2006 (10) TMI 4 - AT - Service Tax

Service Tax Demand Gross receipts cannot be subject to service tax as part of the amount is on account of reimbursable expenses

Issues:
1. Service tax liability on gross receipts for consultancy services.
2. Application of penalties under Section 76 and Section 78 of the Finance Act, 1994.
3. Invocation of longer period for recovery of service tax.
4. Exclusion of reimbursable expenses from service tax.
5. Interpretation of relevant notifications exempting service tax on foreign exchange receipts.

Analysis:

1. Service tax liability on gross receipts for consultancy services:
The appellants were engaged in providing Project Coordinating Consultancy Services (PCC) for a highway improvement project. The dispute arose regarding the service tax liability on the gross receipts received by the appellants. The Revenue contended that service tax was payable on the entire amount received from the client, while the appellants argued that certain services provided did not fall under the category of Consulting Engineering Services. The Tribunal analyzed the scope of services rendered and concluded that not all services were taxable under the category of Consulting Engineering Services. The appellants were found to have correctly paid service tax on their liability, and the demand for differential service tax was held to be unsustainable.

2. Application of penalties under Section 76 and Section 78:
The Original Authority had imposed penalties under Section 76 and Section 78 of the Act without prior permission of the Commissioner. The Tribunal noted that the penalties imposed were excessive and disproportionate, indicating a careless exercise of statutory powers. While acknowledging the purpose of penalties, the Tribunal emphasized the need for exercising proper judgment to avoid the mockery of the judicial delivery system. Consequently, the penalties were set aside, and the appeal was allowed with consequential relief.

3. Invocation of longer period for recovery of service tax:
The lower authorities had invoked a longer period for recovery of service tax, alleging non-filing of ST3 Returns and suppression of facts. However, the Tribunal observed that the appellants had diligently filed their ST3 Returns, providing complete information on amounts received from clients, including reimbursable amounts. The Tribunal concluded that the longer period could not be invoked as there was no evidence of non-disclosure or suppression of facts, thereby rendering a major portion of the demand time-barred.

4. Exclusion of reimbursable expenses from service tax:
The appellants argued that certain reimbursable expenses received from the client were not subject to service tax, citing a DGST Circular and relevant case law. The Tribunal agreed that reimbursable expenses were not taxable and should be excluded from the service tax calculation. The lower authorities' failure to properly scrutinize the information contained in the ST3 Returns led to an incorrect imposition of tax on reimbursable amounts.

5. Interpretation of relevant notifications exempting service tax on foreign exchange receipts:
The Tribunal examined the applicability of Notification Nos. 21/2003-ST and 6/99-ST, which exempted service tax on payments received in convertible foreign exchange. It was found that the lower authorities had not properly considered the implications of these notifications. The Tribunal held that the demand for differential tax was not sustainable both on merits and limitation, and the Commissioner (Appeals) had overlooked critical aspects of the case. Consequently, the impugned order was set aside, and the appeal was allowed with consequential relief.

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