By TIOL News Service

MUMBAI, JAN 31, 2019: A total service tax demand of Rs. 52,27,935/-was confirmed against the appellant under section 66A of FA, 1994 for 2006-07 to 2009-10 on the following counts - as deemed recipient of ‘intellectual property right services' on the transfer of ‘technical knowhow' from M/s Morgan Construction, USA under agreement for the wherewithal to manufacture and assemble steel plant equipment and the process technology for steel rolling and steel wire rods; on the commission paid to overseas agent as deemed recipient of ‘business auxiliary service'.

The amount paid of Rs. 48,88,329/-was also appropriated by the adjudicating authority. Penalty was imposed and interest was held payable.

The appellant is before the CESTAT and submits that the balance demand amount ofRs.3,42,607/-(in respect of IPR service) is attributable to the disagreement over different rates of exchange adopted for computation of assessable value in 2006-07 and 2007-08.

The appellant submits that prior to 28May 2012 [Finance Act, 2012] no provision existed in law to govern the rate of exchange to be adopted in relation to assessable value of service for which consideration was taxed under section 66A of Finance Act, 1994 and that the incorporation then of section 67A in Finance Act, 1994 could not be rendered applicable to payments made in 2006-07 and 2007-08; according to him, the Indian rupee equivalent of the amount remitted could alone be taxable. Moreover, since the amount of tax paid was CENVATable, there was no pecuniary loss to them to warrant the impression of motive to evade duty. Also, the issue concerned interpretation and the SCN had failed to evidence any malafide or any willful misrepresentation on their part.

The Bench considered the submissions and observed that the empowerment of the Central Government to notify the rate of exchange for the purpose of computation of assessable value in relation to chargeability of tax under section 66A of Finance Act, 1994 came into effect much after the period of dispute. Consequently, in the absence of a legal mechanism for alternate computation, the exchange rate at which the payment was remitted to the overseas entity alone could be applied. The demand of tax on the differential rate of exchange was held unsustainable and set aside.

Insofar as imposition of penalty is concerned, the Bench observed that it was apparent from the scheme of ‘deemed provider of service' in section 66A of Finance Act, 1994 and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 that the entitlement to CENVAT credit of tax so paid eliminated the attribution of motive or conduct that are the ingredients for imposition of penalty under section 78 FA, 1994. So also, the dispute relates to interpretation.

The penalties were, therefore, set aside and the appeal was allowed to the limited extent of the differential tax arising from the application of alternate rate of exchange.

(See 2019-TIOL-356-CESTAT-MUM)