No Service Tax on Contribution towards Social Security as part of Salary paid by Employer to Employee under RCM: CESTAT [Read Order]

The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) recently held that no service tax is payable on contribution towards social security as a part of salary paid by the employer to employees under Reverse Charge Mechanism(RCM).

The case revolves around the appellant's payment of service tax under the reverse charge mechanism for expenditures incurred in foreign currency in connection with the contribution towards social security for their overseas holding company's employees working in India.

The appellant had paid a significant sum of Rs. 19,67,840/- as service tax for the period from April 2016 to April 2017 and had also availed of cenvat credit for the same amount, as it was paid under the reverse charge mechanism.

However, it came to the attention of the Revenue that payments made to employees by the employer were excluded from the definition of service under Section 65B(44) of the Finance Act, 1994. Consequently, it was argued that the service tax paid was not required. Additionally, Rule 2(l) of the Cenvat Credit Rules, 2004 was cited to assert that the amount did not qualify as duty or service tax paid, rendering it ineligible for cenvat credit.

Following this, the Revenue initiated proceedings to recover the amount as irregularly availed ineligible cenvat credit. The original authority upheld the demand and imposed penalties, a decision that was upheld by the Commissioner (Appeals), prompting the appellant to appeal to the CESTAT.

During the CESTAT proceedings, the Chartered Accountant representing the appellant argued that despite the service tax not being mandatory, it was paid by the appellant. Importantly, the Revenue had not issued any order stating that the payment was unnecessary or refunded the amount. The appellant's representative cited a ruling by the  Bombay High Court in a similar case involving central excise duty, where it was held that availing cenvat credit for duty paid on inputs was regular when the assessment of the final product was not reversed by Revenue, and no refund was provided.

The appellant's representative emphasised that this situation was revenue-neutral since the amount, although not required, had been paid and cenvat credit of an equal amount was availed, resulting in no loss to the exchequer. As a result, he called for the impugned order to be set aside.

The Department Representative supported the impugned order-in-appeal during the proceedings.

After careful consideration of the case and the arguments put forth, the CESTAT found that service tax was not required to be paid for the contribution towards social security that formed a part of employees' salaries. Despite this, the Revenue had not refunded the service tax paid by the appellant, who had also availed cenvat credit of the same amount. Therefore, the CESTAT held that there was no loss to the exchequer.

The CESTAT bench of Anil G. Shakkarwar, Member (Technical)  relied on the Bombay High Court's ruling in a similar case and set aside the impugned order-in-appeal, effectively granting relief to the appellant.

To Read the full text of the Order CLICK HERE

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