2009 (5) TMI 97 - AT - Service Tax

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 ... Pre-deposit waiver - grossing up under Section 195A of the Income Tax Act - service tax liability on amount charged by foreign service providers for off-shore services - Cenvat credit - prima facie case for stay of recoveryPre-deposit waiver - prima facie case for stay of recovery - Waiver of pre-deposit and stay of recovery of the confirmed service tax demand pending appeal. - HELD THAT: - The Tribunal found a strong prima facie case in favour of the appellants and allowed unconditional waiver of the pre-deposit and stay of recovery. The Tribunal accepted the appellants' contention that they had paid service tax on the amounts charged and received by the foreign service providers for off-shore services, and that therefore an unconditional waiver of the pre-deposit was warranted pending adjudication on merits. The order granting waiver and stay was founded on the Tribunal's assessment of the merits at the prima facie stage rather than on any procedural ground.Pre-deposit waived and recovery stayed pending the appeal.Grossing up under Section 195A of the Income Tax Act - service tax liability on amount charged by foreign service providers for off-shore services - Cenvat credit - Whether the amount required to be grossed up under Section 195A for income-tax purposes can be included for computing service tax demand, and the effect of Cenvat credit on the demand. - HELD THAT: - The Tribunal held prima facie that the grossing up provision under Section 195A of the Income Tax Act applies to the method of computing and paying income tax and is not applicable for computing service tax. The appellants had, on the facts before the Tribunal, paid service tax with reference to the amount charged and received by the service providers and not by including the tax-deduction-at-source gross-up. The Tribunal distinguished the decision relied upon by the Revenue (Salim & Associates v. Commissioner of C. Ex., Calicut) on facts, observing that that case concerned exclusion of tax deducted at source for service tax demand whereas here the appellants had paid service tax on the full consultancy payment. Further, the Tribunal noted that the services were used in relation to manufacture of excisable goods, making the appellants eligible to Cenvat credit, rendering the demand revenue-neutral at least prima facie.Grossing up under Section 195A is not to be treated as part of the taxable service amount for computing service tax; appellants entitled to Cenvat credit and the demand is prima facie revenue-neutral.Final Conclusion: The Tribunal found a strong prima facie case and, observing that grossing up under Section 195A pertains to income-tax computation and that the appellants had paid service tax on the amounts charged by foreign service providers and were eligible for Cenvat credit, allowed unconditional waiver of the pre-deposit and stayed recovery of the confirmed demand for the period March 2004 to September 2007 pending the appeal. 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.