2008 (9) TMI 186 - AT - Service Tax

Utilization of input service credit for payment of tax on Intellectual Property Service received from abroad - during the relevant period, the person who is liable to pay Service Tax and who does not provide any taxable service or does not manufacture final products, shall be deemed to be an output service provider - In view of such a deeming fiction, service tax on such deemed output service can definitely be paid by utilizing the Cenvat credit on input services - demand not justified

Summary

Issues:
1. Utilization of Cenvat credit for paying Service tax on 'Intellectual Property Service'
2. Liability for interest and penalty on delayed payment of Service tax

Analysis:

Issue 1: Utilization of Cenvat credit for paying Service tax on 'Intellectual Property Service'
The case involved a company engaged in the manufacture and sale of garments bearing foreign brand names, receiving 'Intellectual Property Service (IPS)' from foreign companies. The company used Cenvat credit to discharge its Service tax liability on IPS, which was objected to by the revenue department. The Adjudicating Authority held that IPS cannot be considered an 'output service' provided by the company, thus disallowing the use of Cenvat credit. The company contended that as a service receiver, it should be considered a deemed output service provider and entitled to Cenvat credit on various input services, including IPS. The Tribunal noted the definition of 'output service' in the Cenvat Rules and the changes in rules regarding the treatment of IPS as output service. The Tribunal, after considering relevant legal provisions and precedents, concluded that during the relevant period, the company was entitled to use Cenvat credit for paying Service tax on deemed output service like IPS. Therefore, the impugned order disallowing the use of Cenvat credit was set aside, and the company was not liable to pay the demanded Service tax, penalty, or interest.

Issue 2: Liability for interest and penalty on delayed payment of Service tax
Regarding the revenue's appeal on demanding interest and penalty, the Tribunal observed that there was a delay in the company's payment of Service tax, which should have attracted interest as per the statutory provisions. The revenue raised concerns about the adjudicating authority not demanding interest on the delayed payment made in cash. The Tribunal agreed that interest should have been demanded on the delayed amount paid in cash by the company. Additionally, the Tribunal noted that the aspect of penalty proposed in the show cause notice was not addressed by the Commissioner. However, since the Tribunal allowed the company's appeal regarding the Service tax liability, the question of demanding interest or imposing penalties did not arise. Therefore, the Tribunal rejected the revenue's appeal on these grounds.

In conclusion, the Tribunal allowed the company's appeal, setting aside the demand for Service tax and penalties, and rejected the revenue's appeal regarding interest and penalties. The decision was based on the interpretation of relevant legal provisions, precedents, and changes in rules governing the treatment of 'Intellectual Property Service' as an output service for the purpose of utilizing Cenvat credit for paying Service tax.