2006 (2) TMI 25 - AT - Service Tax

Service Tax Liability to pay The tax liability of service tax does not leviable when service provider and service receiver are units of the same legal entity.

Summary

Issues:
- Whether service tax is leviable on services rendered to the Dyeing Unit of the appellant.
- Whether a client relationship is necessary for proposing the levy of service tax.
- Whether the inter unit debit notes raised by the appellant affect the leviability of service tax.
- Whether the analogy drawn by the Commissioner of Central Excise is relevant for the levy of service tax.
- Whether penalty under Sections 76 & 77 of the Finance Act is tenable.

Analysis:
1. Levying of Service Tax: The issue revolved around the leviability of service tax on services rendered to the Dyeing Unit of the appellant. The Asst. Commissioner initially dropped the proceedings, citing the lack of separate legal entities for the service provider and the client, as required by Section 65 (72) of the Act. However, the Commissioner set aside this decision, emphasizing the need for a service provider and a service receiver. The Tribunal ultimately sided with the appellant, stating that when services are rendered within the same corporate entity, there is no client relationship, and thus, no service tax is applicable.

2. Client Relationship Requirement: The appellant argued that a client relationship is essential for proposing the levy of service tax, as per Section 65 of the Finance Act, 1994. They contended that since they belong to the same company, a client relationship cannot be established. The Tribunal agreed with this argument, highlighting that in the absence of separate legal entities for the service provider and the client, the levy of service tax is unwarranted.

3. Impact of Inter Unit Debit Notes: The appellant raised inter unit debit notes for internal accounting purposes, which were eliminated during the consolidation of accounts. They argued that since there was no receipt in the Books of Accounts towards the value of taxable services, the levy of service tax was unjustified. The Tribunal concurred, stating that the absence of receipt for the value of taxable services negates the leviability of service tax as per Rule 6 (1) of the Service Tax Rules.

4. Relevance of Commissioner's Analogy: The Commissioner drew an analogy with excise duty payment on goods clearance to justify the levy of service tax. However, the Tribunal rejected this analogy, clarifying that service tax is only applicable when services are provided to a client. The Tribunal emphasized the distinction between excise duty on goods and service tax on services, reinforcing that a client relationship is crucial for the levy of service tax.

5. Penalty Under Sections 76 & 77: The appellant challenged the levy of penalty under Sections 76 & 77 of the Finance Act, arguing that penalties are not applicable in cases involving the interpretation of the Act and Rules. The Tribunal supported this argument, citing various case laws to establish that penalties are not imposed in matters concerning the interpretation of legal provisions. Consequently, the Tribunal ruled in favor of the appellant, allowing the appeal and rejecting the penalty imposition.

In conclusion, the Tribunal sided with the appellant, emphasizing the absence of a client relationship within the same corporate entity, which rendered the levy of service tax unwarranted. The Tribunal also highlighted the significance of separate legal entities for the service provider and the client in determining the leviability of service tax. Additionally, the Tribunal rejected the Commissioner's analogy with excise duty and deemed the penalty imposition untenable in this context.