Mohan R Lavi: Service tax excesses clog tribunal

The roller-coaster ride that the government is having on revenues from service tax has led to situations where tax is being demanded irrespective of the nature of services rendered and the place where they were rendered.

One such case was the Bajaj Auto Ltd vs Commissioner of Central Excise and Customs, Aurangabad, 2005 (179) ELT 481. For their Kawasaki Bajaj KB 100 motorcycles, BAL entered into periodic agreements with Kawasaki Heavy Industries, Japan, for providing technical know-how, technical assistance and patents for the KB 100.

Probably tempted by the value of the service (Rs 74.80 crores), the service tax officer issued a notice for the recovery of Rs 3.74 crores as service tax.

They decided to label the service provided "engineering consultation services" and also noted that Notification No 23/97 ST proposed recovery of service tax from BAL since Kawasaki did not have an office in India.

It was also their contention that royalty payments were in the nature of licence fees and cannot be treated as services rendered by consulting engineers.

Scrutiny of the agreement between Bajaj Auto and Kawasaki revealed that the agreements provided for deduction of income tax at source and making a payment of the balance to Kawasaki and issue of a certificate of tax deducted at source.

The Finance Act, 1994 and the Service Tax Rules do not have any such clause. Sections 195 and 199 of the Income Tax Act read with Section 203 make it crystal clear that tax needs to be deducted at the time of credit of such income to the account of the person. A similar decision emanated from the tribunal in the case of Navinon Ltd v. CCE, Mumbai 2004 (172) ELT 400.

In the case of Aviat Chemicals Pvt Ltd vs CCE (ST), Mumbai 2004 ( 170) ELT 466, it was held that the right to use trade mark is a transaction in property and not consultancy or advice and that no consultancy or advice is involved in lease or sale of trade mark as it is a transaction in intangible property and in the present case, as can be clearly seen from the agreement, Bajaj Auto has a right to use trademark/trade name of Kawasaki in the clause pertaining to industrial property rights and brand names.

The Customs and Central Excise Appellate Tribunal (CESTAT) perused Rule 6 of the Service Tax Rules and came to the conclusion that there are three people involved: (a) service provider (b) service receiver, and (c) representative/client of service provider.

The CESTAT also concurred with Bajaj Auto who argued that they were the service receivers and Kawasaki were the service providers and hence they could not be both client and agent simultaneously.

The department has got used to demand tax for periods prior to the levy being effected. Even in the instant case, the amendment made to Rule 2 (d)(1) was in August 2002 and, hence, no tax could be demanded prior to this date. This was the ratio of the decision on Commissioner of Central Excise, Chennai v M.R.F. Ltd 2005 (179) ELT 472.

Looking at the proliferating cases on service tax before the CESTAT, one cannot but reminisce on the erstwhile Customs and Central Excise and Gold Appellate Tribunal (CEGAT), where cases used to be filed with the sole intention of delaying payment of duty.

If an encore is not to happen, the finance minister would do well to enact a Service Tax Act that applies the rationale of the decisions of the Supreme Court and a few landmark decisions of the CESTAT. This would be the only way to ensure that frivolous cases do not land up before the CESTAT.