2025 (5) TMI 155 - AT - Service Tax

Classification of Services Received as Management or Business Consultancy Services - Demand of service tax along with interest and penalty - Wrongly availed CENVAT credit - reconciliation of financial statements vis- -vis ST-3 Returns - Claim for Refund/rebate - Show Cause Notice issued invoking extended period - Services Agreement between Huawei China/Singapore - Management or Business Consultancy Service - liability to pay interest and penalty under section 77 - non-payment of service tax under RCM on expenses for Sponsorship services - Corporate Guarantee obtained from their Overseas Associate - HELD THAT - We find that the services fall under Business Auxiliary Services in terms of Section 65(19) of the Act. It was held in M/s. Microsoft Corporation India Pvt Ltd. 2014 (10) TMI 200 - CESTAT NEW DELHI (LB) that dissemination of information to potential customers commenting on any developments in the territory affecting the software industry investigating feasibility of new markets for Microsoft retail products and providing other services of marketing nature etc. local advertising; performing other activities including dissemination of information to potential customers commenting on any developments in the territory affecting the software industry qualify as BAS. We also find that the Tribunal held similarly in Kesar Products Ltd 2014 (5) TMI 689 - CESTAT MUMBAI and J.J. Foam Pvt Ltd and 2013 (7) TMI 554 - CESTAT NEW DELHI We find that Tribunal in the cases of M/s. Medallion Consulting Pvt Ltd. 2017 (4) TMI 96 - CESTAT NEW DELHI ; B.A. Research India Ltd. 2009 (11) TMI 213 - CESTAT AHMEDABAD ; Misys Software Solutions India Pvt Ltd. 2017 (6) TMI 51 - CESTAT BANGALORE ; M/s. Medallion Consulting Pvt Ltd. 2017 (4) TMI 96 - CESTAT NEW DELHI and Glaxo SmithKline Asia 2023 (10) TMI 998 - CESTAT CHANDIGARH held that even services under Market Research and Analysis Services where benefit of the research is used by a customer situated outside India in its business the same will be treated to have been performed outside India and thus amounting to export. Thus we find that either way the appellants claim for Refund/rebate can not be denied. Following the Jindal Stainless Steel 2023 (6) TMI 1197 - CESTAT CHANDIGARH ; Sterlite Industries India Ltd. 2019 (2) TMI 1249 - CESTAT CHENNAI and Sowar Pvt Ltd. 2023 (5) TMI 193 - CESTAT NEW DELHI holding that Extending Corporate Guarantee is not a taxable service. We also find that there is no provision under the Finance Act 1944 to impose any notional value on services. In view of the same we find that the issue is decided in favour of the appellants. The Revenue contends that assessee did not submit any proof. The appellants submit that service tax was discharged on receipt basis as against the demand raised on accrual basis in different financial years; the appellants have accepted the demand and paid the amount along with interest and penalty totaling to Rs.67, 48, 987/-. We find that learned Commissioner has confirmed demand of Rs.35, 41, 833/- on account of reconciliation of financial statements vis- -vis ST-3 Returns along with interest and equal penalty. The appellants claim that they have paid the demand along with interest and penalty. However the same needs to be verified by the lower authorities. Under the facts and circumstances of the case where mens rea was not established looking into the fact that the appellants had sufficient balance and have paid the service tax before issuance of show cause notice we find that no penalty can be imposed. We find that the Tribunal held in the case of Bio -Med Healthcare Products Pvt Ltd. 2014 (12) TMI 289 - CESTAT NEW DELHI that no show cause notice is required to be issued when service tax stands paid by the appellant. Thus the appeal Nos.ST/61636/2018; ST/60160/2020 filed by the appellants M/s Huwaei Telecommunications Co. India Pvt Ltd and appeal No. ST/61696/2018 filed by the Department are partly allowed in the following terms (i) Impugned order dropping the demand of Rs.3, 66, 07, 637/- on account of Management Business Consultants Service is upheld. (ii) Demand of alleged wrongly availed CENVAT credit of Rs.11, 92, 94, 464/- and availment of rebate of the same is set aside; interest and penalty are also accordingly set aside. (iii) Demand of Rs.10, 69, 70, 856/- raised on Corporate Guarantee is set aside; interest and penalty are also accordingly set aside. (iv) Dropping of service tax liability of Rs.6, 75, 40, 376/- is set aside and remanded back to the authority to reconcile with the financial records and ST-3 Returns and any other evidence that may be submitted by the appellants. (v) Regarding the demand of service tax of Rs 35, 41, 833 along with interest and penalty the issue is remanded to the adjudicating authority to confirm the payment of service tax along with interest and penalty by the appellants. (vi) As regards the demands of Rs 1, 56, 959 on Rent-a-Cab Service and demand of Rs 92, 78, 438 (Rs 8282930 Rs 75664 Rs 360500 Rs 559344) as the appellant has discharged the liability along with interest penalties imposed are set aside. (vii) Penalty of Rs.10, 000/- imposed under Section 77 of Finance Act 1994 is also set aside.

