Cold Storage Service: Whether taxable service under Renting of Immovable Property?

Whether service rendered for cold storage can be taxed under the category of ‘Renting of Immovable Property’?
The article also explains a recent Tribunal Judgment in relation to Cenvat Credit

1. Whether service rendered for cold storage can be taxed under the category of ‘Renting of Immovable Property’?

Section 65(102) of the Act specifically excludes any service provided by a cold storage under the category of ‘Storage and Warehouse Service’. However recently, it has been observed that assessees in several cases have received departmental notices in relation to the aforesaid service. As per the department, the said service is taxable under the category of ‘Renting of Immovable Property Service’ for providing the cold storage on rental basis.

The authors with due respect do not agree with the contention of the department that service provided by a cold storage is taxable under the category ‘Renting of Immovable Property’ based on the following: -

• Services provided by cold storage covered more specifically under the category of ‘Storage and Warehousing Service’

Section 65A of the Act provides the principles for determining the classification of taxable service. Clause (2), sub-clause (a) of section 65A states that ‘the sub-clause which provides the most specific description shall be preferred to sub-clauses providing a more general description.’

The Apex Court in the case of Dunlop India Ltd. vs. Union has upheld this principle of classification. [(1983) 13 ELT 1566/AIR 1977 SC 597]

The Hon'ble Court held that:

“in either situation, the classification which is most specific has to be preferred over the one which is not specific or is general in nature. In other words, between the two competitive entries one most nearer to the description should be preferred. Where the class of good manufactured by the assessee falls, say, in more than one heading, of which one may be specific, other more specific, 3rd most specific and 4th general, the rule requires the authorities to classify the goods in the heading which gives the most specific description.”

Services provided by cold Storages is more specifically covered under the category of ‘storage and warehousing.’ The distinction between the service of storage and warehousing and renting of immovable property is that the service of storage and warehousing unlike renting of immovable property also includes providing services such as loading and unloading, security service for the stored goods.

Para 5 of the Circular F.No. B/11/1/2002 – TRU, dated 1-8-2002 issued by the CBEC further emphasizes the above distinction: -

"It has been stated that in some cases a storage owner only rents the storage premises. He does not provide any service such as loading/unloading, stacking, security, etc. A point has been raised as to whether service tax would be leviable in such cases. It is clarified that mere renting of space cannot be said to be in the nature of service provided for storage or warehousing of goods. Essential test is whether the storage keeper provides security of goods, stacking, loading/unloading of goods in the storage area”

Cold storage provides the service of loading and unloading, security of the stored goods.

Thus, based on the above it can be concluded that cold storage service should be classified under the more specific service category of ‘Storage and Warehousing’ than the general service category of ‘Renting of Immovable Property’.

• 'Generalia Specialibus Non Derogate'

Generalia Specialibus Non Derogant is a cardinal principle of interpretation. It means that the special provisions must always override the general provisions.

In the case of Dr. Lal Path Lab (P.) Ltd. vs. CCE [(2006) 5 STT 171 New Delhi – CESTAT] the Tribunal observed that as there was a specific entry for the service rendered by sample collection centres in the service tax code; i.e., ‘Technical Testing and Analysis Service’ and service rendered by the appellants was excluded from the definition of the said service category, the service rendered by them cannot be taxed under any other general entry; i.e., ‘Business Auxiliary service’.

The Tribunal, observed :

"It is well-settled that once there is a specific entry for an item in the tax code, the same cannot be taken out of that specific entry for an item in the tax code, the same cannot be taken out of that specific entry and taxed under any other entry. In the present case, revenue is seeking to discard the specific entry and to bring the appellants’ service under a very general entry, only because under the specific entry no tax is payable. This approach is contrary to the scheme of legislation. What is specifically kept out of a levy by the Legislature cannot be subjected to tax by the revenue administration under another entry”.

On the basis of the above principle too it can be concluded that when there is a specific entry for service rendered by the cold storage in the service tax code, i.e., ‘Storage and Warehousing’ and the cold storage is specifically excluded from the definition of that service category, the service rendered by cold storage cannot be taxed under any other general category; i.e., ‘Renting of Immovable Property’

• Ambiguity in tax laws is to be resolved in assessee’s favour

Where there are two alternative possible views, the view most beneficial to the assessee is to be preferred.

Applying this principle, it can be argued that services rendered by a cold storage is to be to classified under the category beneficial to the assessee; i.e., ‘Storage and Warehousing’.

• Activity of cold storage not taxable as ‘Rental Income’ under Income Tax

In the case of Ganesh Alu Bhandar vs. ITO [(2003) 87 ITD 588 Rajkot], the Tribunal observed that the amount received by cold storage is not taxable as rental income and hence the provisions of TDS as per section 194-I of the Income-tax Act will not apply.

