2021 (11) TMI 428 - AT - Service Tax

Levy of service tax - reverse charge mechanism - amount paid to the foreign agents as commission - It is the case of the Revenue that as per Section 66A of the Finance Act, if services are rendered by a person outside India and are received by a person in India, the recipient of the service has to pay service tax as if he is the one providing the service - period August 2010 to March 2012 - Levy of penalty u/r 173Q - CENVAT Credit - revenue neutrality - extended period of limitation - - HELD THAT - It is undisputed that the charging section under which the Department sought to demand service tax under reverse charge mechanism post 1st July, 2012 in this case is Section 66A read with Section 65(105)(zzb). These sections did not exist after 1 July 2012 and, therefore, any reference to any other legal provisions which may have existed during the relevant period and which could have been invoked is irrelevant. It is a well-settled legal principle that the charging section in any taxing statute must be strictly construed and in case of any ambiguity it should be interpreted in favour of the assessee. In the present case, the charging section which has been invoked for the period post 2012 does not exist at all and, therefore, there is no question of any ambiguity. Even if there is an ambiguity, it should go in favour of the assessee. Levy of penalty u/r 173Q - HELD THAT - The penalty was imposed in both the cases mentioning Rule 173Q clearly indicating the violation on the part of the assessee but without mentioning the clause under this Rule. What was held by the High Courts is that not mentioning a clause of the Rule 173Q does not vitiate the imposition of penalty, when the rule itself is clear and so also are the allegations made. The present case is on a completely different footing and the sections under which the charge is made did not exist at all during the relevant period. There were contrary judgments by the High Court of Punjab Haryana and thereafter the law was changed to make it explicit that credit of service tax paid on commission paid to commission agent is available. Therefore, they would have been eligible for Cenvat credit and could have claimed refund under Rule 5 of CCR, 2004. CENVAT Credit - revenue neutrality - extended period of limitation - HELD THAT - All indirect taxes are essentially revenue neutral at the hands of the tax payer. The assessee pays tax and collects it from its customer. Further, if the customer is himself a tax payer he can take credit of the Cenvat credit paid. For instance, A pays tax on his final product which is supplied to B who immediately takes credit of the tax paid by A and uses it to discharge his own liability. B, in turn, pays tax on his final products and sells them to C who takes credit of the tax so paid. The cycle continues until the final consumer is reached or an exempted good is produced or a non-taxable service is rendered. At that stage, the entire burden of tax gets loaded on to the final consumer or on to the non-excisable good or the non-taxable service - revenue neutrality in itself does not extinguish the tax liability of any person. The impugned order does not discuss the ingredients necessary for invocation of extended period of limitation nor does it invoke the proviso to Section 73(1) in the operative part of the order. It is for this reason that we have to set aside the impugned order for the extended period of limitation. The demand within the normal limitation is not covered by the charging sections invoked - entire demand needs to be set aside and we do so. Since the penalty under Section 78 is linked to and equal to the demand confirmed, it needs to be set aside as well. Similarly interest under Section 75 also needs to be set aside. Appeal allowed - decided in favor of appellant.

Issues Involved:

1. Liability to pay service tax under reverse charge mechanism.
2. Invocation of extended period of limitation.
3. Eligibility for exemption notifications.
4. Revenue neutrality and CENVAT credit.
5. Imposition of penalty under Section 78 of the Finance Act.

Detailed Analysis:

1. Liability to Pay Service Tax Under Reverse Charge Mechanism:

The appellant, a manufacturer of biscuits, was audited for the period August 2010 to March 2012. The audit revealed that the appellant had paid commission to foreign agents but had not discharged service tax under the reverse charge mechanism as per Section 66A of the Finance Act, 1994. The appellant contested this, arguing that before the enactment of Section 66A, there was no provision to tax services provided outside India to a person in India. Furthermore, they argued that the law illegally imposed this tax and that the levy of service tax on such transactions was against the basic principles of business law.

2. Invocation of Extended Period of Limitation:

The Commissioner confirmed the demand for the entire period, invoking the extended period of limitation under Section 73 of the Finance Act. The appellant argued that the extended period should not apply as they had disclosed the commission in their ARE-4 Form and Central Excise invoices, and the exports were done under the supervision of departmental officers. The Commissioner, however, did not provide a clear finding on the invocation of the extended period of limitation in the impugned order.

3. Eligibility for Exemption Notifications:

The appellant claimed eligibility for various exemption notifications (Notification No. 17/2008-ST, Notification No. 18/2009-ST, and Notification No. 42/2012-ST). The Commissioner found that these notifications were conditional, requiring compliance with several conditions which the appellant had not fulfilled. Therefore, the appellant could not claim the benefit of these exemption notifications.

4. Revenue Neutrality and CENVAT Credit:

The appellant argued that the entire exercise was revenue-neutral as they could have availed of CENVAT credit and claimed a refund under Rule 5 of CCR, 2004. The Commissioner relied on the judgment of the High Court of Gujarat in Cadila Healthcare Ltd., which held that services of sales commission agents are not eligible as 'input service' under the definition of CENVAT Credit Rules. However, the appellant pointed out that there were contrary judgments by the High Court of Punjab & Haryana, and the law was later changed to make it explicit that credit of service tax paid on commission to commission agents is available.

5. Imposition of Penalty Under Section 78 of the Finance Act:

The Commissioner imposed a penalty under Section 78, stating that the appellant had willfully suppressed and mis-declared information to evade payment of service tax. The appellant contended that there was no willful suppression of facts and that the extended period of limitation should not apply. The Tribunal noted that the impugned order did not discuss the necessary ingredients for the invocation of the extended period of limitation, nor did it invoke the proviso to Section 73(1) in the operative part of the order.

Conclusion:

For the period post-1st July 2012, the Tribunal found that the charging sections (Section 66A read with Section 65(105)(zzb)) did not exist, and thus, any reference to other legal provisions was irrelevant. Consequently, the demand, interest, and penalties for this period were set aside.

For the period prior to 1st July 2012, the Tribunal acknowledged that the appellant was liable under Section 66A read with Section 65(105)(zzb). However, due to the lack of a clear finding on the invocation of the extended period of limitation and the failure to invoke the proviso to Section 73(1) in the operative part of the order, the entire demand was set aside. Consequently, the penalty under Section 78 and interest under Section 75 were also set aside.

The appeal was allowed, and the impugned order dated 09.10.2015 was set aside with consequential relief, if any.

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