2018 (10) TMI 214 - AT - Service Tax

Imposition of penalty - Reverse Charge Mechanism - Banking and other Financial Services - appellants held a bona fide belief that provider of the service i.e. SWIFT, since situated outside India and the recipients of service were also situated outside India, the services provided by SWIFT, would not be taxable in India. Held that - It is not in dispute that the appellants have paid the entire amount of Service Tax for the services received from the overseas provider of services i.e. SWIFT during the relevant period and liable to discharge Service Tax under reverse charge mechanism. The applicability of Service Tax under reverse charge mechanism though has been introduced by insertion of Section 66A of the Finance Act, 1994, but ultimately the issue is settled by the Hon ble Supreme Court in Indian National Ship Owners Association case 2009 (12) TMI 850 - SUPREME COURT OF INDIA - Thus, there is sufficient cause for not discharging Service Tax by the appellant during the period in dispute. Penalty set aside by invoking section 80 - demand of Service tax with Interest upheld - appeal allowed in part.

Summary

Issues:
- Dispute regarding imposition of penalties on the appellants for non-payment of Service Tax under reverse charge mechanism.
- Interpretation of Section 80 of the Finance Act, 1994 in relation to penalties imposed.

Analysis:
1. The appeal was filed against an Order-in-Original passed by the Commissioner of Central Excise & Service Tax. The appellants, engaged in providing financial services, availed services from overseas parties like SWIFT. They believed these services were not taxable in India as both the provider and recipients were outside India. However, the Department pointed out the non-payment of Service Tax, which the appellants then paid along with interest. A show-cause notice was issued for recovery of Service Tax, interest, and penalty. The total demand was confirmed, and penalties were imposed under Sections 77 and 78 of the Finance Act, 1994.

2. The appellants did not dispute the Service Tax liability but contested the imposition of penalties. They argued that they paid the Service Tax under reverse charge mechanism in good faith, believing the services were not taxable in India. They relied on Section 64 of the Finance Act, 1994 and a circular to support their belief. They also contended that SWIFT services were classifiable as Club or Association Services, and since they were part of SWIFT, no Service Tax was due. They highlighted the insertion of Section 66A in the Finance Act, 1994 and the settled legal position by the Supreme Court and Bombay High Court in a related case.

3. After hearing both sides, the Tribunal acknowledged that the appellants had paid the entire Service Tax for the services received from SWIFT under reverse charge mechanism. The issue of applicability of Service Tax under reverse charge had been settled by the Supreme Court and Bombay High Court. The Tribunal found sufficient cause for the non-payment of Service Tax during the disputed period and invoked Section 80 of the Finance Act, 1994. Consequently, the penalties imposed on the appellants were set aside, and the appeal was partly allowed to the extent of penalty cancellation.

This judgment clarifies the application of penalties under Section 80 of the Finance Act, 1994 in cases where Service Tax liability is not disputed but there are genuine reasons for non-payment under reverse charge mechanism. The Tribunal considered the appellants' good faith belief and legal interpretations in setting aside the penalties, emphasizing the settled legal position on the issue.