Payment of Service tax from Cenvat Credit

PJ/CASE STUDY/2011-12/39

04 January 2012

Payment of Service tax from Cenvat Credit - Import of Service

PJ/Case Study/2011-12/39

CASE STUDY

Prepared By:
CA Pradeep Jain and
Sukhvinder Kaur LLB [FYIC]

Introduction:-

In the case of import of service, the liability to pay the service tax is on the recipient of service under the reverse charge method. The provisions of Section 66A of the Finance Act, 1994 and Rule 2 (1) (d) (iv) of the Service Tax Rules, 1994 impose the liability on the service recipient located in India by treating the said service as an output service. The major debate involved herein is that whether the service recipient can utilize the cenvat credit rightfully earned by him to discharge the service tax liability. Revenue has denied the availment of cenvat credit for paying the service tax on the ground that the service is treated as an output service only by legal fiction and the payment of the service received from abroad is to be made in cash. In the case under study, the High Court has dealt with this issue.

Legal Provisions:-

- Section 66A of the Finance Act, 1994: -

66A. (1) Where any service specified in clause (105) of section 65 is,—

(a) provided or to be provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and

(b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India, such service shall, for the purposes of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provisions of this Chapter shall apply:

Provided that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply:

Provided further that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.

(2) Where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purposes of this section.

Explanation 1.— A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country.

Explanation 2.—Usual place of residence, in relation to a body corporate, means the place where it is incorporated or otherwise legally constituted.
- Rule 2 (1) (d) (iv) of the Service Tax Rules, 1994: -

(d) "person liable for paying the service tax" means -

(i) …….

(ii) ………

(iii) …………

(iv) 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 service;

Commissioner of Service Tax v/s M/s Aravind Fashions Ltd
[2011-TIOL-748-HC-KAR-ST]

Brief Facts:-

- The Assessee is a company engaged in the manufacture and sale of ready made garments bearing the brand name like ‘Wrangler’ and ‘Lee’ which belong to foreign companies.

- The foreign companies provided Intellectual Property Service (IPS) with effect from 10.09.2001 to the assessee and the assessee company being the service provider was made liable to pay service tax in terms of Section 68 (2) of the Finance Act read with Rule 2 (1) (d) (iv)of the service Tax Rules, 1994.

- Assessee filed revised returns and used credit relating to other input services such as advertisement, freight, manpower recruitment, courier services, maintenance, repair and construction services for discharging Service Tax under the category of ‘Intellectual Property Service’ in the capacity of the service receiver.

- Revenue issued show cause notice to the assessee on the ground that that cenvat was wrongly used for paying Service Tax on ‘Intellectual Property Service’ purported service when he is not a service provider but the receiver of service.

- The Adjudicating Authority overruled the objections of the assessee and the demand was confirmed.

- Aggrieved appellant filed appeal before the Tribunal.

- The Tribunal held that though the assessee is a recipient of services in law as the service provider is outside the country he is deemed to be the service provider and tax is levied on him. But to discharge that liability he can use the Cenvat credit which is to his credit and therefore, the Tribunal set aside the order passed by the Commissioner.

- Aggrieved by the said order, Revenue is in appeal before the High Court.

Reasoning of the High Court:-

The High Court held that in the instant case, though the assessee is the recipient of service tax, the service provider is outside the country. In law, he is treated as a service provider and is levied tax. In other words, the liability to pay tax on the service which he has received is foisted on him under law. It is to discharge the liability he is entitled to use the cenvat credit which was available with him and therefore the Tribunal was justified in interfering with the order passed by the Commissioner.

- In that view of the matter, the Tribunal held that there is no merit in appeal of the Revenue.

- With regard to penal liability, it was held that as there is no liability to pay tax the question of imposing penalty would not arise.

- The High Court answered the substantial question of law in favour of the assessee and against the Revenue.

Decision of the High Court:-

Appeals dismissed.

Conclusion:-

This judgment of the High Court has a far reaching effect. The assessee who has rightfully accumulated cenvat credit can utilize it to discharge the liability cast upon him vide Section 66A of the Finance Act, 1994 read with Rule 2 (1) (d) (iv) of the Service Tax Rules, 1994.

******

Comments

PJ/CASE STUDY/2011-12/39
04 January 2012

Post a Comment

Query