Maintenance repair services to Nepal clients liable for service tax without convertible foreign exchange payment

The CESTAT Kolkata held that appellants providing maintenance and repair services to Nepal clients failed to receive payment in convertible foreign exchange, making them liable for service tax despite treating transactions as exports. The tribunal found appellants had bonafide belief that no service tax was payable, having declared all transactions in returns and fulfilled service conditions in Nepal. Consequently, the extended period demand was set aside due to absence of suppression intent, but normal period liability remained. All penalties were waived given interpretational difficulties and bonafide belief. Appeal was allowed in part.

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Issues Involved:
1. Service Tax liability for services rendered outside India.
2. Invocation of the extended period of limitation.
3. Treatment of payment received in Nepalese currency.
4. Simultaneous imposition of penalties under Sections 76 and 78.
5. Demand beyond the extended period of 5 years.
6. Entitlement to cum-tax benefit.

Summary:

1. Service Tax Liability for Services Rendered Outside India:
The appellant argued that services provided to clients in Nepal should not attract Service Tax as per Section 64 of the Finance Act, 1994, which applies only to services within India. However, the Tribunal held that Section 64 specifies jurisdiction and does not exclude services rendered outside India from Service Tax liability. The Export of Services Rules, 2005, which provide for Service Tax exemption, require the receipt of payment in convertible foreign exchange, a condition not met by the appellant.

2. Invocation of the Extended Period of Limitation:
The appellant contended that the extended period should not be invoked as the turnover for Nepal was shown in ST-3 Returns, treating it as exports, and they had a bona fide belief that no Service Tax was payable. The Tribunal found that the appellant had declared all transactions in their books and statutory returns, indicating no intent to evade tax. Thus, the extended period demand was set aside.

3. Treatment of Payment Received in Nepalese Currency:
The appellant argued that payment received in Nepalese currency, converted into Indian Rupees, should be treated as convertible foreign exchange. The Tribunal referred to the Exchange Control Manual of the Reserve Bank of India, which excludes Nepalese currency from being considered as convertible foreign exchange. Hence, the appellant did not meet the mandatory condition for Service Tax exemption.

4. Simultaneous Imposition of Penalties under Sections 76 and 78:
The Tribunal did not specifically address this issue, but by setting aside all penalties, it implicitly resolved this in favor of the appellant.

5. Demand Beyond the Extended Period of 5 Years:
The Tribunal acknowledged that part of the confirmed demand was beyond the extended period of 5 years and set aside this portion of the demand, as there is no legal provision for such an extended period.

6. Entitlement to Cum-Tax Benefit:
The appellant sought cum-tax benefit, arguing that they had not charged Service Tax to their Nepalese clients. The Tribunal denied this benefit, stating that the appellant had a firm belief that no Service Tax was payable and did not intend to treat the consideration as cum-tax.

Conclusion:
The Tribunal upheld the Service Tax demand for the normal period along with interest but set aside the demand for the extended period and beyond 5 years. All penalties were also set aside due to the bona fide belief and interpretational difficulties. The appeal was partly allowed.

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