Whether the appellant is liable to be charged to Service Tax on the services received before 18.04.2006 from overseas person under reverse charge mechanism?

CASE STUDY

Introduction:-

The appellant filed this appeal under Section 85 of the Finance Act, 1994 against the Order-in-Original No. 89/ST/2011 dated 28.06.2011 passed by Addl. Commissioner, Central Excise Commissionerate, Jaipur-II. The adjudicating authority confirmed the demand for the service tax on the ground that in terms of section 66A of the Finance Act, 1994, the appellant is liable for the service tax as he is in receipt of services from overseas person who did not have any establishment in India. As per the appellant, the demand of service tax is not sustainable as the service tax demand for the period before 18.04.2006 has been raised and confirmed; whereas before 18.04.2006, there was no authority with the Govt. to charge service tax. Further, they alleged that there was no reverse charge mechanism prescribed under statutory provisions before 18.04.2006 as the said mechanism was implemented under section 66A which was effective from 18.04.06 and did not have retrospective application. Thus the order was set aside and the appeal stands allowed.

M/s Alcobex Metals Ltd. v/s Additional Commissioner, Central Excise Commissionerate, Jaipur
[Order-In-Appeal no. 84 (RDN) ST/JPR-II/2012 dated: 07.09.2012]

Relevant Legal Provisions:

Finance Act, 1994

Section 66A.Charge of service tax on services received from outside India, - (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.]
"(3) The provisions of this section shall not apply with effect from such date as the Central Government may, by notification, appoint."

Issue: - Following issue was made before the Commissioner:-

Whether the appellant is liable to be charged to Service Tax on the services received before 18.04.2006 from overseas person under reverse charge mechanism?

Brief Facts:-

The Appellant have received foreign agent service for promotion/marketing of their product. Consulting Engineer service, Advertisement and Business Exhibition Service during the period from 01.01.05 to 31.08.06 from overseas persons who did not have any establishment in India, therefore in terms of Section 66A of the Finance Act, 1994 read with Notification No. 36/2004 ST dated 31.12.04 and Rule 2(1)(d)(iv) of Service Tax Rules, 1994, the appellant were liable to pay service tax under reverse charge.
The adjudicating authority has confirmed the demand of Rs 1634709/- under Section 73(1) of Finance Act, 1994 along with interest but no penalty was imposed. Aggrieved with the impugned order, appellant filed this appeal.


Assessee’s Contentions:-

Assessee made following submissions before the Commissioner (Appeals):

·         The appellant submit that the learned Additional Commissioner has relied upon the judgment delivered by the High Court of Rajasthan in the case of Union of India v/s Aditya Cement [2008 (10) STR 228 (Raj)] wherein it was held that the liability was ordered to be fastened only since 01.01.2005. It was also noted by the Additional Commissioner that the said judgment was upheld by the Hon’ble Supreme Court in appeal reported at 2010 (20) SR J141 (SC).

It is submitted that in the said case, the issue was not examined as to whether prior to enactment of Section 66A effective from 18.04.2006 whether the recipient of service was liable to pay service tax. It is submitted that the Hon’ble High Court had not gone into in-depth matter as to whether there was authority of law with the Government to collect service tax from the service recipient in India from 01.01.2005.

It is submitted that theactual liability accrued only w.e.f. 18.04.2006 when Section 66A was enacted. It is submitted that the learned Commissioner (Appeal) has not taken into consideration the fact that although service tax liability was from 01.01.2005 but the service tax became payable when the reverse charge method was introduced by enacting Section 66A.
Appellant submit that before the enactment of Section 66A there was no authority vested by law to levy service tax on a person who is resident in India, but who receives services outside India. It is submitted that this was also held by the Bombay High Court in the case of Indian Shipowners Association v/s Union of India & Ors [2008-TIOL-633-HC-MUM-ST]. This judgment was upheld by the Hon’ble Supreme Court by judgment reported at 2009-TIOL-129-SC-ST.
The law is now settled as regards Service tax liability on receipt of services, will not be prior to 18.04.2006.
It is submitted that in the case of M/s Shradha Terry Products Ltd v/s CCE, Salem [2009-TIOL-1076-CESTAT-MAD] the judgment of the Bombay High Court in Indian Shipowners Association was followed and the judgment of the Rajasthan High Court judgment in the case of Union of India v/s Aditya Cement was held not applicable.
It is submitted that in the following cases, the various High Courts have followed the judgment given in Indian Shipowners Association case.

