2023 (6) TMI 498 - AT - Service Tax

Short-payment of service tax - Management or Business Consultancy service - non-inclusion of VAT amount in the value of taxable service to arrive at the service tax payable by them which has resulted in short-payment of service tax - time limitation - revenue neutrality - HELD THAT - The period involved is prior to 18.4.2006. The appellant has been called upon to pay service tax under reverse charge mechanism. Section 66A was introduced in the Finance Act, 1994 only with effect from 18.4.2006. The judgment of the Hon'ble High Court of Bombay in the case of INDIAN NATIONAL SHIPOWNERS ASSOCIATION VERSUS UNION OF INDIA 2008 (12) TMI 41 - BOMBAY HIGH COURT which has been affirmed by the Hon'ble Supreme Court in UNION OF INDIA VERSUS INDIAN NATIONAL SHIPOWNERS ASSOCIATION 2009 (12) TMI 850 - SC ORDER has held that the service recipient cannot be called upon to pay service tax under reverse charge mechanism for the services rendered prior to the introduction of Section 66A. Following the said decision, the demand upto 18.4.2006 is required to be set aside. Part of the demand is also confirmed from 18.4.2006 to July 2007. It is submitted by the learned counsel that the amounts were paid under book adjustments. So also VAT refunds were received by such book adjustments from their associated enterprise, situated at Netherland. The demand has been made on the book adjustments which are made prior to 10.5.2008. When the entries are made in the books of accounts of the appellant in respect of the amounts which are to be paid to the overseas entities, prior to 10.5.2008, there is no liability to pay service tax merely on such accounts - The decision of the Tribunal in the case of M/S. SIFY TECHNOLOGIES LTD VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, LTU CHENNAI 2015 (3) TMI 964 - CESTAT CHENNAI as well as M/S. NORTEL NETWORKS (I) PVT. LIMITED VERSUS CST, NEW DELHI 2015 (9) TMI 50 - CESTAT NEW DELHI have considered the issue and held the issue in favour of the assessee. After appreciating the facts and following the case laws cited above, the demand for the period after 18.4.2006 also cannot sustain and requires to be set aside. Time Limitation - revenue neutrality - HELD THAT - It is seen that the issue as to whether the recipient of service is liable to pay service tax under reverse charge mechanism to an overseas service provider was under dispute and the Hon'ble Supreme Court in the case of Indian National Shipowners Association had held that the demand cannot be made prior to the introduction of section 66A in the Finance Act, 1994. Further, the situation is revenue neutral as the appellant would be able to take credit of the service tax paid under reverse charge mechanism for the relevant period. The department has not been able to establish any positive act of suppression of facts with intent to evade payment of tax on the part of the appellant. In such circumstances, the demand raised invoking the extended period cannot sustain and the Show Cause Notice is time-barred. The appeal succeeds both on merits as well as on limitation. The appeal is allowed.

Summary

Issues:
The issues involved in the judgment are:
1. Whether the appellant is liable to pay service tax on VAT amount collected by the holding-company.
2. Whether the demand for service tax under reverse charge mechanism is valid for the period prior to the introduction of Section 66A.
3. Whether the liability to pay service tax on book adjustments between associated enterprises is applicable retrospectively.
4. Whether the demand raised invoking the extended period is time-barred.

Issue 1: Liability to pay service tax on VAT amount collected by the holding-company
The appellant had entered into a Service Level Agreement (SLA) with their holding-company, where the holding-company collected VAT from the appellant but the appellant did not pay service tax on this amount. The appellant argued that VAT is not a consideration for services rendered and should not be subject to service tax. The Tribunal found that the demand for service tax on the VAT amount was not justified as the appellant had already discharged service tax on the service charges received under the agreement.

Issue 2: Validity of demand for service tax under reverse charge mechanism
The appellant contended that prior to the introduction of Section 66A, there was no liability to pay service tax under reverse charge mechanism. The Tribunal agreed with this argument citing a judgment of the Hon'ble High Court of Bombay, holding that service tax under reverse charge mechanism cannot be levied for services rendered before the introduction of Section 66A. Therefore, the demand for service tax up to 18.4.2006 was set aside.

Issue 3: Applicability of liability to pay service tax on book adjustments retrospectively
The appellant argued that the liability to pay service tax on book adjustments between associated enterprises was introduced with effect from 10.5.2008 and should not apply retrospectively. The Tribunal, relying on relevant case laws, held that the demand for the period after 18.4.2006, based on book adjustments, was not sustainable and set it aside.

Issue 4: Timeliness of the demand raised invoking the extended period
The appellant raised the issue of limitation, arguing that the demand invoking the extended period was time-barred. The Tribunal agreed with the appellant, stating that the demand could not be sustained as there was no evidence of suppression of facts by the appellant. Therefore, the Show Cause Notice was deemed time-barred and the demand was set aside.

In conclusion, the Tribunal set aside the impugned order, ruling in favor of the appellant on all issues. The appeal succeeded both on merits and limitation, and consequential relief was allowed as per law.