2016 (12) TMI 1469 - AT - Service Tax

Management or Business Consultant s services - associated enterprises - Rule 6 of the Service Tax Rules, 1994 - whether, the amendment in Rule 6 ibid is retrospective or prospective and whether it would apply 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 - The effect of amendment of Rule 6 ibid is that service tax would be required to be paid by the person liable to pay service tax on the taxable services provided to associated enterprises, even where the consideration for the taxable services provided, is not actually received. In such cases, service tax is required to be paid immediately upon crediting/debiting of the amount in the books of accounts or receipt of payment, whichever event occurs earlier. By incorporating the explanation in Rule 6 ibid, the restriction was imposed for the first time that in case of transaction between associated enterprises, service tax has to be paid immediately on entry of the transaction in the books of account, the said amendment will be considered as prospective in effect, otherwise the doctrine of fairness would be defeated. Further, Notification No. 19/2008 introducing Explanation to Rule 6 ibid, no where specifies that the same will have retrospective application to deal with the past transactions. Appeal allowed - tax demand not sustainable - decided in favor of appellant.

Summary

Issues:
1. Retrospective or prospective application of the amendment in Rule 6 of the Service Tax Rules, 1994.
2. Interpretation of the legislative intent behind the introduction of the explanation clause in Rule 6 ibid.
3. Application of the principle of fairness in determining the retrospectivity of legislation.

Analysis:

Issue 1: Retrospective or prospective application of the amendment in Rule 6 of the Service Tax Rules, 1994:
The case involved a dispute regarding the payment of service tax by an appellant to the Service Tax Department for management consultancy services provided to its associated enterprise. The appellant had booked service fees in its accounts but had not received the payment during the relevant period. The amendment in Rule 6, introduced on 10.05.2008, required payment of service tax immediately upon entry in the books of accounts, even if the consideration was not actually received. The Tribunal analyzed the retrospective or prospective nature of this amendment. It held that since the legislative intent was to prevent tax avoidance, the amendment should be considered prospective. The Tribunal emphasized that the amendment did not specify retrospective application and that applying it retrospectively would go against the principle of fairness. Therefore, it concluded that the service tax demand could not be confirmed for the outstanding service fee not realized during the disputed period, setting aside the impugned order and allowing the appeal in favor of the appellant.

Issue 2: Interpretation of the legislative intent behind the introduction of the explanation clause in Rule 6 ibid:
The Tribunal examined the legislative intent behind the introduction of the explanation clause in Rule 6 of the Service Tax Rules, 1994. It noted that the amendment aimed to address tax avoidance issues related to transactions between associated enterprises. The legislative intent was clarified by the Central Board of Excise and Customs (CBEC) to prevent tax evasion based on non-realization of money from associated enterprises. The Tribunal emphasized that the amendment imposed a new restriction for immediate payment of service tax upon entry in the books of accounts in such transactions. It concluded that this legislative intent supported the prospective application of the amendment to ensure fairness and prevent tax avoidance.

Issue 3: Application of the principle of fairness in determining the retrospectivity of legislation:
In analyzing the retrospectivity of the legislation, the Tribunal applied the principle of fairness. It highlighted that legislation modifying accrued rights or imposing new duties should generally be treated as prospective unless the legislative intent for retrospective application is clear. The Tribunal emphasized that explanatory legislation is typically passed to clarify previous provisions and should not alter existing rights unfairly. Based on this principle, the Tribunal concluded that the amendment in Rule 6, requiring immediate payment of service tax for transactions with associated enterprises, should be considered prospective to uphold fairness and legislative intent. This approach guided the Tribunal's decision to set aside the service tax demand imposed on the appellant.

This comprehensive analysis of the judgment addresses the issues involved, the legal interpretations made by the Tribunal, and the application of relevant principles to arrive at a decision in favor of the appellant.