- Unitech Limited v/s CST, Delhi [2009-TIOL-293-HC-DEL-ST]

- CCE (ST), Chennai v/s M/s EID Parrty [2009-TIOL-927-CESTAT-MAD]

- CCE, Ludhiana v/s M/s Bhandari Hosiery Exports Ltd [2010-TIOL-103-HC-P&H-ST]

- M/s S R Batliboi v/s UoI [2010-TIOL-376-HC-DEL-ST]

- M/s T Abdul Wahid v/s UoI [2011-TIOL-90-HC-MAD-ST]

It is submitted that the judgment of the Indian Association Shipowners Association was followed by the Tribunals in the following cases, by saying that the issue is no longer res-integra:
- M/s Sandvik Asia Ltd v/s CCE, Pune-I [2009 – TIOL – 1356 – CESTAT – MUM]

- M/s Tata Steel Ltd v/s CCE & ST, Jamshedpur [2010-TIOL-386-CESTAT-KOL]

- CCE, Hyderabad v/s M/s TFL Quinn India P Ltd [2009-TIOL-1904-CESTAT-BANG]

- M/s ABB Ltd v/s CST, Bangalore [2009-TIOL-1988-CESTAT-BANG]

- M/s Indian Farmers Fertilizers Co-Op Ld v/s CCE, Ahmedabad [2010-TIOL-579-CESTAT-AHM]

Thus, it is clear that the service tax on import of service is applicable from 18.4.2006. But the learned adjudication officer has ignored this Apex Court decision and confirmed the demand. Such an order is totally erroneous and liable to be set aside.
·         It is further submitted that the impugned show cause notice and the impugned Order-in-Original are not sustainable as the service tax demand for the period before 18.04.2006 has been raised and confirmed and before 18.04.2006 there was no authority with the Government to charge service tax. Therefore, the impugned show cause notice was issued and the Order-in-Original are passed without the authority of law available with the respondents-authority. Therefore, the impugned order is required to be set aside.
·         The Additional Commissioner has further relied upon the Board Circular issued from F. No. 275/7/2010-CX. 8A dated 30.06.2010 wherein it was clarified that in case taxable service is received from a non-resident, not having office/establishment in India, and received in India, the service tax liability arises w.e.f. 01.01.2005 on reverse charge basis on recipient of service in India.
In this regard, it is submitted that in the said Circular it has been said that the liability to pay service tax will arise under reverse charge method w.e.f. 01.01.2005. It is submitted that there was no reverse charge mechanism prescribed under statutory provisions before 18.4.2006. It is submitted that the said mechanism was enabled under Section 66A which was effective from 18.04.2006 and did not have retrospective application. Therefore, before 18.04.2006 the service tax could not be charged from the service recipient.
It is further submitted that the learned Adjudicating Authority referring to the said Circular and consequently, upon the issuance of Notification No. 36/2004-ST dated 31.12.2004 under Section 68 (2) of the Finance Act, 1994 read with Rule 2(1) (d)(iv) of the service tax Rules, 1994, has found that service tax liability on services received in India from a non-resident arises w.e.f 01.01.2005.
In this regard, it is submitted that the Notification No. 36/2004-ST was amended vide Notification No. 9/2006-ST dated 19.04.2006 to provide that the liability will be of the consignor of any taxable service provided or to be provided from a country other than India and received in India, under section 66A of the Finance Act, 1994.
Therefore, it is clear that Section 66A of the Finance Act will be applicable. Moreover, this ruling has been given by Apex Court and hence the same is applicable from 18.4.2006 only. Even the adjudication officer is also aware of the fact that the tax is applicable from 18.4.2006 which is clear from para 4.6 of order wherein he himself say that penalty should not be imposed as there are divergent view on import of service prior to 18.4.2006.
·         It is further submitted that the said Circular is not sustainable as it is trying to impose service tax on the services provided and utilized outside India. It is submitted that in this regard, they had in their reply submitted 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.
            However, the Adjudicating Authority has not considered the said contention of the appellant and has not discussed the same in the impugned order. Therefore, the order passed by the Adjudicating Authority is not sustainable as all the contentions raised by the appellant have not been considered. This amounts to violation of principles of natural justice.
·         On the issue of invocation of extended period of limitation, they have submitted that the audit has raised this point. They have filed amendment in registration certificate. This was done by the department. Thereafter, they have paid the service tax along with service tax and filed return immediately. They have filed the condonation of delay along with these returns on 24.11.2006 wherein it is clearly mentioned that audit has taken the point and they are paying the service tax. Thereafter, the department has issued show cause notice no. V(ST)SCN/929/JDR/07/3978 dated 9.4.2007. The penalty of Rs. 500/- was also imposed on them by OIO No. 2480/ST/07 dated 29.10.2007. Thereafter, this second show cause notice was issued. They have pleaded in their reply that extended period cannot be invoked in second show cause notice. But the learned adjudication officer tried to mislead the thing by saying that they have not submitted the information. But he kept silent on the issue that extended period cannot be invoked when the second show cause notice is issued on the same subject. Such an order is liable to be quashed.
·         The appellant further submit that when the penalty is not imposed on them on the point that there were divergent opinion on service tax on import of service prior to 18.4.2006, then the demand cannot be confirmed as there is Apex Court decision on the same. Further, the penalty is not imposed on bonafide belief of assessee then the demand is also barred by time of limitation.
·         The learned adjudication officer have given hearing as on 22, 28 and 30 by single letter and said that they have failed the opportunity of personal hearing. This is totally wrong. The law provides for three opportunities and it should be provided separately and giving hearing by single letter is totally erroneous. Further, the factory was closed and letter did not reach the factory. Secondly, the name of authorized representative was also on record. The hearing letter should also be given to him so that he can attend the hearing. Hence this is gross violation of natural justice and such an order is liable to be set aside.

