2019 (3) TMI 1378 - AT - Service Tax

Manufacturers win tax case on foreign agent commissions, penalty set aside

The tribunal ruled in favor of the appellants, manufacturers and exporters of cotton yarn, regarding the liability to pay service tax on commission paid ... Reverse charge mechanism - exemption under Business Auxiliary Service - Notification No. 13/2003-S.T. - penalty under Section 76 - remission of penalty under Section 80Reverse charge mechanism - exemption under Business Auxiliary Service - Notification No. 13/2003-S.T. - Liability to pay service tax on commission paid to foreign commission agents for export orders during the relevant period. - HELD THAT: - The appellants' contention that cotton yarn is an agricultural produce attracting exemption under the Business Auxiliary Service and Notification No. 13/2003-S.T. was examined and rejected. The Tribunal did not accept that cotton yarn fell within the claimed exemption and held that the appellants were liable to discharge service tax under the reverse charge mechanism for the period in question. The court noted the appellants' reliance on exemptions and the notification but found those contentions unsustainable on the facts and law presented. [Paras 5]The demand for service tax for the normal period (18-4-2006 to 29-2-2008) stands confirmed as the appellants are liable under the reverse charge mechanism; the claimed exemption is not available.Penalty under Section 76 - remission of penalty under Section 80 - Validity of the penalty imposed under Section 76 for non-payment of service tax during the period when the legal position was under litigation. - HELD THAT: - Although the substantive liability for service tax was affirmed, the Tribunal took judicial notice that the question of liability under the reverse charge mechanism was the subject of prolonged litigation. In view of the bona fide belief arising from that litigation, the Tribunal exercised its power under Section 80 to set aside the penalty levied under Section 76. The Tribunal found it inappropriate to visit the appellants with penalty where the legal position was unsettled and contested. [Paras 5]The penalty imposed under Section 76 is set aside and remitted invoking Section 80; consequential reliefs, if any, follow.Final Conclusion: Appeal partly allowed: substantive service tax liability for the period 18-4-2006 to 29-2-2008 affirmed (claimed exemption rejected), but penalty under Section 76 remitted under Section 80 on account of bona fide belief arising from ongoing litigation. Issues:1. Liability to pay service tax on commission paid to foreign agents under reverse charge mechanism.2. Exemption from service tax on cotton yarn as an agricultural produce.3. Applicability of Notification No. 13/2003-S.T.4. Imposition of penalty under Section 76.5. Settlement of the issue of liability to pay service tax under reverse charge mechanism by the decision of the Hon'ble Supreme Court.Analysis:Issue 1: Liability to pay service tax on commission paid to foreign agents under reverse charge mechanismThe appellants, manufacturers and exporters of cotton yarn and blended yarn, utilized commission agents for procurement of export orders outside India and paid commission to foreign agents. The liability to pay service tax on such commission under reverse charge mechanism with effect from 18-4-2016 was established. The appellants were issued a show-cause notice for non-payment of service tax for the period 18-4-2006 to 29-2-2008. The original authority confirmed the demand, interest, and penalties. However, the Commissioner (Appeals) set aside the demand hit by limitation and the penalty imposed under Section 78. The tribunal acknowledged that the issue of liability under reverse charge mechanism was under litigation, and the appellants were not at fault for not discharging the service tax during the relevant period. Consequently, the penalty under Section 76 was set aside invoking Section 80 of the Finance Act, 1994.Issue 2: Exemption from service tax on cotton yarn as an agricultural produceThe appellants argued that cotton yarn being an agricultural produce should be exempt from service tax under Business Auxiliary Service. However, the tribunal disagreed with this argument, stating that cotton yarn did not fall within the exemption notification as pointed out by the appellants' counsel. Therefore, the contention that the appellants were not liable to pay service tax under Notification No. 13/2003-S.T. was deemed unsustainable.Issue 3: Applicability of Notification No. 13/2003-S.T.The tribunal noted that the argument regarding the appellants' exemption from service tax under Notification No. 13/2003-S.T. could not be sustained. The tribunal's decision was based on the fact that the issue of liability under reverse charge mechanism was subject to prolonged litigation, and the appellants were not at fault for not paying the service tax during the relevant period.Issue 4: Imposition of penalty under Section 76The penalty imposed under Section 76 was contested by the appellants on the grounds of their bona fide belief that they were not liable to pay service tax. The tribunal, considering the circumstances and the prolonged litigation on the issue of liability, set aside the penalty under Section 76 invoking Section 80 of the Finance Act, 1994.Issue 5: Settlement of the issue of liability to pay service tax under reverse charge mechanism by the decision of the Hon'ble Supreme CourtThe tribunal acknowledged that the issue of liability to pay service tax under reverse charge mechanism was under litigation for a significant period. The decision of the Hon'ble Supreme Court in the case of M/s. Indian National Ship Owners' Association settled the issue, providing clarity on the liability. This settlement of the legal position contributed to the tribunal's decision to set aside the penalty under Section 76 and partially allow the appeal with consequential reliefs.