.S.R.Sundar, learned counsel for the respondent have been heard. 4. The sequence of relevant dates and events is as follows: (i)A show cause notice (in short SCN ) was issued by the respondent calling upon the petitioner to explain why differential service tax of an amount of Rs. 1,70,07,530/- not be demanded from the petitioner in terms of section 73(1) of the Finance Act, 1994 for the period January, 2013 to March, 2015. (ii)The respondent at paragraph 4.2 of the SCN, states as follows: '4.2. Since it appeared that in terms of Rule 3 of Point of Taxation Rules, 2011 the assessee is required to pay service tax immediately on raising invoices and the practice adopted by the assessee i.e making payment of Service Tax only on realization basis from the clients as against the accrual basis is in contravention of Rule 3 of the Point of Taxation Rules 2011. From the verification of value declared as Revenue from Operations in the Profit and Loss account and payment of service tax declared in the respective ST-3 returns, it appeared that the assessee have short paid service tax for the period 2012-13 (January to M....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the financial statement by the construction industry on the basis of stage of completion. Whereas AS-7 has no relevance with payment of service tax as service tax is governed by Finance Act and Service Tax Rules. In terms of explanation to Rule 3 of Point of Taxation Rules, if the service provider receive any advance towards the provision of service, the date of payment of service tax shall be the date of receipt of each such advance. Hence the assessee are required to pay service tax immediately on receipt of advance. The assessee had averred that they had paid service tax on receipt basis and there was no short payment of service tax by them and the demand of service tax leads to double taxation on the service income for which service tax has already been paid. However, the assessee have neither given any statement/details on the receipt of consideration received from the buyers during the material period and payment of service tax within the time nor given any break-up details of income reflected as Revenue from Operations in the balance sheet to get exclusion from service category. Assessee had only furnished Annexure A- which is a sample of details reflecting only the advance....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mination of Point of Taxation. 9.Rule 3 is extracted below: "Rule 3 - Determination of point of taxation: For the purposes of these rules, unless otherwise provided, 'point of taxation' shall be, - (a) the time when the invoice for the service [provided or agreed to be provided] is issued: [Provided that where the invoice is not issued within the time period specified in rule 4A of the Service Tax Rules, 1994, the point of taxation shall be the date of completion of provision of the service.] (b) in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment: (Provided that for the purposes of clauses(a) and (b),- (i) in case of continuous supply of service where the provisions of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the receiver of service to make any payment to service provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ortions of AS 7, in so far as it is relevant to this writ petition, hereunder: . . . . Recognition of Contract Revenue and Expenses 21. When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date. An expected loss on the construction contract should be recognised as an expense immediately in accordance with paragraph 35. 22. In the case of a fixed price contract, the outcome of a construction contract can be estimated reliably when all the following conditions are satisfied: Construction Contracts 73 (a) total contract revenue can be measured reliably; (b) it is probable that the economic benefits associated with the contract will flow to the enterprise; (c) both the contract costs to complete the contract and the stage of contract completion at the reporting date can be measured reliably; and (d) the contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the consideration to be exchanged; and (c) the manner and terms of settlement. It is also usually necessary for the enterprise to have an effective internal financial budgeting and reporting system. The enterprise reviews and, when necessary, revises the estimates of contract revenue and contract costs as the contract progresses. The need for such revisions does not necessarily indicate that the outcome of the contract cannot be estimated 29. The stage of completion of a contract may be determined in a variety of ways. The enterprise uses the method that measures reliably the work performed. Depending on the nature of the contract, the methods may include: (a) the proportion that contract costs incurred for work performed upto the reporting date bear to the estimated total contract costs; or (b) surveys of work performed; or (c) completion of a physical proportion of the contract work. Progress payments and advances received from customers may not necessarily reflect the work performed. 30. When the stage of completion is determined by reference to the contract costs incurred upto the reporting date, only those contract costs that reflect work performed are includ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....see to produce material in support of its stand and, at paragraph No.11, states that the audited balance sheets for the financial years 2012-13, 2013-14 and 2015-16, statement recorded from the VP of the petitioner, worksheet and written submissions are the basis of issuance of the SCN. By way of replies, the petitioner on 22.09.2016, 28.02.2017 and 11.04.2017 explains yet again that the P and L account cannot be the basis of the assessment. The impugned order is passed notwithstanding the objections raised, and negating the same. 19.Clause (i) of the proviso to Rule 3 specifically provides for determination of the point of taxation in cases of continuous supply as in the case of the petitioner herein. 20.The petitioner enters into agreements with customers for the construction of apartments. The agreement provides for demarcated activities, described stage-wise (in short landmarks ) upon the completion of which, payments are to be released by the customer. The rendition of the service results in the accrual of the receipt of consideration in respect thereof. 21.The relevant clause in the construction agreement dated 30.12.2014 (provided as a sample) reads thus: "....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xamined whether the receipts offered to tax correspond and cover the stages in respect of which consideration has accrued as per the agreement with the customer. 24.Rules 3(a) and (b) provide for the point of taxation to be either the point of raising of invoice (Rule 3(a)) or in a case where the service provider has received the payment even prior to the time stipulated in the invoice, upon receipt of such payment(Rule 3(b)). In the present case, no invoice is said to have been raised. However, the petitioner confirms that it has, in fact, received lump-sum advances corresponding to several initial landmarks in the contract, even prior to the achievement of such landmarks. As per the provisions of Rule 3(b), the entire sum received thus becomes taxable upon receipt and according to Mr.Prabhakar, has been offered to tax. 25.Instead of such determination by application of the provisions of Rule 3, the respondent relies upon the P and L accounts to conclude that the amounts reflected therein have not been offered for service tax. The reporting of income in the P and L being irrelevant for the purposes of determination of service tax payable, the basis of the impugned assessment....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Registrar of trade Marks Bombay and others (1998 (8) SCC 1)). 31.The petitioner is, admittedly, recognizing revenue under the 'Project Completion Method' in terms of AS-7 issued by ICAI. We need not, in the present case, concern ourselves with the method followed for the preparation of financials as the same has no impact upon the Point of Taxation Rules. Suffice it to state that the AS provides a certain methodology for the computation of income from projects that is at variance with the method set out under Rule 3. 32.Insofar as Rule 3 sets out a specific modus operandi in this regard, it assumes priority and is the only relevant factor to be taken into account in the determination of point of rendition and accrual of services for the purpose of imposition of service tax. The first issue is answered accordingly. 33.As far as the application of Rule 3 is itself concerned, Mr.Sundar insists that the materials in support of the petitioners stand have not been produced and relies upon the finding in the impugned order to this effect at paragraph 13.5 thereof (extracted earlier). The petitioner has, admittedly, produced the agreements setting out the slabs for payme....