2023 (7) TMI 1327 - AT - Service Tax

Penalties set aside for manufacturer-exporter due to revenue neutrality despite service tax liability on professional services

CESTAT Ahmedabad set aside penalties imposed on manufacturer-exporter despite service tax payment. Appellant challenged taxability of Market Survey fees, ... Levy of penalty - penalties imposed inspite of service tax was paid - taxability of service challenged for setting aside penalty - Market Survey fees - Export Promotional Expenses - Technical Fees and Consultant Fees - Legal and Professional Consultancy - revenue neutrality - HELD THAT:- It is found that without going into merit of taxability the issue of penalty or otherwise also can be decided on the submission of revenue neutral. The appellant being a manufacturer and exporter of the goods all the services received by the appellant are in relation to export of goods - all the services were used in relation to export of goods. Therefore, the appellants were eligible for availing the cenvat credit on the service tax payable on the aforesaid services on reverse charge mechanism. In view of the decisions in COMMR. OF C. EX. & CUS., VADODARA-II VERSUS INDEOS ABS LIMITED [2010 (3) TMI 656 - GUJARAT HIGH COURT] and COMMISSIONER VERSUS INDEOS ABS LTD [2011 (3) TMI 1575 - SC ORDER] it is found that whenever there is a revenue neutral situation no malafide should be attributed to the assessee. Considering the aforesaid settled legal position in the present case the penalties imposed by the Adjudicating Authority are not sustainable. Hence, the same are set aside. However, the service tax paid by the appellant is maintained on conceding by the learned Chartered Accountant. Consequently, the interest on service tax demand is also sustained and the same is recoverable from the appellant. The impugned order stands modified - Appeal allowed in part. ISSUES PRESENTED AND CONSIDERED 1. Whether penalties for non-payment of service tax can be sustained where the service tax has been paid by the recipient and availed as cenvat credit, rendering the transaction revenue-neutral. 2. Whether the services received from persons located outside India and used in relation to export of goods are taxable on the recipient in India under the reverse charge mechanism. 3. Whether interest on service tax paid under investigation remains payable where the underlying tax liability is admitted and paid by the appellant. ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustainment of penalties where tax is paid and situation is revenue-neutral Legal framework: Penalties for non-payment of service tax arise under statutory provisions where tax is not paid or evaded. Cenvat Credit Rules and export refund provisions operate to ensure tax paid on inputs/services used for export does not burden export competitiveness, potentially producing a revenue-neutral outcome. Precedent Treatment: The Tribunal relied on established appellate authority holding that when tax paid is fully available as credit or refund (i.e., revenue-neutral), adjudication of ancillary disputes may be academic and punitive action is inappropriate; in such circumstances revenue should not be enriched and penalties are not attracted absent mala fides. Interpretation and reasoning: The Court examined the factual matrix showing (i) services were used exclusively in relation to export, (ii) the recipient paid the service tax under reverse charge, and (iii) the tax paid was taken as cenvat credit. The Tribunal reasoned that where the payment of tax does not result in revenue accruing to the exchequer (because it is matched by credit/refund), imputing malafide or invoking penal consequences is not warranted. The Court considered that penalties are consequential on a finding of taxable liability coupled with culpability; where tax is paid and availed as credit, the punitive element lacks justification absent evidence of deliberate evasion. Ratio vs. Obiter: Ratio - In a revenue-neutral situation where service tax payable under reverse charge is paid and availed as cenvat credit/refund such that no net gain accrues to the revenue, penalties for non-payment are not sustainable in absence of mala fide. Obiter - Observations on broader circumstances under which revenue neutrality may render disputes academic. Conclusion: Penalties imposed by the adjudicating authority were set aside because the circumstances produced revenue neutrality and there was no basis to attribute malafide to the recipient. Issue 2: Taxability of services received from abroad used for export of goods Legal framework: The Taxation of Services (Provided from Outside India and Received in India) Rules and the reverse charge provisions determine taxability of services received from non-resident service providers; certain rules exempt services used for export of goods from taxation in the hands of the recipient. Precedent Treatment: Appellate authorities have addressed whether services exclusively in relation to export of goods fall outside taxable ambit in the hands of the Indian recipient, and whether the applicability of reverse charge leads to cenvat/refund mechanisms neutralizing tax incidence. Interpretation and reasoning: The Court noted the appellants received services categorized as business auxiliary services, management and business consultancy, and professional/legal consultancy, all used in procuring/exporting goods (market survey, export promotion, technical/consultancy support). Applying the rule that services used for export are not taxable in the hands of the service recipient (subject to conditions), the Court observed that the appellant's contention on non-taxability was advanced primarily to challenge penalties; the Tribunal did not finally adjudicate the pure taxability merits but treated the matter in the context of revenue neutrality and availability of credit. Ratio vs. Obiter: Obiter - The Court did not conclusively decide the taxability issue on merits; rather, it treated the services as used for export and focused on the consequence (credit/refund) of such use. The decisive principle applied is that services used for export may lead to credit/refund entitlements which can affect penalty analysis. Conclusion: The Court avoided a final determination on taxability but accepted that the services were used for export and that credit/refund availability rendered the dispute revenue-neutral for the purpose of penalty assessment. Issue 3: Liability for interest where tax is paid under investigation Legal framework: Interest is payable on delayed payment of service tax as per statutory provisions and remains collectible even where tax is subsequently paid under protest or after demand, subject to judicial determination of tax liability. Precedent Treatment: Authorities recognize distinction between tax, penalty and interest: payment of tax and availment of credit/refund may negate penalty but does not automatically extinguish interest due on late payment, unless statutory or judicial relief is granted relieving interest. Interpretation and reasoning: The Tribunal accepted the appellant's concession that service tax was paid during investigation and taken as cenvat credit. While penalties were set aside owing to revenue neutrality, the Court held that interest on the service tax demand was properly recoverable because the tax liability arose and was not negated for the period of default; interest consequences are collateral to the decision on penalties and remain enforceable. Ratio vs. Obiter: Ratio - Interest on service tax paid belatedly remains payable and recoverable even if penalties are vacated on grounds of revenue neutrality; penalty and interest are distinct legal consequences. Conclusion: Service tax paid by the appellant is maintained and interest on the demand is sustained and recoverable; penalties are set aside. Cross-References and Consolidated Outcome Where services from abroad are used exclusively for export and the recipient pays tax under reverse charge that is subsequently availed as cenvat credit or refundable, the situation may be revenue-neutral; in such cases, imposition of penalties for non-payment is not sustainable absent mala fides, while interest on belated payment remains recoverable. The Court modified the impugned order by setting aside penalties but upholding the tax and interest recoverable.