Revenue neutrality and pre-SCN payment defeated service tax demand, interest, and penalties on foreign group company book provisions.

Service tax was payable on amounts provided in the books of account for services received from foreign group companies under section 66A read with section 67 of the Finance Act, 1994, as amended for associated enterprise transactions. However, the assessee had already paid the tax and interest before the show-cause notice, had invoked the protection of section 73(3), and the non-payment was treated as an inadvertent continuation of an earlier practice. Because the duty was revenue neutral through available Cenvat credit, suppression was not established and section 73(4) did not apply. The demand, interest and penalties were therefore not sustainable.

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Issues: Whether service tax was payable on amounts provided in the books of account for services received from foreign group companies, and whether the demand, interest and penalties could survive when tax and interest were paid before issuance of the show-cause notice and the assessee pleaded revenue neutrality and absence of suppression.

Analysis: The liability arose under section 66A of the Finance Act, 1994 read with section 67 as amended to include amounts provided in the books of account for associated enterprise transactions. However, the assessee had been regularly paying service tax on actual payments to foreign service providers and the non-payment on book provisions was treated as an inadvertent continuation of the earlier position. Since the tax so payable was immediately available as Cenvat credit and could have been neutralised against duty on final products, the dispute was revenue neutral. In that background, suppression of fact was not established and section 73(4) of the Finance Act, 1994 was held inapplicable. The assessee had also paid the tax and interest before the show-cause notice and had opted for the protection under section 73(3) by letter dated 02/07/2009.

Conclusion: The demand, interest and penalties were not sustainable, and the appeal was allowed in favour of the assessee.

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