2018 (7) TMI 23 - AT - Service Tax

Extended period of limitation - Banking and Other Financial Services - upfront fee paid on reverse charge basis - Held that - During this very period, the issue of taxability on such payment made to foreign service provider was mired in litigation - the appellant cannot be charged with having suppressed information or having indulged in misstatement or fraud with intent to evade payment of tax liability. Also, even during the investigation stage and before issue of SCN appellants have paid up the tax liability on 28.11.2007. Extended period of limitation cannot be invoked - appeal allowed on the ground of limitation.

Issues involved:
1. Liability to pay service tax on upfront fee paid by appellants under reverse charge mechanism.
2. Applicability of penalties under various provisions of law.
3. Validity of demand for tax liability.
4. Issue of limitation in the case.

Analysis:
1. Liability to pay service tax on upfront fee:
The case revolved around the appellants' liability to pay service tax on upfront fees paid to banks for facilitating External Commercial Borrowings (ECB). The department contended that the appellants were liable to pay service tax under the category of 'Banking and Other Financial Services' on a reverse charge basis. The appellants argued that the upfront fee was not for any taxable service provided by the bank and that the service was not within the ambit of 'Banking and Other Financial Services.' They also highlighted that the confusion regarding the taxability of such payments to foreign service providers was resolved only after specific judgments by the Hon'ble High Court of Bombay and the Hon'ble Apex Court. The appellants further emphasized that they had consistently maintained their position on the non-taxability of the upfront fee even before the issuance of the show cause notice.

2. Applicability of penalties:
The original authority had imposed penalties under Section 76, 77 & 78 of the Finance Act, 1994. In appeal, the Commissioner (Appeals) set aside the penalty under Section 76 but upheld the remaining order. The appellants argued that there was no justification for proposing penalties under Section 77 & 78 of the Act or invoking the extended period for demand. The department, on the other hand, supported the imposition of penalties and contended that the upfront fees paid by the appellants fell under the category of 'Banking and Other Financial Services' and were taxable on a reverse charge basis.

3. Validity of demand for tax liability:
The appellants raised concerns regarding the validity of the demand for tax liability, emphasizing that the entire proceedings were hit by limitation. They argued that the demand could at best be fastened on the bank in India that processed the application and documents related to the loan. The appellants also pointed out that the confusion regarding the liability to pay service tax under the reverse charge mechanism existed before the introduction of Section 66A of the Act and was only clarified post specific judgments by the courts.

4. Issue of limitation:
The Tribunal analyzed the case from the perspective of limitation and found that the proceedings were hit by limitation. They noted that the disputed tax liability was paid during the course of investigation, and the appellants consistently maintained their position on the non-taxability of the upfront fee even before the issuance of the show cause notice. The Tribunal held that the appellant could not be charged with suppression of information or intent to evade tax, as they had paid the entire proposed tax liability before the issuance of the show cause notice. Therefore, the extended period of limitation could not be invoked, and the appeal was allowed on the grounds of limitation.

This detailed analysis of the judgment highlights the key arguments presented by both parties, the Tribunal's evaluation of the issues, and the ultimate decision based on the limitation aspect in favor of the appellant.

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