2019 (1) TMI 1114 - AT - Service Tax

Reverse Charge Mechanism - Intellectual property services - payments made in connection with receipt of know-how under contract with their parent organisation outside India - Held that - The tax liability devolves on the appellant, notwithstanding being the recipient of the service, not as person liable to tax in Service Tax Rules, 1994 but as deemed provider; this coalescing of the provider and the recipient in the same person fictionally obliterates the existence of the overseas provider. Accordingly, it would be incorrect to read the provisions of Explanation in section 67 of Finance Act, 1994, effective from 10th May 2008, to apply in such instances of import of services to that which is relevant only for the valuation of the service. Accordingly, the discharge of tax liability on the billing raised by the de facto provider of service cannot be faulted - The tax liability on the value of intellectual property services is required to be adjusted to the extent of cess paid under the appropriate legislation. Penalty u/s 78 of FA - Held that - The discharge of tax liability by the appellant on the appropriate and proper determination of liability would suffice to exclude the scope for imposition of penalty under section 78 of Finance Act, 1994 - Moreover, the appellant had no reason to attempt to evade this tax in view of the eligibility for CENVAT credit of the tax paid. The imposition of penalty under section 78 is thus not grounded in law. The demand in the impugned order to the extent that the tax liability had been discharged at regular intervals by the appellant before issue of show cause notice is set aside - the liability to interest, if any, arising from delayed payment in accordance with the law as espoused, may be computed and informed to the appellant for due discharge - matter is remanded back to the original authority for the decision only on the correctness of the short payment of ₹ 8,08,864 and applicability of interest - appeal allowed by way of remand.

Issues:
Tax liability on 'know-how' receipt under contract with parent organization outside India, tax liability in transactions between associated entities, discharge of tax liability on billing raised by de facto provider, imposition of penalty under section 78 of Finance Act, 1994, adjustment of tax liability on 'intellectual property services' to cess paid, remand for decision on correctness of short payment and interest.

Analysis:

Issue 1: Tax liability on 'know-how' receipt under contract with parent organization outside India
The appellant contested the order-in-original, arguing that the tax liability under section 66A of the Finance Act, 1994, had already been discharged for payments related to 'know-how' receipt under a contract with their parent organization outside India. The impugned order failed to consider this discharge and demanded tax again due to the absence of registration as a provider of 'intellectual property services' under section 65(105)(zzr) of the Finance Act, 1994. The Tribunal found the order to be a collection of undisputed facts and laws applied with casual disregard, leading to contradictory findings regarding the tax liability.

Issue 2: Tax liability in transactions between associated entities
The impugned order alleged that tax liability in transactions between associated entities arises upon posting in books of accounts, irrespective of when bills for taxable services are raised. The Tribunal disagreed, citing the deeming fiction of 'recipient' as the 'provider' and the Taxation of Services Rules, 2006. The order's findings confirmed a tax liability along with interest and penalty, but discrepancies in assessing the short payment supported the appellant's claim of regular tax discharge. The crystallization of short levy was attributed to differences in assessable values between tax deduction certificates and actual tax liability.

Issue 3: Discharge of tax liability on billing raised by de facto provider
The appellant argued that tax liability was discharged based on bills raised by their parent entity, which was not acknowledged in the impugned order. The failure to register as a provider of 'intellectual property services' was considered a technical breach, especially since tax liability was held to be effective only from a specific date by the High Court. The Tribunal emphasized that the appellant, as the recipient, was deemed the provider, merging both roles and eliminating the overseas provider, thus justifying the discharge of tax liability based on billing by the de facto provider.

Issue 4: Imposition of penalty under section 78 of Finance Act, 1994
The Tribunal ruled that the appellant's discharge of tax liability, based on the correct determination of liability, negated the grounds for imposing a penalty under section 78 of the Finance Act, 1994. The appellant's eligibility for CENVAT credit further indicated no intent to evade tax. Citing a previous Tribunal decision on the taxability of 'intellectual property services,' the Tribunal found no legal basis for imposing the penalty.

Issue 5: Adjustment of tax liability on 'intellectual property services' to cess paid
The Tribunal directed the adjustment of tax liability on 'intellectual property services' to the extent of cess paid under the relevant legislation, ensuring the correct determination of the overall tax liability.

Issue 6: Remand for decision on correctness of short payment and interest
The dispute was remanded to the original authority solely to decide on the correctness of the short payment amount and the applicability of interest. The Tribunal emphasized the need to rectify the lacuna in the impugned order regarding the appellant's detailed submissions on the disputed amount for proper consideration.

In conclusion, the appeal was disposed of, and the demand in the impugned order was set aside concerning the tax liability already discharged by the appellant. The original authority was tasked with deciding the correctness of the short payment and interest, ensuring a fair resolution of the remaining issues.

---

← Previous Next →