Foreign Supplier Exempt from Service Tax on Activities, Tribunal Rules on Pre-2006 Applicability

The tribunal set aside the demand for service tax on activities by a foreign supplier during 2005-2006, ruling that service tax on imported services was not applicable before 18/04/2006. The tribunal also held that a composite contract for plant and machinery supply should not be vivisected for service tax purposes before the introduction of Works Contract Service in 2007. The classification of activities like transfer of engineering knowhow and technical assistance fell under works contract service. The tribunal concluded that the entire demand for service tax should be set aside, allowing the appeal.

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Issues:
1. Levy of service tax on activities undertaken by a foreign supplier during 2005-2006.
2. Vivisection of a composite contract for plant and machinery supply for service tax liability.
3. Classification of activities like transfer of engineering knowhow and technical assistance for service tax.
4. Charging service tax under erection, commissioning, or installation services.
5. Applicability of reverse charge mechanism for service tax on imported services.

Analysis:
1. The appellant challenged the demand for service tax on activities by a foreign supplier during 2005-2006, arguing that service tax on imported services only became taxable from 18/04/2006 with the introduction of Section 66A and the Taxation of Services Rules, 2006. They cited CBEC Circulars and case laws to support their position. The tribunal noted that service tax cannot be levied on imported services before 18/04/2006. In this case, all invoices from the foreign supplier were dated before this date, leading to the conclusion that the demand for service tax should be set aside.

2. The appellant contended that a composite contract for plant and machinery supply should not be vivisected to impose service tax on individual activities. They relied on a Supreme Court decision stating that works contract services cannot be divided for service tax before the introduction of Works Contract Service (WCS) in the statute on 01/06/2007. The tribunal agreed, emphasizing that the contract involved both goods supply and services, falling under works contract service, and thus, service tax on separate service elements before 01/06/2007 was not valid.

3. Regarding the classification of activities like transfer of engineering knowhow and technical assistance for service tax, the tribunal noted that these services were part of a composite contract involving plant and machinery supply. The contract listed service elements separately, but the tribunal held that such contracts would be covered within the category of works contract service, especially since the machinery import and associated services were completed before the introduction of WCS in 2007.

4. The appellant objected to the charging of service tax under erection, commissioning, or installation services, arguing that these activities were carried out with technical personnel provided by the foreign supplier. The tribunal did not find merit in this argument, as the overall contract was treated as a composite contract for plant and machinery supply, falling under works contract service.

5. The tribunal also addressed the applicability of the reverse charge mechanism for service tax on imported services. It noted that Section 66A was introduced for levy of service tax on reverse charge basis on imported services from 18/04/2006. Since the disputed period was 2005-2006, and all invoices were issued before 18/04/2006, the tribunal concluded that the entire demand for service tax should be set aside. Consequently, the impugned order was set aside, and the appeal was allowed.

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