By TIOL News Service

MUMBAI, OCT 20, 2017: ON enquiry, it was learnt by the departmental officers that the appellants were paying consideration to their group companies located outside India for receipt of "Business Auxiliary Service, Management Consultancy Service,Intellectual Property Service".

The appellants were making payments or making provisions for payment in their books of accounts when dealing with their group companies situated abroad. As per the Explanation (c) inserted on 10/05/2008 in Section 67 of Chapter V of Finance Act, 1994 service tax is required to be paid on the amount for which provisions for payment related to the transaction with associated enterprises is made in the books of accounts of a person.

It was observed that on such amounts for which the provision was made in the books,service tax was not paid by the appellant.

The appellant paid the entire amount of service tax along with interest before issuance of show-cause notice on 18/01/2011 i.e. on 02/07/2009 and 14/08/2009.

In adjudication, while the demand was confirmed and amounts paid appropriated, penalty under Sections 76 & 78 were also imposed.

The appellant is before the CESTAT and submits that it was due to inadvertence that the appellant continued to follow the provisions prevailing prior to 10/05/2008. However, they have been showing the amount of provision in their books of accounts and, therefore, suppression of facts is not established. It is further submitted that service tax which was payable on the amount of provision made in the books of accounts was instantly available as a CENVATCredit to the appellant and hence the entire exercise is revenue neutral. Support is derived from the decisions in Endeka Ceramics India Pvt. Ltd. – 2013-TIOL-497-CESTAT-AHM, Intervalve (I) Ltd. – 2015-TIOL-1095-CESTAT-MUM.

The appellant also submits that since they had paid service tax along with interest before issuance of the show-cause notice and the option under Section 73 (3) was intimated to the department vide their letter dated 02/07/2009, the department ought not to have served them with a SCNas per provisions of Section 73(3) of the Finance Act, 1994.

The AR while justifying the impugned order submitted that revenue neutrality is not a ground for avoiding payment of service tax; that since they did not declare the service value in their ST-3 return, therefore, there is a clear suppression of fact by the appellants.

The Bench observed -

4. …It is observed that the appellant was otherwise making their regular payment of service tax in respect of service charges paid to the foreign service provider, which was a legal provision prior to 10/05/2008 by amendment to the explanation given in Section 67. The amount of payment for which provision was made though not transacted actually also became liable for payment on service tax. The appellant appears to have followed the old provision inadvertently. This is not a case whether the appellant was not inclined to pay the service tax at all in respect of the amount payable to the foreign service provided for which the provision was made in the books of accounts, the appellant was otherwise making payment of service tax on the actual payment made to foreign service provider. Therefore, there was no intention to evade payment of service tax. The submission of the appellant that the entire exercise is revenue neutral was found force. Since the service tax which was payable was available as a Cenvat Credit to the appellants themselves instantly after making the payment of service tax. There was neither loss or gain to the appellant as well as to the revenue, as the appellant could have reduced the duty payment liability in case on payment of duty in respect of their final products. Therefore, this is a case of revenue neutrality. In this fact when the suppression of fact is not established under sub-section (4) of Section 73 will not get attracted. The appellant admittedly exercised the option provided under Section 73 (3) by submitting letter dated 02/07/2009, which is scanned below: …"

Noting that from the letter dated 02/07/2009, the clear intention of the appellant to opt for the provisions of section 73(3) of the FA, 1994 was evident coupled with the payment of service tax and interest made by them much before issuance of SCN on 18/01/2011, the Bench concluded that the department was not supposed to issue any SCN to the appellant.

The appeal was allowed.

(See 2017-TIOL-3738-CESTAT-MUM)