2012 (7) TMI 191 - AT - Service Tax

TDS must be included in gross value for service tax assessment on foreign consultancy services under Section 66A and Rule 7(1)

CESTAT Chennai ruled that TDS (withholding tax) must be included in the gross value for service tax assessment on technical and project consultancy ... Valuation of taxable service - assessable value - service recipient liability under legal fiction created by Section 66A - treatment of income-tax deducted at source in assessable value - temporal scope of liability for services received from abroad - computation of assessable value under Rule 7(1) of Service Tax (Determination of Value) Rules, 2006 - waiver of penalty under Section 78 - validity and execution of vakalatnama - representation and adjournmentValidity and execution of vakalatnama - representation and adjournment - Adjournment request by counsel in absence of a valid vakalatnama was refused and the appeal was heard in absence of appellant's representative. - HELD THAT: - The Tribunal examined the record and found no vakalatnama on file in favour of the advocates who sought adjournment; an application for adjournment was not signed by a named signatory. Reliance was placed on the Supreme Court's observations in Uday Sankar Triyar regarding routine defects in vakalatnamas and on directions of the High Court of Delhi to treat such defects as grounds for returning defective vakalatnamas. In the absence of a valid vakalatnama the advocates could not be permitted to represent the appellant and the adjournment request was declined. The Tribunal therefore proceeded to hear the appeal with assistance of Revenue's representative.Adjournment refused for want of valid vakalatnama and appeal heard in absence of appellant's representative.Temporal scope of liability for services received from abroad - service recipient liability under legal fiction created by Section 66A - No service tax is leviable on engineering consultancy services received from abroad prior to 18.4.2006; liability arises only from 19.4.2006 onwards. - HELD THAT: - Section 66A (and Rule 2(i)(d)(iv)) was introduced with effect from 18.4.2006 to make recipients in India liable for taxable services provided by foreign service providers having no place of business in India. The Tribunal accepted the settled proposition that where no statutory provision existed to tax such services prior to 18.4.2006, no liability arises for that period. Consequently, the adjudication demand stands modified to exclude any levy for the period prior to 18.4.2006, and taxable liability is confined to the period when the statutory provisions were in force.No levy of service tax for engineering consultancy services availed from abroad prior to 18.4.2006; liability confined to the period after the provision took effect.Valuation of taxable service - assessable value - treatment of income-tax deducted at source in assessable value - computation of assessable value under Rule 7(1) of Service Tax (Determination of Value) Rules, 2006 - For the period 19.4.2006 to 30.9.2007, service tax is leviable on the gross amount of consideration for engineering consultancy services, inclusive of income-tax deducted at source, as the assessable value. - HELD THAT: - Section 67 prescribes that assessable value is the 'gross amount' charged for the taxable service; the Explanation to Section 67 treats 'consideration' as any amount payable for the service. Rule 7(1) (effective 19.4.2006) provides that for services covered by Section 66A the measure of value is the actual consideration charged. The Tribunal observed that, as a legal fiction under Section 66A the recipient is treated as if he had provided the service in India, so the consideration inclusive of amounts deducted at source falls within the assessable value unless facts of the contract show otherwise. The Show Cause Notice averred that the consultancy agreement expressly treated the contract price as net of taxes but made taxes payable by the payer as an addition to price; that factual position was not rebutted by the appellant. On the available material the Tribunal held that income-tax deducted at source formed part of the contract price and therefore the gross amount inclusive of such tax is exigible to service tax for the stated period.Service tax payable for 19.4.2006 to 30.9.2007 on gross consideration inclusive of income-tax deducted at source.Cum-tax benefit - adjudicatory consideration on modified demand - Claim for cum-tax benefit was not finally disposed of and is to be considered by the adjudicating authority when raising the modified demand. - HELD THAT: - The Tribunal noted that entitlement to any cum-tax benefit requires factual and legal assessment at the stage of computing the modified demand. Rather than decide the claim in the present appellate order, the Tribunal directed that the Authority may consider the appellant's grounds for cum-tax benefit while framing the modified demand in accordance with law.Claim for cum-tax benefit remitted for consideration by the Authority at the time of raising the modified demand.Waiver of penalty under Section 78 - Penalty imposed under Section 78 of the Finance Act, 1994 is waived. - HELD THAT: - Given the difficulty and genuine uncertainty in understanding the law applicable at the inception of the liability and the date when taxability arose, the Tribunal exercised its discretion to relieve the appellant from penalty. The Tribunal observed that complexity in the legal position at material times justified waiver of penalty under Section 78.Penalty under Section 78 waived.Final Conclusion: The appeal was partly allowed: the adjudication is modified to exclude any service tax liability for services received prior to 18.4.2006; service tax is sustained for the period 19.4.2006 to 30.9.2007 on the gross consideration inclusive of income-tax deducted at source; the claim for cum-tax benefit is remitted to the Authority for determination while framing the modified demand; penalty under Section 78 is waived; and the Tribunal proceeded with hearing after refusing adjournment for want of a valid vakalatnama. 1. ISSUES PRESENTED and CONSIDERED- Whether the appeal can be entertained and adjourned in the absence of a valid vakalatnama authorizing the appearing counsel to represent the appellant.- Whether service tax is payable by the appellant on technical consultancy and project consultancy services received from foreign service providers without a place of business in India, under Section 66A of the Finance Act, 1994.- Whether the period prior to 18.4.2006 is liable to service tax on such foreign consultancy services, given the retrospective applicability of Section 66A.- The correct valuation of taxable service for levy of service tax: whether the gross amount of consideration includes income tax deducted at source under Income Tax Law or whether the net amount actually remitted to the foreign consultant is the assessable value.