Reverse-charge service tax on foreign services and TDS inclusion in value were confined by statutory charge and limitation rules.

Reverse-charge service tax on foreign services could be levied only from the introduction of section 66A of the Finance Act, 1994, so any demand for the earlier period was not sustainable. The tax deducted at source borne by the Indian recipient was a statutory income-tax burden and not part of the agreed consideration for the foreign consultancy service, so it was excluded from the taxable value. The record also did not show wilful suppression or intent to evade, so the extended limitation period was unavailable and the demand was time-barred.

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Issues: (i) whether service tax under the reverse charge mechanism could be levied for the period prior to the introduction of section 66A of the Finance Act, 1994; (ii) whether the tax deducted at source borne by the service recipient was includible in the taxable value for service tax; (iii) whether the demand was barred by limitation.

Issue (i): whether service tax under the reverse charge mechanism could be levied for the period prior to the introduction of section 66A of the Finance Act, 1994.

Analysis: Liability on services received from abroad under reverse charge was held to arise only from the introduction of section 66A with effect from 18.04.2006. The earlier period could not be subjected to service tax on that basis.

Conclusion: The demand for the period prior to 18.04.2006 was not sustainable and was set aside in favour of the assessee.

Issue (ii): whether the tax deducted at source borne by the service recipient was includible in the taxable value for service tax.

Analysis: The agreements showed that the agreed consideration for the foreign consultancy services was the actual fee payable to the service provider, while the income-tax deduction was a statutory burden borne by the Indian recipient. Grossing up under the direct tax law was only for deduction purposes and did not convert the TDS component into consideration for service tax. The amount subjected to TDS was not part of the consideration charged for the service.

Conclusion: The TDS component was not includible in the taxable value and the demand on that basis was unsustainable in favour of the assessee.

Issue (iii): whether the demand was barred by limitation.

Analysis: The dispute involved a legal interpretation on taxability of foreign services and the inclusion of TDS in value. The record did not establish wilful suppression or intent to evade service tax so as to justify the extended period.

Conclusion: The demand was time-barred and could not be sustained in favour of the assessee.

Final Conclusion: The impugned demands could not survive on merits or on limitation, and the appeals succeeded with consequential relief according to law.

Ratio Decidendi: Statutory tax deducted at source borne by the recipient, when not forming part of the agreed consideration payable to the foreign service provider, does not constitute the taxable value for service tax; further, reverse-charge liability for foreign services arises only from the statutory provision creating that charge and cannot be fastened retrospectively by implication.

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