2025 (5) TMI 68 - AT - Service Tax

Demand of service tax along with interest and Penalty - Reverse Charge Mechanism (RCM) on royalty payment to its foreign parent company for software licensing - Section 76 of Finance Act 1994 (Act) - revenue neutral situation. HELD THAT - We find that in view of the Statutory Provisions the demand of service tax made as well as confirmed in the adjudication proceeding does not suffer from any infirmity as a ground of revenue neutrality cannot be a generic defence in all cases for not raising the demand as such. Had it been the Statutory Provision the very purpose of making the provisions for payment of service tax on reverse charge basis or payment of duty even for inter unit transfer or sale to related companies would become otiose as it is very well known that if any service tax is paid by a service provider or excise duty is paid by manufacturer the receipt of such goods as service would be entitled to take the credit and thereafter utilise the same for payment of further service tax liability or central excise duty. However taking of credit and utilisation thereon is regulated in terms of Cenvat Credit Rules. Such revenue neutralities may be considered as a valid ground as defence for non-invocation of extended period or imposition of penalty etc. where suppression mis-statement etc. are alleged. However in a situation where the penalty is not being imposed under Section 78 nor any extended period is being invoked the ground of revenue neutrality cannot be interpreted in a manner so as to nullify the entire demand itself and as a consequence also nullifies the demand of interest and imposition of penalty under Section 76 also. Therefore we are of the considered opinion that the plea of revenue neutrality for non-maintenance of demand per se and consequentially non- recovery of interest as well as non-imposition of penalty under Section 76 is not tenable. We however find that there has been substantive compliance by the appellant when they paid the non-paid service tax even before the issue of show cause notice and in fact paid some interest thereon. We also note that there is no allegation of any suppression fraud etc. The Adjudicating Authority has imposed penalty under Section 76 at the maximum permissible. We find that in the facts of the case the penalty of Rs. 10, 00, 000/- would be just and accordingly modify the amount of penalty imposed. Thus we find no infirmity in the order of the Commissioner except to the extent modified supra and accordingly upheld the impugned order. Appeal allowed partly.

Summary

The core legal questions considered in this appeal are:

1. Whether the appellant was liable to pay service tax under the Reverse Charge Mechanism (RCM) on royalty paid to its foreign parent company for software licensing.

2. Whether the plea of revenue neutrality-where the appellant claims that the service tax paid would have been admissible as Cenvat Credit, thereby neutralizing the revenue impact-can be a valid ground to negate the demand of service tax itself.

3. Whether interest under Section 75 of the Finance Act, 1994, is payable on the delayed or short payment of service tax in a revenue neutral situation.

4. Whether penalty under Section 76 of the Finance Act, 1994, can be imposed in the absence of any malafide intent, suppression, or fraud, especially when the appellant claims revenue neutrality.

5. Whether the provisions of Section 73(3) providing immunity on payment of duty and interest are applicable in the facts of this case.

Issue 1: Liability to Pay Service Tax under Reverse Charge Mechanism (RCM)

The appellant held a Master License Agreement from its foreign parent company for software solutions, sublicensing these to customers in India. The Department contended that the appellant was liable to pay service tax on royalty paid to the foreign principal under RCM.

The appellant did not dispute the nature of the duty or the legal requirement to pay service tax under RCM but contended that since the service tax paid would be admissible as Cenvat Credit, the situation was revenue neutral, negating the demand.

The Court examined statutory provisions and found no dispute that service tax was payable under RCM on royalty payments to the foreign principal. The appellant's argument of revenue neutrality was noted but held not to negate the statutory obligation to pay service tax. The Court emphasized that the Cenvat Credit Rules, 2004, impose conditions on credit utilization, and a hypothetical assumption that credit would have been available cannot override the statutory mandate for payment of service tax.

Issue 2: Validity of Revenue Neutrality as a Defence to Demand

The appellant argued that since the service tax paid would have been available as Cenvat Credit, the demand was revenue neutral and therefore unsustainable.

The Court analyzed relevant case laws where revenue neutrality was accepted as a defence, noting that in some cases, demands were set aside on this ground. However, the Court distinguished those cases, pointing out that acceptance of revenue neutrality as a blanket defence would render statutory provisions for reverse charge and inter-unit transfers ineffective. It would allow businesses to avoid payment of service tax on services received from non-resident providers by relying solely on credit availability.

