2019 (3) TMI 1378 - AT - Service Tax

Reverse charge mechanism - use of services of commission agents for procurement of export orders outside India and paid commission to such foreign based agents - non-payment of service tax for the period 18-4-2006 to 29-2-2008 - Held that - Cotton yarn is not an agricultural produce falling within the exemption notification. The argument that the appellants are not liable to pay service tax under Notification No. 13/2003-S.T., dated 26-6-2003 therefore cannot sustain - demand upheld. Penalty - Held that - The issue whether the assessee was liable to pay service tax under reverse charge mechanism was under litigation for a long time Appeal allowed in part.

Summary

Issues:
1. Liability to pay service tax on commission paid to foreign agents under reverse charge mechanism.
2. Exemption from service tax on cotton yarn as an agricultural produce.
3. Applicability of Notification No. 13/2003-S.T.
4. Imposition of penalty under Section 76.
5. Settlement of the issue of liability to pay service tax under reverse charge mechanism by the decision of the Hon'ble Supreme Court.

Analysis:

Issue 1: Liability to pay service tax on commission paid to foreign agents under reverse charge mechanism
The appellants, manufacturers and exporters of cotton yarn and blended yarn, utilized commission agents for procurement of export orders outside India and paid commission to foreign agents. The liability to pay service tax on such commission under reverse charge mechanism with effect from 18-4-2016 was established. The appellants were issued a show-cause notice for non-payment of service tax for the period 18-4-2006 to 29-2-2008. The original authority confirmed the demand, interest, and penalties. However, the Commissioner (Appeals) set aside the demand hit by limitation and the penalty imposed under Section 78. The tribunal acknowledged that the issue of liability under reverse charge mechanism was under litigation, and the appellants were not at fault for not discharging the service tax during the relevant period. Consequently, the penalty under Section 76 was set aside invoking Section 80 of the Finance Act, 1994.

Issue 2: Exemption from service tax on cotton yarn as an agricultural produce
The appellants argued that cotton yarn being an agricultural produce should be exempt from service tax under Business Auxiliary Service. However, the tribunal disagreed with this argument, stating that cotton yarn did not fall within the exemption notification as pointed out by the appellants' counsel. Therefore, the contention that the appellants were not liable to pay service tax under Notification No. 13/2003-S.T. was deemed unsustainable.

Issue 3: Applicability of Notification No. 13/2003-S.T.
The tribunal noted that the argument regarding the appellants' exemption from service tax under Notification No. 13/2003-S.T. could not be sustained. The tribunal's decision was based on the fact that the issue of liability under reverse charge mechanism was subject to prolonged litigation, and the appellants were not at fault for not paying the service tax during the relevant period.

Issue 4: Imposition of penalty under Section 76
The penalty imposed under Section 76 was contested by the appellants on the grounds of their bona fide belief that they were not liable to pay service tax. The tribunal, considering the circumstances and the prolonged litigation on the issue of liability, set aside the penalty under Section 76 invoking Section 80 of the Finance Act, 1994.

Issue 5: Settlement of the issue of liability to pay service tax under reverse charge mechanism by the decision of the Hon'ble Supreme Court
The tribunal acknowledged that the issue of liability to pay service tax under reverse charge mechanism was under litigation for a significant period. The decision of the Hon'ble Supreme Court in the case of M/s. Indian National Ship Owners' Association settled the issue, providing clarity on the liability. This settlement of the legal position contributed to the tribunal's decision to set aside the penalty under Section 76 and partially allow the appeal with consequential reliefs.