Service Tax Exemption On Quality Assurance Charges for Testing Rifles: CESTAT

The Chennai Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that no service tax is payable on the quality assurance charges for testing rifles.

The bench of P. Dinesha (Judicial Member) and M. Ajit Kumar (Technical Member) has observed that the assessee is engaged in an activity that is purely in the public interest and is undertaken as per mandatory and statutory functions. He drew attention to Rule 22 of the Arms Rules, 1962, which states that proof testing of firearms manufactured by a licensed dealer shall be carried out only in accordance with the regulations that may be framed by the central government or framed by such authority as a government may specify on his behalf and approved by that government. No dealer shall sell a firearm that has not been duly proof tested. Hence, the amounts collected towards quality assurance charges for testing the rifles are fees prescribed for conducting the quality checks and are not subject to service tax.

The appellant/assessee is registered with the Service Tax Department for providing “Technical Inspection and Certification Service” and is paying the applicable service tax for the period from 2008–09 onwards.

The Senior Quality Assurance Officer informed the Service Tax Department that, as per their HQDGQA, New Delhi directive, they had to pay service tax from 1.7.2003 to 31.3.2010, along with interest, after the necessary sanction of funds from Head Quarters, New Delhi.

However, the appellant did not make any payments towards their service tax liability for the period prior to their registration and did not file any return till 2010–11.

During scrutiny of the records of the appellant, the officers of Central Excise noticed that the appellant did not make any payments for the period from 2006–07 to 2009–2010 towards quality assurance charges for testing rifles, though they obtained registration and started complying with the said provisions for the subsequent period.

Therefore, it appeared that the appellant had willfully contravened the provisions of the Finance Act of 1994 with the intent to evade payment of service tax.

After due process of law, the adjudicating authority demanded a service tax of Rs. 41,16,723/- along with interest and imposed penalties under sec. 77, 77(2), and 78 of the Finance Act, 1994.

The appellant filed an appeal before the Commissioner (Appeals), who upheld the order of the lower adjudication authority and rejected the appeal.

The assessee contended that the appellant is part of the Directorate General of Quality Assurance (DGQA), Ministry of Defence, Government of India, entrusted with the responsibility of providing quality assurance of armament stores in respect of armaments meant for the Army, Navy, and Air Force. The dispute relates to the alleged service tax liability of the appellant in respect of consideration received under the heading 'technical inspection and certification agency' service as defined under Section 65(109) of the Finance Act 1994. The appellant is engaged in an activity that is purely in the public interest and is undertaken as per mandatory and statutory functions.

The tribunal relied on the decision of Jammu and Kashmir High Court in WP number 1391/2010 which were filed by various manufacturers of Guns challenging the levy of service tax on quality assurance charges. The Jammu and Kashmir High Court held that no service tax can be levied on the petitioners who are granted licence under Section 5 of the Arms Act, 1950 even if the service provider i.e. the Senior Quality Assurance Officer is in Kanpur where Section 64 of the Finance Act, 1994 is applicable.

Counsel For Appellant: H.S. Manoharan

Counsel For Respondent: Anoop Singh

Case Title: Senior Quality Assurance Officer Versus Commissioner of GST & Central Excise

Case No.: Service Tax Appeal No.40791 of 2015

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