Whether the service recipient is liable for service tax for services received from abroad prior to 18.4.2006?

CASE STUDY

Prepared By:
C.A.Rajani Thanvi
Bharat Rathore

Introduction: -

There are some services which have not been taken into the net of service tax. As and when these will be included in the category of taxable services, the service providers were become liable for the service tax on the same. But the tax on any service cannot be demanded from the assessee for that period in which these services were not covered in the taxable services. This is the issue in the following case under study :-

In the matter of M/s Lucid Colloids Ltd.,Jodhpur
[Order-In-Original no. 767/ST/2009-10] dt. 19.8.2010

Relevant Legal Provisions: -

Section 66A of Finance Act, 1994(inserted w.e.f. 18.04.2006)

1(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 betreated as the country from which the service is provided or to be provided.

Section 69(1) of Finance Act, 1994:-

“69(1)Every person liable to pay the service tax under this Chapter or the rules made thereunder, shall, within such time and in such manner an in such form as may be prescribed, make an application for registration to the Superintendent of Central Excise.”

Brief facts of the case: -

The Noticee is registered with service tax department. The noticee received Business Auxiliary services from abroad during the period from 01/01/2005 to 16/06/2005. In this regard the noticee paid an amount to that outside firm and did not pay service tax on the same whereas as per Rule 2(1) (d) (V) of Service Tax Rules, 2004 read with notification no. 36/2004-ST dated 3.12.2004. The Noticee is service receiver and he has to pay service tax. By this act it contravened the provision of Section 66 & 68 of Finance Act, 1994.

Noticee’s Contentions: -

Noticee replied to the Show Cause Notice on the following contentions:

The noticee submit that theyhave received services from the overseas Agent during the period 01.01.2005 to 16.06.2005 and they were correct in not paying the Service Tax amount involved in this period. In this respect it is submitted that the services rendered by the offshore agents were brought into the purview of Service Tax by insertion of Section 66A in the Chapter V of the Finance Act, 1994. This Section was inserted w.e.f. 18-4-2006. As such, prior to this date services rendered outside India are not chargeable under the provisions of Finance Act, 1994. This view was taken by hon’ble Ahmedabad Tribunal in case of Foster Wheeler Energy Ltd. vs. Commr. Of C. Ex. & Cus., Vadodara-II reported at 2007 (7) STR 443 (Tri.-Ahmd.). On the basis of above citation it is ample clear that the service tax was not payable on the services rendered prior to 18-4-2006. As such they have not contravened any provisions of the Finance Act, 1994 and thus the show cause notice is not viable and is liable to be quashed no demand, interest or penalty should be confirmed on them.

The noticee also submit that the merits in of above stated judgment of Foster Wheeler Energy Ltd. is followed by the hon’ble Delhi Tribunal in the case of Dimensional Stones vs. Commissioner of Central Excise, Jaipur reported at 2008 (9) STR 56 (Tri.-Del.). In this case, the Stay is granted to the appellant by considering the merits. The analysis of above cited decisions makes it ample clear that the Service tax was not leviable on the services received from abroad prior to the date of 18-4-2006 and as such they were correct in not paying the Service Tax on the services received during the period from 1-1-2005 to 16.6.2005. Therefore, the show cause notice is not tenable and is liable to be quashed.

The noticee submits that the levy and collection of Service Tax is governed by the Chapter V of the Finance Act, 1994 and Chapter VA of the Finance Act, 2003. Section 64 of this Chapter restricts the applicability of Service Tax to the whole of India except the State of Jammu and Kashmir. As such, the charging Section itself states that this Chapter will not be applicable outside India. Hence the services received or consumed outside India cannot be made taxable in the India. This view was taken by the hon’ble Apex Court in the case of Ishikawajma-Harima Heavy Indus. Ltd. reported at 2007 (6) STR 3 (S.C.). In this case it was held that the services which are rendered and utilized outside India cannot be charged to tax in India. As such, the above case is supporting the fact that the Chapter V governing the provisions relating to Service Tax applies only to the areas situated within India except Jammu and Kashmir. Since the alleged services are rendered by foreigners these do not come within the ambit of Service Tax law as contained in Chapter V of the Finance Act, 1994. As such the show cause notice is not legally sustainable and is liable to be set aside and proceedings initiated against them should be dropped.

As regards the non-taking of Registration under the category of “Business Auxiliary Services” is concerned they submit that according to Section 69 of the Finance Act, 1994 the person liable to pay service tax are liable to take registration under Service Tax. The analysis of above provision makes it clear that only the persons liable to pay service tax are required to get registered. Since they were not liable to pay service tax during the period 01.01.2005 to 16.06.2005 on the basis of above discussion they were also not required to take the registration. Therefore, the show cause notice is not legally sustainable and is liable to be set aside and no demand, interest or penalty should be imposed on them.

