2025 (2) TMI 264 - AT - Service Tax

Levy of service tax - reverse charge mechanism - whether the Withholding Tax paid by the appellants in respect of the consideration received from their overseas partners i.e VISA and MasterCard in the assessable value of the service tax payable by the appellant under Reverse Charge Mechanism? - invocation of extended period of limitation - HELD THAT - In the facts and circumstances of the case the contracts entered into by the appellants are distinct in relation to the reimbursement of WHT; while the Agreement with MasterCard indicated that such WHT is not reimbursable the Agreement with VISA indicated that VISA would reimburse the WHT periodically on providing the necessary proof of payment of WHT by the appellants. In this background it is seen that the appellants have been paying service tax on the grossed-up value in respect of the consideration received from the MasterCard and have not been paying service tax in respect of VISA. Hon ble Supreme Court in the case of Bhayana Builders 2018 (2) TMI 1325 - SUPREME COURT held that Explanation 3 to sub-section (1) of Section 67 removes any doubt by clarifying that the gross amount charged for the taxable service shall include the amount received towards the taxable service before during or after provision of such service implying thereby that where no amount is charged that has not to be included in respect of such materials/goods which are supplied by the service recipient naturally no amount is received by the service provider/assessee. Though sub-section (4) of Section 67 states that the value shall be determined in such manner as may be prescribed however it is subject to the provisions of sub-sections (1) (2) and (3). Moreover no such manner is prescribed which includes the value of free goods/material supplied by the service recipient for determination of the gross value. Section 67A of the Finance Act 1994 gives an understanding that the consideration received must be for the service provided. In case a part of the consideration is identifiable not to be for provision of such service the same cannot be considered as consideration for the purposes of payment of service tax. In the impugned case it is found that there is a clear-cut demarcation between the two Agreements. While the Agreement with MasterCard does not recognize the payment of WHT by the appellants as reimbursable expenses the Agreement with VISA considers it to be reimbursable subject to provision of proof. In case of the MasterCard Agreement the entire consideration received by the appellants is to be treated as gross consideration as that is the amount paid by the appellant to the overseas MasterCard for the services received. Therefore rightly the appellant treated the grossed-up value as the consideration and discharged the due service tax. It is clear that the consideration as received for the service that is to say the consideration mentioned in invoice to be to such service is the assessable value for the purposes of levy of service tax provided no other amounts have been paid over and above the value shown in the invoice. As far as the amounts that flow to the service provider (to the service receiver in case of reverse charge) the same constitutes gross consideration in terms of Section 67D - the grossed-up value is correctly considered by the appellants as consideration and applicable service tax was discharged on the same. In case of amounts paid to VISA card the amount of WHT is agreed to be reimbursed to the appellant and therefore that amount does not form part of consideration as it flows back to the appellant the service recipient. Therefore the appellants were right in not discharging the service tax on the same. Extended period of limitation - HELD THAT - As the issue came to be settled by a series of judgements by the Tribunal at a later date there are reasons to believe that the appellants could have entertained a bona fide belief. Moreover Revenue does not highlight with evidence any act of suppression etc. on the part of the appellants with an intent to evade payment of duty. Moreover the appellants have been filing ST-3 Returns regularly. The Revenue has not made out any case for invocation of extended period. Conclusion - The appellants correctly excluded the reimbursed WHT from the assessable value for VISA and that the demand for the extended period was unsustainable. Appeal allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the Withholding Tax (WHT) paid by the appellants in respect of services received from VISA and MasterCard forms part of the assessable value for service tax under the Reverse Charge Mechanism.
• Whether the appellants are entitled to claim that the demand for service tax is time-barred due to the invocation of the extended period without sufficient evidence.
• Whether the appellants are liable for penalties under Sections 77 and 78 of the Finance Act, 1994, given the circumstances of their case.

ISSUE-WISE DETAILED ANALYSIS

1. Inclusion of Withholding Tax in Assessable Value

• Relevant Legal Framework and Precedents: Section 67 of the Finance Act, 1994, defines the value of taxable services as the gross amount charged by the service provider. The Tribunal considered precedents such as Bhayana Builders and Intercontinental Consultants and Technocrats Pvt. Ltd., which emphasize that only amounts charged for the service provided should be included in the taxable value.
• Court's Interpretation and Reasoning: The Tribunal noted that the agreements with VISA and MasterCard were distinct regarding the reimbursement of WHT. For MasterCard, the WHT was not reimbursed, while for VISA, it was reimbursed upon submission of proof. Therefore, the WHT paid to MasterCard was part of the consideration, whereas for VISA, it was not.
• Key Evidence and Findings: The Tribunal found that the appellants paid service tax on the grossed-up value for MasterCard, but not for VISA, due to the reimbursement arrangement.
• Application of Law to Facts: The Tribunal applied Section 67 and relevant case law to conclude that the WHT reimbursed by VISA did not form part of the assessable value, while the WHT for MasterCard did.
• Treatment of Competing Arguments: The Tribunal rejected the Department's argument that all expenses, including WHT, should be included in the assessable value, emphasizing the distinction based on reimbursement.
• Conclusions: The Tribunal concluded that the appellants correctly excluded the reimbursed WHT from the assessable value for VISA but should have included it for MasterCard.

2. Time-Barred Demand and Penalties

• Relevant Legal Framework and Precedents: The Tribunal considered the provisions of Section 73 of the Finance Act, 1994, regarding the extended period for issuing a show cause notice and the imposition of penalties under Sections 77 and 78.
• Court's Interpretation and Reasoning: The Tribunal found no evidence of suppression or intent to evade tax by the appellants, as they regularly filed returns and the issue was subject to interpretation based on evolving case law.
• Key Evidence and Findings: The Tribunal noted that the appellants had paid the service tax for the period in question before the issuance of the show cause notice, indicating a lack of intent to evade tax.
• Application of Law to Facts: The Tribunal applied the principles of bona fide belief and the absence of suppression to conclude that the extended period could not be invoked.
• Treatment of Competing Arguments: The Tribunal rejected the Department's argument for invoking the extended period and imposing penalties, citing the lack of evidence for suppression.
• Conclusions: The Tribunal concluded that the demand for the extended period was unsustainable, and no penalties were warranted.

SIGNIFICANT HOLDINGS

• Core Principles Established: The Tribunal reiterated that only amounts charged for the service provided should be included in the assessable value for service tax. Reimbursed expenses do not form part of the consideration.
• Final Determinations on Each Issue: The Tribunal allowed the appeal, holding that the appellants correctly excluded the reimbursed WHT from the assessable value for VISA and that the demand for the extended period was unsustainable.