2009 (5) TMI 76 - AT - Service Tax

Tribunal overturns penalties in service tax case due to voluntary payment before law enactment.

The Tribunal set aside all penalties imposed on the appellant in a case involving service tax demand for intellectual property services received from a ... Imposability of service tax on an Indian recipient for services received from abroad prior to the enactment of section 66A - Penalty under sections 76, 77 and 78 contingent on existence of taxable liability - Effect of judicial invalidation of regulatory provision authorising levy on recipients of foreign servicesImposability of service tax on an Indian recipient for services received from abroad prior to the enactment of section 66A - Penalty under sections 76, 77 and 78 contingent on existence of taxable liability - Effect of judicial invalidation of regulatory provision authorising levy on recipients of foreign services - Whether penalties under sections 76, 77 and 78 could be imposed where the service tax demand related to intellectual property services received from abroad for the period October, 2004 to March, 2006 - HELD THAT: - The Bombay High Court in Indian National Shipowners Association held that authority to levy service tax from a person resident in India in respect of services received from abroad was conferred on the Central Government for the first time by section 66A with effect from 18-4-2006, and the pre-existing rule purporting to authorise such levy was struck down. The demand in this case related to the period prior to 18-4-2006; consequently the legal source for levying service tax on the Indian recipient for that period did not exist. Each of the penalties under sections 76, 77 and 78 is leviable only against a person who is liable to pay service tax. Since the appellant was not liable in law to pay service tax for the disputed period, imposition of the penal provisions could not be sustained despite prior voluntary payment of tax and interest.Penalties under sections 76, 77 and 78 set aside and the appeal allowed.Final Conclusion: Because the authority to levy service tax on an Indian recipient of services from abroad was held to exist only from 18-4-2006, the appellant was not liable for the tax for October, 2004 to March, 2006 and therefore cannot be penalised under sections 76, 77 and 78; the penalties are set aside and the appeal is allowed. Issues:Adjudication of service tax demand, imposition of penalties, applicability of penalty on voluntary tax payment, authority to levy service tax from recipient in India for services received from abroad, legality of penalty imposition.Analysis:1. The original authority confirmed a service tax demand against the assessee for intellectual property services received from a foreign company, leading to penalties under sections 76, 77, and 78 of the Finance Act, 1994. The Commissioner (Appeals) upheld this order, prompting the assessee to appeal. The main contention was the imposition of penalties despite the service tax with interest being paid before the show-cause notice was issued.2. The appellant argued that no penalty should apply as the tax was voluntarily paid before the enactment of section 66A of the Finance Act, 1994, which authorized the levy of service tax on services received from abroad. Citing precedents and the Bombay High Court's decision, the appellant claimed that no penalty should be imposed on a taxpayer who paid the duty before a show-cause notice.3. The department contended that the appellant never denied the tax liability and paid it voluntarily, making them liable for mandatory penalties. Referring to relevant case laws, including a Supreme Court judgment, the department argued that penalties were applicable even if the tax was paid before the show-cause notice.4. The Tribunal analyzed the legal basis of the case, considering the striking down of certain provisions of the Service Tax Rules, 1994 by the Bombay High Court. It was established that the authority to levy service tax on services received from abroad was vested in the Central Government under section 66A from 18-4-2006. As the tax paid by the appellant was not legally payable, the penalties under sections 76, 77, and 78 were deemed inapplicable. The Tribunal emphasized the importance of the High Court's judgment in invalidating the legal source of the service tax demand.5. Consequently, the Tribunal set aside all penalties imposed on the appellant, ruling in favor of the appellant in the appeal.