2008 (11) TMI 105 - AT - Service Tax

Appellant availed External Commercial Borrowings from non-resident lenders, and had paid certain fees/charges for arranging ECB appellants contention that entire exercise is Revenue neutral and omission has occurred because of lack of coordination between Head office & factory, is acceptable - appellants have lost by making a mistake as they have paid more than Rs. 34 lakhs as interest which is not available to them as credit SCN need not have been issued penalty set aside

Summary

Issues:
- Applicability of service tax on External Commercial Borrowings
- Coordination issues leading to non-payment of service tax
- Revenue neutrality and intention to evade payment of tax
- Interpretation of Section 73(3) of the Finance Act, 1994
- Imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994

Analysis:

1. Applicability of service tax on External Commercial Borrowings:
The case involved M/s. Essar Steel Ltd. availing External Commercial Borrowings (ECB) from non-resident lenders, leading to the payment of certain fees/charges for arranging ECB. It was established that the service received fell under the category of 'Banking and other Financial Services,' making the appellant liable to pay service tax. The appellant had submitted details of the service received, relevant agreements, and documents to the Directorate General of Central Excise Intelligence (DGCEI). The adjudicating authority confirmed the demand for service tax, interest, and imposed penalties under Sections 76, 77, and 78 of the Finance Act, 1994.

2. Coordination issues leading to non-payment of service tax:
The appellant argued that the omission to pay service tax occurred due to a lack of coordination between the company's headquarters in Bombay and the factory in Hazira, Surat, where the transaction relating to ECB was handled. The appellant contended that the levy was a new one and emphasized that they had promptly paid the service tax upon realization, entitling them to Cenvat credit. The appellant highlighted the Revenue neutrality of the exercise, citing their substantial payment of Central Excise duty as evidence of their compliance.

3. Revenue neutrality and intention to evade payment of tax:
Both parties presented contrasting views on Revenue neutrality as the sole criterion for assessing liability. The appellant stressed that the Revenue-neutral nature of the exercise, coupled with the lack of intention to evade tax, should be considered. The Revenue, however, argued that liability assessment should not solely rely on Revenue neutrality and questioned the appellant's explanation regarding lack of coordination.

4. Interpretation of Section 73(3) of the Finance Act, 1994:
The appellant referenced Section 73(3) of the Finance Act, 1994, which states that if service tax is paid before the issuance of a notice, the Central Excise officer should not serve any notice. The appellant also cited a Supreme Court decision to support their argument that in Revenue-neutral cases, delving into classification and other issues may not serve a purpose.

5. Imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994:
The Tribunal, after considering the arguments from both sides, found merit in the appellant's contentions. The lack of coordination between the company's offices led to the omission to pay service tax, resulting in the appellant's loss of over Rs. 34 lakhs as interest, not available as Cenvat credit. The Tribunal concluded that there was no intention to evade payment of duty, and penalties under Section 78 of the Finance Act, 1994, were not justified. The appellant was granted the benefit of Section 80 of the Finance Act, 1994, regarding penalties under other sections. The duty and interest already paid were confirmed, while the imposed penalties were set aside, leading to the disposal of the appeal and stay petition.