2023 (10) TMI 995 - AT - Service Tax

Nature of services - Professional services or existence of employee / employer relationship - services received by it from foreign companies in the capacity of recipient of services - demand of service tax alongwith interest and penalties u/s 77 and 78 of FA. The Principal Commissioner confirmed the demand of service tax on the amount paid to Pual Cerullo for the reason that the appellant had not submitted evidence to substantiate that Pual was its employee. HELD THAT - The matter need not be remanded as it is evident from the impugned order that the only reason the Principal Commissioner confirmed the demand on the payment made to Pual is that the employment contract and other evidence were not produced before him. The letters of appointment and the termination letter produced before us make it amply clear that Pual was appointed as the Chief Operating Officer. Therefore, the relationship between the appellant and Pual was that of an employer and employee. It is undisputed that the services rendered by an employee to its employer are out of the ambit of service tax. The demand of service tax, therefore, needs to be set aside to the extent of Rs. 9,45,494/- on this count - The remaining amount of Rs. 6,24,074/- with interest is uncontested and needs to be upheld. Penalty u/s 77 of FA - HELD THAT - The penalty under section 77 of Rs. 10,000/- was imposed for the reason that the appellant had not correctly reflected the total amount of service tax due from it. This fact is evident as an amount of Rs. 6,24,074/- was admittedly short paid by the appellant. Penalty upheld. Penalty u/s 78 of FA - HELD THAT - The appellant does not have an intention to evade payment of service tax because by not paying such service tax the appellant would gain nothing - the imposition of penalty under section 78 of the Finance Act cannot be sustained and needs to be set aside. Appeal allowed in part.

Summary

Issues:
The issues involved in the judgment are the demand of service tax on payments made to an employee, imposition of penalties under sections 77 and 78 of the Finance Act, and the evidentiary requirements for establishing employer-employee relationship.

Demand of Service Tax on Payments to Employee:
The appellant, a registered entity providing various services, contested the demand of service tax of Rs. 9,45,494/- on payments made to an individual named Pual Cerullo, claiming he was an employee and such payments should not be taxable under the Finance Act. The Principal Commissioner had confirmed the demand citing lack of evidence to prove the employment relationship. However, the termination letter produced during the appeal clearly indicated Pual was appointed as the Chief Operating Officer, establishing an employer-employee relationship. As services rendered by an employee to the employer are exempt from service tax, the demand of Rs. 9,45,494/- was set aside.

Imposition of Penalties under Sections 77 and 78:
A penalty of Rs. 10,000/- under section 77 was imposed for the appellant's failure to correctly reflect the total amount of service tax due, which was short paid. This penalty was upheld as it was evident from the records. Regarding the penalty under section 78, it was contested by the appellant on grounds of revenue neutrality and lack of evidence to establish fraudulent intent. The Tribunal found that to impose a penalty under section 78, elements of fraud or willful misstatement must be proven. As the entire transaction was revenue neutral and there was no evidence of intent to evade payment, the penalty under section 78 was set aside.

Evidentiary Requirements for Employer-Employee Relationship:
The judgment emphasized the importance of establishing the employer-employee relationship to determine the tax liability on payments made to individuals. It highlighted the significance of providing documentary evidence such as appointment letters, salary details, and termination letters to substantiate the nature of the relationship. Failure to provide such evidence can lead to disputes regarding the tax treatment of payments made to individuals.

In conclusion, the appeal was partly allowed, upholding the demand of service tax on certain payments, confirming the penalty under section 77, and setting aside the penalty under section 78 based on the lack of evidence of fraudulent intent.