2025 (3) TMI 380 - AT - Service Tax

Liability of appellant to pay service tax on selling commission on RCM basis - invocation of extended period in revenue neutral situations - interest and penalties. Liability of appellant to pay service tax on selling commission on RCM basis - HELD THAT - Section 65(105) of the Finance Act 1994 lists the categories of taxable services . Sub-clause (zzb) of the section defines the taxable service as any service provided or to be provided to a client by any person in relation to business auxiliary service . In the instant case it is noted that the service is provided in a country outside India the provisions of Section 66A will also come into play. Section 66A inserted by the Finance Act 2006 contains provisions regarding service tax liability where service is provided by a service provider who is based outside India to a service recipient who is based in India. Section 66A have to be read with the provisions of Rule 2(1)(d)(iv) of the Service Tax Rules 1994 which states that in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under Section 66A of the Act the recipient of such services shall discharge service tax liability. In the instant case it is not disputed that M/s. Parah had provided the service of selling agent to the appellant. The agreement between the appellant and M/s. Parah clearly evidences that the service provider was engaged to provide services of marketing and sale of appellant s products in UAE. The payment made in convertible foreign exchange was under the head selling commission - the services provided by a commission agent are included in the category of taxable service termed as business auxiliary service where service is provided by a service provider who is based outside India to a service recipient who is based in India. Section 66A inserted by the Finance Act 2006 read with the Service Tax Rules 1994 mandate that service tax liability is to be discharged by the service recipient. The Appellants as recipient of taxable service from offshore service providers are liable to pay the service tax under Rule 2(1)(d)(iv) of the Service Tax Rules only. Invocation of extended period of limitation in revenue neutrality situations - penalties - HELD THAT - Mere Non Registration and non filing of return cannot be a reason to dismiss the plea of bonafide belief to non taxable nature of the activity of the appellant in that case. This was followed by coordinate Bench of this Tribunal in Jet Airways (I) Ltd. Versus Commissioner Of Service Tax Mumbai 2016 (8) TMI 989 - CESTAT MUMBAI wherein it was reiterated that the extended period cannot be invoked due to applicability of Revenue neutrality - Penalties imposed under Section 77(2) and 78 is set-aside. Conclusion - i) Service tax on selling commission is liable to paid by the appellant. However the demand for the extended period is held to have been wrongly invoked in view of the discussions on revenue neutrality. (ii) Penalties imposed under Section 77(2) and 78 is set-aside for the same reason. The impugned order stands modified to the extent indicated above and the appeal is allowed partially.

Summary

The judgment from the Appellate Tribunal CESTAT New Delhi involves an appeal by M/s The Indure Private Limited against an order confirming a demand of Rs. 1,99,19,333/- along with interest and penalties. The case primarily revolves around the classification of services for tax purposes and the applicability of service tax under the Reverse Charge Mechanism (RCM) for services received from abroad.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered include:

• Whether the appellant is liable to pay service tax on the selling commission under the Reverse Charge Mechanism?
• Whether the extended period of limitation is applicable in revenue-neutral situations?
• Whether the interest and penalties imposed are justified?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Liability to pay service tax on selling commission under RCM

• Relevant legal framework and precedents: The case hinges on the interpretation of "business auxiliary service" (BAS) under Section 65(19) of the Finance Act, 1994, and the applicability of Section 66A, which deals with services received from outside India.
• Court's interpretation and reasoning: The Tribunal noted that the services provided by M/s Parah International FAZCO were in the nature of marketing and selling, falling under BAS. The appellant's argument that services were provided on a principal-to-principal basis was rejected.
• Key evidence and findings: The Tribunal referred to the agreement between the appellant and M/s Parah, which evidenced the provision of marketing services for the appellant's products in UAE.
• Application of law to facts: The Tribunal concluded that the services received by the appellant were taxable under BAS, and the appellant was liable to pay service tax under RCM as per Section 66A and Rule 2(1)(d)(iv) of the Service Tax Rules, 1994.
• Treatment of competing arguments: The appellant's contention that services were performed outside India and thus not taxable was dismissed, as the tax liability under RCM applies to services received in India.
• Conclusions: The Tribunal held that the appellant is liable to pay service tax on the selling commission received from M/s Parah International FAZCO.

Issue 2: Applicability of the extended period in revenue-neutral situations

• Relevant legal framework and precedents: The Tribunal considered the applicability of the extended period of limitation in cases where the situation is revenue neutral.
• Court's interpretation and reasoning: The Tribunal referred to previous judgments, including those of the Supreme Court, which held that in revenue-neutral situations, the extended period cannot be invoked.
• Key evidence and findings: The Tribunal noted the appellant's argument regarding the availability of CENVAT credit, which would render the situation revenue neutral.
• Application of law to facts: The Tribunal agreed with the appellant that the situation was revenue neutral, as any service tax paid would be available as credit.
• Treatment of competing arguments: The Department's argument that revenue neutrality does not negate the requirement to pay tax was considered but ultimately not upheld in this context.
• Conclusions: The Tribunal held that the extended period of limitation was wrongly invoked due to the revenue-neutral nature of the situation.

Issue 3: Justification of interest and penalties

• Relevant legal framework and precedents: The imposition of penalties was considered under Sections 77(2) and 78 of the Finance Act, 1994.
• Court's interpretation and reasoning: The Tribunal found that penalties were not justified due to the appellant's bona fide belief in the non-taxability of the services and the revenue-neutral nature of the situation.
• Key evidence and findings: The Tribunal noted the appellant's compliance in providing necessary information to the Department and the absence of any malafide intent.
• Application of law to facts: The Tribunal concluded that penalties should not be imposed in cases where the appellant acted under a bona fide belief and the situation was revenue neutral.
• Treatment of competing arguments: The Department's argument for penalties was not upheld due to the lack of evidence of suppression or malafide intent.
• Conclusions: The Tribunal set aside the penalties imposed under Sections 77(2) and 78.

3. SIGNIFICANT HOLDINGS

• Core principles established: The Tribunal reinforced the principle that in revenue-neutral situations, the extended period of limitation is not applicable, and penalties should not be imposed where there is a bona fide belief in non-taxability.
• Final determinations on each issue: The Tribunal held that the appellant is liable to pay service tax on the selling commission under RCM, but the demand for the extended period was not justified. Penalties were also set aside.

The impugned order was modified accordingly, with the appeal being allowed partially, reflecting the Tribunal's findings on each issue. The Tribunal's decision underscores the importance of considering the nature of services, the applicability of tax laws, and the impact of revenue-neutral situations on tax liability and penalties.