Profit and Loss Accounts can’t be relied for Determination of Service Tax Liability: Madras HC [Read Judgment]

The Madras High Court in Firm Foundations & Housing Pvt. Ltd. vs. Principal Commissioner of Service Tax, held that profit and Loss Accounts cannot be relied upon for determination of the point of rendition and accrual of services for the purpose of imposition of service tax.

The Petitioner, Firm Foundations & Housing Pvt. Ltd is engaged in promotion and construction of residential apartments and complexes. The projects are undertaken on a joint venture basis. The petitioner builds on the property of other landowners. A Show Cause Notice (SCN) was served to the petitioner to explain why differential service tax should not be demanded from the petitioner in terms of Section 73(1) of the Finance Act, 1994.

As per the SCN, the assessee was 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 was in contravention of Rule 3 of the Point of Taxation Rules 2011. The SCN further provided that 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 had short paid service tax. The service tax actually payable as per Profit and Loss account, service tax actually paid and service tax due were calculated and it appeared that the assessee was liable to pay the differential Service Tax amount.

The petitioner in their reply stated that the entire amount was already paid and that the SCN would make a double levy upon the Petitioner. The petitioner also stated that they had relied upon the methodology which was in line with the prescription contained in the Point of Taxation Rules,2011.

However, the Assessing Officer passed the order, reiterating the demand in the SCN on the basis of the revenue accounted for in the Profit and Loss account of the petitioner, which ordered the petitioner to pay the differential service tax.

Aggrieved the petitioner filed a Writ Petition before the High Court. The issue before the court was whether the action of respondent in the determination of the point of rendition of service relying on the profit and loss account of the petitioner was justified.

The Counsel for the Petitioner contended that it was the Point of Taxation Rules that would govern the determination of the time of the rendition of service and consequent accrual of receipt and liability to tax thereof, and not the P and L accounts of the petitioner. The petitioner insisted tax determination on the basis of rule 3(b).

The Counsel for the respondent argued that Profit and Loss Accounts of the Petitioner could be used for the determination of the time of the rendition of service and consequent accrual of receipt and liability to tax. He relied on three decisions of the Delhi, Mumbai and Ahmadabad Benches of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) in support of his submission that reliance on the Balance Sheet and Profit and Loss Account was proper in deciding service tax liability.

The Bench Comprising of Justice Dr. Anita Sumanth found the cases relied on the respondents to be not applicable as those cases were decided prior to the enactment of Taxation Rules 2011. According to the bench, Rule 3 set out some specific modus operandi for determination of tax liability and that such method assumed priority. “The petitioner has, admittedly, produced the agreements setting out the slabs for payment and an annexure tabulating the receipts, upon completion of each stage of completion of the project before the authorities. It was for the respondent to have looked into the same and called for further information if necessary to assess the receipts in line with Rule 3 of the Rules. Admittedly this has not been done and the respondent merely adopts the income reflected in the P and L account as the receipts for the purpose of service tax which is contrary to the method set out in Rule 3 for the determination of the point of taxation and the quantification thereof.”