Whether service tax payable on every foreign remittance without even examining that it is import of service or not?

PJ/Case Study/2015-16/109

Prepared by:- CA Neetu Sukhwani &
Prayushi Jain

CASE STUDY

Introduction:- M/s Curio Carvers, hereinafter referred to as the assessee were engaged in manufacture and export of handicraft items. A show cause notice was issued to them consequent to details obtained from State Bank of Bikaner and Jaipur relating to list of outward remittances made by them. It was alleged that in respect of one transaction wherein the description of the transaction was specified as “CLAIM”, they have imported services and consequently were liable to pay service tax under the reverse charge mechanism. Hence, service tax demand of Rs. 30,563/- was raised against them along with interest and penalties under section 76, 77 and 78 of the Finance Act, 1994. The outcome of the appeal is the subject matter of present case study.

M/s Curio Carvers [OIO No. 46/2015-ST(DEMAND)] Dated 05.05.2013

Relevant Legal Provisions:-

Ø Section 66A of the Finance Act,1994

Ø Section 66C of the Finance Act, 1994

Ø Section 68 of the Finance Act, 1994

Ø Section 69 of the Finance Act, 1994

Ø Section 70 of the Finance Act, 1994

Ø Rule 3 of the Taxation of Services Rules, 2006

Ø Rule 3 of the Place of Provision Rules, 2012

Ø Rule 2(1)(d)(iv) of Service Tax Rules, 1994

Ø Rule 2(1)(d)(i)(g) of Service Tax Rules, 1994

Ø Section 78 of the Finance Act, 1994

Issue Involved:

The following issue was before the Adjudicating authority:-
Whether service tax payable on every foreign remittance without even examining that it is import of service or not?

Brief Facts:- It was alleged that M/s Curio Carvers had made outward remittances of Rs 2,96,728/- for import of services for receiving the Business Auxiliary Services and other services but had not paid the tax amounting to Rs 30,563/- and thereby had contravened the provisions of Section 66,68,69, and 70 of the Finance Act 1994 read with Rule 3(iii) of the Taxation of Services Rules, 2006 and Rule 2(1)(d)(iv) of Service Tax Rules, 1994 read with Section 66A of the Finance Act, 1994 and/ or Rule 3 of the Place of Provision Rules, 2012 and Rule 2(1)(d)(i)(g) of Service Tax Rules, 1994 read with section 66C of the Finance Act 1994. The State Bank of Bikaner and Jaipur, Bhagat ki Kothi, Jodhpur vide letter dated 05.05.2014 provided the list of outward remittances of import of services for the financial year 2007-08 to 2012-13. On scrutiny of the details provided by SBBJ, it appeared that the service provider had made outward remittance for the import of services and paid Rs 2,96,728/- to PIER-1 IMPORT USA but had not discharged their service tax labiality of Rs 30,563/-.

It was alleged by the department that the service receiver had never informed the department about the remittances made in convertible foreign currencies to their service provider for import/ obtaining the service of business auxiliary services and any other taxable services. Thus it appeared that the assessee had failed to declare the receipt of the above taxable services to the jurisdictional officer and suppressed the correct nature of taxable service received by them with intend to evade payment of the service tax on the value of taxable services. It was alleged that they had not taken registration under Rule 4 of Service Tax Rules, 1994.

As from the above facts it appeared that they as a service recipient had willfully, deliberately suppressed the correct nature and value of taxable service received by them from the company based outside India and failed to determine and pay service tax with an intent to evade payment of Service Tax in contravention of the various provisions of the Finance Act, 1994. Therefore the extended period was revoked by department and accordingly issued the show cause notice as to why:-

1)    Service tax amounting to Rs. 30,563/- should not be demanded and recovered from them in terms of proviso to section 73(1) of the Finance Act, 1994.

2)    Interest should not be recovered from them as per applicable rate on the amount of service tax mentioned above under Section 75 of the Finance Act, 1994.

3)    Penalty should not be imposed upon them in terms of Section 76 of the Finance Act, 1994 for nonpayment of tax dues.

4)    Penalty should not be imposed upon them under the provisions of section 77 of the Finance Act, 1994 for failure to file service tax returns by due dates.

5)    Penalty should not be imposed upon them under section 78 of the Act for willful suppression of the facts with intent to evade payment of tax dues and for contravention of various provisions of the Finance Act, 1994 and rules made there under.

