2013 (5) TMI 55 - AT - Service Tax

Business Auxiliary Service - Non payment of service tax on the amount paid by the appellant to the visiting engineers of foreign company from whom they have purchased the technical evaluation - Accordingly demand of duty, interest & penalties arise. - Held that - from 18.04.06, the appellant is liable to discharge the service tax liability. It is seen from the records that the audit party pointed out this anomaly to appellant and appellant had, on issuance of show cause notice discharged the service tax liability and interest thereof. Regarding Penalty - Hon ble High Court of Karnataka in the case of Motor World 2012 (6) TMI 69 has laid down the law as to when the provisions of Section 80 (Penalty not be imposed in certain cases) can be invoked and fully applicable in the case. I invoke the provisions of Section 80 of Finance Act, 1994 and set aside the penalties imposed by the lower authorities on the appellant under the provisions of Section 76 & 78 of the Finance Act, 1994.

Summary

Issues involved:
Service tax liability on payment to foreign engineers for technical assessment, challenge to penalties under Section 76 & 78 of the Finance Act.

Analysis:

1. The appellant entered into a contract with a US-based company for technical assessment, falling under 'Business Auxiliary Service.' The department issued a show cause notice demanding service tax, interest, and penalties under Sections 76 and 78 of the Act. The lower authorities confirmed the demand, interest, and penalties.

2. The appellant appealed, arguing that they believed the payments to foreign engineers were not taxable due to confusion on taxability and the reverse charge mechanism. The department contended that the appellant, being in the organized sector, should have known the law.

3. The main issue was the challenge to penalties under Section 76 & 78 of the Finance Act. The appellant had paid for technical evaluation services under the reverse charge mechanism. The appellant discharged the service tax liability upon audit party's observation.

4. The counsel argued that the appellant could have availed Cenvat credit if the service tax was paid, as it was related to manufacturing activity. The lower authorities imposed penalties under both Sections 76 and 78, which was considered improper.

5. Considering the submissions, it was found that the appellant could have reasonably believed the services were not taxable due to confusion on import of services. Referring to a High Court case, it was established that penalties should not be automatic and reasonable cause should be considered.

6. Applying the principles from the High Court case, the penalties under Sections 76 & 78 were set aside under Section 80 of the Finance Act. The appeal was allowed, and the penalties imposed by the lower authorities were overturned.