Service tax on foreign-sourced business auxiliary services arose only from 18.04.2006; prior-period demand and related penalties were set aside.

Service tax on business auxiliary services received from a foreign provider was held payable only from 18.04.2006, so the demand for the earlier period did not survive and was set aside. Penalties under Sections 76 and 78 of the Finance Act, 1994 were also held unsustainable because a then-operative departmental circular stated that services provided beyond India's territorial waters were not liable to service tax, giving the assessee reasonable cause under Section 80. The penalty under Section 77 was upheld.

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Issues: (i) whether service tax was payable on the recipient of business auxiliary services received from a foreign service provider prior to 18.04.2006; (ii) whether penalties under Sections 76 and 78 of the Finance Act, 1994 were sustainable in view of Section 80 and the departmental circular then in force.

Issue (i): whether service tax was payable on the recipient of business auxiliary services received from a foreign service provider prior to 18.04.2006.

Analysis: The liability to service tax on such services was held to arise only with effect from 18.04.2006, following the view taken by the Bombay High Court and later followed by the Delhi High Court and other decisions. On that basis, tax demanded for the period before 18.04.2006 could not survive, and the tax liability required redetermination accordingly.

Conclusion: The demand for the period prior to 18.04.2006 was set aside in favour of the assessee.

Issue (ii): whether penalties under Sections 76 and 78 of the Finance Act, 1994 were sustainable in view of Section 80 and the departmental circular then in force.

Analysis: The circular stating that services provided beyond the territorial waters of India were not liable to service tax remained in force until withdrawn on 10.05.2007. The assessee's belief that no tax was payable was held to be bona fide, constituting reasonable cause within Section 80. Penalty under Section 77 was not disputed and was upheld, but the penalties under Sections 76 and 78 were held to be unsustainable.

Conclusion: Penalties under Sections 76 and 78 were set aside in favour of the assessee, while penalty under Section 77 was upheld.

Final Conclusion: The appeal succeeded in part: the pre-18.04.2006 tax demand and the penalties under Sections 76 and 78 did not survive, whereas the penalty under Section 77 was sustained.

Ratio Decidendi: In the case of services received from a foreign provider, service tax liability arose only from 18.04.2006, and a binding circular in force till its withdrawal could furnish reasonable cause under Section 80 for deleting penalties under Sections 76 and 78.

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