No Service Tax liability arise on loans & advances, if it is revealed in Audited Balance Sheet

We are sharing a Important Judgement with you of Hon’ble CESTAT Mumbai.

Reliance Infratel Ltd. Versus Commissioner of Service tax, 
Mumbai – II
[2015 (4) – CESTAT MUMBAI]
Reliance
Infratel Ltd. (the
Appellant or the Company) is a subsidiary
of Reliance Communications Limited (RCM) (collectively
referred to as parties) providing taxable service falling under Business Support Services. The
Company was formed when RCM demerged the business of Telecom infrastructures
and Telecom operating services into different entities and the business of
Telecom infrastructure was demerged into the Appellant. Rs. 283/- crore were
given by RCM to the Appellant towards the expenditure incurred by RCM even
before the Appellant came into existence by way of expenses towards the initial
setting up and also by way of payments made to vendors for supply of materials.
Further, since the Telecom towers require huge investments the Appellant
borrowed Rs. 1210/- crore from RCM during June, 2007 and September, 2007 as
interest-free loan which was repaid/ returned by December 31, 2007.
Investigation
of the Appellant was initiated on November 26, 2007 by the officers of DGCEI
and it was alleged that the financial support given to Appellant by RCM in
terms of the Master Service Agreement dated April 10, 2007 (the Agreement) was in the nature of advance for the taxable services rendered or to be
rendered by the Appellant to RCM and is required to be set off against the
bills that would be raised later by the Appellant on RCM.
Therefore,
DGCEI issued a SCN demanding Service tax liability along with interest and
penalty for the period from April 10, 2007 to March 31, 2008 which was
confirmed by the Adjudicating Authority.
Being aggrieved
the Appellant preferred an appeal before the Hon’ble Tribunal, Mumbai
contending that the sum of Rs. 1, 493/- crores (“impugned amount”)received by the Appellant from RCM is a loan by way of Inter Corporate
Deposits given to the Appellant.
The Hon’ble
CESTAT, Mumbai held as under:

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The Agreement and the audited balance sheets of the parties does not
lead to a conclusion that the impugned amount received by the Appellant was in
nature of advances for the services to be rendered;

Further, repayment of impugned amount is not afterthought as even prior
to the investigations, on September 20, 2007 the Appellant had recorded and
treated the amount as Inter Corporate Deposits in the half Yearly balance
sheet;

Audited Balance Sheet for the year ending March 31, 2008 of both the
parties which are in the public domain show Rs. 1,210/- crore as a loan and not
as consideration for any services rendered. Further, there is no dispute that
the Appellant had repaid Rs. 1,210/- crore received from RCM during the same
financial year;

Amount of Rs. 283/- crore was given before the Appellant came into
existence and the same was repaid during the same financial year, hence Rs.
283/- cannot be treated as a consideration received for the services to be
rendered by the Appellant but it is a financial support given by RCM to the
Appellant by way of loans. Further, both the parties being Public Limited
Companies, have clearly indicated in their balance sheets that the amounts have
been shown as received and loans repaid.

Scrutiny of the balance sheets produced revealed that accounts of the
parties do not indicate any co-relation in the repayment of the loan and
receipt of the service charges by the Appellant.

Invoices raised by the Appellant on RCM do not reflect adjustment of
impugned amounts and the Appellant has discharged Service tax liability for the
consideration received in respect of the invoices raised;

In terms of Section 67 of the Finance Act, 1994, only payment made
towards services provided can be brought under the ambit of consideration
received and not any other amount.

Thus, the
Hon’ble Tribunal allowed the appeal in favour of the Appellant and held that no
Service tax liability arises on loans and advances if it is revealed in the
audited balance sheet.

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