By TIOL News Service

MUMBAI, JUNE 24, 2015: APPEALS have been filed against various orders confirming the demand of service tax, interest thereon and imposing penalties on a finding that the appellants have not discharged the service tax liability on amounts remitted by them to the persons situated abroad on receiving services from them. The period involved in all the demands is post 18.04.2006.

The facts are that the appellants are engaged in the business of manufacturing & sale of cut diamonds and polished diamonds. The rough diamonds are imported from M/s. DTC, U.K., who are pioneers in diamond market. M/s. DTC ensures the appellants that diamonds are not conflict/blood diamonds, have Kimberely process Certification and the sale is done through M/s. Bonas & Co. Ltd., London, who acts as a broker between the appellants herein and M/s. DTC. The appellants pay commission to the broker in foreign exchange. The said foreign exchange is remitted through the banking channels. As mentioned, service tax liability has been saddled against all the appellants.

Before the CESTAT the appellant submitted that the demands are hit by limitation inasmuch as they had filed a Writ Petition No. 2482 of 2006 on 8 th September, 2006 before the Bombay High Court challenging the constitutional validity of levy of service tax on services rendered and received from outside India;that the said writ petition was admitted on 29 th March, 2007 and is still pending; that they had entertained a bona fide belief that they are not liable to pay the service tax till the outcome of the writ petition filed by themand hence, imposition of penalties on the appellants is un-called for and needs to be set aside. The appellant further claims Revenue Neutrality on the ground that few of the appellants are discharging the service tax liability on various other connected services and if they pay the service tax under reverse charge mechanism, they are eligible to avail Cenvat credit.

The AR submitted that none of the appellants responded positively to the summons issued and were always claiming that writ petition filed by them challenging the constitutional validity is still pending; that after the date of payment of commission to the foreign entity was provided the Revenue issued the show cause notices, hence there was delay from the appellants' end for which there cannot be a claim of limitation. Further, on merits, the issue is now settled by the judgment of the Bombay High Court in the case of Indian National Ship Owners Association - 2009-TIOL-150-HC-MUM-ST which has been upheld by the Supreme Court - 2009-TIOL-129-SC-ST. In the matter of limitation, support is drawn from the case of Baba Asia Ltd. - 2011-TIOL-229-CESTAT-DEL.

The Bench observed -

++ Though the writ petition filed by the appellant is pending before the hon'ble High Court of Bombay, the issue of liability to pay service tax under reverse charge mechanism, as per the provisions of Section 66A of the Finance Act,1994, is now settled by the Apex Court, holding that the service tax liability would arise under the reverse charge mechanism w.e.f 18.4.2006. Accordingly, in view of the law being settled we hold that on merits, the appellants appeal do not succeed.

++ At the same time, we find that all the appellants have been taking a consistent plea before the adjudicating authority that they were under a bona fide belief that the writ petition which has been filed by them has been filed by them has been admitted and is still pending, hence they need not discharge any service tax liability. On perusal of the records, we find that factually appellants had filed writ petition on 8.9.2006 and it was admitted by the Hon'ble High Court and departments Affidavit was filed on 29.9.2006, which admitted the contentions that the appellants were engaged in importing of rough diamonds and have paid commission to the brokers through whom they procured diamonds from DTC.

++ If the department was aware of writ petition filed by the appellants and have filed an affidavit in September 2006, nothing prevented them from issuing protective demand notices in order to safeguard the Revenue. As has been already reproduced hereinabove, we find that bulk of the show cause notices were issued by the Revenue department in 2011 invoking the periods as indicated against the details of individual appellants. In our view, the demand of the service tax liability by invoking the extended period in all these cases will not survive as Revenue was well aware of the activity of the appellant of remitting the payments to the broker as commission through proper banking channels, which has been mentioned in writ petition before the Hon'ble High Court.

++ The Revenue department having filed an affidavit before the Hon'ble High Court in response to the writ petition filed by the appellant, invocation of extended period seems to be not inconsonance of the law, and it has to be held that the Revenue authorities were aware of the fact that the appellant have remitted money to the broker situated abroad as commission. We are of the considered view, that appellants could have entertained a bona fide belief that the constitutional validity having been challenged by them in writ petition and the same being pending before the Hon'ble High Court, they need not pay any service tax on the amount that is remitted to the brokers. This can be bona fide belief of the appellants, accordingly, the demand which has been confirmed against all the appellants by invoking the extended period of limitation are liable to be set aside and we do so to that extent the appeals are allowed. At the same time, the demands which are within the period of limitation from the date of issuance to the show cause notice needs to be upheld with interest and we do so, to that extent appeals are rejected.

On the issue of penalties, the CESTAT observed that the appellants could have entertained a bona fide belief that Writ petition may be decided in their favour and, therefore, by invoking the provisions of s. 80 of the FA, 1994, the Bench set aside the penalties.

The appeals were disposed of.

(See 2015-TIOL-1223-CESTAT-MUM)