2018 (2) TMI 1866 - AT - Service Tax

Reverse Charge Mechanism - respondent entered into a contract with M/s. Agrinergy Ltd. UK for assistance in implementing clean development mechanism as per Article 12 as Kyoto Protocol - management or business consultant service or not - Held that - The respondent did not receive any statutory service from UK Company and the transaction is purely commercial in nature. The terms of the agreement and the manner of consideration to be paid clearly make it that the services received by the respondent are covered under the category of management or business consultant service. It is clear that in the present case the respondent did receive consultancy or technical assistance in relation to respondent. The CDM project implemented in such power plant resulted in generation of carbon credits (CERs), which were further transferred on consideration to others by the respondent. As per the agreement 7 % of the total consideration is retained by UK Company, who facilitated by way of consultancy and other related activities in the creation of CDM project. We note that the impugned order misdirected itself while examining the matter of transaction as well as the scope of tax entry for such transaction. The tax liability of the respondent on reverse charge basis is sustainable - appeal allowed - decided in favor of Revenue.

Summary

Issues:
1. Tax liability on reverse charge basis for services received from a foreign service provider related to a clean development mechanism project under the Kyoto Protocol.

Analysis:
The case involves a dispute regarding the tax liability on reverse charge basis for services received by the respondent from a foreign service provider in relation to a clean development mechanism (CDM) project under the Kyoto Protocol. The respondent, engaged in manufacturing iron and steel products, entered into an agreement with a UK company for assistance in implementing the CDM project, which involved services like project design validation, registration, and verification. The CDM project resulted in the generation of emission reduction certificates (CERs) that could be sold for consideration. The agreement specified an annual fee of 7% of the value of CERs arising from the project.

The original authority imposed service tax liability on the respondent, which was confirmed along with a penalty. However, on appeal, the Commissioner (Appeals) set aside the original order, considering the CERs as 'goods' sold by the respondent to the UK company and relying on a circular stating that the service provider acted as an agency in pursuance of an Act/Regulation, thus not liable to tax. The Commissioner held that the services provided by the UK company did not fall under the category of "management or business consultant service."

Upon hearing arguments from both parties, the Tribunal analyzed the terms of the agreement and the nature of services provided. It was noted that the UK company assisted in project design, validation, and registration, leading to the availability of CERs that could be transferred for a monetary consideration. The Tribunal concluded that the services received by the respondent fell under the category of management or business consultant service, as defined in Section 65(65) of the law, encompassing consultancy or technical assistance related to various areas of management.

The Tribunal found that the respondent did receive consultancy and technical assistance in relation to the CDM project, resulting in the generation and sale of CERs. The UK company retained a percentage of the consideration for facilitating the creation of the CDM project through consultancy activities. The Tribunal disagreed with the reasoning of the impugned order, stating that the transaction fell within the scope of the tax entry for such services. Therefore, based on the terms of the agreement, the Tribunal held that the tax liability of the respondent on a reverse charge basis was sustainable, allowing the appeal of the Revenue and restoring the original order.