Assessee’s Contention:-The assessee made following contentions before the adjudicating authority:-

The impugned show cause notice issued was wholly and totally erroneous and was liable to be set aside.

They submitted that it had been alleged that they had not paid service tax on the service imported by them for which they were liable to pay service tax under the reverse charge mechanism. It was being stated that on scrutiny of the details provided by the SBBJ, they had made outward remittance for import of service but had not discharged their service tax liability. In this respect, they submitted that they did not deny the remittance made by them to the foreign party, PIER 1 IMPORT USA as listed in the impugned show cause notice but they submitted that there was no service tax liability on the transaction mentioned in the impugned show cause notice. They submitted that for a transaction to be leviable to service tax, it was necessary that it is in the nature of service and is not specifically exempted. They submitted that there was no service tax payable on the transaction mentioned and the impugned show cause notice was devoid of merits and was liable to be quashed.

They submitted that the transaction dated 17.04.2009 pertaining to PIER 1 IMPORT USA amounting to USD 5958.39 pertained to payment made by them in lieu of shortages found in the goods dispatched by them and the claim for damages made by the buyer. They submitted that out of the above stated amount, $ 718.39 was being claimed as there was shortage in the quantities received by the buyer and the said fact was clear from the correspondence made via mail. They submitted that it had been clearly mentioned in the correspondence made via mail that as total quantity of 256 was received short, the buyer claimed 718.39 US $. Further as regards the balance amount of 5240 US$ was concerned, the same also pertained to claims for improper supply of goods made to them. They submitted that PIER 1 IMPORT USA was their buyer of goods and did not provide any service to them. As such, no service tax was leviable on the transactions made with their buyer that were purely in the nature of sales or claims for shortages in the quantities dispatched by them. Therefore, the impugned show cause notice demanding service tax was not at all tenable and deserved to be quashed. They were unable to submit the supporting documents such as purchase order etc., as their unit had been closed and the matter pertains to transactions conducted in the year 2009.

They further submitted that as in view of the above discussion, the service tax demand itself was not sustainable; the question of paying interest at the applicable rate under section 75 did not arise. Hence, the impugned show cause notice deserved to be set aside.

They further submitted that the impugned show cause notice had been issued by invoking the extended period of limitation on the ground that they had suppressed the correct nature and value of taxable service received by them from the company based outside India. In this respect, they submitted that from the above cited submissions, it was very much clear that there was no service tax liability on the specified transactions and as such, there was no good reason to hide or suppress any information from the revenue department so as to invoke the extended period of limitation. As such, when there was no service tax liability, the charge of suppression is not sustainable and so the impugned show cause notice is barred by limitation.

Furthermore, when any information was not required to be provided, its non submission cannot be alleged as suppression as held in following cases:-

Ø APEX ELECTRICALS PVT. LTD. VS UNION OF INDIA [1992 (61) E.L.T. 413 (GUJ.)]:-
“Demand - Limitation - Suppression - Information not required to be supplied under law if not supplied does not amount to suppression - Proviso to Section 11A(1) of Central Excises and Salt Act, 1944.”
Ø PROLITE ENGINEERING CO. VS UNION OF INDIA [1995 (75) ELT 257 (GUJ.)]:-
“Demand - Limitation - Non-disclosure of information which is not required to be disclosed or recorded by statutory provision or prescribed proforma does not amount to suppression or concealment - Extended period of limitation not invokable - Proviso to Section 11A(1) of Central Excises & Salt Act, 1944 - Rules 9(2) and 57-I of Central Excise Rules, 1944.”
An analysis of both of these decisions given by hon’ble High Courts made it clear that the information not required to be submitted under law does not amount to suppression. In the instant case, the assessee were not required to provide the details of transactions on which no service tax was payable by them. As such, non providing of information not required to be provided under law, does not amount to suppression. Therefore, in the light of above decisions, the allegation of suppression is not sustainable and the demand is barred by the clause of limitation.
They further submitted that invocation of extended period of limitation was not justified in their case in the light of decision of hon’ble Supreme Court in the case of Rainbow Industries v/s. CCE [1994 (74) ELT 3 (SC)] wherein it had been held that for invoking the extended period, two ingredients were essential – (i) Wilful suppression, mis-declaration, etc. and (ii) Intention to evade payment of duty. In absence of both of these extended period cannot be invoked. This was also held in the case of Chemphar Drug & Limits reported in (2002-TIOL-266-SC- CX) - [1989 (40) E.L.T. 276 (S.C.)] that extended period of limitation can only be invoked in case of fraud, collusion, suppression or willful misstatement. In absence of these essential ingredients, extended period cannot be invoked. Verdicts of hon’ble Supreme Court held as under:-
“Demand – Central Excise – Limitation –Invoking extended period of five years – something positive other than mere inaction or failure on part of the manufacturer or producer or conscious or deliberate withholding of information when the manufacturer knew otherwise, is required before it is saddled with any liability, before the period of six months.”
Thus, in the light of above decision, extended period cannot be invoked blindly in every case. Where the assessees have been acting in the boundaries of law, the extended period cannot be invoked. Similar decision is given in the following cases:-
Ø PUSHPAM PHARMACEUTICALS COMPANY VS. CCE, MUMBAI ( 2002-TIOL-235-SC-CX )
Ø LARSEN & TOUBRO LTD. Versus COMMISSIONER OF C. EX., PUNE-II [2007 (211) ELT 513(S.C.)]
Ø PADMINI PRODUCTS vs. CCE[1989 (43) ELT 195 (Supreme Court)]

