2022 (5) TMI 141 - AT - Service Tax

Valuation - amount of withhold tax paid by the Appellant, over and above the consideration paid to the foreign service providers, to be included in the assessable value or not - import of services - reverse charge mechanism - period from May 2006 to March 2010 - recovery of CENVAT Credit on various input services availed in connection with the construction of the hotel. Service Tax liability on the withholding tax component - HELD THAT - It is true that, the issue is covered in favour of the Appellant in various decisions relied upon by the learned counsel for the Appellant. However, it is observed that, the issue as to how the withholding tax paid in India would be treated by the Foreign Service provider, while determining his tax liabilities, has not clearly come out in those decisions - With regard to limitation, the decision in M/S. T.V.S. MOTOR COMPANY LIMITED VERSUS COMMISSIONER OF CENTRAL EXCISE SERVICE TAX, CHENNAI 2021 (9) TMI 81 - CESTAT CHENNAI , is squarely applicable to this case, where it was held that when the TDS amount has been borne by the assessee and only the consideration for the services as agreed upon by the parties has been paid to the service provider, the same cannot be included in the taxable value for determining the Service Tax liability. The demand of Service Tax of Rs.10,24,257/- for the period May 2006 to March 2010, by way of issue of SCN on 08.06.2011, by invoking the extended period of demand, is not sustainable, in the absence of any justification for invoking the extended period. Accordingly, the above demand of Service Tax, along with demand interest and penalties is set aside as time barred. CENVAT Credit - HELD THAT - During the relevant period, the definition of the term input service specifically covered services used in relation to setting up of the premises of the provider of output services . The reliance placed by the Commissioner on CBEC Circular No.98/1/2008 dated 04- 01-2008, is not sustainable in as much as the said circular has been held to be contrary to the provisions of law, in several judgments. It is a fact on record that these services were used for construction of hotel premises, from which various taxable services would be provided by the Appellant, after completion of construction - The definition of the term input has been amended from 07.07.2009 so as to specifically exclude the goods used for construction of immovable property from the scope of inputs , whereas there is no such restriction in the definition of input service . Even though there was an observation in the impugned order that the disputed credit has been reversed voluntarily by the Appellant, admitting their ineligibility to credit, the said observation is effectively countered by the learned counsel for the Appellant, by drawing reference to the reply to the SCN and written submissions. The demand for denial of CENVAT Credit is not sustainable in law. Since the demand itself is not sustainable, the demand of interest and imposition of penalty are also liable to be set aside. Since the credit has already been reversed, the Appellant is entitled for consequential relief as per Section 142 (6)(a) of CGST Act, in view of the introduction of GST - Appeal allowed.

Summary

Issues Involved:
1. Service Tax liability on withholding tax component.
2. Denial of CENVAT Credit on various input services used for the construction of a hotel.

Analysis:

1. Service Tax liability on withholding tax component:
The Appellant was constructing a seven-star hotel and availed services from foreign and domestic providers. The Commissioner confirmed a Service Tax demand of Rs. 10,24,257, including interest and penalties, on the grounds that the "withhold tax" paid by the Appellant should be included in the taxable service value. The Appellant argued that under Rule 7 of the Service Tax (Determination of Value) Rules, 2006, the value of taxable services from outside India should be the actual consideration charged. They contended that withholding tax, calculated by grossing up the actual consideration, should not be included in the taxable value. The Appellant cited several decisions supporting their stance, including Garware Polyester Ltd., Magarpatta Township Dev. & Cons. Co. Ltd., and Hindustan Oil Exploration Co. Ltd. The Department countered by asserting that withholding tax should form part of the consideration under Section 67 of the Finance Act, 1994, and Rule 7 of the Service Tax Rules. The Tribunal, referencing the TVS Motor Company Ltd. case, found that the demand was time-barred due to the interpretational nature of the issue and the lack of wilful suppression. Thus, the Service Tax demand, interest, and penalties were set aside as time-barred.

2. Denial of CENVAT Credit on various input services:
The Commissioner disallowed CENVAT credit of Rs. 5,27,64,905 availed by the Appellant on input services like architect services, consulting engineering services, etc., used in the construction of the hotel, citing that the resulting immovable property (hotel) was not eligible for credit. The Appellant argued that during the relevant period, the definition of 'input service' under Rule 2(l) of the CENVAT Credit Rules, 2004, included services used for "setting up of the premises of the provider of output service." They contended that after the hotel's construction, it would provide various taxable services, making the credit admissible. The Appellant cited several decisions, including Sai Samhita Storages Pvt. Ltd., Mundra Port & Sez Ltd., and Lemon Tree Hotels Pvt. Ltd., supporting their claim. The Tribunal found that the Commissioner's reliance on CBEC Circular No. 98/1/2008 was unsustainable, as the circular was contrary to several judicial decisions. The Tribunal held that the input services used for constructing the hotel premises, which would provide taxable services, were eligible for CENVAT credit. Consequently, the denial of CENVAT credit, along with interest and penalties, was set aside. The Appellant was entitled to consequential relief under Section 142 (6)(a) of the CGST Act due to the introduction of GST.

Conclusion:
The appeal was allowed, setting aside the Service Tax demand on the withholding tax component as time-barred and reversing the denial of CENVAT credit on input services used for constructing the hotel. The Appellant was granted consequential relief in accordance with the CGST Act.