2018 (4) TMI 1387 - AT - Service Tax

Classification of services - the appellant have entered into agreements with various foreign entities for obtaining licence to use technical know-how and technical information and also various engineering services, in connection with setting up of their manufacturing plant/refineries - whether the service to be classified as Consulting Engineering Service or otherwise? - Held that - the Revenue sought to classify the service under the category of Consulting Engineering Service , however the service received by the appellant from various foreign based services provider is clearly in the nature of technical know-how and technical information and also various engineering services, in connection with setting up of their manufacturing plant/refineries - From the nature of service it is very clear that the said services cannot be covered under the Consulting Engineering Service . This issue has been considered in detail by coordinate Bench of this Tribunal in the case of Bharat Oman Refineries Ltd. Vs. CCE & SERVICE TAX, Bhopal 2017 (4) TMI 1129 - CESTAT NEW DELHI , where it was held that The very fact that all these agreements talk about the foreign companies as licensor itself is revealing. In a typical agreement for consultancy service, there will be no licensor or licensee with transfer of licensed process technology or proprietary technical information. Demand do not sustain - appeal allowed - decided in favor of appellant.

Issues Involved:
1. Classification of services under "Consulting Engineering Service."
2. Applicability of Section 66A of the Finance Act, 1994.
3. Limitation period for raising demand.
4. Revenue neutrality and eligibility for Cenvat credit.
5. Imposition of penalties under Sections 77 and 78 of the Finance Act, 1994.

Issue-wise Detailed Analysis:

1. Classification of Services under "Consulting Engineering Service":
The appellant entered into agreements with various foreign entities for obtaining technical know-how, technical information, and engineering services for setting up their manufacturing plant/refineries. The Revenue classified these services under "Consulting Engineering Service" as per Section 65(31) of the Finance Act, 1994. However, the appellant contended that these services were for the transfer of technical know-how and not for consultancy. The agreements involved the supply of know-how, process packages, and other services like test runs, HAZOP studies, and training. The Tribunal concluded that the services received were in the nature of technical know-how and technical information, which do not fall under "Consulting Engineering Service." This conclusion was supported by previous judgments such as Bharat Oman Refineries Ltd. and others.

2. Applicability of Section 66A of the Finance Act, 1994:
The learned Commissioner dropped the demand for the period before the insertion of Section 66A on 18.04.2006, as there was no provision making the recipient liable for service tax on services provided from outside India. For the period post-18.04.2006, the Tribunal found that the services received were not taxable under "Consulting Engineering Service" and thus, Section 66A was not applicable.

3. Limitation Period for Raising Demand:
The appellant argued that the demand for the period 19.04.2006 to 31.03.2007 was barred by limitation. The Tribunal noted that the department was aware of the agreements due to earlier show-cause notices. Additionally, the appellant had a bona fide belief that the services were not taxable in India, supported by various circulars and clarifications. The Tribunal found that the extended period for raising the demand was not justifiable.

4. Revenue Neutrality and Eligibility for Cenvat Credit:
The appellant contended that the entire service tax payable was available as Cenvat credit, leading to a revenue-neutral situation. The Tribunal agreed, noting that the services were availed for the business activity of manufacturing, and thus, the appellant had no intention to evade tax. This was supported by judgments in cases like Jet Airways and British Airways, which held that revenue neutrality is a valid ground, especially under the Reverse Charge Mechanism.

5. Imposition of Penalties under Sections 77 and 78 of the Finance Act, 1994:
The appellant argued that penalties under Sections 77 and 78 were not imposable due to the absence of intent to evade tax. The Tribunal found that the issue related to the interpretation of law, and thus, the extended period and penal provisions were not invocable. This was supported by judgments in cases like Pannu Property and Motor World.

Conclusion:
The Tribunal set aside the impugned order to the extent it confirmed the demand with interest and penalties, allowing the appeal based on the merits of the issue. The services received by the appellant were not taxable under "Consulting Engineering Service," and the demand was not sustainable. The appeal was allowed, and the order was pronounced in court on 19.04.2018.

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