Service tax pre-deposit modified to bank guarantee where prima facie liability was doubtful and merits hearing was directed.

The pre-deposit requirement in a service tax appeal was modified where the Tribunal had already indicated that raw material, packing material, overheads and profit should not have been included in the tax base, and there was also a prima facie view that the assessee may not be liable to service tax in light of Bharat Sanchar Nigam Ltd. On the assessee offering security, the revenue interest was directed to be protected through a bank guarantee instead of insisting on full pre-deposit. The appeal was then to be heard and decided on merits expeditiously.

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Issues: Whether the pre-deposit condition imposed in the service tax appeal required modification, and whether the appeal should be directed to be heard on merits upon furnishing security.

Analysis: The Court noted that the Tribunal itself had found that, for the purpose of levying service tax, the cost of raw materials, packing materials, overheads and profit ought not to have been taken into account. It further recorded a prima facie view that, in light of the Supreme Court decision in Bharat Sanchar Nigam Ltd., the petitioner may not be liable to pay service tax. In these circumstances, and on the petitioner offering a bank guarantee, the Court considered it appropriate to modify the earlier order and secure the revenue through a bank guarantee instead of insisting on the entire pre-deposit.

Outcome: The impugned order was modified, the petitioner was directed to furnish a bank guarantee of Rs. 25 lakhs, and the Tribunal was directed to hear and decide the appeal on merits expeditiously.

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