2018 (9) TMI 253 - AT - Service Tax

Reverse charge - variation in the value due to exchange rate variation - revenue neutrality - demand of service tax with interest and penalty - Revenue has sought to demand service tax only in respect of those payments which were in excess of the amounts booked in their book of accounts. However department has not given any credit were the amounts paid were actually less than the amounts booked in the book of accounts. - Held that - the service tax in all such cases is required to be determined, immediately when the transaction between the Associated Enterprises get reflected in the books of account and not when the payment is made. This is view is also in line with AS-11 issued by the Accounting Standard Board of ICAI. Any other view would not be incorrect but also against the basic scheme of Service Tax Law, and would be only lead to arbitrage of tax, because any person will like to determine the taxable value in such transactions on the date when the exchange rate is minimum and thereby will reduce the tax payable. In our view the such tax arbitrage cannot be sound principle of taxation in any tax system. Undisputed fact is that demand has been made in respect of the gross amount after taking into account the exchange rate fluctuation less the amounts booked in the book of accounts on the receipt of invoice for the services received. Appellants have paid the service tax on the amounts actually calculated by taking into account the prevalent exchange rate and the gross invoice value, on the date when invoice was received and expenditure booked in the books of account - by insertion of section 67A, intention of legislature for laying down the date for determination of taxable value and tax incidence, on the date of providing the service or when the service has been agreed to be provided has been made crystal clear. In a way the determination of taxable value and tax incidence has been totally delinked from the date of payment of tax. Appeal allowed - decided in favor of appellant.

Issues Involved:
1. Exchange rate fluctuations and their impact on service tax liability.
2. Determination of the taxable value under Section 67 of the Finance Act, 1994.
3. Applicability of penalties under Sections 76, 77, and 78.
4. Revenue neutrality and its implications on the demand.
5. Limitation period for issuing show cause notices.

Issue-wise Detailed Analysis:

1. Exchange Rate Fluctuations and Their Impact on Service Tax Liability:
The appellant, a registered Central Excise Assessee, received taxable services from associated companies outside India and paid service tax on a reverse charge basis based on the value credited in their books. Due to exchange rate fluctuations, discrepancies arose between the booked value and the actual remittance. The Revenue demanded service tax on the excess payments due to these fluctuations but did not credit instances where the remittance was less. The Tribunal emphasized that the service tax should be paid based on the gross amount charged at the time of booking the expenditure, not on the actual remittance amount, aligning with the explanation in Rule 6 of the Service Tax Rules, 1994.

2. Determination of the Taxable Value Under Section 67 of the Finance Act, 1994:
The Tribunal analyzed Sections 66A, 67, and 68 of the Finance Act, 1994, and relevant rules, emphasizing that the taxable value should be determined based on the gross amount charged when the service is recorded in the books of accounts, not on the actual payment date. The Tribunal referred to Accounting Standard-11 (AS-11) and clarified that exchange differences should be recognized as income or expenses in the period they arise. The Tribunal concluded that the service tax should be determined when the transaction is recorded in the books, not when payment is made, to prevent tax arbitrage.

3. Applicability of Penalties Under Sections 76, 77, and 78:
The Commissioner (Appeal) had upheld the demand for differential service tax but dropped the penalties, acknowledging no intention to evade tax. The Tribunal did not delve into penalty issues further, focusing on the merit of the demand itself.

4. Revenue Neutrality and Its Implications on the Demand:
The appellant argued that since the service tax paid on a reverse charge basis is available as CENVAT Credit, the issue is revenue-neutral. The Tribunal acknowledged this but focused on the proper determination of the taxable value and the timing of tax payment, aligning with the statutory provisions and accounting standards.

5. Limitation Period for Issuing Show Cause Notices:
The appellant contended that the demand for the period up to 2011-12 was time-barred, as the show cause notice was issued on 1st January 2012, and there was no intention to evade tax. The Tribunal did not address this limitation issue explicitly, as it found the demand unsustainable on merit.

Conclusion:
The Tribunal allowed the appeals, concluding that the service tax should be determined based on the value recorded in the books of accounts at the time of booking the expenditure, not on the actual remittance amount. The Tribunal emphasized the need to prevent tax arbitrage and aligned its decision with statutory provisions and accounting standards. The appeals were allowed, and the order of the Commissioner (Appeal) was not sustained on merit.

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