2025 (7) TMI 638 - AT - Service Tax

Levy of service tax on Reverse Charge Mechanism (RCM) under Section 66A of FA - Liability to pay service tax under the category of Authorised Service Station under Section 65(105)(zo) read with Section 69(9) of the Finance Act 1994 - revenue neutrality - extended period of limitation - HELD THAT - Following the ratio of the decision of the Tribunal in the matter of M/s. Dynamic Motors 2011 (11) TMI 308 - CESTAT NEW DELHI and considering the definition of authorized service station the service provided by the appellant cannot be considered as carried out by an authorized service station. Accordingly demand of duty against authorized service station is unsustainable. As regarding confirming the duty under RCM and imposing penalty by invoking the extended period of limitation and penalty it is found that there is no discussion in the impugned order regarding the taxable service involved in such activities. Further even if the appellant had paid service tax under RCM basis as confirmed by the Adjudication Authority they are eligible for claiming the CENVAT credit against such payment. The demand is for the period from April 2005 to March 2008 and the normal period for issuing show-cause notice expired on 24.4.2009 whereas it was issued only on 04.06.2009. Thus the said demand under RCM is not considered on merit as the entire demand is time-barred. Considering the Revenue neutral situation and following the decision in the matter of Asmitha Microfin Ltd. 2019 (9) TMI 122 - CESTAT HYDERABAD and Sarovar Hotels Pvt. Ltd. 2017 (9) TMI 893 - CESTAT MUMBAI the demand under RCM confirmed by invoking the extended period of limitation and penalty imposed are unsustainable. The impugned order is set aside - appeal allowed.

Summary

The core legal questions considered by the Tribunal in this appeal are as follows:

1. Whether the appellant is liable to pay service tax under the Reverse Charge Mechanism (RCM) as per Section 66A of the Finance Act, 1994, on foreign exchange expenditure incurred for services received from outside India.

2. Whether the services rendered by the appellant fall under the category of "Authorised Service Station" under Section 65(105)(zo) read with Section 69(9) of the Finance Act, 1994, thereby attracting service tax liability.

3. Whether the demand of service tax confirmed by the adjudicating authority under the extended period of limitation is sustainable in law.

4. Whether penalties imposed under various provisions of the Finance Act are justified.

Issue 1: Liability to pay service tax under Reverse Charge Mechanism (RCM) on foreign exchange expenditure

Relevant legal framework and precedents: Section 66A of the Finance Act, 1994, imposes service tax on services provided from outside India and received in India under the RCM. The Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, further clarify the conditions under which such services are taxable. Section 65(105) enumerates taxable services. The appellant contested the demand on the ground that the adjudicating authority did not specify the nature of services involved in the foreign exchange expenditure and failed to establish that the services were imported into India as per the statutory rules.

Court's interpretation and reasoning: The Tribunal noted that the adjudicating authority had mechanically invoked Section 66A without identifying the specific taxable services or establishing that the services were received in India. The appellant submitted detailed bifurcation of the services and corresponding foreign exchange payments, including legal services, testing inspection and certification services, and product development expenditure.

Regarding legal services, the appellant argued that these services became taxable only from 1.9.2009, whereas the expenditure was incurred prior to that date, thus no service tax liability arose. The Tribunal accepted this submission, noting that the service tax law did not cover legal services before the specified date.

Concerning testing, inspection, and certification services, the appellant contended these services were performed outside India and thus not "received in India" under Rule 3(ii) of the 2006 Rules, making Section 66A inapplicable. The Tribunal agreed that since the services were rendered outside India and not received in India, no service tax liability under RCM arose.

Product development expenditure was argued not to fall within any taxable service under Section 65(105). The Tribunal found no evidence to classify such expenditure as taxable service and noted that the adjudicating authority also accepted that no consideration was paid or payable for certain amounts, further negating the tax demand.

Application of law to facts and treatment of competing arguments: The Tribunal carefully examined the nature of each service and the timeline of taxability. It rejected the Revenue's broad invocation of Section 66A without detailed analysis of the service nature or compliance with the import of service rules. The appellant's evidence and invoices were given due consideration, leading to the conclusion that the demand under RCM was unsustainable on merits.

