2021 (9) TMI 81 - AT - Service Tax

Tribunal rules in favor of appellants, setting aside Service Tax demand & rejecting TDS inclusion.

M/s. T.V.S. Motor Company Limited Versus Commissioner of Central Excise & Service Tax, Chennai

The Tribunal ruled in favor of the appellants in both appeals, setting aside the demand for Service Tax before 18.04.2006 and rejecting the inclusion of ... Valuation - reverse charge mechanism - inclusion of tax deducted at source (TDS) in assessable value for determining the taxable value - Technical Consultancy Services and Project Consultancy Services - Section 66 of the Finance Act, 1994 read with 2(1)(d)(iv) of the Service Tax Rules, 1994, before the introduction of Section 66A of the Finance Act - extended period of limitation - Eligibility for cum-tax benefit. HELD THAT:- The issue as to whether the appellants are liable to pay Service Tax under reverse charge mechanism before the introduction of Section 66A in the Finance Act, 1994 is settled by the decision of the Hon’ble High Court of Bombay in the case of INDIAN NATIONAL SHIPOWNERS ASSOCIATION VERSUS UNION OF INDIA [2008 (12) TMI 41 - BOMBAY HIGH COURT]. The Hon’ble High Court held that the liability to pay Service Tax under reverse charge mechanism would arise only after the introduction of Section 66A with effect from 18.04.2006 to the Finance Act, 1994. The said decision was upheld by the Hon’ble Supreme Court in UNION OF INDIA VERSUS INDIAN NATIONAL SHIPOWNERS ASSOCIATION [2009 (12) TMI 850 - SC ORDER] - the demand of Service Tax till 18.04.2006 cannot sustain. Levy of service tax - TDS borne by the appellant while grossing up of the consideration payable to the service provider - HELD THAT:- The TDS is paid / deposited to Government by the appellant out of a statutory liability. Such activity of deducting the tax at source is a legal obligation and the amount so deducted cannot be taken as consideration for services rendered. The amount on which the parties have reached a consensus ad idem can only be the consideration for the services. Further, the amount of tax deducted varies and depends upon the rate in force. There is no agreement by the parties with regard to the amount of TDS that has to be deducted. It wholly depends upon the law prevailing in the direct tax regime. The decision in the case of M/S. HINDUSTAN OIL EXPLORATION CO. LTD. VERSUS COMMISSIONER OF GST & CENTRAL EXCISE [2019 (2) TMI 1248 - CESTAT CHENNAI] have categorically held that when the TDS amount has been borne by the assessee and only the consideration for the services as agreed upon by the parties has been paid to the service provider, the same cannot be included in the taxable value for determining the Service Tax liability. The demand for the entire period (3/2004 to 9/2007 and 10/2006 to 9/2007) cannot sustain and requires to be set aside - the issue is also found in favour of the appellant. Extended period of limitation - HELD THAT:- The issue is wholly an interpretational one and there were several litigations pending before different fora. So also, it has to be noted that the appellant has dutifully discharged the Service Tax liability on the entire consideration paid by them. The demand is only on the TDS portion remitted under the Income Tax Act. There is no positive act of wilful suppression with intention to evade payment of Service Tax brought out by the Department for invoking the extended period - the demand is time-barred and cannot sustain. Eligibility for cum-tax benefit - HELD THAT:- Since it is held that there is no liability to pay the differential tax, the issue of cum-tax benefit has no relevance and the demand confirmed cannot sustain and requires to be set aside. Appeal allowed. Issues Involved:1. Liability to pay Service Tax under reverse charge mechanism before the introduction of Section 66A of the Finance Act, 1994.2. Inclusion of Tax Deducted at Source (TDS) in the taxable value for discharging Service Tax.Detailed Analysis:1. Liability to Pay Service Tax Under Reverse Charge Mechanism Before the Introduction of Section 66A:The Tribunal addressed whether the appellants were liable to pay Service Tax under the reverse charge mechanism before Section 66A was introduced in the Finance Act, 1994. The Tribunal referenced the decision of the Hon’ble High Court of Bombay in the case of M/s. Indian National Shipowners Association v. Union of India, which held that liability under the reverse charge mechanism would arise only after the introduction of Section 66A effective from 18.04.2006. This decision was upheld by the Hon’ble Supreme Court. Consequently, the Tribunal concluded that the demand for Service Tax prior to 18.04.2006 could not be sustained and must be set aside.2. Inclusion of TDS in the Taxable Value for Discharging Service Tax:The second issue was whether Service Tax should be levied on the amount of TDS borne by the appellant when grossing up the consideration payable to the service provider. The appellant argued that the consideration agreed upon in the Advisory Agreement was net of all duties and taxes, and the TDS was borne by the appellant, not the service provider. The Tribunal noted that the TDS amount was grossed up only for the purpose of the Income Tax Act, and the consideration for Service Tax purposes remained unchanged.The Tribunal reviewed several precedents, including decisions in M/s. Hindustan Oil Exploration Co. Ltd., M/s. Indian Additives Ltd., and M/s. Centre for High Technology, which consistently held that when the TDS is borne by the service recipient, it should not be included in the taxable value for Service Tax purposes. The Tribunal agreed with these precedents, emphasizing that the TDS is a statutory obligation and not a consideration for services rendered.Arguments on Limitation:The appellant also argued on the ground of limitation, stating that the issue was interpretational and involved several litigations. The Tribunal noted that the appellant had discharged the Service Tax liability on the actual consideration paid, and there was no evidence of willful suppression with intent to evade tax. Therefore, the demand invoking the extended period of limitation was found to be unsustainable and time-barred.Cum-Tax Benefit:In Service Tax Appeal No. 41077 of 2013, the issue was whether the appellant was eligible for cum-tax benefit. Since the Tribunal held that there was no liability to pay the differential tax, the issue of cum-tax benefit became irrelevant and the demand was set aside.Conclusion:The Tribunal set aside the impugned orders in both appeals, allowing the appeals with consequential reliefs as per law. The judgment emphasized that the TDS borne by the appellant should not be included in the taxable value for Service Tax purposes and that the demand for Service Tax prior to 18.04.2006 was unsustainable. The Tribunal also found the demand time-barred due to the interpretational nature of the issue and lack of evidence of willful suppression.