2014 (10) TMI 96 - AT - Service Tax

Intellectual Property Right service - exemption notification No. 17/2004-S.T. dated 10.9.2004 - Held that - Procedure followed by the appellant has resulted in short payment of service tax to the extent of R&D cess deducted till cess was paid. Therefore, a view can be taken that there was a delayed payment of service tax to the extent of R&D cess and the appellants are liable to pay interest. Demanding entire amount of service tax equal to R&D cess is not correct. Since we have taken a view that the appellant does not have prim facie case in respect of deduction made by them and we have also taken note of the consequence of the procedure followed by the appellant, we consider that the appellant should deposit the interest because of the delayed payment of service tax to the extent of R&D cess within eight weeks and report compliance on 11/9/2014. Subject to compliance of above requirement, there shall be waiver of pre-deposit and stay against recovery of balance dues for 180 days from the date of this order - Partial stay granted.

Summary

Issues:
1. Liability to pay service tax on transactions with associated enterprises on accrual basis.
2. Deductibility of R&D cess paid from service tax liability.
3. Delayed payment of service tax due to R&D cess deduction.

Analysis:
1. The appellant entered into a Technical Collaboration Agreement (TCA) with a foreign company, necessitating payment for design and development charges, technician fee, and royalty. Following the insertion of reverse charge levy under Section 66A of the Finance Act, 1994, the appellant started paying service tax on consideration paid to the foreign company under the TCA. The liability to pay service tax on transactions with associated enterprises was shifted to an accrual basis from 10.5.2008, as per Rule 6(1) of the ST Rules, 1994. The appellant contended that the services were classified under 'Intellectual Property Right' service, as per relevant sections and exemption notification.

2. Under the Research and Development Cess Act, 1986, R&D cess is required to be paid on technology imports, payable to RBI before making any payments. Exemption Notification No. 17/2004-S.T. allowed deduction of R&D cess from service tax. The appellant argued that a mismatch arose due to the requirement to pay service tax on book entry with R&D cess payment mandated only upon foreign exchange payment. The appellant claimed that the legislative intent was to allow deduction, but the tribunal disagreed. The tribunal highlighted that the notification and statutes were clear, allowing only for deduction of R&D cess paid, and the appellant could have paid the cess before making payments for technology imports.

3. The tribunal found that the appellant's procedure resulted in a short payment of service tax due to R&D cess deduction. It concluded that the appellant had no prima facie case for deduction and noted the consequences of the procedure followed. As a result, the tribunal held the appellant liable to pay interest for delayed service tax payment due to R&D cess deduction. The appellant was directed to deposit the interest within eight weeks, with a waiver of pre-deposit and stay against recovery of balance dues for 180 days, subject to compliance.