The Court concluded that revenue neutrality cannot be a generic defence to negate the demand itself. It may, however, be relevant in cases involving extended period demands or allegations of suppression or fraud, which are not present here.

Issue 3: Applicability of Interest under Section 75 on Delayed Payment

The appellant contended that no interest was payable under Section 75 due to the revenue neutral nature of the demand. They relied on various judgments supporting non-payment of interest in revenue neutral cases.

The Court examined the statutory provision of Section 75, which mandates payment of simple interest on delayed payment of service tax at rates notified by the Central Government. The provision does not condition interest liability on malafide intent or suppression.

The Court referred to a series of High Court and Tribunal judgments holding that interest is mandatorily payable on short or delayed payment of service tax, even if the duty is paid before issuance of show cause notice. The Court also relied on the Supreme Court's ruling that interest is leviable on duty paid prior to show cause notice.

The Court rejected the appellant's reliance on revenue neutrality to avoid interest liability, holding that statutory provisions require interest payment regardless of credit availability.

Issue 4: Imposition of Penalty under Section 76

The appellant argued that penalty under Section 76 should not be imposed due to revenue neutrality and absence of malafide intent.

The Court analyzed Section 76(1), which provides for penalty up to 10% of the service tax amount where there is short payment or non-payment, except in cases involving fraud, suppression, or wilful misstatement. The Court noted that proof of malafide intent is not a prerequisite for penalty under Section 76.

The Court relied on several judgments affirming that penalty can be imposed without establishing intent to evade tax. It also noted that the appellant had voluntarily paid the tax and some interest before the show cause notice but did not pay the full interest due, thus not qualifying for immunity under Section 73(3).

While upholding the imposition of penalty, the Court reduced the penalty from the maximum imposed by the Adjudicating Authority to Rs. 10,00,000/- as a just and equitable amount considering the facts.

Issue 5: Applicability of Section 73(3) Immunity

The appellant contended that under Section 73(3), if the duty and interest are paid before issuance of show cause notice, no demand can be raised.

The Court examined the proviso to Section 73(3) and Explanation 1, which clarify that immunity is available only if the entire duty and applicable interest are paid. Since the appellant did not pay the full interest due, the immunity provision was not attracted.

The Court found the Adjudicating Authority's interpretation correct in denying the benefit of Section 73(3) to the appellant.

Conclusions and Treatment of Competing Arguments

The Court acknowledged the appellant's voluntary payment of service tax and partial interest before the show cause notice, and absence of any allegation of fraud or suppression. However, it rejected the argument that revenue neutrality negated the demand, interest, and penalty.

The Court held that statutory provisions mandate payment of service tax under RCM, and interest under Section 75 is mandatorily payable on delayed payment regardless of revenue neutrality. Penalty under Section 76 is also imposable without proof of malafide intent when there is short payment.

The Court distinguished earlier judgments relied upon by the appellant, noting that many involved reversal of credit or were factually different, and that revenue neutrality cannot be a universal shield against statutory demands.

The Court modified the penalty to Rs. 10,00,000/- from the maximum imposed but otherwise upheld the demand, interest, and penalty.

Significant Holdings

"A ground of 'revenue neutrality' cannot be a generic defence in all cases for not raising the demand as such. Had it been the Statutory Provision, the very purpose of making the provisions for payment of service tax on reverse charge basis... would become otiose."

"The provisions under Cenvat Credit Rules, 2004 are not unconditional and it requires meeting various conditions before a credit of input or input service can be taken... A hypothetical assumption that they would have got the credit had they paid it earlier... cannot negate a statutory provision."

"Section 75 clearly states that interest is required to be paid on non-payment or short payment of service tax... even if the duty is paid prior to issuance of show cause notice, interest is still leviable for the money withheld."

"There is no need to establish any malafide intent or suppression or intention to evade service tax etc., for imposing penalty under Section 76, if the non-payment or short payment is established."

"Section 73(3) immunity is available only if the entire duty along with applicable interest is paid. Since the appellant did not pay the full interest due, the benefit of Section 73(3) cannot be extended."

"The penalty imposed is modified to Rs. 10,00,000/- as just and equitable in the facts of the case."