Brief Facts of the Case
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“Section 66A”
(a) provided or to be provided by a person who has stablished a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and (b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India. Such service shall, for the purpose of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provisions of the chapter shall apply: Provided that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply: Provided further that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.
Explanation 1. - A person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country. Explanation 2. - Usual place of residence, in relation to a body corporate, means the place where it is incorporated or otherwise legally constituted. 16.2. On going through the above provisions of Rule 2(1)(d)(iv) of Service Tax Rules, 1994 and section 66A of The Finance Act, 1994 it is clear that both these provisions provide for charging or recovering the service tax under reverse charge mechanism, they have to be separately examined in reference to the present case. Whereas Section 66A is a charging section, Rule 2(1)(d)(iv) of Service Tax Rules, 1994 is a recovering provision. Before examining the recovery aspect it is essential to examine the chargeability aspect. If tax alleged to be recoverable is not capable of being charged, the question of examining the recovery comes later. 16.3. Noticee further submitted that the impugned SCN proposed the Service Tax, Education cess and Higher Education Cess on the alleged services provided from outside India but received in India for the period 2004-05, 2005-06, 2006-07, 2007-08 and 2008-09 for Rs.8,36,660/-, Rs.14,43,142/-, Rs.16,97,150/-, Rs.28,19,616/- & Rs.12,18,395/- respectively totally amounting to Rs.80,14,963/-. 16.4. From the above, it can be verified that the impugned SCN has not considered the period covered for the alleged Service vis-à-vis the applicability of the provisions of Rule 2(1)(d)(iv) of Service Tax Rules, 1994 and section 66A of The Finance Act 1994. By this the noticee mean to say that, the test of applicability or otherwise of the provisions of Rule 2(1)(d)(iv) of Service Tax Rules, 1994 and section 66A of The Finance Act 1994 should be carried out with respect to the period during which such services in question were provided. 16.5. There is a difference in interpretation for applying provisions of Rule 2(1)(d)(iv) of Service Tax Rules, 1994 and section 66A of The Finance Act 1994. In other words, applicability of section 66A precedes the applicability of Rule 2(1)(d)(iv) of Service Tax Rules, 1994 meaning thereby that if section 66A cannot be made applicable to a transaction account of the nature of the transaction being not chargeable, the question of applicability of Rule 2(1)(d)(iv) of Service Tax Rules, 1994 does not arise since the said provision is for determining the liability about who actually is liable to pay service tax if at all the transaction is liable to service tax. Needless to mention that section 66A came into operation from 18.04.2006 since it has applicability with prospective date. Hence the transactions in the instant case taking place after 18.04.2006 can only be said to or considered for charging Service Tax under reverse charge mechanism since this is a new section introduced as a charging section with specified date of applicability i.e. 18.04.2006. Hence it cannot have any retrospective effect unless otherwise specified. In this view of the matter, the amount of Service Tax proposed to be levied for the period prior to 18.04.2006 i.e. for the period 2004-05 & 2005-06 in respect of alleged foreign bank charges (Service Tax of Rs.2,32,093/-) is without correct application of the provisions and hence the impugned SCN to that extent is liable to be set aside. 16.6. Here if the Notice is closely examined, the applicability of the above provisions, it becomes clear that Section 66A is a charging section, Rule 2 (1) (d) (iv) of Service Tax Rules, 1994 is a recovering provision. Before examining the recovery aspect it is essential to examine the chargeability aspect. If tax alleged to be recoverable is not capable of being charged, the question of examining the recovery comes later. Also both of these provisions need to be separately examined for the present case. 16.7. The argument of the noticee regarding applicability of provisions of Section 66A remains unchanged irrespective of the category of the service in so far as the services are provided prior to 18.04.2006. Hence in the instant case all the services i.e. services in relation to ‘Foreign Bank Charges’ provided prior to 18.04.2006 are not chargeable to Service Tax as far as the period up to 18.04.2006 is concerned. Hence the question which now needs to be examined is regarding the proposal to levy Service Tax for the period subsequent to 18.04.2006. 