Summary

The core legal questions considered by the Tribunal include:

(i) Whether the demand of service tax on services received from an overseas entity classified as 'Management or Business Consultancy Services' was rightly dropped, given the nature of services rendered;

(ii) Whether the demand based on reconciliation differences between financial statements and service tax returns was correctly dropped;

(iii) Whether the appellant was eligible for rebate claimed on Market Research Agency Services (MRAS) treated as export of service, and whether the revenue could recover the rebate sanctioned without appeal;

(iv) Whether service tax was payable under the Reverse Charge Mechanism (RCM) on corporate guarantees provided by overseas associated enterprises to banks on behalf of the appellant;

(v) Whether the demand on short payment of service tax under Erection, Commissioning and Installation Service (ECIS) was justified;

(vi) Whether interest and penalty were properly imposed on Cenvat Credit wrongly availed on Rent-a-Cab and Event Management Services;

(vii) Whether penalty under section 77 was rightly imposed on various confirmed demands including double availment of Cenvat credit and short payment under RCM.

Issue-wise Detailed Analysis:

(i) Classification of Services Received from Overseas Entity (Management or Business Consultancy vs. ECIS):

The relevant legal framework involves the definitions under Section 65(105)(zzd) of the Finance Act, 1994, which defines Erection, Commissioning and Installation Services (ECIS), and the principle that management consultancy services cover advisory roles only, not actual performance of work.

The Tribunal examined the nature of services provided by the overseas entity (Huawei China) in Nepal, focusing on the sub-contract agreement dated 09.10.2010 and a certificate from Huawei China detailing activities such as physical handling, unpacking, installation of telecom equipment, and testing. The Court emphasized that the service provider performed actual installation and commissioning rather than mere advisory or consultancy services.

Precedents cited include decisions holding that operational autonomy and responsibility distinguish a management contract from consultancy (Basti Sugar Mills Pvt. Ltd.) and Supreme Court affirmations that consultancy implies advice, not execution.

The Tribunal rejected the revenue's argument relying on financial statement terminology ('Project Management Service' and 'Network Rollout Services'), holding that classification must be based on the actual service performed and contract terms rather than invoice or accounting descriptions.

Conclusion: The demand under Management or Business Consultancy Services was rightly dropped, as the services fell under ECIS and were not taxable as consultancy.

(ii) Demand Based on Reconciliation Differences:

The issue concerned discrepancies between financial statements and ST-3 returns, leading to a demand of Rs. 6.75 crore. The Commissioner initially dropped the demand based on reconciliation submitted by the appellant.

The Tribunal found that the principle adopted by the Commissioner-that service tax is payable on receipt basis and that the gross amount charged includes taxable value plus service tax-is sound. However, the revenue pointed out numerical discrepancies between figures used in the show cause notice and those accepted by the Commissioner.

The Tribunal remanded the issue to the adjudicating authority for proper reconciliation of figures based on correct records, recognizing the validity of the appellant's principle but acknowledging the need to resolve accounting differences.

Conclusion: Demand dropped by the Commissioner was set aside and remanded for re-examination and reconciliation.

(iii) Rebate Claimed on Market Research Agency Services (MRAS) and Recovery of Refund:

The appellant claimed rebate/refund on MRAS treated as export of service. The Commissioner confirmed demand and recovery of rebate on the ground that the services were MRAS and not Business Auxiliary Services (BAS) as claimed by the appellant.

The Tribunal analyzed the service agreement, noting that the appellant's activities involved promotion, marketing, customer liaison, and market information gathering, which fall under BAS as per Section 65(19) of the Finance Act. The Tribunal cited precedents including Microsoft Corporation India Pvt Ltd and Kesar Products Ltd, where similar activities were held to be BAS.

