By TIOL News Service

MUMBAI, FEB 10, 2015: THE appellant entered into an agreement with M/s. MBT International Inc., USA on 03/01/2005 for development of their business of IT software mainly in the telecom sector. As per the agreement, the foreign entity was required to carry out sales promotion and marketing activities on behalf of the appellant, perform administrative support functions such as order processing, customer credit review, customer invoicing, etc., discuss and negotiate business proposals and contracts with clients in USA, facilitate communication between the appellant and its clients or prospective clients on various matter and so on. For the services rendered, the appellant was required to remunerate MBT International Inc., in a sum equal to 4% of the service charge billed on the foreign client. The said agreement and the payments made thereon were not intimated to the department by the appellant. However, the matter came to light when the audit of the records was conducted by the department in July 2010 and thereafter.

The proceedings culminated in confirmation of a service tax demand of Rs.3,93,19,650/- along with interest and penalties by CCE, Pune - III.

The Bench observed -

Merits:

++ From the agreement dated 03/01/2005 with MBT International Inc., USA it is clear that the said agreement was for market promotion of the services rendered by the appellant who is situated in India. Such sales promotion and marketing activities fall within the definition of ‘business auxiliary services' which was taxable from 2003 onwards and, there is no dispute in this regard.

++ A perusal of section 66A of FA, 1994 makes it absolutely clear that the service tax liability is attracted when taxable services are received from a foreign service provider and the service recipient is situated in India and has its fixed establishment/permanent residence in India. Further, a deeming legal fiction has been created so as to treat the service-recipient as the service provider and for application of the provisions of Chapter V of the Finance Act, 1994. Therefore, in terms of the deeming fiction, the appellant was required to declare the transactions in the statutory returns filed under Section 70 of the said Finance Act as if he has provided the said service.

++ The liability to service tax on the consideration paid for the services received for the period on or after 18/04/2006 is beyond challenge and if there is a delay in payment of such service tax, the appellant would be liable to pay interest thereon on the service tax liability. Consequently, the demand of service tax in respect of ‘business auxiliary services' received for the period 2006-07 has to be upheld and this amounts to Rs. 2,69,94,321/- and interest liability therein works out to Rs. 1,48,95,196/-. The demand for the period prior to 18.04.2006 is not sustainable in law in view of the decision of the hon'ble Bombay high Court in the case of Indian National Shipowners' Association, - 2008-TIOL-633-HC-MUM-ST.

Limitation:

++ The argument that the demand is hit by time-bar is not convincing at all. The reliance placed in the case of Muthiah Chettiar vs. Commissioner of Income Tax ((1969) 74 ITR 183),has no relevance since the said decision pertains to the provisions of Income Tax Act, which is different from the provisions of the Finance Act, 1994, which governs the levy and assessment of the service tax.

++ The contention of the appellant that there was no specific column for declaration of the amounts paid lacks merits for the reason that the appellant has to declare the amounts received as the amounts billed or charged as the appellant is deemed as a service provider. Even otherwise, the appellant could have disclosed this information in the return with suitable remarks in this regard. Therefore, the non-disclosure of the details of the transaction in the ST-3 returns in spite of specific statutory mandate in this regard clearly amount to suppression of facts. An identical issue was considered by this Tribunal in the case of Star India Pvt. Ltd. - 2014-TIOL-1886-CESTAT-MUM and the contention rejected.

++ As regards the contention raised by the appellant that the appellant in their annual balance sheets provided the relevant information, we have perused the balance sheets and the balance sheets do not reflect the payments made for the various transaction separately. It only gives the gross amount of the expenditure incurred in terms of foreign currency. From that information it cannot be gathered, for what purpose the expenditure was incurred, whether it was for a taxable service or otherwise.

++ It is on record that the appellant had not provided copy of the agreement to the department in respect of the services received from abroad and these were provided only in 2010 when the investigation commenced. Further, the exact details of the payments made in respect of the marketing promotion activities were given to the department for the first time only in January 2011 vide letters dated 05/01/2011 and 07/01/2011. The show cause notice has been issued on 24/04/2011 and, therefore, it cannot be said that the show cause notice is barred by limitation of time.

Penalties:

Since clarity on the matter came with the decision of the hon'ble Bombay High Court in the case of Indian National Shipowners' Association, the benefit of doubt could be extended to the appellant for non-disclosure of the information at the relevant time. Therefore, invoking the provisions of Section 80, we waive the penalty imposed on the appellant under Sections 76, 77 and 78 of the Finance Act, 1994.

The appeal was disposed of in above terms.

(See 2015-TIOL-295-CESTAT-MUM)