In the above cases, it was held that mere negligence or failure to pay duty on part of assessee was not sufficient to invoke the extended period of limitation. It should be proved that there was suppression of facts with intent to evade payment of service tax. This was not the case here. We had rightfully not paid service tax on the specified transaction as no service tax was payable on the said transaction and were also not required to disclose the information separately to the department. As such, this was not the case of suppression. Thus, the extended period was wrongly invoked
They further submitted that no penalty was imposable under section 78 of the Finance Act, 1944. It was submitted in the preceding paragraphs that there was no suppression of facts and so the extended period of limitation was not invocable. They submitted that when it had been established that there was no fraud, collusion or wilful mis-statement or suppression of facts with malafide intention, then the penalty under section 78 cannot be imposed. Hence, the proceedings initiated vide the impugned show cause notice were not at all tenable.
Moreover, mere stating the Section/Rule was not sufficient and rather, the specific clause along with proper reasoning was required to be given in the show cause notice so as to impose penalty on the assessee. In this regard, reliance was placed on the recent judgment of Hon’ble Madras High Court, wherein the appeal filed by the Revenue for imposition of penalty under section 11AC was dismissed on account of the fact that there was no discussion as regards the various requirements which were necessary for the purpose of levy of penalty under Section 11AC of Central Excise Act 1944. They submitted that as the section 11AC of the Central Excise Act, 1944 was similarly worded as section 78 of the Finance Act, 1994, the ratio of the below cited decision was squarely applicable in the present case also. The citation and the synopsis were reproduced as follows for the sake of convenient reference:
·         CCE vs M/s Crocodile India Pvt Ltd. [2013-TIOL-518-HC-MAD-CX]:
CE - Reversal of CENVAT Credit before issue of Show Cause Notice - SCN does not detail grounds for imposing penalty application of Section 11AC would depend upon the existence or otherwise of the conditions expressly stated in the section - No penalty : A cursory reading of the notice shows that except for mere reference to the proposal to levy penalty under Section 13(1) of CENVAT Credit Rules, 2002, there is no discussion as regards the various requirements which are necessary for the purpose of levy of penalty under Section 11AB of Central Excise Act 1944. The Apex Court pointed out that the application of Section 11AC would depend upon the existence or otherwise of the conditions expressly stated in the section, once the section is applicable, the concerned authority would have no discretion in quantifying the amount and penalty must be imposed equal to the duty determined under sub-section (2) of Section 11A. In so holding, the Apex Court held that in every case of non payment or short payment of duty, penal provisions cannot be automatically invoked; in other words, the conduct of the assessee in each of the case, before imposing penalty, has to be looked at on the bona fides of the assessee as regards his claim which otherwise would not be sustained in law. - Revenue Appeal Dismissed : MADRAS HIGH COURT.
In this case also, mere reference had been made to the provisions of section 78 without even specifying the clause under which penalty was imposable on them. As such, no penalty was imposable on them under section 78 and the impugned show cause notice should be quashed.