Reasoning of the Commissioner (Appeals):-

The Commissioner (Appeals) held that the adjudicating authority has relied upon the clarification issued by the Board under F. No 275/7/2010-CX 8A dated 30.06.2010 wherein it was clarified that in case taxable service is received from a non-resident, not having office/establishment in India, and received in India, the service tax liability arises w.e.f. 01.01. 05 on reverse charge basis on recipient of service in India. The appellant had submitted that there was no reverse charge mechanism prescribed under statutory provisions before 18.04.2006 as the said mechanism was enabled under Section 66A which was effective from 18.04.06 and did not have retrospective application. In their support, they relied upon various pronouncement of the court that service tax is chargeable from the date of enactment of Section 66A i.e. 18.04.06. In this regard they find that the Board vide F. No. 276/8/2009-CX 8A dated 26.09.11 has withdrawn the instruction F. No. 275/7/2010-CX 8A, dated 30.06.2010 and clarified that in view of the various judgments of the Hon'ble Supreme Court, the service tax liability on any taxable service provided by a non resident or a person located outside India, to a recipient in India, would arise w.e.f. 18.4.2006. i.e. the date of enactment of section 66A of the Finance Act. 1994 The said clarification is as follows:-
"Kind attention is invited to instruction F No. 275/7/2010-CX8A, dated 30.06.2010, wherein the Board had communicated its view that services tax on a taxable service received in India, when provided by a non-resident/person located outside India, would be applicable on reverse charge basis with effect from 1.1.2005, and that the ratio of judgement in M/s Indian National Shipowners Association (INSA) case [2009 (13) STR 235 (Bom.)] would not apply to such cases. Further, direction was issued to field formations to defend the levy of service tax on such services for the period on or after 1.1.2005, as post INSA judgement, it has been held by the High Courts/Tribunal in a large number of cases, applying ratio thereof, that service tax on such services is leviable only w.e.f. 18.4.2006. However, the appeals filed by the department before the Hon’ble Supreme Court, for defending the levy of service tax on such services w.e.f. 1.1.2005, have been dismissed recently in the following cases:-
(i) SLP (C) No. 29539 of 2010 in CCE Vs Bhandari Hosiery Exports Ltd.
(ii) SLP (C)No. 18160 of 2010 in CST Vs United Ltd
(iii) SLP (C) No. 34208/09 of 2010 in UOI Vs S R Batliboi & Co.
(iv) SLP (C)No. 328/332 of 2011 in UOI Vs Ernst & Young
(v) SLP (C) No 25687-25688/2011 in CCE Vs Needle Industries
(vi) SLP (C) No 25689-25690/2011 in UOI Vs SKM Engg Products
                      Further, Review petition No. 1686 of 2011 filed in the case of Bhandari Hosiery has    also been dismissed by the Hon’ble Supreme Court vide order dated 18/8/2011.
                          In view of the aforementioned judgments of the Hon’ble Supreme Court, the service tax liability on any taxable service provided by a non resident or a person located outside India, to a recipient in India, would arise w.e.f. 18.4.2006, i.e., the date of enactment of section 66A of the Finance Act, 1994. The Board has accepted this position. Accordingly, the instruction F No. 275/7/2010-CX8A.dated 30.6 2010 stands rescinded.”
It is thus clear that service tax was not payable prior to 18.04.06 on the service received by the resident of India from a non resident or a person located outside India who did not have any establishment in India.
Further they observe that the demand was raised for the services received by the appellant during the period from 01.01.05 to 31.01.06. As such they find that appellant was not liable to pay service tax on the services received by them from a non resident or a person located outside India who did not have any establishment in India.

Decision:-

Appeal allowed.

Conclusion:- After studying this appeal, we conclude that, when a provision is applicable in law specifying the date from which it is to be made effective, then liability cannot be imposed under any circumstances on the assessee. The provision is to be given retrospective application only when it is specifically warranted by the law.
The service tax on import of service under reverse charge has been confirmed by Apex Court that it is applicable from 18.4.2006 when the reverse charge mechanism has come into effect. The demand prior to that period is not sustainable.

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PJ/CASE STUDY/ 2012-13/27
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