2018 (7) TMI 1531 - AT - Service Tax

Reverse Charge Mechanism - Classification of services are not clear - Demand is sought to be made on the ground that there is a difference between the ledger amounts and the amounts reflected in the Service Tax returns filed by the appellant - Held that - Hon ble Supreme Court in the case of Ranbaxy Laboratories Limited vs. Union of India 2011 (10) TMI 16 - SUPREME COURT OF INDIA , held that it is a well settled proposition of law that a fiscal legislation has to be construed strictly and one has to look merely at what is said in the relevant provision; there is nothing to read in; nothing to be implied and there is no room for any indentment . The order fastening a liability on the assessee has to pass this test. On going through the Order-in-Original, it is found that Ld. Commissioner has not examined as to how each of the items of expenditure discussed above amount to services received by the appellant in India and how they are chargeable to service tax under reverse charge mechanism. Also there are various items of expenditure such as salaries, office expenses etc. which need to be classified by the department in the first place to show how these amount to services rendered by the service provider abroad and received in India and how they are liable to charge to service tax under reverse charge mechanism. In the present case, where the appellant is supposed to have received the services and is liable to pay service tax under reverse charge mechanism, it is essential that the department say what services were received by the appellant and how they were unclassifiable and how they were liable to be charged under reverse charge mechanism and compute their tax liability accordingly. This is an original work to be done with respect to each of the specific items of expenditure on which service tax is proposed to be charged. It is appropriate to remit the matter back to the original adjudicating authority with a specific direction to compute the demand after specifying how each of the items of the expenditure are chargeable to service tax - appeal allowed by way of remand.

Summary

Issues Involved:
1. Classification of various expenses for service tax liability.
2. Applicability of reverse charge mechanism for services received from abroad.
3. Validity of demand based on ledger entries vs. ST-3 returns.
4. Exemption claims under the negative list of services.
5. Procedural lapses in issuing the show cause notice.

Detailed Analysis:

1. Classification of Various Expenses for Service Tax Liability:
The appellants incurred expenses under several heads including commissions, patent and product registration charges, business promotion, professional charges, salaries, office expenditure, clinical test charges, and various other office-related expenses. The department sought to classify these expenses under taxable service categories such as Business Auxiliary Service, IPR services, advertisement agency services, legal and professional consultancy services, and technical testing and analysis service, among others. The appellants contended that many of these expenses were either not related to taxable services or were incorrectly classified. For instance, they argued that patent and product registration charges were statutory fees paid to foreign governments and thus fell under the negative list of services under Section 66D of the Finance Act, 1994, exempting them from service tax.

2. Applicability of Reverse Charge Mechanism for Services Received from Abroad:
The department alleged that the appellant had not discharged service tax liability on services received from abroad under the reverse charge mechanism. The appellants argued that many of these services were consumed outside India and thus not subject to service tax in India. They also pointed out that intermediary services provided by intermediaries located outside India are not taxable under Rule 9 of the Place of Provision Rules, 2012, and this provision has retrospective effect from 01.10.2014.

3. Validity of Demand Based on Ledger Entries vs. ST-3 Returns:
The department's demand was based on discrepancies between amounts recorded in the appellant's ledger and those declared in their ST-3 returns. The appellants argued that the ledger amounts included provisions, past period amounts, and amounts written off, which did not necessarily reflect actual payments for services. They cited the case of DHL Express India Pvt. Ltd., arguing that demands must be based on specific findings of taxable services provided and not merely on ledger entries.

4. Exemption Claims Under the Negative List of Services:
The appellants claimed exemptions for certain expenses under the negative list of services. For example, they argued that patent and product registration charges paid to foreign governments were exempt under Section 66D. They also contended that office expenses, salaries, and other similar expenditures did not constitute taxable services.

5. Procedural Lapses in Issuing the Show Cause Notice:
The appellants argued that the show cause notice was issued without verifying the nature of the alleged services, the details of the service providers, the taxability of such services, and the applicability of Section 66A. They cited the principle that fiscal legislation must be construed strictly, as held in the case of Ranbaxy Laboratories Limited vs. Union of India, emphasizing that the demand must specify the nature and classification of services received.

Conclusion:
The tribunal found that the department had not adequately classified the expenses or demonstrated how they constituted taxable services received in India. The demand was based on ledger entries without proper verification of the nature of services. The tribunal remanded the matter back to the original adjudicating authority with instructions to re-examine the classification of each expense and determine the tax liability accordingly, following the principles of natural justice. The appeals were disposed of by way of remand.