17. We again draw the kind attention of Your Honour to the following citation: 2009 (13) S.T.R. 235 (Bom.) IN THE HIGH COURT OF JUDICATURE AT BOMBAY D.K. Deshmukh and J.P. Devadhar, JJ. INDIAN NATIONAL SHIPOWNERS ASSOCIATION Versus UNION OF INDIA Writ Petition No. 1449 of 2006, decided on 11-12-2008 The decision in the abovementioned case was that services provided prior to 18.04.2006 are not liable to be taxed. But the revenue preferred an appeal against the order of the Hon’ble High Court before the Supreme Court and the Hon’ble Apex Court had dismissed the appeal of the revenue the citation of which is as under: “Union of India v.Indian National Shipowners Association-2010(17) S.T.R. J57(S.C.)”- ( copy enclosed ) In this way the proposal to levy Service Tax in respect of all cases where services are provided prior to 18.04.2006 are liable to be dropped and hence the impugned ORDER IN APPEAL passed by the Honourable Commissioner (Appeal) deserves to be dropped. 17.1.Noticee further submitted that ratio of the judgment in the case of Indian national ship owners association is also followed by the Honourable Chennai Tribunal as per the following citation 2009 (16) S.T.R. 605 (Tri. - Chennai) SHARADHA TERRY PRODUCTS LTD. Versus
COMMISSIONER OF C. EX., SALEM The said judgement has also reproduced Para 16 to 20 to decision of the Honourable High court in the Indian National Ship Owners Association which clearly states as under
17.2. Without prejudice to whatever stated hereinabove the above issued has been resolved by the CBEC vide its Instruction issued vide F.No. 276/8/2009-CX8A Dated 26.09.2011 the relevant para of the said instructions reproduced hereunder; “ Kind attention is invited to instruction F No. 275/7/2010-CX8A, dated 30.6.2010, wherein the Board had communicated its view that services tax on a taxable service received in India, when provided by a non-resident/person located outside India, would be applicable on reverse charge basis with effect from 1.1.2005, and that the ratio of judgement in M/s Indian National Shipowners Association (INSA) case [2009 (13) STR 235 (Bom)] would not apply to such cases. Further, direction was issued to field formations to defend the levy of service tax on such services for the period on or after 1.1.2005, as post INSA judgment, it has been held by the High Courts/Tribunal in a large number of cases, applying ratio thereof, that service tax on such services is leviable only w.e.f. 18.4.2006. However, the appeals filed by the department before the Hon’ble Supreme Court, for defending the levy of service tax on such services w.e.f. 1.1.2005, have been dismissed recently (subsequent to the issuance of said instruction dated 30.6.2010) in the following cases.
Further, Review Petition No. 1686 of 2011 filed in the case of Bhandari Hosiery has also been dismissed by the Hon’ble Supreme Court videorder dated 18/8/2011.
(emphasis supplied….) 17.3. Without prejudice to whatever stated hereinabove and assuming but without admitting that service tax is applicable on the alleged foreign bank charges than also it is now amply clear from the above instructions of CBEC that service tax liability on any taxable service provided by a non resident or a person located outside India, to a recipient in India, would arise w.e.f. 18.4.2006, i.e., the date of enactment of section 66A of the Finance Act, 1994 and hence in the instant case the demand pertaining to period prior to 18.04.2006 deserves to be dropped forthwith. 18. “RELATIONSHIP OF SERVICE RECEIVER AND SERVICE PROVIDER” 18.1. Looking to the provisions of chargeability of service tax, it is clear that first of all there should be a provision of service. Provision of service can take place only when there exist a relationship of Service Provider and Service Receiver between the parties to the transaction involved. But in fact they have no such relation or locus-standie with such banks who actually act and work exclusively for and on behalf of their buyer. They deal only with Noticee banker in India to whom they remit the payment on behalf of noticee buyer. Since they receive the instructions or act upon the instructions of noticee’s buyers in foreign country, the noticee does not exercise any control or authority over such banks. In this way, the noticee has no any control over or relation with those banks and hence the question of providing of service or existence of a relationship of Service Receiver and Service Provider does not arise. 18.2. Not only this but even if there is a chance of existence of relationship between service receiver and service provider, it can be between their bank in India and such foreign banks or between noticee’s buyers and such foreign banks. These foreign banks are exclusively acting on behalf of their clients in the foreign country and they act exclusively for and under the instructions of noticee’s buyers which also is suggestive of the facts that there is a relationship between noticee’s buyer and such foreign bankers and the noticee has no any such relation with or does not have any control on such foreign banks. In addition to this, such banks have neither provided any service to the noticee nor has the noticee availed or used such services here in India. Hence alleging chargeability of Service Tax in this case is too much stretching of the provisions of Service Tax, which are applicable only within the framework of the chargeability of the Service Tax under Finance Act, 1994. 