2018 (7) TMI 92 - AT - Service Tax

Liability of Service tax - Book adjustment was made on the technical know-how fees paid by appellant to the associate company - The department was of the view that after the amendment cit. 10/5/2008 brought forth in Section 67 of the Finance Act, 1994, the appellants are liable to pay the service tax on book adjustments made with regard to associate enterprises. Held that - The period is from 1/1/2007 to 31/12/2007, the explanation (c) to Section 67 of the Finance Act, 1994 provided that in respect of associate enterprises, service tax is required to be paid by the person liable to pay service tax on book adjustments also. However, the said amendment is applicable only from 10/5/2008 prospectively - the demand of service tax in respect of royalty / technical know-how fees cannot sustain and requires to be set aside. Penalty - entire service tax paid before issuance of SCN - Consulting Engineering Service - Held that - the entire liability was discharged much before the issuance of SCN - the penalty imposed is unwarranted in terms of sub-section (3) of Section 73 of the Finance Act, 1994 - Penalty set aside. Appeal allowed - decided in favor of appellant.

Issues:
1. Liability to pay service tax on book adjustments made with regard to associate enterprises.
2. Applicability of the amendment to Section 67 of the Finance Act, 1994 retrospectively.
3. Demand of service tax under Consulting Engineering Service.
4. Imposition of penalties.

Issue 1: Liability to pay service tax on book adjustments made with regard to associate enterprises:
The appellants, manufacturers of various products, made book adjustments towards royalty payable to their associate company, M/s.Mitsuba Corporation, Japan, for technical assistance received. The department contended that post-amendment to Section 67 of the Finance Act, 1994, the appellants were liable to pay service tax on such book adjustments. The appellants argued that they discharged service tax under reverse charge mechanism on royalty payments and technical know-how fees, but not on book adjustments made before the amendment. The Tribunal held that the amendment was prospective from 10/5/2008, citing precedents and legislative intent. Consequently, the demand for service tax on book adjustments was set aside.

Issue 2: Applicability of the amendment to Section 67 of the Finance Act, 1994 retrospectively:
The Tribunal analyzed the insertion of an Explanation in Rule 6 of the Service Tax Rules, 1994, effective from 10-5-08, regarding transactions with associated enterprises. It emphasized that the legislative intention was to introduce a new provision, not to remove doubts in existing provisions. Precedents were cited to establish that amendments placing restrictions prejudicial to the assessee are not retrospective. The Tribunal clarified that the amendment to Section 67 was substantive and applicable only prospectively. The decision in another case was distinguished as clarificatory amendments are retrospective only if they do not materially change existing provisions. Thus, the Tribunal held that the amendment did not warrant retrospective application.

Issue 3: Demand of service tax under Consulting Engineering Service:
The appellants had paid the entire service tax before the show cause notice was issued for Consulting Engineering Service. They challenged only the penalty imposed, which the Tribunal found unwarranted under sub-section (3) of Section 73 of the Finance Act, 1994. Consequently, the penalty was set aside.

Issue 4: Imposition of penalties:
Regarding the penalty imposed on the appellants, the Tribunal found it unjustified for Consulting Engineering Service as the entire liability was discharged before the show cause notice. Therefore, the penalty was set aside, and the impugned order was overturned, allowing the appeal with consequential reliefs.

In conclusion, the Tribunal ruled in favor of the appellants, setting aside the demand for service tax on book adjustments made with regard to associate enterprises, rejecting retrospective application of the amendment to Section 67, and nullifying the penalties imposed for Consulting Engineering Service.

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