2019 (6) TMI 1147 - HC - Service Tax

Reverse Charge (RCM) - Constitutional validity of the provision of sub-Clause (iv) of Rule 2 (1)(d) of Service Tax Rules, 1994 - Period from 2002-03 to 2004-05 - Consulting Engineer service - Liability of service tax - service tax in respect of the value of the said engineering plans, drawings and designs imported by it from M/s. Loesche GmbH of Germany for rendering services under the heading of Consulting engineering Service - HELD THAT - The service tax makes the person, who is providing the service, liable to pay. As such the Rules, more particularly Rule 2 (1)(d)(iv) of Service Tax Rules, 1994 (for short the 1994 Rules ) cannot be held to be in conformity with the provisions of the Act and the Constitution of India. Article 265 of the Constitution of India lays down that no tax shall be levied or collected except by authority of law. As such, the impugned notification and amendment is ultra vires the Constitution and is liable to be set aside. All taxable services are defined in Section 65 of the Finance Act which include only three types of services namely, any service provided to an investor by a stock-broker, to a subscriber by telegraph authority and to a policy holder by a insurer carrying on general insurance business. Section 68 of the Act requires every person providing the taxable service to collect service tax at the specified rate. Section 69 of the Act provides that registration of a person responsible for collecting service tax. Sub-section 2 of Section 5 of the Act indicates that it was the provider of the service, who is responsible for collecting the tax and obliged to get itself registered. Thus, on a conspectus of Section 65, 66, 68 and 69 of the Act make it abundantly clear that no tax for rendering service can be collected from the recipient of service. The rule empowering the authorities to collect service tax from the recipient of services cannot be held to be valid and in conformity with law - Rule 2 (1)(d)(iv) of Service Tax Rules, 1994 is ultra vires the provisions of the Act and the Constitution and is accordingly declared bad in law. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:

1. Constitutional validity of sub-Clause (iv) of Rule 2 (1)(d) of Service Tax Rules, 1994.
2. Legality of the show-cause notice issued under the said rule.

Issue-wise Detailed Analysis:

1. Constitutional Validity of sub-Clause (iv) of Rule 2 (1)(d) of Service Tax Rules, 1994:

The petitioners challenged the constitutional validity of sub-Clause (iv) of Rule 2 (1)(d) of Service Tax Rules, 1994, which was inserted via Notification No.12/2002-Service Tax, dated 01.08.2002. This rule makes the recipient of a taxable service in India liable to pay service tax if the service provider is a non-resident or operates from outside India without any office in India. The petitioners argued that this provision is ultra vires the Constitution and the Finance Act, 1994, which stipulates that the service tax liability lies with the service provider.

The petitioners relied on the Supreme Court judgment in Laghu Udyog Bharati v. Union of India, which clarified that the service tax is levied on the person providing the service, not the recipient. The Bombay High Court's decision in Indian National Shipowners Association v. Union of India was also cited, which held that Rule 2 (1)(d)(iv) is contrary to the provisions of Section 68 of the Finance Act and invalidated the rule for making the recipient liable for service tax.

The court concluded that the rule empowering authorities to collect service tax from the recipient of services is not in conformity with the law. It held that Rule 2 (1)(d)(iv) of the Service Tax Rules, 1994, is ultra vires the provisions of the Finance Act and the Constitution, declaring it bad in law.

2. Legality of the Show-Cause Notice Issued Under the Said Rule:

The petitioners also sought to set aside the show-cause notice dated 10.01.2005 issued by the Assistant Commissioner, Central Excise & Customs, Rourkela-II Division, pursuant to the impugned notification. The notice demanded service tax from the petitioner-company for engineering plans, drawings, and technical documents imported from M/s. Loesche GmbH of Germany.

The court noted that the show-cause notice was issued based on the invalidated rule. Given the declaration that Rule 2 (1)(d)(iv) is ultra vires, the show-cause notice cannot stand the scrutiny of law. Consequently, the court set aside the show-cause notice.

Conclusion:

The court allowed the writ application, declaring Rule 2 (1)(d)(iv) of the Service Tax Rules, 1994, ultra vires and invalid. It also set aside the show-cause notice issued under the said rule. No order as to costs was made.