2017 (9) TMI 30 - AT - Service Tax

Banking & Other Financial Services rendered by service providers outside India in connection with raising Foreign Currency Convertible Bonds - fees paid to foreign agents - other charges like, Commitment charges, Out of pocket expenses, Trusteeship fees, Processing fees, Listing fees, Printing fees etc - reverse charge mechanism - Held that - Such services have become taxable only with effect from 1.9.2009 and therefore the demand on legal fees in our view is unsustainable - for the limited purpose of requantification of the demand eliminating legal fees, the matter requires to be remanded to the adjudicating authority. Penalties u/s 76 and 78 - Held that - there was much controversy as to the liability to pay service tax under reverse charge mechanism during the relevant period. Prior to introduction of Section 66A in Finance Act, only the Rules provided for such levy and the doubt was whether there can be levy of service tax merely by providing in the Rules, without having a charging section in the Act - penalties imposed are unwarranted. Appeal allowed in part and part matter on remand.

Issues Involved:
- Liability to pay service tax on fees paid to foreign agents
- Applicability of reverse charge mechanism under Rule 2 (1) (d) (iv) of Service Tax Rules, 1994
- Controversy regarding payment of service tax before the introduction of Section 66A
- Suppression of facts by the appellants
- Imposition of penalties under Section 76 and 78
- Revenue neutral situation due to the ability to avail credit on service tax paid

Analysis:

1. Liability to pay service tax on fees paid to foreign agents:
The appellants were engaged in manufacturing and availing credit on inputs. They had availed taxable merchant banking services from service providers outside India for raising Foreign Currency Convertible Bonds. The issue was whether the appellants were liable to pay service tax on these services under the reverse charge mechanism.

2. Applicability of reverse charge mechanism under Rule 2 (1) (d) (iv) of Service Tax Rules, 1994:
The appellants argued that prior to the introduction of Section 66A in the Finance Act, there was confusion regarding the liability to pay service tax under the reverse charge mechanism. They contended that they were not aware of their liability and that there were decisions in their favor before the clarification provided by the courts.

3. Controversy regarding payment of service tax before the introduction of Section 66A:
The appellants claimed that they did not discharge service tax due to a genuine belief that they were not liable to pay. They cited the judgment of the Hon'ble High Court of Bombay and the Supreme Court which clarified the issue. The period in question was immediately after the introduction of Section 66A, making it a crucial factor.

4. Suppression of facts by the appellants:
The appellants argued that they did not suppress any facts and provided all necessary information to the department when requested. They contended that the demand based on extended period was unsustainable, citing precedents where such demands were set aside.

5. Imposition of penalties under Section 76 and 78:
The authorities had imposed penalties under Section 76 and 78, which the appellants challenged as unwarranted. They argued that as there was no suppression and they had paid a substantial amount before the Show Cause Notice, the penalties should be set aside.

6. Revenue neutral situation due to the ability to avail credit on service tax paid:
The appellants highlighted that even if there was an omission to pay service tax, the situation was revenue-neutral as they could avail credit on the tax paid. They contended that this factor alone justified setting aside the demand.

In conclusion, the Tribunal modified the orders by setting aside the demand for service tax on legal fees and directing the authority to reevaluate the demand. The penalties imposed under Section 76 and 78 were also set aside, considering the circumstances of the case and the revenue-neutral aspect. The appeals were partly allowed based on the above terms.

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