- Whether penalty under Section 78 of the Finance Act, 1994 should be imposed considering the circumstances of the case.- Whether the appellant is entitled to cum-tax benefit while computing service tax liability.2. ISSUE-WISE DETAILED ANALYSISValidity of Representation and Adjournment RequestThe Tribunal scrutinized the record and found no vakalatnama filed in favor of the advocates who appeared and sought adjournment. The application for adjournment was signed by an unnamed person, and no authorized representative was present to explain the default. The Court referenced the Supreme Court's ruling in Uday Sankar Triyar v. Ram Kalesawar Prasad Singh, which emphasized the critical importance of properly executed vakalatnamas for valid legal representation. The ruling enumerated common defects in vakalatnamas and underscored the necessity for strict compliance and verification by court registries.Further, the Delhi High Court's directions in Deepak Khosla v. Union of India mandated strict scrutiny and rejection of defective vakalatnamas. Applying these principles, the Tribunal declined the adjournment request as the advocates lacked authority to represent the appellant, and no valid vakalatnama was on record. This approach preserved procedural propriety and judicial time, particularly given the delay of three years since the stay order.Liability to Service Tax on Foreign Consultancy Services under Section 66AThe appellant received technical and project consultancy services from foreign service providers without a place of business in India during March 2004 to September 2007. Section 66A, inserted with effect from 18.4.2006, made the recipient of such services liable to pay service tax as if the service was provided in India. Prior to this date, no provision existed to tax such services, and the Tribunal relied on the Apex Court decision in Union of India v. Indian National Shipowners Association, which held that no liability arises before the insertion of Section 66A.Accordingly, the Tribunal held that service tax is not leviable for the period before 18.4.2006. For the period from 19.4.2006 to 30.9.2007, the appellant is liable to pay service tax on the foreign consultancy services received.Valuation of Taxable Service and Inclusion of Income Tax Deducted at SourceThe core dispute involved the valuation of the taxable service for service tax purposes. The appellant contended that the assessable value should exclude income tax deducted at source (TDS) under Income Tax Law, arguing that the contract required payment of net fees after TDS. Revenue contended that the gross amount before deduction of TDS constitutes the taxable value.Section 67 of the Finance Act, 1994, provides that the assessable value for service tax is the 'gross amount charged by the service provider.' Explanation under Section 67 defines 'consideration' to include any amount payable for the taxable service. Rule 7(1) of the Service Tax (Determination of Value) Rules, 2006, applicable to services covered under Section 66A, states that the value shall be the actual consideration charged for the services provided or to be provided.The Tribunal examined the agreement with one of the foreign service providers, which stated that the contract price was net of all duties and taxes, which were payable in addition to the price. This indicated that the income tax deducted at source was to be treated as part of the contract price payable by the appellant. The appellant failed to produce agreements or plead material facts to rebut this finding.Since Section 66A treats the recipient as if they themselves provided the service in India, the legal fiction extends to valuation, requiring inclusion of the income tax deducted at source in the assessable value. The Tribunal concluded that the gross consideration inclusive of income tax deducted at source is the correct taxable value for the period after 18.4.2006.Limitation and Period of Tax LiabilityThe appellant argued that the Show Cause Notice was barred by limitation beyond 30.9.2006. The Tribunal agreed that since the law was not in force before 18.4.2006, no liability arises for that period. The tax demand and interest are therefore limited to the period from 19.4.2006 to 30.9.2007, modifying the adjudication order accordingly.Cum-Tax BenefitThe appellant sought cum-tax benefit, which allows for adjustment of service tax paid on the service provider's side. The Tribunal noted that this ground could be considered by the adjudicating authority at the time of raising the modified demand, in accordance with law.Penalty under Section 78Considering the novelty and complexity of the law at the time of incidence, the Tribunal exercised discretion to waive the penalty imposed under Section 78 of the Finance Act, 1994. The difficulty in understanding the taxability of foreign consultancy services justified relief from penalty.3. SIGNIFICANT HOLDINGS'Vakalatnama, a species of Power of Attorney, is an important document, which enables and authorizes the pleader appearing for a litigant to do several acts as an Agent, which are binding on the litigant who is the principal... It should, therefore, be properly filled/attested/accepted with care and caution.''In the absence of a valid vakalatnama, the advocates cannot be allowed to represent the appellants nor any adjournment request from them can be entertained.''There shall not be levy of service tax on the engineering consultancy services availed from foreign consultant abroad prior to 18.4.2006.''There shall be levy of service tax at the applicable rate for the period 19.4.2006 to 30.9.2007 on the gross amount of consideration inclusive of income tax deducted at source involved in availing engineering consultancy service availed under Section 66A of the Act.''The expression what is 'actual consideration charged for service provided or to be provided' shall depend on the facts and circumstances of each case... by such legal fiction the consideration inclusive of income tax deducted at source shall be assessable value for the purpose of the Act in the hands of the service recipient.''Considering the difficulty in understanding the law applicable at inception and date of incidence to taxability, it would be proper to waive the penalty imposed under that Section.'Core principles established include the strict requirement of valid vakalatnama for representation before the Tribunal, the retrospective applicability of Section 66A from 18.4.2006, the inclusive nature of 'consideration' for valuation under service tax law, and the discretionary waiver of penalty in cases of genuine legal uncertainty.Final determinations were that the appeal was to be heard without adjournment due to lack of valid representation; service tax liability arises only from 19.4.2006 onwards; valuation includes income tax deducted at source; penalty under Section 78 is waived; and cum-tax benefit is to be considered by the adjudicating authority in due course.