2018 (6) TMI 523 - AT - Service Tax

Levy of service tax - reverse charge - appellant has deducted TDS, being the part of royalty - whether the appellant is liable to pay service tax on the alleged deducted portion of TDS from the royalty paid to the foreign company? - Held that - The Mumbai Bench of the Tribunal in Magarpatta Township Dev. & Construction Co. Ltd. 2016 (3) TMI 811 - CESTAT MUMBAI has held that the demand of service tax on the TDS portion cannot sustain when there is no evidence to indicate that such amount was consideration for services received from the service provider - appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Liability to pay service tax on TDS portion of royalty paid to a foreign company.

Analysis:
The case involved the appellant, engaged in manufacturing additives, who paid service tax on royalty and other fees to a foreign company under reverse charge mechanism but did not pay service tax on the TDS portion as per Section 195 of the IT Act, 1961. The department alleged that the appellant, by deducting TDS, should also pay service tax on the royalty. The original authority confirmed the demand, interest, and imposed penalties under Sections 76 and 78 of the Finance Act, 1994. The Commissioner (Appeals) set aside the demand before April 18, 2006, citing a previous case. The appellant contended that they paid service tax on the net royalty amount and separately discharged the TDS amount to the government, as per the agreement with the foreign company. The appellant argued that since they paid the entire royalty amount to the foreign company and separately paid the TDS amount to the government, the demand for service tax on the TDS portion was unjustified. The appellant relied on a previous Tribunal decision to support their argument.

The main issue to be decided was whether the appellant was liable to pay service tax on the TDS portion deducted from the royalty paid to the foreign company. The department claimed that since TDS was deducted, service tax should also be paid on the royalty. However, the appellant demonstrated through the agreement and payment details that they paid the TDS separately to the government, over and above the royalty paid to the foreign company. The Commissioner (Appeals) had already set aside the demand before April 18, 2006. Citing a relevant Tribunal decision, it was noted that the service tax liability should be based on the actual consideration charged for the services provided. The Tribunal held that the demand for service tax on the TDS portion was unfounded, as the appellant had already discharged the service tax on the royalty paid to the foreign company. Therefore, the impugned order was set aside, and the appeal was allowed with any consequential relief as per the law.

In conclusion, the Tribunal ruled in favor of the appellant, holding that the demand for service tax on the TDS portion of the royalty paid to the foreign company was unjustified. The appellant had demonstrated that they paid the TDS separately to the government and had already discharged the service tax on the royalty amount. The decision was based on the interpretation of relevant rules and previous case law, ultimately leading to the allowance of the appeal and setting aside of the impugned order.