2018 (4) TMI 1240 - AT - Service Tax

Penalty u/s 78 - commission paid to sales agents outside India - reverse charge mechanism - Held that - the issue of taxation in respect of commission paid to foreign agents was the subject matter of litigation before various fora till the constitutional validity of section 66A of the Act was upheld with effect from 18.4.2006 - there was reasonable cause for the failure of the appellant to discharge tax liability and hence the provisions of section 80 of the Act will be attracted - penalty set aside - appeal allowed.

Summary

Issues:
1. Liability of service tax on commission paid to foreign agents under Business Auxiliary Service.
2. Imposition of penalty under section 78 of the Finance Act.

Analysis:

Issue 1: Liability of service tax on commission paid to foreign agents under Business Auxiliary Service
The case involved the appellants exporting finished goods and engaging sales agents in various countries for which they paid commissions. The Department contended that service tax was applicable on these amounts under Business Auxiliary Service as per section 65(19) of the Finance Act, 1994, to be paid by the appellant on reverse charge mechanism. A show cause notice was issued proposing a demand of &8377; 21,06,240/- with interest and penalties. The adjudicating authority confirmed this proposal, which was upheld by the Commissioner (Appeals). The appellants contested the imposition of penalty under section 78 of the Act.

Issue 2: Imposition of penalty under section 78 of the Finance Act
During the hearing, the appellant's counsel argued that the appellants contested only the penalty imposed under section 78. They mentioned that the appellants and Trade Association had challenged the levy of service tax through a Writ Petition, obtaining a stay. However, after the constitutional validity of section 66A of the Act was upheld, they were advised to discharge the service tax liability. The counsel argued that due to confusion regarding taxability during the relevant period, there was no ground for imposing a penalty. It was also highlighted that the tax liability was paid within one month of receiving the show cause notice. On the other hand, the respondent's representative supported the impugned order, stating that the tax liability was not paid within one month of the notice.

Judgment:
The Tribunal acknowledged that the issue of taxation on commission paid to foreign agents was under litigation until the constitutional validity of section 66A was upheld. Considering this, the Tribunal found a reasonable cause for the appellant's failure to discharge the tax liability, invoking the provisions of section 80 of the Act. Consequently, the Tribunal waived the penalty imposed under section 78, modifying the impugned order to set aside the penalty without affecting the service tax liability. The appeal was allowed on these grounds.

This detailed analysis outlines the legal issues, arguments presented, and the Tribunal's decision in the case, addressing both the liability of service tax and the imposition of penalties under the Finance Act.