Reverse charge on overseas banking services sustained, while pre-notice payment and bona fide belief justified penalty waiver.

Service tax was held payable on upfront fee, commitment fee and similar charges paid to an overseas service provider in connection with external commercial borrowings, on the basis that banking and financial services received from abroad attracted the reverse charge mechanism under section 66A(2) of the Finance Act, 1994. However, where the assessee paid the tax and interest before issue of the show cause notice, section 73(3) barred notice for the amount already discharged and the bona fide belief supported waiver of penalties under section 80. The demand for tax and interest was sustained, but the penalties were set aside.

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Issues: (i) Whether service tax was payable on upfront fee, commitment fee and similar charges paid to an overseas service provider in connection with external commercial borrowings. (ii) Whether, in view of payment of tax and interest before issuance of the show cause notice, penalties could be sustained.

Issue (i): Whether service tax was payable on upfront fee, commitment fee and similar charges paid to an overseas service provider in connection with external commercial borrowings.

Analysis: The liability to service tax on such payments was treated as settled in principle. The assessee had availed banking and financial services from abroad and the levy was examined in the context of reverse charge and the treatment of permanent establishments as separate persons under section 66A(2) of the Finance Act, 1994.

Conclusion: Service tax was payable on the disputed amounts.

Issue (ii): Whether, in view of payment of tax and interest before issuance of the show cause notice, penalties could be sustained.

Analysis: The assessee had discharged the tax liability with interest before issuance of the notice. In that situation, section 73(3) of the Finance Act, 1994 barred issuance of a notice for the amount already paid, and the facts disclosed a bona fide belief. On that basis, the penalty provisions were not attracted and section 80 of the Finance Act, 1994 was applied to sustain waiver of penalties.

Conclusion: Penalties were not sustainable and the order setting them aside was upheld.

Final Conclusion: The demand of service tax and interest was sustained, but the waiver of penalties was confirmed, and both appeals failed.

Ratio Decidendi: Where the assessee pays the service tax with interest before issuance of the notice, section 73(3) of the Finance Act, 1994 restricts penal consequence for the paid amount, and bona fide belief can justify waiver of penalties under section 80 of the Finance Act, 1994.

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