Reverse charge service tax on overseas technical know-how was not sustainable before section 66A came into force.

Liability to pay service tax on technical know-how and related services received from persons outside India on reverse charge basis arose only after insertion of section 66A of the Finance Act, 1994 with effect from 18.04.2006. For the period before that date, including financial year 2005-06, the charge was not legally attracted. As the principal demand failed, the connected levy of interest and penalties also could not survive, and the demand was set aside in favour of the assessee.

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Issues: Whether service tax, interest, and penalties could be sustained on reverse charge basis for technical know-how and related services received from persons located outside India during the period prior to insertion of section 66A of the Finance Act, 1994.

Analysis: The liability to pay service tax on services procured from outside India on reverse charge basis was held to arise only after insertion of section 66A of the Finance Act, 1994 with effect from 18.04.2006. For the disputed period, namely financial year 2005-06, the charge was not legally attracted. Once the principal demand was unsustainable, the connected levy of interest and penalties also could not survive.

Conclusion: The demand of service tax, interest, and penalties was held unsustainable and set aside in favour of the assessee.

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