2018 (11) TMI 1292 - AT - Service Tax

Penalty u/s 76, 77 and 78 of FA - Non-payment of Service tax - import of services - reverse charge mechanism - It was alleged that the appellants were receiving Intellectual Property Services and Management Consultancy Services from their principals in UK and have not paid service tax on the same - Held that - In the instant case, the appellants have paid penalty of 25% before the issuance of show-cause notice. They had a reasonable belief for the reason that the liability of the service recipient to pay service tax under the reverse charge mechanism was in doubt for everyone in the field during the relevant period. It was only after the Supreme Court s decision in the Indian National Shipowners case 2009 (12) TMI 850 - SUPREME COURT OF INDIA , the issue had attained finality. There were reasons to entertain a reasonable belief. The appellants have also paid the penalty of 25% before the issue of show-cause notice - penalty not imposable - appeal allowed - decided in favor of appellant.

Issues:
1. Liability to pay service tax under reverse charge mechanism on import of services.
2. Applicability of penalties under Sections 76, 77, and 78 of the Finance Act, 1994.
3. Reasonableness of belief for non-payment of service tax.

Analysis:

Issue 1: Liability to pay service tax under reverse charge mechanism on import of services
The appellants, manufacturers of chemicals, received services from their UK principals without paying service tax. The dispute revolved around the applicability of service tax under reverse charge mechanism. The appellants argued that the liability to pay service tax on import of services was effective only from 18/04/2006, citing relevant legal precedents and circulars. They contended that confusion existed regarding the levy of service tax on imported services until the Supreme Court's decision in a specific case. The Tribunal acknowledged the confusion among taxpayers and the finality brought by the Supreme Court's decision, ultimately allowing the appeal due to the reasonable belief held by the appellants.

Issue 2: Applicability of penalties under Sections 76, 77, and 78 of the Finance Act, 1994
The Commissioner had confirmed demands against the appellants, including penalties under Sections 76, 77, and 78 of the Finance Act. The appellants argued against the imposition of penalties, emphasizing their bona fide belief in not paying the service tax. They cited cases where penalties were set aside due to reasonable causes for non-payment of tax. The Tribunal considered the reasonable belief of the appellants, the confusion prevailing in the industry, and the subsequent settlement of the issue by higher courts. Relying on legal principles, the Tribunal found merit in the appellants' arguments and concluded that penalties were not justified in the circumstances.

Issue 3: Reasonableness of belief for non-payment of service tax
The Department contended that the appellants' plea of bona fide belief was not sustainable, emphasizing the need for a well-informed belief for entities of a certain stature. However, the Tribunal found that the appellants had paid a penalty before the show-cause notice, indicating a reasonable belief. The Tribunal highlighted the need for reasonable cause in penalty imposition, as per legal provisions and judicial interpretations. Considering the circumstances, the Tribunal allowed the appeal, emphasizing the necessity of a reasonable cause for failure to pay service tax.

In conclusion, the Tribunal allowed the appeal, emphasizing the confusion in the industry, the reasonable belief held by the appellants, and the subsequent settlement of the issue by higher courts. The decision highlighted the importance of reasonable cause in penalty imposition and provided consequential reliefs to the appellants.

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