2011 (4) TMI 1087 - HC - Service Tax

High Court rules recipient not liable for service tax from foreign company pre-2006

The High Court upheld the Tribunal's decision, ruling that the assessee was not liable to pay service tax for services received from a foreign company ... Charge of service tax on services received from outside India - Liability to pay service tax rests with service provider unless statute or notification specifies recipient - Effect of statutory amendment making recipient liable with retrospective/non retrospective operation (introduction of provision shifting liability) - Notification under sub section (2) of section 68 empowering Central Government to specify person liable to payCharge of service tax on services received from outside India - Liability to pay service tax rests with service provider unless statute or notification specifies recipient - Assessee not liable to pay service tax on royalty/technical know how payments made to foreign holding company for the period 2003-C4 - HELD THAT: - The Tribunal's finding that the assessee is not liable to pay service tax in respect of services received from a foreign company during the relevant period is upheld. Prior to the statutory amendment effective 18 04 2006, the general rule was that the person providing a taxable service was liable to pay service tax, and where the provider was a person located outside India with no establishment in India, the recipient could not be treated as the person liable unless the Central Government, exercising its power under the non obstante clause in sub section (2) of the relevant provision, had specified otherwise by notification. The notifications issued in 2004-2006 did not, before the Finance Act 2006 amendment, directly render the recipient liable in the circumstances of this case. The Finance Act 2006 (effective 18 04 2006) introduced a provision treating services provided from outside India as taxable as if the recipient had himself provided the service, thereby shifting liability to the recipient only from that date. Consequently, for payments made in period 2003 C4 the liability to pay service tax could not be fastened on the assessee as recipient. [Paras 3, 4, 5]Appeal dismissed; assessee not liable to pay service tax for the stated period.Final Conclusion: The appeal is dismissed. For the period in question (2003 C4) service tax liability could not be imposed on the recipient where the service provider was situated outside India and no statutory provision rendered the recipient liable until the amendment effective 18 04 2006. Issues:- Liability of the assessee to pay service tax for services received from a foreign company.- Interpretation of Section 66A(2) regarding the liability to pay service tax.Analysis:Issue 1: Liability of the assessee to pay service tax for services received from a foreign companyThe case involved the appellant challenging an order by the Tribunal stating that the assessee was not liable to pay service tax for services received from a foreign company. The assessee had paid royalty fees to their holding company for supplying technical data, and a show-cause notice was issued demanding service tax. The assessee contended that the payment was for the use of technology and did not involve the rendering of technical assistance. The Assistant Commissioner rejected this explanation, confirmed the demand, and imposed a penalty. The Commissioner of Central Excise set aside the order regarding royalty fees, leading to the Revenue appealing to the Tribunal. The Tribunal, citing precedent judgments, held that the assessee was not liable to pay service tax as the provider of service, being a foreign company, should have paid the tax.Issue 2: Interpretation of Section 66A(2) regarding the liability to pay service taxThe Tribunal reasoned that during the relevant period, the liability to pay service tax was on the provider of service and not the recipient, especially if the provider was a company. It was highlighted that only from 18.04.2006 onwards, with the introduction of Section 66A(2), the liability shifted to the service recipient. The Tribunal dismissed the appeal based on this interpretation. The High Court referred to a previous case involving Micro Labs Ltd. where it was clarified that the Central Government could specify a person other than the service provider to pay tax. The introduction of Section 66A in 2006 made it clear that services received from outside India would be taxable, treating the recipient as the service provider for tax purposes. Therefore, prior to 2006, the service tax was not payable by the recipient if the service provider was outside the country and had no permanent address or place of business within India.In conclusion, the High Court upheld the Tribunal's decision based on the interpretation of Section 66A(2) and precedent judgments, dismissing the appeal as the service tax liability was not on the assessee for services received from a foreign company during the relevant period.