Further, the Tribunal acknowledged decisions holding that where market research benefits a customer outside India, the service qualifies as export (Medallion Consulting Pvt Ltd, B.A. Research India Ltd, etc.).

Regarding recovery of rebate without appeal against the refund sanction order, the Tribunal relied on the principle that once refund is sanctioned and no appeal is filed, the order attains finality (Eveready Industries India Ltd, BT (India) Pvt Ltd). It held that revenue cannot recover the refund by invoking Section 73(1) as erroneous refund without going through proper appellate process.

Conclusion: The appellant was entitled to rebate/refund on BAS classification and export of service; recovery of rebate without appeal was not permissible, and the demand was set aside.

(iv) Service Tax on Corporate Guarantee under RCM:

The Commissioner imposed service tax on corporate guarantees provided by overseas associated enterprises to banks on behalf of the appellant, valuing services at 2% of the guaranteed amount based on Safe Harbour Rules.

The appellant contended there was no service or consideration involved, relying on multiple precedents (DLF Home Developers Ltd, Jindal Stainless Steel, Edelweiss Financial Services Ltd, Sterlite Industries India Ltd, Sowar Pvt Ltd) holding that corporate guarantees by associated enterprises are not taxable services under banking and financial services.

The Tribunal noted that the Finance Act requires both a service and consideration for taxability. The revenue failed to produce evidence of consideration or cost benefit flowing to the appellant. The Tribunal also observed that applying notional value under Safe Harbour Rules is not supported by the Finance Act.

Conclusion: The demand for service tax on corporate guarantees was set aside as no taxable service or consideration existed.

(v) Demand on Short Payment under ECIS:

The appellant admitted payment of Rs. 21.56 crore twice, later rectified by reversal entries certified by a Chartered Accountant. The Commissioner confirmed demand of Rs. 35.41 lakh after reconciliation.

The Tribunal observed that the appellant had paid the confirmed demand along with interest and penalty. It remanded the issue to the adjudicating authority to verify the payments and confirm the demand accordingly.

Conclusion: Partial demand confirmed; verification and confirmation remanded to lower authority.

(vi) Interest and Penalty on Cenvat Credit on Rent-a-Cab and Event Management Services:

The appellant reversed the Cenvat credit of Rs. 1,56,959 before issuance of Show Cause Notice and contended no penalty or interest was payable as the credit was not utilized.

The Tribunal relied on the decision in M/s Strategic Engineering (P) Ltd, holding that interest and penalty are not leviable if credit is reversed before utilization and before show cause notice.

Conclusion: Penalty and interest imposed were set aside.

(vii) Penalty under Section 77 on Various Confirmed Demands:

The appellant argued no mens rea or suppression existed, and service tax was paid before show cause notice. The Tribunal referred to precedents (Bio-Med Healthcare Products Pvt Ltd) holding that no show cause notice is required if tax is paid and no fraudulent intent is established.

Conclusion: Penalty under Section 77 was set aside given absence of mens rea and prior payment of tax.

Significant Holdings:

"An ocean separates a manager from a management consultant, a performer from an advisor or a coach... There is no management consultancy in the facts of the present case and the demand is clearly beyond the scope of the statute."

"Classification must be based on the actual service performed and terms of the contract and not merely on accounting or invoice descriptions."

"Where market research benefits a customer situated outside India in its business, the service is treated as performed outside India and qualifies as export of service."

"Once refund is sanctioned and no appeal is filed, the order attains finality; revenue cannot recover the refund invoking Section 73(1) without challenging the refund order."

"No service tax is payable on corporate guarantees provided by associated enterprises in absence of consideration or taxable service."

"Interest and penalty are not leviable where Cenvat credit is reversed before utilization and prior to issuance of show cause notice."

"Penalty cannot be imposed where there is no mens rea and tax is paid before show cause notice."

Final Determinations:

(i) Demand on Management or Business Consultancy Services was rightly dropped;

(ii) Demand on reconciliation differences remanded for proper verification;

(iii) Demand on rebate on MRAS set aside; appellant entitled to rebate/refund;

(iv) Demand on service tax on corporate guarantees set aside;

(v) Partial demand on ECIS confirmed; verification remanded;

(vi) Penalty and interest on Cenvat credit reversed before utilization set aside;

(vii) Penalty under Section 77 on various demands set aside.