Retrospective tax expansion barred, but reverse-charge service tax had to be paid in cash and limitation was extended.

An amendment widening the taxable value by covering book adjustments with an associated enterprise was held not to apply retrospectively, so service tax could not be demanded for periods before 10.05.2008; liability survived only for post-amendment adjustments already discharged with interest. For reverse-charge service tax on services received from foreign providers, cash payment was required and prior utilisation of Cenvat credit was not accepted, and the extended limitation period remained invocable where the prescribed payment method was not followed. Penalty objections tied to the full original demand did not survive after the pre-10.05.2008 demand was set aside.

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Issues: (i) Whether the amendment with effect from 10.05.2008, bringing amounts adjusted with an associated enterprise within the taxable value, could be applied retrospectively to demand service tax on outstanding balances prior to that date; (ii) Whether service tax payable on reverse charge basis for services received from foreign service providers could be discharged by utilization of Cenvat credit instead of cash payment, and whether the extended period of limitation was invocable; (iii) Whether penalty under Section 78 of the Finance Act, 1994 ought to have been imposed on the total tax demand.

Issue (i): Whether the amendment with effect from 10.05.2008, bringing amounts adjusted with an associated enterprise within the taxable value, could be applied retrospectively to demand service tax on outstanding balances prior to that date.

Analysis: The amendment to Section 67 of the Finance Act, 1994 and the corresponding insertion in Rule 6(1) of the Service Tax Rules, 1994 expanded the tax base by treating amounts received through book adjustment with an associated enterprise as part of the taxable value. Such a change widened the taxing net. Relying on the principle that an amendment widening the levy cannot be treated as retrospective unless clearly provided, the demand was held unsustainable for the period before 10.05.2008. Liability was confined only to adjustments made on or after the amendment date, and the amount for that later period had already been discharged with interest.

Conclusion: The demand for the pre-10.05.2008 period was set aside in favour of the assessee.

Issue (ii): Whether service tax payable on reverse charge basis for services received from foreign service providers could be discharged by utilization of Cenvat credit instead of cash payment, and whether the extended period of limitation was invocable.

Analysis: Service tax under Section 66A of the Finance Act, 1994 and Rule 5 of the Taxation of Services (Provided from outside India and received in India) Rules, 2006 was required to be paid in cash, with credit available only after such cash payment. Utilization of Cenvat credit at the point of discharge did not create a revenue-neutral situation. The demand was therefore upheld. On limitation, the disclosure in returns did not preclude invocation of the extended period where the statutory mode of payment had not been followed.

Conclusion: The demand on reverse charge basis and the invocation of the extended period were upheld against the assessee.

Issue (iii): Whether penalty under Section 78 of the Finance Act, 1994 ought to have been imposed on the total tax demand.

Analysis: Since the demand relating to the pre-10.05.2008 period was set aside and the balance amount relating to reverse charge liability stood separately dealt with, the Revenue's grievance that penalty should have been imposed on the entire original demand did not survive.

Conclusion: The Revenue's challenge to the penalty was rejected.

Final Conclusion: The assessee succeeded on the retrospective levy issue, failed on the reverse charge and limitation issue, and the Revenue's appeal on penalty was dismissed, resulting in a modification of the impugned order and only partial relief to the assessee.

Ratio Decidendi: An amendment that enlarges the taxable net cannot be applied retrospectively, and reverse-charge service tax prescribed to be paid in cash cannot be validly discharged by prior utilization of Cenvat credit.

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