The noticee further submit that they were required to furnish details in ST-3 returns regarding the taxable service provided by them and service tax paid by them. Since they were not required to pay the service tax on the aforesaid services there is no question of mentioning the details in the ST-3. As such they have acted rightfully under the provisions of the Finance Act, 1994 and the rules framed thereunder. Therefore the show cause notice is not sustainable and the proceedings initiated against them should be dropped and no demand, interest or penalty should be imposed on them.

They further submit that on the basis of above discussion it is ample clear that they have acted well within the boundaries of law. Our act was based on bonafide belief as per decisions given by various appellate authorities from time to time as cited above. It has been held in various cases that no penalty is warranted when the assessee has acted on the basis of bonafide belief. Reliance is placed on following cases:-

* Sri Krishna Alloys vs Commissioner of Central Excise, Salem [2006 (200) ELT 158 (Tri.-Chennai)]

* Asha Pavro Electronics Pvt. Ltd. vs. Commr. Of C. Ex., Mumbai-III [2002 (143) ELT 543 (Tri.-Mumbai)]

* Star Neon Singh vs. Commissioner of Central Excise, Chandigarh [2002 (141) ELT 770 (Tri.-Del.)]

* Straw Products Ltd. vs. Collector of Central Excise, Indore [1996 (87) ELT 115 (Tribunal)]

* Johnson & Johnson Ltd. vs. Collector of Central Excise, Bombay [1995 (78) ELT 193 (Tribunal)]

* Indian Explosives Ltd. vs. Collector of Customs [1992 (60) E.L.T. 111 (Cal.)]

* Tata Engineering & Locomotive Co. Ltd. vs. Collector of Customs [1991(56) E.L.T. 812 (Tribunal)]

* Surat Municipal Corpn. Vs. Commissioner of C. Ex., Surat [2006(4) S.T.R. 44 (Tri. - Del.)]

The analysis of above cited decisions makes it clear that since they have acted under bonafide, no penalty can be imposed on them. Therefore, the benefit of above referred cases should be extended to them and the show cause notice should be set aside and the whole proceedings should be dropped.

They submit that the show cause notice has been issued by invoking the extended period of 5 years which is not justified as the extended period under proviso to Section 11A of Central Excise Act, 1944 is invokable only in case of fraud, misstatement or collusion. This proviso is produced as follows for your ready reference:-

“Provided that where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded by reason of fraud, collusion or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of this Act or of the rules made thereunder with intent to evade payment of duty, by such person or his agent, the provisions of this sub-section shall have effect, [as if, [***]] for the words [one year], the words “five years” were substituted :”

As such, extended period can be invoked only if there is any fraud, collusion or misstatement on part of assessee. Suppression of facts means something required under the law to disclose but one does not discloses. This is not in our case. They are maintaining the proper records as required under the law. This was reason that the audit has checked these invoices with record and took the audit para. If they had any intention to willfully suppress the same, they should not have shown the record and bills to them. These all were properly filed and recorded in books of accounts. As such, they strongly rebut the allegation of willful suppression as invoked in the impugned show cause notice. Even they have deposited the lumpsum amount of service tax for the period starting from 18-4-2006, the date from when it was applicable. The department has not issued any show cause notice for this period. It means the department was aware of all the facts and this is the reason why the show cause notice is not issued for that period. Now the impugned show cause notice is issued for the prior period invoking the extended time under proviso to Section 11A of the Central Excise Act, 1944. This is not understandable to them when department was aware of all the facts then how the extended period is invoked for a part period. As such, the issue of show cause notice itself is not legally sustainable and is liable to be set aside.

Finding of the Adjudicating Authority: -

The Adjudicating Authority stated that here the issued involved is place of providing service and applicability of date 18/04/2006 when Section 66 A of Finance Act, 1994 was enacted. Since the service is provided by an outside firm who does not have any office in India so as per section 66-A and notification 36/2004-ST Rule 2(I)(d) (v) of service tax Rules, the Noticee has to pay tax. But consequent to enactment of Section 66-A in Finance Act, 1944 which provides that the recipient in India is liable to pay tax on service received from abroad only from 18.4.2006.

The adjudicating authority relied up on the judgement of hon’ble Bombay High Court in case of National Ship-owners Association Vs UOI [2009(13)STR/235/Bom.] held that the recipient in India is liable to pay tax on service received from abroad only from 18/04/2006 i.e. before 18/04/2006 there was no service tax. Hence, the period covered is 1.01.2005 to 16.06.2005, so it is hit by Section 66-A of finance Act, 1994.