19. “AMOUNT INVOLVED ARE NOT CONSIDERATIONS TOWARDS ANY SERVICE PROVIDED OR TO BE PROVIDED” 19.1. Provisions of rule 2(1)(d)(iv) of Service Tax Rules, 1994 as well as Section 66A requires that consideration for the services received should have been made in foreign currency. But here in the instant case the bank charges deducted are nothing but are in the nature of short payment of export realization at the time of remittance of export proceeds and the same have been wrongly considered as consideration for services allegedly provided by such foreign banks. The contention of the noticee that this transaction cannot be termed as providing of service by any person to any other person chargeable to Service Tax U/s 66A of The Finance Act, 1994 is true in view of the fact that, what is collected by the foreign bank is not something which the noticee has either paid or was willing to pay in exchange of or in consideration of any service or value addition provided or to be provided by such foreign banks. And hence when the bank charges deducted by such foreign banks is without provision of any kind of service or value addition actually received or in anticipation of provision of service chargeable to Service Tax U/s 66A, there arises no question either of provision of service or payment of Service Tax. 20. “FOREIGN BANKS PURELY ACTS ON BEHALF OF THE NOTICEE’S BUYER” 20.1. Such foreign banks deal only with the noticee’s banker in India to whom they remit the payment on behalf of noticee’s buyer. They remit the payment to the noticee banker on behalf of their clients in those foreign countries and hence they act for and on behalf of their clients i.e. noticee’s buyers in foreign country. 21. “ALL APPLICABLE SERVICE TAX CHARGED BY THE NOTICEE’S BANK IN INDIA AND THE SAME IS ALREADY PAID BY THE NOTICEE” 21.1. What is chargeable to Service Tax is only the amount charged as bank charges by noticee’s bank is evident only from the fact that noticee’s bank in India collects bank charges and applicable Service Tax from them. If there is a case of any applicability of Service Tax, it would have been the duty of noticee’s bank in India to pay Service Tax on whatever value of Services provided by them. 22. REVENUE NUETRAL 22.1. Noticee submitted that without prejudice to whatever discussed hereinabove and in the earlier reply filed with the department on 29.10.09 & 20.05.10, noticee drawn attention to the fact that this is the case of revenue neutrality. Since the entire exercise is revenue neutral. Hence, above show cause notice is liable to be dropped on this ground alone. 22.2. Noticee further submitted that without accepting but assuming the contention of the department i.e. as alleged by the department that noticee is liable to service tax on the alleged foreign bank charges then also the noticee would have claimed the credit of service tax paid on the said charges by them and thus there by making the whole transaction as revenue neutral since noticee would have paid service tax on such alleged foreign bank charges and again would have claimed the credit of the service tax paid on the alleged foreign bank charges. 22.3. The Noticee submitted that they are engaged in manufacturing taxable goods. The Noticees are paying service tax on the services rendered by them. Assuming whilst denying that the Noticees are liable to pay service tax on the aforesaid services, as alleged in the above show cause notice, the Noticees would be entitled to avail credit of service tax paid on the aforesaid services and utilize the same for payment of service tax on dutiable goods in terms of rule 3(1) read with Rule 3(4) of the Cenvat Credit rules, 2004. Hence, the entire exercise would become revenue neutral. Accordingly, no demand would survive in such a situation. Therefore, the above show notice is liable to be set aside on this ground as well. The same principle has been followed in recent decision of Hon’ble CESTAT Ahmedabad in case of Essar Steel Ltd. Vs. CCE Surat-I 2009 (13) STR 579 (Tri.-Ahmd.) 22.4. In support of the above submission, the Noticee placed reliance upon decision of the Hon’ble Supreme Court in CCE V/s Textile Corporation of Marathawada 2008 (231) ELT 195 (SC). In that case, the assessee had facilities in its factory for carrying out bleaching, dyeing, printing and mercerising of textile fabrics. The assessee subjected the fabric to any one or more of such processes, paid duty at the last stage and cleared them. The department alleged that the assessee was required to pay duty each time the fabric was subjected to one process. Thus, in the case of fabrics which were subjected to bleaching, dyeing and printing, then duty was required by the assessee to be paid on the bleached fabrics and once again upon that fabric when it was dyed and a third time when that dyed fabric was subjected printing. However, the Hon’ble Supreme Court held that if assessee has to pay the excise duty at each and every stage of manufacturing, it would be entitled to credit and the whole exercise would be revenue neutral. In other words, duty, if paid on bleached fabric was available as credit for payment of duty on dyed fabric and duty, if paid on dyed fabric was available as credit for payment of duty on printed fabric. Under such scenario, the demand of duty on bleached and dyed fabric is not maintainable when duty was paid at the last stage namely printed fabric. 