2022 (9) TMI 167 - AT - Service Tax

Levy of service tax - receipt of intellectual property service from the overseas entity - consequence of merger on the appointed date was tantamount to acknowledging the overseas transfers as their own or not - HELD THAT - In any case, deeming that the amalgamated entity came into being on 1st April 2009, the status of the amalgamating entities outside India needs to be borne in mind and it is not seen from the records that they have ceased to operate at those locations after the appointed date. That would have been impossible considering that the effective merger occurred in April and May 2010. Therefore, the consequence of deemed amalgamation from 1st April 2009 would be to deem the foreign companies as overseas offices of the appellant. Section 66A(2) of Finance Act, 1994 and the Explanation therein make it abundantly clear that, for the purposes of the levy thereof, such units are to considered as independent; in such circumscribing circumstances, the procurement of services outside India by the branch or office of an Indian assessee does not fall within the purview of rule 3 of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. The impugned order has failed to identify the taxable service' that the erstwhile foreign entities had obtained from the foreign service provider without which the test of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 is not met. The adjudicating authority has failed to consider the deemed demutualization of amalgamated entity and amalgamating entities for the period prior to effective merger and has superficially applied the appointed date conundrum to the no brainer , and default, articulation in section 66A of Finance Act, 1994 without taking in the entire canvass of this special provision of law to charge tax on specifically intended transactions. The impugned order has failed to be in compliance with the mandate of section 66A of Finance Act, 1994 warranting it to be set aside - Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Levy of service tax under section 73 of the Finance Act, 1994.
2. Charging of interest under section 75 of the Finance Act, 1994.
3. Imposition of penalties under sections 77 and 78 of the Finance Act, 1994.
4. Applicability of section 66A of the Finance Act, 1994.
5. Impact of corporate restructuring and merger on tax liability.

Detailed Analysis:

1. Levy of Service Tax under Section 73 of the Finance Act, 1994:
The appeal concerns M/s Star India Pvt Limited, which was levied a service tax of Rs. 52,37,68,283 for the financial year 2009-10. The tax authorities argued that the payment of Rs. 508,51,28,961 received by M/s Star L, Hong Kong for the use of its recognizable mark was for 'intellectual property service' from an overseas entity. The appellant contended that these payments were made by three foreign companies, which were later merged with the appellant, and thus should not be taxable.

2. Charging of Interest under Section 75 of the Finance Act, 1994:
Interest was charged on the alleged service tax liability under section 75 of the Finance Act, 1994. The appellant argued that the payments made were during the interregnum period before the effective date of the merger and should not attract interest.

3. Imposition of Penalties under Sections 77 and 78 of the Finance Act, 1994:
Penalties equivalent to the service tax amount were imposed under section 78, and additional penalties under section 77 of the Finance Act, 1994. The appellant contested these penalties, arguing that the payments were part of a corporate restructuring and were not taxable.

4. Applicability of Section 66A of the Finance Act, 1994:
The tax authorities relied on section 66A of the Finance Act, 1994, which pertains to services procured from outside India. The appellant argued that the payments were for the use of a non-exclusive, non-transferable right to use marks, which did not conform to the definition of 'intellectual property service' under section 65(55b) of the Finance Act, 1994. The Tribunal noted that section 66A is a special provision intended to tax services procured from abroad by deeming the recipient as the provider of the service.

5. Impact of Corporate Restructuring and Merger on Tax Liability:
The merger of the three foreign companies with the appellant was approved with an appointed date of 1st April 2009, though the effective dates were in April and May 2010. The appellant argued that the payments made by the foreign companies during the interregnum should not be taxable. The Tribunal observed that the tax authorities had not determined the nature of the service in the agreement between the foreign entities and the Hong Kong entity before the merger. The Tribunal also noted that the financial records post-merger should not be the basis for tax liability without considering the actual transactions.

Conclusion:
The Tribunal concluded that the impugned order failed to comply with the mandate of section 66A of the Finance Act, 1994, and did not adequately determine the nature of the taxable service. The Tribunal set aside the impugned order and allowed the appeal, ruling that the payments made by the foreign entities before the effective merger date should not be subject to service tax under section 66A. The Tribunal emphasized the need for a thorough examination of the nature of the transactions and the applicability of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.

Order Pronounced:
The appeal was allowed, and the impugned order was set aside on 01/09/2022.