2008 (11) TMI 105 - AT - Service Tax

Tribunal rules in favor of Essar Steel Ltd. on service tax dispute

The Tribunal found in favor of the appellant, M/s. Essar Steel Ltd., regarding the applicability of service tax on External Commercial Borrowings. The ... Liability to service tax on 'Banking and other Financial Services' - revenue neutrality of tax payments - entitlement to Cenvat credit - penalty under Sections 76, 77 and 78 of the Finance Act, 1994 - benefit under Section 80 of the Finance Act, 1994 - show cause notice under Section 73(3) of the Finance Act, 1994 - pre-deposit waiverLiability to service tax on 'Banking and other Financial Services' - entitlement to Cenvat credit - Service tax liability for fees/charges paid for arranging External Commercial Borrowings is confirmed and the duty and interest paid are sustained. - HELD THAT: - The Tribunal accepted that the services received by the appellant in respect of arranging External Commercial Borrowings are classifiable under 'Banking and other Financial Services', thereby attracting service tax. The appellant had submitted agreements and documents to the DGCEI and paid the service tax with interest after being communicated to do so. On the facts found by the adjudicating authority and having regard to the classification, the Tribunal confirmed the demand of duty and the interest already paid. The Tribunal noted that the payment entitled the appellant to claim Cenvat credit, and that the payment was revenue neutral in effect, but held that liability nonetheless subsisted and was properly discharged by the appellants prior to adjudication.Duty and interest already paid by the appellant are confirmed.Penalty under Sections 76, 77 and 78 of the Finance Act, 1994 - benefit under Section 80 of the Finance Act, 1994 - revenue neutrality of tax payments - Penalties imposed under the Finance Act, 1994 are set aside and the appellants are held entitled to benefit under Section 80. - HELD THAT: - The Tribunal accepted the appellants' explanation that the omission to pay service tax arose from lack of coordination between the factory and head office and that there was no intention to evade payment of tax. The Tribunal observed that the appellants had in fact paid the duty and interest and suffered a net loss (interest not available as Cenvat credit), reinforcing absence of deliberate evasion. Applying these findings, the Tribunal concluded that penalty under Section 78 (and other penalties) was not imposable and that the appellants should receive the relief contemplated by Section 80 of the Finance Act, 1994 in respect of penalties under other sections.Penalties imposed on the appellants are set aside and benefit under Section 80 is allowed.Show cause notice under Section 73(3) of the Finance Act, 1994 - pre-deposit waiver - Although the Tribunal agreed that a show cause notice under Section 73 need not have been issued in the circumstances, the existing notice was not quashed and the matter was examined on merits. - HELD THAT: - The appellants relied on Section 73(3) to contend that no notice should issue where service tax is paid before notice, and the Tribunal agreed in principle that this case was one in which a notice need not have been issued. However, since a notice had been issued and the parties consented to disposal of the appeal with waiver of pre-deposit, the Tribunal proceeded to examine and decide the substantive issues rather than quash the notice as a preliminary step.The Tribunal noted that issuance of the show cause notice was not necessary but proceeded to examine the matter on merits without quashing the notice; pre-deposit requirement was waived by consent for disposal.Final Conclusion: The appeal is disposed of by confirming the service tax duty and interest already paid by the appellant while setting aside the penalties; the Tribunal allowed benefit under Section 80 of the Finance Act, 1994 and proceeded to decide the matter on merits after waiving pre-deposit by consent. Issues:- Applicability of service tax on External Commercial Borrowings- Coordination issues leading to non-payment of service tax- Revenue neutrality and intention to evade payment of tax- Interpretation of Section 73(3) of the Finance Act, 1994- Imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994Analysis:1. Applicability of service tax on External Commercial Borrowings:The case involved M/s. Essar Steel Ltd. availing External Commercial Borrowings (ECB) from non-resident lenders, leading to the payment of certain fees/charges for arranging ECB. It was established that the service received fell under the category of 'Banking and other Financial Services,' making the appellant liable to pay service tax. The appellant had submitted details of the service received, relevant agreements, and documents to the Directorate General of Central Excise Intelligence (DGCEI). The adjudicating authority confirmed the demand for service tax, interest, and imposed penalties under Sections 76, 77, and 78 of the Finance Act, 1994.2. Coordination issues leading to non-payment of service tax:The appellant argued that the omission to pay service tax occurred due to a lack of coordination between the company's headquarters in Bombay and the factory in Hazira, Surat, where the transaction relating to ECB was handled. The appellant contended that the levy was a new one and emphasized that they had promptly paid the service tax upon realization, entitling them to Cenvat credit. The appellant highlighted the Revenue neutrality of the exercise, citing their substantial payment of Central Excise duty as evidence of their compliance.3. Revenue neutrality and intention to evade payment of tax:Both parties presented contrasting views on Revenue neutrality as the sole criterion for assessing liability. The appellant stressed that the Revenue-neutral nature of the exercise, coupled with the lack of intention to evade tax, should be considered. The Revenue, however, argued that liability assessment should not solely rely on Revenue neutrality and questioned the appellant's explanation regarding lack of coordination.4. Interpretation of Section 73(3) of the Finance Act, 1994:The appellant referenced Section 73(3) of the Finance Act, 1994, which states that if service tax is paid before the issuance of a notice, the Central Excise officer should not serve any notice. The appellant also cited a Supreme Court decision to support their argument that in Revenue-neutral cases, delving into classification and other issues may not serve a purpose.5. Imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994:The Tribunal, after considering the arguments from both sides, found merit in the appellant's contentions. The lack of coordination between the company's offices led to the omission to pay service tax, resulting in the appellant's loss of over Rs. 34 lakhs as interest, not available as Cenvat credit. The Tribunal concluded that there was no intention to evade payment of duty, and penalties under Section 78 of the Finance Act, 1994, were not justified. The appellant was granted the benefit of Section 80 of the Finance Act, 1994, regarding penalties under other sections. The duty and interest already paid were confirmed, while the imposed penalties were set aside, leading to the disposal of the appeal and stay petition.