Service tax demand set aside where no payment made to provider under reverse charge mechanism

CESTAT Chennai held that service tax demand under Business Auxiliary Service and Technical Inspection and Certification Service lacked factual and legal basis where no payment was made by appellant to the service provider. The tribunal ruled that if quality checking services existed, liability would fall on the actual service provider, not the appellant under reverse charge mechanism. Regarding GTA services, demand for extended period was set aside citing revenue neutrality principle per Nirlon Ltd case, as appellant would be eligible for cenvat credit. Tax liability for normal period was upheld with interest but penalties were entirely set aside due to revenue neutral situation. Appeal was partly allowed.

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Issues involved:
The issues involved in the judgment are whether the appellant is liable to pay service tax under 'Business Auxiliary Service', 'Technical Inspection and Certification Service', and 'GTA Service'.

Business Auxiliary Service and Technical Inspection and Certification Service:
The appellant, engaged in the manufacture and export of knitted garments, receives orders for supply of goods to M/s.Bonprix, Germany through M/s.JPS Trading, a sourcing agent based in Dubai. The department alleged that deductions made by the appellant in the invoice for bonus, inspection charges, and recycling compensation are payments for services provided by M/s.JPS Trading, Dubai, and are taxable. However, the tribunal found that the deductions were discounts in the sale transaction, not payments for services. The quality testing of garments was done by M/s.Fashion Force in India, an agent of M/s.JPS Trading, Dubai. The tribunal held that the demand under 'BAS' and 'Technical Inspection and Certification Service' lacked factual and legal basis, setting it aside.

GTA Service:
Regarding the demand under GTA service, the authorities granted abatement after 1.3.2008 but invoked the extended period for the period before. The appellant argued that services related to export are not subject to service tax, and even if paid, tax would be eligible as credit. Citing precedents, the tribunal held that the extended period cannot be invoked in a revenue-neutral situation. The demand, interest, and penalties under 'GTA Service' for the extended period were set aside. However, the appellant is liable to pay tax on GTA services for the normal period along with interest, with penalties entirely set aside due to the revenue-neutral situation.

Conclusion:
The tribunal partly allowed the appeal, setting aside the demand, interest, and penalties under 'Business Auxiliary Service' and 'Technical Inspection and Certification Services'. For 'GTA Service', the demand, interest, and penalties for the extended period were set aside, but the appellant is liable to pay tax for the normal period along with interest. The penalties for GTA services were entirely set aside.

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