Reverse charge service tax fails where advance for capital goods is refunded after contract cancellation and no service survives.

Advance paid for procurement of capital goods, followed by cancellation of the contract and refund by the foreign supplier, did not give rise to any surviving taxable service. On those facts, service tax was not payable under reverse charge mechanism because the payment was towards goods and not towards a service transaction. As the tax demand itself failed, the penalty also could not survive. The impugned order was set aside and the appeal was allowed with consequential relief.

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Issues: Whether service tax was payable under reverse charge mechanism on the advance paid for procurement of capital goods, where the contract was subsequently cancelled and the advance was refunded, and whether penalty could survive.

Analysis: The advance was found to have been paid towards the capital goods and not towards any service. The contract was cancelled and the amount paid was refunded by the foreign supplier. On these facts, no service transaction survived between the parties, and the demand could not be sustained under reverse charge. Since the tax demand itself failed, the penalty also could not survive.

Conclusion: The appellant was held not liable to pay service tax under reverse charge mechanism and no penalty was imposable.

Final Conclusion: The impugned order was set aside and the appeal was allowed with consequential relief.

Ratio Decidendi: Where the payment is for procurement of goods, the contract is cancelled, and the consideration is refunded, no taxable service survives to attract service tax under reverse charge mechanism.

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