2012 (8) TMI 881 - HC - VAT and Sales Tax

Whether the respondents can collect service tax from the petitioners as service recipients on the payments made to a service provider which is a non-resident and who does not have any office in India? Held that - The entire issue is thus covered by the decision of this court in the case of Quintiles Data Processing Centre (I) P. Ltd. 2011 (4) TMI 585 - GUJARAT HIGH COURT wherein held that in the absence of any charging section in the parent Act, on the basis of rule 2(1)(d)(iv), service tax cannot be collected from the service recipient.The impugned show-cause notices, therefore, quashed. Appeal allowed.

Summary

Issues:
Challenge to show-cause notices for service tax liability on royalty payments made to a U.S. based company by a company under the Companies Act, 1956.

Analysis:
1. The petitioners challenged two show-cause notices issued by the respondent authorities regarding service tax liability on royalty payments made to a U.S. based company. The petitioners contended that the authorities lacked jurisdiction to collect service tax from them as service recipients. They argued that without a charging section in the Finance Act, 1994, the authorities could not levy service tax based solely on Rule 2(1)(d)(iv) of the Service Tax Rules.

2. The counsel for the petitioners relied on the decision in Laghu Udyog Bharti v. Union of India, highlighting that in the absence of a charging section, the liability to collect service tax from the service recipient cannot be established. Additionally, the Division Bench of the High Court had previously ruled that service tax cannot be collected from the service recipient based on Rule 2(1)(d)(iv) without a charging section in the parent Act.

3. The Department argued that the introduction of section 66A in the Act allowed for the collection of service tax from service recipients in cases where the service provider is a non-resident. However, the petitioners withdrew their challenge to section 66A and Rule 2(1)(d)(iv) during the proceedings.

4. The central issue revolved around whether the authorities could collect service tax from the petitioners as service recipients for payments made to a non-resident service provider without an office in India. The court examined the relevant provisions, including Rule 2(1)(d)(iv) and section 66A, to determine the tax liability on royalty payments made during a specific period.

5. Referring to the decision in Quintiles Data Processing Centre (I) P. Ltd., the court concluded that prior to the introduction of section 66A, the authorities could not recover service tax from a service recipient when the service provider was a non-resident without an office in India. The court held that relying solely on Rule 2(1)(d)(iv) for tax collection before the enactment of section 66A was impermissible.

6. Based on the precedent set in Quintiles Data Processing Centre (I) P. Ltd., the court quashed the show-cause notices, ruling in favor of the petitioners. The judgment reiterated that without a specific charging section like section 66A, service tax collection from service recipients in such circumstances was not legally permissible.