2018 (2) TMI 156 - AT - Service Tax

Banking and Other Financial Services - the assessee raised funds through issue of Foreign Currency Convertible Bonds (FCCB) in capital markets through overseas lead arrrangers to whom they paid charges in the form of upfront fee, management fee, commitment fee, underwriting fee, out-of-pocket expense, legal fee etc. - period involved is after 18.4.2006 - reverse charge mechanism - Held that - The Tribunal in assessee s own case M/s. Sakthi Sugars Ltd Versus Commissioner of Central Excise, Salem 2017 (9) TMI 30 - CESTAT CHENNAI , has held that the demand on said legal fees cannot sustain for the reason such charges will not fall under Banking and Financial services and that such service has become taxable only with effect from 1.9.2009 - the demand on legal fees requires to be set aside. For the limited purpose of requantification of the demand, eliminating legal fees, the matter is remanded to the original authority - appeal allowed by way of remand.

Summary

Issues:
- Liability to pay service tax under reverse charge mechanism for charges paid to overseas lead arrangers
- Applicability of service tax on legal fees paid to overseas arrangers
- Imposition of penalties under sections 76 and 78 of the Finance Act, 1994

Analysis:

1. Liability to pay service tax under reverse charge mechanism for charges paid to overseas lead arrangers:
The case involved the issue of whether the appellant was liable to pay service tax under Banking and Other Financial Services for charges paid to overseas lead arrangers. The Tribunal analyzed the situation post-April 18, 2006, and considered the legal fees paid to overseas arrangers. It was established that the demand on legal fees did not fall under Banking and Financial services and became taxable only from September 1, 2009. The Tribunal also addressed the penalties imposed, highlighting the uncertainty regarding the liability to pay service tax under the reverse charge mechanism during the relevant period. The judgment in the case of Indian National Shipowners Association clarified the issue, confirming that the penalties were unwarranted.

2. Applicability of service tax on legal fees paid to overseas arrangers:
The Tribunal examined whether the legal fees paid by the appellant to overseas arrangers should attract service tax. It was determined that such charges did not fall under Banking and Financial Services and were only made taxable from September 1, 2009. Consequently, the demand on legal fees was set aside, and the matter was remanded for the re-quantification of the demand, excluding legal fees. The Tribunal emphasized that the demand on all services and fees, except legal fees, was to be maintained.

3. Imposition of penalties under sections 76 and 78 of the Finance Act, 1994:
Regarding the penalties imposed under sections 76 and 78 of the Finance Act, 1994, the Tribunal considered the arguments presented by the appellant's counsel. It was acknowledged that there was significant controversy surrounding the liability to pay service tax under the reverse charge mechanism before the introduction of Section 66A in the Finance Act. The Tribunal, citing the judgment in the case of Indian National Shipowners Association, concluded that the penalties were unjustified. The decision to set aside the penalties was based on the availability of credit on the service tax paid on input services, leading to a revenue-neutral situation.

In conclusion, the Tribunal allowed the appeal filed by the assessee, setting aside the demand on legal fees and dismissing the appeal filed by the department. The decision was based on the precedent set in a similar case and the clarification regarding the imposition of penalties under the relevant sections of the Finance Act, 1994.