Mobilization Advances Not Taxable Prior to POT Rules, 2011: CESTAT sets aside Service Tax Demand [Read Order]
CESTAT held that mobilization advances received were not taxable prior to the introduction of the Point of Taxation Rules, 2011, and set aside the service tax demand.
The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ) allowed the appeal, holding that mobilization advances received during 2009-2010 were not taxable services, as the levy on advances was introduced only with the Point of Taxation Rules, 2011.
The dispute began when a Show Cause Notice dated 22.10.2010 demanded ₹1,91,63,640 to the appellant, filed by NCC Ltd. (formerly Nagarjuna Construction Company Ltd.) as service tax along with interest and proposed penalty under Section 76 of the Finance Act, 1994.
After adjudication, the Commissioner confirmed a service tax demand of ₹76,04,297 and interest of ₹1,15,59,343, along with penalties.
Aggrieved, the appellant approached the Tribunal.
The appellant submitted that the advances were released by clients to meet initial mobilization expenses such as arrangement of plant and machinery, site facilities, infrastructure, men/material mobilization required to commence contract work. These advances were released only against submission of bank guarantees and on charging interest, and were not paid against provision of any taxable service.
The appellant further argued that mobilization advances were brought under the service tax levy for the first time only when the Point of Taxation Rules, 2011 were introduced vide Notification No. 18/2011-ST dated 01.03.2011.
Since the period of dispute was 2009–2010, the appellant contended that the advances could not be taxed, as no provision existed at the relevant time treating advances as consideration for services.
The appellant relied on decisions including Gammon India Ltd., Vs CST Mumbai (2021), where mobilization advances were held not to be taxable prior to the introduction of the Point of Taxation Rules.
The Bench comprising A.K. Jyotishi (Technical Member) and Angad Prasad (Judicial Member) examined Rule 3 of the Point of Taxation Rules, 2011 and noted that Explanation 1 specifically treats advances as taxable only from the date the Rules came into force.
The Tribunal held that prior to 01.03.2011, receipt of mobilization advance could not be considered as the date of provision of any taxable service, nor could the amount be treated as consideration for any taxable service.
The Tribunal referred to the decision in Gammon India Ltd., where it was held that mobilization advance is merely a financial arrangement within the contract, granted to enable the contractor to prepare for undertaking the work, and therefore cannot be included in the gross amount for valuation of taxable services.
The Tribunal noted similar findings in the Thermax Instrumentation Ltd., Vs CCE (2016) decision, where mobilization advances were treated as deposits backed by bank guarantees and not as income or consideration for services.
The Tribunal concluded that it is a settled position of law that mobilization advances were not taxable during the relevant period.
Accordingly, the CESTAT set aside the impugned order and allowed the appeal with consequential relief.
The Appellant was represented by B. Venugopal along with P. Sai Makarandh, while B. Sangameshwar Rao appeared for the Revenue.
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