Reverse charge service tax on imported services was not leviable before Section 66A; exempt ADB services and publication subscriptions escaped tax.

Service tax on imported services on reverse charge basis was not leviable for the period before Section 66A came into force on 18.04.2006, so demands for that earlier period were unsustainable. Services relating to ADB projects were treated as exempt under Notification No. 16/2002-ST read with the United Nations (Privileges and Immunities) Act, and remittances for foreign publication subscriptions were not taxable where no taxable service was procured. Interest was maintained on the admitted tax liability, but penalties were waived under Section 80 of the Finance Act, 1994, with penalties under Sections 77 and 78 not surviving to the extent set aside.

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Issues: (i) Whether service tax could be demanded on reverse charge basis for services received from abroad for the period prior to 18.04.2006; (ii) Whether the demand relating to ADB-related services and subscription of foreign publications was sustainable; (iii) Whether penalties and interest were liable to be maintained.

Issue (i): Whether service tax could be demanded on reverse charge basis for services received from abroad for the period prior to 18.04.2006.

Analysis: Liability on the recipient for services imported from outside India arose only after insertion of Section 66A of the Finance Act, 1994 with effect from 18.04.2006. For the earlier period, the settled law did not permit levy on reverse charge basis for such foreign services. The demand was also traced to Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 and the Taxation of Services (Provided from outside India and Received in India) Rules, 2006, but the charge itself was not available before the statutory insertion of Section 66A.

Conclusion: The demand for the period up to 17.04.2006 was not sustainable and was set aside in favour of the assessee.

Issue (ii): Whether the demand relating to ADB-related services and subscription of foreign publications was sustainable.

Analysis: Services rendered in relation to ADB projects were held eligible for exemption under Notification No. 16/2002-ST dated 02.08.2002, read with Section 3 of the United Nations (Privileges and Immunities) Act, 1947. As to subscription of foreign publications, the Tribunal found that mere remittance towards subscription, without procurement of a taxable service, did not attract service tax.

Conclusion: The demand relating to ADB projects and publication subscriptions was set aside in favour of the assessee.

Issue (iii): Whether penalties and interest were liable to be maintained.

Analysis: Interest was sustained on the admitted and paid tax liability. However, in the circumstances, the proportionate penalty was not warranted and was set aside by invoking Section 80 of the Finance Act, 1994. Penalties imposed under Sections 77 and 78 of the Finance Act, 1994 did not survive to the extent set aside.

Conclusion: Interest was upheld on the admitted liability, while penalties were set aside in favour of the assessee.

Final Conclusion: The appeal succeeded in substantial part, with the pre-18.04.2006 demand and the disputed residual items being deleted, while only the admitted tax with interest was sustained and penalty relief granted.

Ratio Decidendi: Service tax on imported services on reverse charge basis could not be levied for the period prior to the statutory insertion of Section 66A, and no tax could be imposed where an exemption applied or where no taxable service was procured.

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