Reverse charge service tax on foreign software services fails where the Indian arm is only incidental support, and extended limitation is barred.

Reverse charge service tax on software-related services received from a foreign supplier was held unsustainable where the Indian subsidiary was treated as only providing incidental support and did not justify fastening liability on the recipient on a permanent establishment theory. The Tribunal also held that the demand could not be extended by invoking the extended period of limitation because the dispute was interpretational and the record did not show wilful suppression or mala fide intent to evade tax. The service tax demand was therefore set aside on both merits and limitation, with consequential relief.

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Issues: (i) Whether service tax under reverse charge mechanism was payable on software-related services received from a foreign supplier where the foreign enterprise had an Indian subsidiary allegedly functioning as its permanent establishment; (ii) Whether the demand could be sustained by invoking the extended period of limitation.

Issue (i): Whether service tax under reverse charge mechanism was payable on software-related services received from a foreign supplier where the foreign enterprise had an Indian subsidiary allegedly functioning as its permanent establishment.

Analysis: The dispute concerned import of software-related services for use with diamond processing machines, with payment made directly to the foreign supplier. The Tribunal noted that the identical controversy had already been decided in earlier proceedings involving the same business arrangement. Applying that reasoning, it accepted that the Indian entity's activities were only incidental support functions and did not, on the facts found, justify fastening reverse charge liability on the recipient on the premise that the foreign supplier lacked a permanent establishment in India. The substantive liability issue was therefore governed by the earlier binding view that the service tax demand could not be sustained in such a situation.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): Whether the demand could be sustained by invoking the extended period of limitation.

Analysis: The Tribunal followed the earlier decision on limitation as well. It accepted that the controversy was interpretational, that the record did not establish wilful suppression or mala fide intent to evade tax, and that the demand beyond the normal period could not be maintained on the extended limitation theory.

Conclusion: The issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded on both merits and limitation, and the service tax demand was set aside with consequential relief.

Ratio Decidendi: Where the foreign supplier's Indian arm does not justify treating the foreign supplier as lacking a permanent establishment for the relevant service arrangement, reverse charge liability cannot be fastened on the Indian recipient on that basis; in an interpretational dispute without wilful suppression, the extended period of limitation is not invocable.

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