CESTAT Chennai: Waiver granted for service tax pre-deposit on off-shore services

The Appellate Tribunal CESTAT, Chennai, granted the waiver of pre-deposit of service tax amounting to Rs. 1,65,53,563 for off-shore services from March 2004 to September 2007. The Tribunal held that grossing up under Section 195A of the Income Tax Act does not apply for computing service tax. It distinguished a previous decision on tax deducted at source exclusion, stating that the services received were eligible for Cenvat credit, ensuring revenue neutrality. The Tribunal found a strong prima facie case for unconditional waiver and stayed the recovery pending appeal, with the order pronounced on 18-5-2009.

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Issues:
Waiver of pre-deposit of service tax on off-shore services; Applicability of grossing up of amount under Section 195A of the Income Tax Act for service tax calculation; Distinction from previous Tribunal decision on tax deducted at source exclusion; Eligibility for Cenvat credit and revenue neutrality.

Analysis:

The Appellate Tribunal CESTAT, Chennai, considered the application for waiver of pre-deposit of service tax amounting to Rs. 1,65,53,563 confirmed on payments made to foreign service providers for "off-shore services" from March 2004 to September 2007. The Tribunal noted the contention of the applicants that they are liable to pay service tax based on the amount charged and received by the service provider, and that the provision for grossing up under Section 195A of the Income Tax Act is not applicable for computing service tax. The Tribunal found merit in the argument that the decision in Salim & Associates v. Commissioner of C. Ex,, Calicut, 2007, relied on by the Revenue, is distinguishable as it pertained to tax deducted at source exclusion, unlike the present case where service tax was paid on the entire technical consultancy payment to foreign service providers for off-shore services. Additionally, the Tribunal observed that the services received by the applicants were used in relation to the manufacture of excisable goods, making them eligible for Cenvat credit, rendering the demand revenue-neutral.

The Tribunal, after deliberation, held that a strong prima facie case for unconditional waiver of pre-deposit had been established on merits. Consequently, the Tribunal granted the prayer of the assessees for waiver of pre-deposit and stay of recovery of the amounts adjudged pending the appeal. The operative part of the order was pronounced in open court on 18-5-2009.

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