Conclusion: The demand for service tax under RCM on foreign exchange expenditure for the period 2005-2008 is not maintainable as the services were either not taxable during that period or not received in India as required by law.

Issue 2: Liability under the category of Authorised Service Station

Relevant legal framework and precedents: Section 65(105)(zo) defines taxable service provided by an authorised service station, which is further explained under Section 65(8) and Section 69(9) of the Finance Act, 1994. Circular No.699/15/2003-CX clarifies that an authorised service station must be authorised by a motor vehicle manufacturer to service or repair vehicles manufactured by that manufacturer. The Tribunal relied on the precedent set in the case of CCE vs. Dynamic Motors, which emphasized that authorization must be specific to the manufacturer whose vehicles are serviced.

Court's interpretation and reasoning: The Tribunal observed that the appellant, being a manufacturer with its own service station, did not produce admissible evidence to demonstrate that its activities fell within the scope of an authorised service station as defined by the statute. The Tribunal reiterated the principle from Dynamic Motors that authorization must be manufacturer-specific and services must relate to vehicles of that manufacturer only.

Application of law to facts and treatment of competing arguments: The appellant argued that it was not liable under this category as it did not operate as an authorised service station for any other manufacturer's vehicles. The Revenue contended otherwise, but the Tribunal found no evidence to support the Revenue's claim and held that the appellant's service activities did not meet the statutory definition.

Conclusion: The demand of service tax under the category of authorised service station is unsustainable and set aside.

Issue 3: Validity of invoking extended period of limitation for demand and penalty

Relevant legal framework and precedents: The Finance Act prescribes limitation periods for issuance of show cause notices. The extended period can be invoked only in cases of willful suppression or fraud. The appellant relied on Supreme Court decisions in Continental Foundation Joint Venture and Jaiprakash Industries Ltd., which restrict the use of extended limitation unless strict criteria are met. Further, the appellant cited decisions in Asmitha Microfin Ltd. and Sarovar Hotels Pvt. Ltd., which held that invoking extended limitation in revenue-neutral situations (where CENVAT credit is available) is unsustainable.

Court's interpretation and reasoning: The Tribunal noted that the show cause notice was issued after the normal limitation period had expired, and the adjudicating authority invoked the extended period without sufficient discussion or proof of suppression. The Tribunal also observed that the appellant was entitled to claim CENVAT credit on any service tax paid under RCM, creating a revenue-neutral situation.

Application of law to facts and treatment of competing arguments: The Revenue argued that suppression justified extended limitation. However, the Tribunal found no material to substantiate suppression or fraud. The appellant's entitlement to CENVAT credit negated any revenue loss to the government, making the extended limitation invocation inappropriate.

Conclusion: The demand and penalty confirmed under the extended period of limitation are unsustainable and liable to be set aside.

Issue 4: Penalty imposed under various provisions

The penalty imposed by the adjudicating authority was set aside by the Commissioner (Appeals) for certain provisions. The appellant challenged the remaining penalties. The Tribunal found that since the demand itself was not sustainable, the penalties imposed on the same basis also could not be sustained. The absence of willful suppression or fraud further negated penalty justification.

Significant holdings and core principles established:

"As regarding demand of duty against authorized service station, following the ratio of the decision of the Tribunal in the matter of M/s. Dynamic Motors (supra) and considering the definition of authorized service station, the service provided by the appellant cannot be considered as carried out by an authorized service station. Accordingly, demand of duty against authorized service station is unsustainable."

"Even if the appellant had paid service tax under RCM basis as confirmed by the Adjudication Authority, they are eligible for claiming the CENVAT credit against such payment. The demand is for the period from April 2005 to March 2008 and the normal period for issuing show-cause notice expired on 24.4.2009 whereas it was issued only on 04.06.2009. Thus the said demand under RCM is not considered on merit as the entire demand is time-barred."

"Considering the Revenue neutral situation and following the decision in the matter of Asmitha Microfin Ltd. and Sarovar Hotels Pvt. Ltd. (supra), the demand under RCM confirmed by invoking the extended period of limitation and penalty imposed are unsustainable."

The Tribunal ultimately set aside the impugned order, allowing the appeal with consequential relief as per law.