CESTAT Rules, No Penalty Leviable If Assessee Fails To Discharge Tax Liability Under Bonafide Belief That No Tax Needed To Be Paid
Pranav B Prem
In a significant ruling, the New Delhi Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that no penalty can be imposed on an assessee who fails to discharge tax liability under the bonafide belief that no tax is payable. The decision was rendered in the case of M/s The Indure Private Limited v. Commissioner of Service Tax, Delhi-II (Service Tax Appeal No. 51192 of 2017).
Background of the Case
The appellant, M/s The Indure Private Limited, is engaged in the business of manufacturing, procurement, and commissioning of ash handling equipment, including EPC projects for thermal power plants and the operation and maintenance of ash handling systems. The case arose when the department initiated an investigation against the appellant regarding service tax liability on amounts paid in foreign currency for receiving services from abroad. The department alleged that the appellant had failed to pay service tax on selling commission paid to M/s Parah International FAZCO, Dubai, for the period 2008-09 to 2010-11. The demand of Rs. 1,99,19,333/- was confirmed against the appellant along with interest and penalties under Section 66A of the Finance Act, 1994, read with Rule 2(1)(d)(iv) of the Service Tax Rules, 1994. The Adjudicating Authority upheld the demand, and the Commissioner (Appeals) confirmed the order. Aggrieved by these findings, the appellant approached the Tribunal.
Arguments by the Appellant
The appellant contended that the services received from M/s Parah International FAZCO were not classifiable under ‘Business Auxiliary Services (BAS)’ but rather under market research and consultancy. According to the appellant, the services were performed entirely outside India, and no part of the service was rendered in India, making it non-taxable under Section 64 of the Finance Act, 1994. The appellant also argued that, even if tax was payable, the situation was revenue-neutral as they would have been entitled to claim CENVAT credit. Citing precedents, including Jet Airways (1) Ltd. v. CST, Mumbai (2016 (44) STR 465), the appellant asserted that in cases where revenue neutrality applies, there is no basis for imposing penalties.
It was further argued that the appellant had made all necessary disclosures and provided complete information during the investigation, thereby ruling out any allegations of suppression or misstatement.
Respondent's/ Department’s Contentions
The Department argued that the appellant had clearly engaged M/s Parah International FAZCO for marketing and selling their products in the UAE, which falls under the definition of "Business Auxiliary Service" as per Section 65(19) of the Finance Act, 1994. Since the service provider was located outside India and the appellant was the service recipient, the liability to pay service tax under the reverse charge mechanism (RCM) was undeniable.
The Department also contended that revenue neutrality does not automatically negate the requirement to pay tax or the imposition of penalties, relying on judgments such as Forbes Marshall Private Limited v. CCE, Pune-I (2015 (1) TMI 458-CESTAT Mumbai) and The Paper Products Ltd. v. Commissioner of Central Excise (2015-TIOL-559-CESTAT-MUM).
Findings of the Tribunal
The Tribunal carefully analyzed the definitions of "Business Auxiliary Service" and "Business Support Service" under the Finance Act, 1994. It observed that the agreement between the appellant and M/s Parah International FAZCO clearly indicated that the foreign entity was engaged in promoting and selling the appellant’s products in the UAE. Therefore, the services fell within the scope of "Business Auxiliary Service," making the appellant liable to pay service tax under Section 66A.
However, on the issue of penalty, the Tribunal relied on established precedents concerning revenue-neutral situations. The Tribunal held that: "Even if payment is made through CENVAT for GTA services, which is impermissible, it cannot be stated that the assessee had misstated or suppressed any information or evaded tax in as much as the details of the payment were available in the return."
The Tribunal further noted that: "If an Assessee fails to discharge tax liability under the bonafide belief that no tax need be paid due to Revenue neutrality, then as the judgement stated that as the issue involved in this case was purely of interpretation, we hold that no penalty is leviable on the Appellant." The Tribunal emphasized that in cases where the issue is one of interpretation and where there is no deliberate suppression or intention to evade tax, the imposition of penalties is unwarranted.
Ruling of the Tribunal
Based on the above findings, the CESTAT issued the following directions:
The appellant is liable to pay service tax on the selling commission under the reverse charge mechanism.
The extended period of limitation cannot be invoked due to the revenue-neutral nature of the transaction.
The penalties imposed under Section 77(2) and Section 78 of the Finance Act, 1994, are set aside.
The appeal was accordingly allowed partially.
Appearance
Shri A.K.Batra, Chartered Accountant for the Appellant
Shri Rakesh Kumar, Authorized Representative for the Department
Cause Title: M/s The Indure Private Limited v. The Commissioner of Service Tax
Case No: Service Tax Appeal No. 51192 Of 2017
Coram: Hon’ble Dr. Rachna Gupta [Member (Judicial)], Hon’ble Ms. Hemambika R. Priya [Member (Technical)]
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