2013 (2) TMI 409 - Commissioner - Service Tax

Court overturns Service tax demand, finds in favor of appellant. Time-barred claim. TDS, penalties not upheld.

The court set aside the impugned Order entirely, ruling in favor of the appellant. The demand for Service tax was deemed time-barred under Section 73(1) ... Treatment of TDS – Whether service Tax is leviable on gross amount charged inclusive of TDS – Assessee received Technical Consultancy Service from various service providers, who were not having their office in India – Assessee had paid the Service tax on the value of service charges paid after deducting TDS – Held that:- Assessee agreed to pay to service provider GBP 370,000, this sum being net of all withholding taxes in India. Whether the assessee pay tax or not, still the foreign service provider is entitled for GBP 370,000 in full. Tax if any paid by the assessee would have to be borne by him and the same cannot be passed on to the foreign party. Thus the gross amount charged by the service provider cannot be treated as inclusive of TDS – Further as per Rule 7 of Service Tax (Determination of Value) Rules, 2006, actual consideration to be the value of taxable service provided from outside India. In the instant case, the gross amount charged by foreign party is only 370,000 GBP, which is not inclusive of TDS – Therefore TDS value need not to be included in the taxable value – In favour of assessee. There was no charging section for levy of Service tax on the service rendered by foreign national to a person in India prior to the insertion of Section 66A of the Act which took place on 18-4-2006 – Show Cause Notice was issued on 2-6-2008, demanding Service tax for a period from July 2005 to March 2008 . Assessee are liable to pay Service tax w.e.f. 18-4-2006 only.Therefore demand cannot be raised as the same is hit by limitation of time under Section 73(1) of the Finance Act, 1994 – In favour of assessee. Issues:- Barred by limitation- Liability for Service tax prior to 19-4-2006- Taxable value including TDS- Grossing up process under Income Tax Act- Imposition of penalties under Sections 76 & 78 of the Finance Act, 1994Analysis:1. Barred by Limitation:The appellant contended that the notice dated 2-6-2008, covering the period from July 2005 to March 2008, is beyond the period of limitation. The judgment highlighted that the demand for Service tax can only be raised on payments made during April 2006 and September 2006. As the Show Cause Notice was issued on 2-6-2008, the demand even on those two payments is time-barred under Section 73(1) of the Finance Act, 1994.2. Liability for Service Tax Prior to 19-4-2006:The appellant argued that they were not liable for Service tax prior to 19-4-2006. The judgment referred to relevant case laws and concluded that the appellants are liable to pay Service tax on 'Consulting Engineer Service' received from the foreign company as service receiver only from 18-4-2006 onwards, specifically for the last two instalments paid to the foreign service provider in April 2006 and September 2006.3. Taxable Value Including TDS:The main issue revolved around whether TDS should be included in the taxable value for Service tax. The appellant emphasized that the gross amount charged by the foreign service provider was independent of TDS amount, as per the agreement terms. The judgment analyzed the agreement clause and relevant rules to determine that the TDS value need not be included in the taxable value, as the consideration received by the foreign service provider was separate from the TDS amount.4. Grossing Up Process under Income Tax Act:The appellant argued that the process of grossing up is permitted under Section 195A of the Income Tax Act. However, the judgment did not delve deeply into this argument as the main focus was on the inclusion of TDS in the taxable value for Service tax.5. Imposition of Penalties under Sections 76 & 78:The appellant contended that no penalty under Sections 76 & 78 of the Finance Act, 1994 should be levied as they had been furnishing information as required by law to the revenue. The judgment did not find the imposition of penalties sustainable due to the revenue-neutral nature of the issue, especially considering the inclusion of TDS in the taxable value was deemed incorrect.In conclusion, the judgment set aside the impugned Order entirely, ruling that the demand was barred by limitation under Section 73(1) of the Finance Act, 1994. The appellant's arguments regarding the liability for Service tax prior to 19-4-2006 and the inclusion of TDS in the taxable value were carefully considered and resolved in favor of the appellant.