2008 (9) TMI 186 - AT - Service Tax

Appeal success: Company wins Service tax dispute, allowed to use Cenvat credit.

The Tribunal allowed the company's appeal, setting aside the demand for Service tax and penalties, based on the interpretation of relevant legal ... Deemed output service - Cenvat credit for payment of service tax on deemed output service - liability to pay service tax as service receiver - taxable services provided from outside India not to be treated as output service (post 19-4-2006)Deemed output service - Cenvat credit for payment of service tax on deemed output service - Validity of using Cenvat credit on input services to discharge service tax liability on 'Intellectual Property Service' received from a foreign service provider for the relevant period - HELD THAT: - During the relevant period the statutory scheme applied a deeming fiction that a person liable to pay service tax who did not provide any taxable service would be treated as a provider of an output service. In that legal position the service received from the foreign provider, on which the assessee as service receiver was liable to pay service tax, was a 'deemed output service' and therefore service tax on that deemed output service could lawfully be discharged by utilizing Cenvat credit on input services. The subsequent amendment effective 19-4-2006 removed the explanation and, together with the Import Service Rules, altered the position so that taxable services provided from outside India and received in India would not be treated as output service for purposes of availing Cenvat credit; that change is prospective and does not affect the relevant period. Applying the law as it stood for the period in question, the demand was not sustainable. [Paras 4, 6, 7, 10]Demand of service tax for the period 10-9-2004 to 30-9-2005 on account of use of Cenvat credit for 'Intellectual Property Service' set aside; assessee entitled to use Cenvat credit to discharge that liability for the relevant period.Interest and penalty on disputed demand - Whether interest and penalty should be imposed in respect of the disputed demand after allowing the assessee's appeal - HELD THAT: - The adjudicating authority had proposed interest under Section 75 and penalty under Section 76 in the show cause notice. The Tribunal, having held that the demand itself is not sustainable and has been set aside, observed that the question of demanding interest or imposing penalty does not arise in consequence of allowing the assessee's appeal. Accordingly, the revenue's contention as to unpaid interest and penalty was rejected in view of the substantive decision in favour of the assessee. [Paras 9, 10]Revenue's appeal seeking interest and penalty is rejected as the primary demand has been quashed; no interest or penalty is leviable.Final Conclusion: Assessee's appeal allowed and the demand, interest and penalties confirmed by the adjudicating authority set aside for the period 10-9-2004 to 30-9-2005; revenue's appeal dismissed. Issues:1. Utilization of Cenvat credit for paying Service tax on 'Intellectual Property Service'2. Liability for interest and penalty on delayed payment of Service taxAnalysis:Issue 1: Utilization of Cenvat credit for paying Service tax on 'Intellectual Property Service'The case involved a company engaged in the manufacture and sale of garments bearing foreign brand names, receiving 'Intellectual Property Service (IPS)' from foreign companies. The company used Cenvat credit to discharge its Service tax liability on IPS, which was objected to by the revenue department. The Adjudicating Authority held that IPS cannot be considered an 'output service' provided by the company, thus disallowing the use of Cenvat credit. The company contended that as a service receiver, it should be considered a deemed output service provider and entitled to Cenvat credit on various input services, including IPS. The Tribunal noted the definition of 'output service' in the Cenvat Rules and the changes in rules regarding the treatment of IPS as output service. The Tribunal, after considering relevant legal provisions and precedents, concluded that during the relevant period, the company was entitled to use Cenvat credit for paying Service tax on deemed output service like IPS. Therefore, the impugned order disallowing the use of Cenvat credit was set aside, and the company was not liable to pay the demanded Service tax, penalty, or interest.Issue 2: Liability for interest and penalty on delayed payment of Service taxRegarding the revenue's appeal on demanding interest and penalty, the Tribunal observed that there was a delay in the company's payment of Service tax, which should have attracted interest as per the statutory provisions. The revenue raised concerns about the adjudicating authority not demanding interest on the delayed payment made in cash. The Tribunal agreed that interest should have been demanded on the delayed amount paid in cash by the company. Additionally, the Tribunal noted that the aspect of penalty proposed in the show cause notice was not addressed by the Commissioner. However, since the Tribunal allowed the company's appeal regarding the Service tax liability, the question of demanding interest or imposing penalties did not arise. Therefore, the Tribunal rejected the revenue's appeal on these grounds.In conclusion, the Tribunal allowed the company's appeal, setting aside the demand for Service tax and penalties, and rejected the revenue's appeal regarding interest and penalties. The decision was based on the interpretation of relevant legal provisions, precedents, and changes in rules governing the treatment of 'Intellectual Property Service' as an output service for the purpose of utilizing Cenvat credit for paying Service tax.