2019 (1) TMI 1113 - AT - Service Tax

Reverse charge mechanism - intellectual property right services - business auxiliary service - demand of tax on differential rate of tax - penalty - Held that - The empowerment of the Central Government to notify the rate of exchange for the purpose of computation of assessable value in relation to chargeability of tax under section 66 A of Finance Act, 1994 came into effect much after the period of dispute. Consequently, in the absence of a legal mechanism for alternate computation, the exchange rate at which the payment was remitted to the overseas entity alone could be applied. The demand of tax on the differential rate of exchange does not sustain and is set aside. Furthermore, it is apparent from the scheme of deemed provider of service in section 66A of Finance Act, 1994 and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 that the entitlement to CENVAT credit of tax so paid eliminates the attribution of motive or conduct that are the ingredients for imposition of penalty under section 78 of Finance Act, 1994. The residuary provision for imposing the figment of import on transactions enumerated in section 65(105) of Finance Act, 1994 does not extend to intellectual property rights , unique as they are and not amenable, by comparison with procurement of such property from within the country, to countervailing. The said Rules have an inbuilt provision for exemption of all services that do not fall within the ambit of import of service by reference to section 93 of Finance Act, 1994 excluding this particular activity thereby from the ambit of tax. Penalties set aside - appeal allowed to the limited extent of the differential tax arising from the application of alternate rate of exchange.

Issues:
1. Recovery of tax under section 66A of Finance Act, 1994 for 'intellectual property right services' and 'business auxiliary service'.
2. Disagreement over exchange rates for computation of assessable value.
3. Applicability of provisions regarding rate of exchange for services taxed under section 66A.
4. Imposition of penalties and demand for differential amount.
5. Compliance with conditions for exemption from service tax claimed to be exports.
6. Application of Tribunal decisions in similar cases.
7. Entitlement to CENVAT credit and elimination of penalty under section 78.

Analysis:
1. The appeal challenges the recovery of tax under section 66A of Finance Act, 1994 for 'intellectual property right services' and 'business auxiliary service'. The appellant contests the confirmation of recovery and penalties imposed by the impugned order. The disagreement over the exchange rates used for computation of assessable value is highlighted, with a differential amount remaining between confirmed recovery and the amount paid for 'intellectual property rights service'.

2. The appellant argues that prior to 28th May 2012, no provision governed the rate of exchange for services taxed under section 66A. They claim that the incorporation of section 67A in 2012 could not be retroactively applied to payments made in 2006-07 and 2007-08. The appellant asserts that the tax liability was partially discharged, and there was no motive to evade duty.

3. The Tribunal examines the narrow dispute scope and concludes that the legal mechanism for alternate computation of exchange rates was absent during the dispute period. Therefore, the demand for tax based on differential exchange rates is set aside. The judgment emphasizes the importance of the exchange rate at the time of payment to the overseas entity.

4. Regarding penalties, the appellant challenges the imposition based on an order that lacked proper reasoning and application of mind by the adjudicating authority. The Tribunal notes that the entitlement to CENVAT credit of tax paid under section 66A eliminates the basis for penalty under section 78 of the Finance Act, 1994. The judgment cites relevant case law to support the interpretation that liability to tax cannot be deemed for 'intellectual property rights' under the Finance Act, 1994.

5. The Tribunal sets aside the penalties imposed and allows the appeal to the limited extent of the differential tax resulting from the application of alternate exchange rates. The judgment emphasizes the legal complexities surrounding 'intellectual property rights' services and the necessity to consider specific laws governing such services for taxation purposes.

This detailed analysis covers the issues raised in the legal judgment while preserving the key legal terms and significant findings of the Tribunal.

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