22.5. The Hon’ble Supreme Court has consistently held that where demand raised against by the Revenue is equal to the credit available to the assessee, then the demand is not maintainable. See: (i) CCE V/s Narayan Polyplast [ 2005 (179) ELT 20 (SC) ] (ii) CCE V/s Narmada Chematur [2005 (179) ELT 276(SC) ] (iii) CCE V/s Coca-Cola India [2007 (213) ELT 490(SC)] 23. Therefore, the above show cause notice is liable to be dropped on this ground itself. 23.1. WITHOUT PREJUDICE, THE COMPUTATION OF DEMAND OF SERVICE TAX IS INCORRECT 23.2. Without prejudice to whatever is discussed hereinabove and in the earlier reply filed with the department on 29.10.09 & 20.05.10, The Noticee states and submited that the computation of demand is incorrect. Therefore, the above show cause notice is liable to be dropped on this count as well. 23.3. The Noticee submitted that the above show cause notice alleges that the services, if any, provided by the aforesaid foreign service providers are liable to service tax under banking or other financial services. Therefore, demand of service tax, if any, can be raised on fees paid to the above foreign service providers. 23.4. Further, the consideration which the Noticees have received is inclusive of the service tax payable. In the case of excise duty also, it has been held that the amount received should be taken as cum-duty price and the value should be derived there from, by excluding the duty alleged to be payable as required under Section 4(4)(d)(ii) of the Central Excise Act, 1944. 23.5. In support of this submission, the Noticees rely the Larger Bench decision in the case of Sri Chakra Tyres 1999 (108) ELT 361. The said decision of the Larger Bench has been affirmed by the Hon’ble Supreme Court as the departmental appeal has been dismissed at order reported in 2002 (142) ELT A279 (SC). The said principle is accepted in the context of Service tax in the case of Advantage Media Consultant 2009 (14) STR J49 (SC) by Supreme Court also. 23.6. The Noticee also rely on the Apex Court judgment in the case of CCE vs. Maruti Udyog Limited 2002 (49) RLT 1 (SC), wherein it has been held that the deduction under Section 4(4)(d)(ii) is allowable, even in situations where no duty was paid at the time of removal. Thus, for service tax calculation, the amount paid by the service receiver should be considered as cum tax payment and service tax should be calculated accordingly. 23.7. The above view is also supported by Trade Notice No.20/2002 dated 23.5.2002 of Delhi-II Commissionerate, which reads as under: “The liability to pay the service tax remains with the service provider in the current scenario. Failure to realise or even charge the 5% service tax does not negate this statutory liability. In event of any such failure, the amounts released from client in lieu of having rendered the service(s) will be taken to constitute amounts inclusive of service tax. Accordingly, the amount of service tax will be determined and required to be deposited to the credit of the Central Government”. The above settled legal position as clarified by the above circular was given legal recognition with Explanation 2 which was added to Section 67 of the Finance Act, 1994 with effect from 10.09.2004. 23.8. Therefore, the above show cause notice needs to be dropped forthwith. 23.9. NO PENALTY IMPOSABLE. NO INTEREST PAYABLE 23.10. Without prejudice to whatever is discussed hereinabove and in the earlier reply filed with the department on 29.10.09 & 20.05.10, Noticee submits that as regards the proposal to impose the penalty u/s 76, 77 & 78 of The Finance Act, 1994 the noticee would like to submit that in a situation where the noticee was not liable to pay service tax as argued in the foregoing Paras and the earlier replied submitted by the noticee on 29.10.09 & 20.05.10 the questions of penalty does not arise. 24. The Noticee submits that they were under bonafide belief that they are not liable to pay service tax for the reasons stated hereinabove. The question involved in the present case is purely one of interpretation. This is a reasonable cause for non payment of service tax. Therefore, no penalty can be imposed on the noticee in view of section 80 of The Finance act, 1994. 24.1. Hence, in this view of the matter, the proposal to impose the penalty u/s 76, 77 & 78, does not sound legal and hence does not hold water. As regards the proposal to pay interest as proposed in the SCN under section 75 of the Finance Act, 1994 the same is also not sustainable on the similar grounds. 24.2. Noticee further submits that argument of the noticee also holds good in view of the decisions cited hereunder: PJ/Case Laws/2010-11/1049 Commissioner of Central Excise, Pune-I Versus
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