In a significant decision, the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), Eastern Zonal Bench, Kolkata, dismissed a service tax demand of ₹51,68,799, along with associated penalties and interest, against M/s. Maple Exports Private Limited. The case revolved around foreign currency expenses that the tax authorities claimed were liable for service tax under the reverse charge mechanism.
The dispute originated when a Kolkata-based exporter of leather goods incurred foreign currency expenses on activities such as sales commissions, sales promotions, and other charges as part of their export operations.
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The department scrutinised the company’s financials for the period 01.10.2007 to 31.03.2012 and issued a show cause notice. They demanded service tax, alleging that the company had not paid taxes on services received from abroad.
Upon review, the CESTAT observed that the department could not provide evidence to prove that the foreign currency expenditures incurred by Maple Exports were related to taxable services received.
The Tribunal noted that most of the expenses categorised as “sales promotion” involved discounts, bonuses, and purchases of goods, which do not fall under the service tax net. These expenses were therefore not liable for tax under the reverse charge mechanism.
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The Tribunal also noted that the demand was raised beyond the normal period of limitation. Maple Exports had regularly filed its returns and disclosed these expenses in its financial statements.
As such, there was no suppression of facts, and the invocation of the extended limitation period by the department was deemed unjustified. Furthermore, the Tribunal remarked that the case was revenue neutral.
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Ultimately, the Tribunal concluded that, in the absence of substantial evidence proving that services were received against these foreign currency spends, the tax demand was unsustainable. Consequently, the Tribunal quashed the demand for ₹51,68,799, along with any penalties and interest.
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