2016 (12) TMI 229 - AT - Service Tax

Exemption from levy of service tax on import of services - interpretation of statute - reverse charge transaction - reimbursements made over to service providers - transaction in the nature of commitment charges and waiver fees - whether that exemption can lead to escapement from tax in the hands of the recipient of service in a reverse charge transaction? - claim of exemption under immunity provisions in the Asian Development Bank Act, 1966 and International Finance Corporation (Status, Immunities and Privileges) Act, 1958 - Held that - while analyzing section 66A of Finance Act, 1994, the fiction of taxable service is legislated and thereafter the recipient is legislated as tax payer. When the enactments that honour international agreements specifically immunize the operations of the service provider from taxability, a law contrary to that in the form of section 66A which legislates such operations into tax net will not prevail In arriving at this interpretation, we are guided by two important considerations both of which flow from the mandate to respect and honour international commitments; more particularly when they have force of law. We have already observed the mischief that would follow to the principle of national treatment if we were to accept the position taken by the adjudicating Commissioner. Our place in the comity of nations is determined by our respect for commitments made at the international negotiation tables. Compliance, as a signatory to international treaties, conventions and agreements, has been the subject of various disputes before the Supreme Court. In the initial years, a strict view with Article 253 as the centre-piece was the trend of judicial thinking. Thus the Hon ble Supreme Court was not much convinced that the doctrine of pacta sund servanda could override the constitutional prescription of legislating treaties into enactment for acquiring force of law. In the evolution of judicial interpretation, the obligation of the State in accordance with Article 51 has been held to render treaties and agreements as binding. In the situation of Agreements having been enacted to have force of law, there can be no doubt that the intent of the those Agreements must prevail over an interpretation that begins and end within the framework of a taxing statute We do not concur with the need for a separate exemption as held in the impugned order. The existing laws enacted by the sovereign legislature of the Union suffice for the purpose of giving effect to Agreements. And to attain that end, the taxing statute, if it offers the scope, must be so interpreted. Confirmation of demands of tax, interest thereon and imposition of penalties are without authority of law. Impugned order is set aside with consequential relief.

Summary

Issues Involved:
1. Entitlement to exemption from levy of service tax outside the provisions of Finance Act, 1994.
2. Whether such exemption can lead to escapement from tax in the hands of the recipient of service in a 'reverse charge' transaction.

Issue-wise Detailed Analysis:

1. Entitlement to Exemption from Levy of Service Tax Outside the Provisions of Finance Act, 1994:

The appellant, M/s Coastal Gujarat Power Ltd, contested the demand for service tax on payments made for various fees and charges under the External Commercial Borrowing (ECB) scheme from overseas lenders. The tax authorities alleged that these payments constituted consideration for 'banking and other financial services' under section 65(12) and were liable to tax under section 65(105)(zm) of the Finance Act, 1994. The appellant argued that these payments were exempt under the Asian Development Bank Act, 1966, and the International Finance Corporation (Status, Immunities and Privileges) Act, 1958, which provide immunity from taxation to these entities.

The Tribunal examined the legislative framework, including section 66A of the Finance Act, 1994, which imposes a 'reverse charge' mechanism for services received from outside India. The Tribunal also referred to the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, which delineate the scope of taxable services and exemptions. The Tribunal concluded that the exemptions claimed by the appellant were applicable to transactions of the Asian Development Bank and the International Finance Corporation, as these entities are legislatively acknowledged to have jurisdictional presence in India.

2. Exemption Leading to Escapement from Tax in 'Reverse Charge' Transactions:

The Tribunal analyzed whether the exemptions under the Asian Development Bank Act, 1966, and the International Finance Corporation (Status, Immunities and Privileges) Act, 1958, could lead to escapement from tax in a 'reverse charge' transaction. The Tribunal noted that section 66A of the Finance Act, 1994, creates a legal fiction where the recipient of the service is deemed to be the provider. However, the Tribunal emphasized that the services rendered by the Asian Development Bank and the International Finance Corporation are immune from taxation under their respective statutes, which prevail over the provisions of the Finance Act, 1994.

The Tribunal highlighted that the non obstante clause in the exemption provisions of the two Acts demonstrates the sovereign legislative intent to grant immunity from all forms of taxation, including service tax. The Tribunal rejected the adjudicating Commissioner's view that the appellant's claim for exemption was not tenable and that the exemptions did not apply to the present case. The Tribunal concluded that the existing laws enacted by the sovereign legislature suffice to give effect to the Agreements and that the taxing statute must be interpreted in harmony with these exemptions.

Conclusion:

The Tribunal set aside the impugned order, which had confirmed the demand of service tax, interest, and penalties on the appellant. The Tribunal held that the appellant was entitled to exemption from service tax under the Asian Development Bank Act, 1966, and the International Finance Corporation (Status, Immunities and Privileges) Act, 1958, and that these exemptions prevail over the provisions of the Finance Act, 1994. Consequently, the demands for tax, interest, and penalties were deemed to be without authority of law, and the appellant was granted consequential relief.