It was also submitted that when there was no malafide intention to evade duty or to suppress facts from the department, penalty was not imposable in view of Supreme Court judgment given in the case of Hindustan Steel Vs. State of Orissa [1978 2 ELT J 159 (Supreme Court)]. In this case it was held that an order imposing penalty for failure to meet statutory obligation was a result of proceedings which were quasi judicial in nature and penalty should not ordinarily be imposed unless the person acted deliberately in defiance of law or was guilty of misconduct or dishonest or acted in conscious disregard of his obligation. In view of Supreme Court judgment, since intention to evade payment of duty was not there, penal provisions could not be invoked.
They also submitted that in view of proviso inserted in Section 78, w.e.f. 10.05.2008, it was specifically stated that :
“Provided further that if the penalty is payable under this section, the provisions of section 76 shall not apply.”
Therefore, in view of the specific provision in the Act w.e.f., 10.05.2008, simultaneous imposition of penalties under section 76 & 78 was not warranted. They further submitted that the service tax demand raised in the impugned show cause notice pertained to period 2009-10 and the amendment in section 78 had been made effect from 10.05.2008, but even then, penalties under both sections had been proposed. They further submitted that the present show cause notice that had been issued on the basis of old provisions was not at all sustainable and deserved to be set aside. Moreover, there were many judicial pronouncements that have concluded that simultaneous imposition of penalties under section 76 & 78 was not proper even for the period prior to the amendment. As such, the impugned show cause notice proposing to impose penalties under both the sections 76 and 78 was bad in law and is liable to be quashed.

Reasoning of judgment:-It was found that the show cause notice was issued on the basis of list of outward remittance for import of services received in reply to the Superintendent Central Excise (Service Tax) Range-1, Jodhpur’s Letter No. CE-5/ST-II/JDR/Remittance/9/12/Pt./87 dated 03.04.2014 wherein the bank stately furnished “the details of ST w.e.f 2007-08 to 2012-13 along with address of senders.” It was found that the details so furnished by the bank were in the form of a tabular list having column viz date, payee, foreign currency, amount, i.e. in foreign currency amount in INR i.e. Indian Rupees, sender’s name and address and purpose of remit which have been briefly stated such as commission, law charges, reg charges, Education fee, charges, investment in shares, protesting charges, family maintain, lab testing chg, exhibition fees, books of stall, rent on building, export claim, NAC, refund claim, loan, tuition fee, gift, excess payment refunded, hotel booking, commission and erection charges, professional fees, purchase of carton label, over payment return by DR note, participation in fair, design and sample charges, adv for ocean freight, for US sales tax no, Comm on sales, service charges to marketing agent, cancellation of export order, payment of DR note, law labour fees, claim against export, cost of registration, fair charges, rent on furniture, chg for electricity connection, adv refunded. It was also found that the entry in the above list against which this Show Cause Notice was issued contained “purpose of remit” as “CLAIM”.
It was found that only document relied upon for issuance of the Show Cause Notice was the “List of Outward Remittances for Import of Services” received in the reply to the Superintendent, Central Excise (Service Tax) Range-1, Jodhpur’s letter no. CE-5/ST-II/JDR/REMITTANCE/9/12/Pt./87 dated 03.04.20154 wherein the bank furnished “the details of ST w.e.f. 2007-08 to 2012-13 along with the address of senders.”
It was found that there was no substance in the allegation brought out in the show cause that “the remittance made in convertible foreign currencies to their service provider for import/ obtaining the service of Business Auxiliary Services” and any other service as the document available on record do not demonstrate or even indicate any event of receipt of service. As such a demand of service taxes was not sustainable/survives.
Even from the bare perusal of the copy of Email dated 02.12.2008 and copy of email 27.03.2009 and list of remittance furnished by the bank, it was clear that the amount of $ 5958.39 which also includes $718.39 was in connection with exportation of goods and not for any services.
Accordingly order was passes by vacating the demand and dropping the proceedings of Show Cause Notice.

Decision:-Show Cause notice dropped.

Conclusion:- The substance of this case is that each and every transaction of foreign remittance cannot be levied to service tax by blindly treating the same as import of service. For any transaction to be leviable to service tax it is necessary that the same falls under the defination of service. In the present case the transaction was related to the payment of damages to the buyer due to short supply of goods. This transaction had no relation with provision of service and could not be considered as import of service. When the transaction was not concluded as import of service, the question of paying service tax on the same under reverse charge mechanism does not arise.

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PJ/Case Study/2015-16/109
25 July 2015

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