Service tax on foreign services received in India was unsustainable for the pre-amendment period, with related penalties also set aside.

Service tax could not be demanded from an Indian recipient for services received from overseas agencies for the period before 18.04.2006, because there was then no charging provision fastening such liability on the recipient under the Service Tax Rules, 1994. The later amendment could not validate the levy for the earlier period, so the demand was unsustainable. As the tax demand failed, the penalties under Sections 76, 77 and 78 of the Finance Act also could not survive independently and were set aside.

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Issues: (i) Whether service tax could be demanded from the recipient in India for services received from overseas agencies for the period prior to 18.04.2006; (ii) Whether the demand and consequential penalties could be sustained for that period.

Issue (i): Whether service tax could be demanded from the recipient in India for services received from overseas agencies for the period prior to 18.04.2006.

Analysis: The liability was sought to be fastened on the service recipient under Rule 2(1)(d)(iv) of the Service Tax Rules, 1994. The governing judicial position held that, for the relevant period, there was no charging provision making the recipient liable for service tax on such services received from outside India. The demand related entirely to a period prior to 18.04.2006, and the later amendment could not sustain the levy for the earlier period.

Conclusion: The demand of service tax on the recipient for the period prior to 18.04.2006 was not sustainable and was held to be in favour of the assessee.

Issue (ii): Whether the demand and consequential penalties could be sustained for that period.

Analysis: Once the tax demand itself failed for the relevant period, the penalty provisions invoked under Sections 76, 77 and 78 of the Finance Act could not survive independently.

Conclusion: The demand and penalties were set aside in favour of the assessee.

Final Conclusion: The appeal succeeded and the impugned order was set aside, resulting in relief to the assessee with respect to the disputed service tax demand and penalties.

Ratio Decidendi: In the absence of a charging provision making the recipient liable, service tax cannot be demanded from the recipient for services received from abroad for a period preceding the statutory amendment creating such liability.

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