2024 (9) TMI 696 - AT - Service Tax

Amendment in Rule 6 of CCR is retrospective or prospective? - applicability of amendment to the outstanding balance available as on 10.05.2008 or only prospective in respect of entries made in the books of accounts post 10.05.2008 - HELD THAT - In the instant case, the period of dispute is for the tax pending on such outstanding amounts as reflected in their Books of accounts, immediately after the amendment. Undoubtedly, these were for services received during the period prior to the said amendment, as the payment had not been received. Since, the liability for payment of service tax arises upon receipt of payment towards taxable services, which has admittedly not been received by the appellant, there was no scope or occasion to discharge the service tax liability in terms of Rule 6 ibid as it had existed at the relevant disputed period. The confirmation of service tax and interest liability in the impugned order that amendment of Rule 6 ibid will have retrospective effect defeats the legislative intent and also against the principles of legal jurisprudence. It is also noted that payment of service tax in respect of transactions between associated enterprises on the basis of book entry was introduced only w.e.f. 10.05.2008 by incorporating the Explanation clauses in both Section 67 of the Finance Act, 1994 and Rule 6 ibid. The service tax statute holding the field at the relevant point of time did not contain any provision for demand of service tax by the authorities, prior to realization of the value of taxable services - N/N. 19/2008 introducing Explanation to Rule 6 ibid, nowhere specifies that the same will have retrospective application to deal with the past transactions. The service tax demand cannot be confirmed on the service fee not realized during the disputed period from the associate enterprise, even if the same has been reflected in the books of accounts of the appellant as the amount outstanding. There are no merits in the impugned order, and thus, the same is set aside - appeal allowed.

Issues Involved:
1. Retrospective vs. Prospective Application of Rule 6 Amendment.
2. Liability to Pay Service Tax on Outstanding Balances.
3. Applicability of Penalty and Interest.

Detailed Analysis:

1. Retrospective vs. Prospective Application of Rule 6 Amendment:

The core issue was whether the amendment to Rule 6 of the Service Tax Rules, 1994, effective from 10 May 2008, should be applied retrospectively or only prospectively. The amendment introduced an explanation stating that service tax should be paid on amounts credited or debited in the books of accounts for transactions with associated enterprises, regardless of actual payment.

The appellant argued that the law applicable at the time of rendering the service should be applied. They contended that prior to the amendment, service tax was payable only upon actual payment for services. The explanation added on 10 May 2008 did not specify that it applies to amounts accrued before this date. The appellant cited various judgments to support that amendments affecting substantive law should have prospective effect unless explicitly stated otherwise.

The Tribunal agreed with the appellant, noting that the amendment did not specify retrospective application. The Tribunal cited the Delhi High Court's decision in Pr. Commissioner of GST, Delhi vs McDonalds India Pvt Ltd, which held that similar explanations were not clarificatory and thus should not be applied retrospectively. The Tribunal concluded that the amendment to Rule 6 should only apply to transactions post-10 May 2008.

2. Liability to Pay Service Tax on Outstanding Balances:

The department contended that the appellant was liable to pay service tax on services received from associated enterprises located outside India under the Reverse Charge Mechanism. Before the amendment, service tax was due upon making payment for such services. Post-amendment, service tax was due upon making a debit or credit entry in the books of accounts.

The Tribunal found that the appellant had not received payment for services before the amendment and thus had no liability to pay service tax under the pre-amendment rules. The Tribunal held that the service tax liability could not be imposed on outstanding balances in the books of accounts as of 10 May 2008, as the amendment was not intended to be retrospective.

3. Applicability of Penalty and Interest:

The appellant argued that no penalty should be levied as they had paid the service tax before the issuance of the show cause notice. They cited Section 73(3) of the Finance Act, 1994, which bars the imposition of penalties if the duty and interest are paid before the notice is issued.

The department argued that the appellant had willfully suppressed facts and did not disclose the outstanding amounts as of 10 May 2008, justifying the extended period for demand and interest.

The Tribunal did not find merit in the department's argument, given the prospective application of the amendment. Therefore, the Tribunal concluded that the appellant was not liable for penalties or interest on the service tax for the period before the amendment.

Conclusion:

The Tribunal set aside the impugned order, concluding that the service tax demand could not be confirmed on the service fee not realized during the disputed period from the associated enterprise. The appeal was allowed in favor of the appellant, emphasizing that the amendment to Rule 6 should apply prospectively and not retrospectively.

(Order pronounced in the open Court on 11.09.2024)

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