Based on the above, it can be further concluded that the activity of cold storage cannot be classified under the category of ‘Renting of Immovable Property’

2. Bidhata Industries (P.) Ltd. vs. Commissioner of Central Excise [2008] 12 STT 189 (Mum. – CESTAT)- Whether mere availment of cenvat credit without utilization thereof will result in any interest liability?

Fact of the case

It was observed by the department that the assessee had availed excess credit on inputs, WIP and finished goods. It was undisputed that the excess credit taken by the assessee was due to error in calculation and was unintentional. On being pointed out, the same was reversed by the assessee. The Department issued a Show Cause Notice to the assessee for the demand of interest as per provisions of section 11AB of the 1944 Act, read with rule 12 of the Rules. The assessee contested the notice stating that it had only raised the credit but had not utilized the same. The assessee further stated that it had enough balance in the Cenvat credit account for discharging its liability. The adjudicating authority, however, rejected the above contention of the assessee and confirmed the demand of the interest and imposed the penalty. On appeal, the Commissioner (Appeals) upheld the order of the adjudicating authority.

The revenue submitted that rule 12 provides for the recovery of interest from the assessee in case the assessee had wrongly availed credit and it is not a pre-condition that it should have utilized the credit so taken.

Observations made by the Hon'ble Tribunal

The assessee had taken excess Cenvat credit and reversed the same on being pointed out. Further, the excess credit availed the assessee was due to error in calculation and was unintentional. Also the assessee during the period had not utilized the said excess credit for discharge of duty. The Tribunal observed that based on the above facts there was no motive attributable for raising the excess credit by the assessee. On that factual matrix, it had to be decided as to whether the assessee was liable to pay interest on the said excess amount of credit taken by him, which was lying unutilized. It can be noticed from section 11AB that the interest liability is foisted upon the assessee if there is short payment of duty or non-payment of duty or erroneous refund of duty. The said section also indicates the method of quantification of the amount of interest. On a holistic reading of the above section, it can be concluded that interest is chargeable from the defaulter for the period of default of payment of duty be it either short or non-payment of duty. The calculation of the quantum of interest and the period for which such interest is to be demanded will depend upon the facts and circumstances of the case.

On a plain reading of rule 12, it can be seen that the said rule seeks to recover interest where cenvat credit has been taken or utilized wrongly. The whole issue revolved around what is the meaning of word ‘interest’. The Tribunal observed that there is no definition of the word ‘interest’ in the 1944 Act or the Rules made hereunder. Relying on the judgment of the Hon'ble Supreme Court in the case of Central Bank of India vs. Ravindra [2002] 1 SCC 367, the Tribunal stated that the interest is a compensation fixed by agreement or allowed by law for the use or detention of money, or for the loss of money by one who is entitled to its use. However, in this case, it was on records that the excess credit taken by the assessee was not utilized which was not due to the Government and, as such, there was nothing payable on the date of issuance of show-cause notice.

Further, Rule 12 provides that, where cenvat credit has been wrongly taken or utilized or has been erroneously refunded, such credit, along with interest, shall be recovered. Side by side, the same rule also stipulates that section 11AB would apply mutatis mutandis, for effecting such recoveries. Section11AB deals with inter alia, short payment of duty. Interest payable, there under, on the duty short paid. Short payment of duty necessarily has to relate to wrong utilization of credit and not to wrong taking thereof. As such, by making the provisions of section 11AB applicable to rule 12, the said rule clarifies, implicitly, that interest would be payable only in the case of misutilization of credit and not wrong taking thereof.

Moreover, interest is chargeable under section 11AB from the first date of the month succeeding the month in which the duty ought to have been paid, till the date of payment of such duty. The ending point for computation of interest is, therefore, the date of payment of duty. At the same time, the liability to pay interest could be said to exist, at all, only once there is determination, under section 11A(2), that duty has been short paid in the case of cenvat, i.e., that cenvat has been wrongly utilized. Once such determination takes place, the interest would, undoubtedly, start running from an earlier date; i.e., from the first of the month succeeding the month in which duty ought to have been paid. It is a question of some nicety, however, as to the ending point, till which the interest would run. If the credit wrongly utilized were to be reversed, such reversal would, undoubtedly, obliterate the effect of misutilization and bring to an end, incident of interest. Interest would be chargeable under the rules only on the quantum of credit wrongly utilized and would run only till the date when sufficient legitimate credit balance is available in the assessee’s RG23A part II account to neutralize misutilisation. Mere wrong taking of credit, without utilization thereof, cannot result in any liability to pay interest though quite possibly, in the different facts and circumstances of the case, liability to penalty may arise.