Non-Payment of Service Tax Due to Service Provide in Non-Taxable Territory:  CESTAT sets aside Demand of  Service Tax under RCM on Legal Charges [Read Order]

The Delhi bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) set aside the demand of service tax under the Reverse Charge Mechanism (RCM) on legal charges and non-payment of service tax due to service providers in non-taxable territory.

M/s. Essjay Ericsson (P) Ltd, the appellant in the present case is registered under Service Tax for providing ‘Maintenance and Repairing Services’ and ‘Renting of Immovable Property Services’.  The tax audit of the appellant was conducted on 24th July 2018 for the period 2013-14 to 2017-18. 

During the audit, the department observed that the appellant had agreed with M/s. Ericsson India Private Limited for providing certain services.  The department found that the wrong availment of Cenvat credit on Employee Insurance (Rs.1,59,52,509/-), non-reversal of Cenvat credit under Rule 6(3) of Cenvat Credit Rules, 2004 (Rs.1,18,66,102/-) and non-payment of Service Tax under RCM on legal charges (Rs.35,203/-).

 Shri Pawan Arora and Ms. Akanksha Kumari, Advocates appeared for the appellant and Shri Harshvardhan, Authorized Representative for the department.  

 The appellant has mentioned that the availment of Cenvat credit on employee insurance has been denied based on the exclusion clause of the definition of input services in Cenvat Credit Rules, 2004 (CCR, 2004).  It was impressed upon that the exclusion of certain services from input services is only when such services are purely for the personal use or consumption of any employee. 

It was submitted that the insurance policy was obtained with respect to the employees who work on the site.  Otherwise, it was taken for the group of employees and it was a statutory mandate, the availment has wrongly been refused. 

With respect to the exercise of option under Rule 6(3) of CCR, 2004 and the non-reversal of Cenvat credit under the said rule, it is mentioned that no time limit has been provided for intimation to the department for the option to be exercised under Rule 6(3) of CCR, 2004.  Otherwise, also, the condition of filing the declaration is merely a directory.

The adjudication authority has held that appellant is required to reverse the Cenvat credit on common input services on the ground that the appellant has also provided non-taxable services in the State of Jammu & Kashmir.  Since there is no denial that the appellant was providing taxable as well as non-taxable services, the proportionate reversal of Cenvat credit has to be done by Rule 6(3) of CCR, 2004. 

A two-member bench comprising Dr Rachna Gupta, Member (Judicial)  and Mrs Hemambika R Priya, Member (Technical) observed that the service recipient who is located in the taxable territory is made liable to pay 100 per cent service tax

The appellant as a service provider was liable under Reverse Charge Mechanism to discharge the said liability, the recipient in the present case being situated in a non-taxable territory.  Apparently and admittedly, the liability on this count stands already discharged by the appellant. There is no evidence on record about the discharge of said liability beyond the reasonable time. 

Since there is no evidence of any positive act on the part of the appellant proving that the appellant had the intention to evade the payment of duty.  In these circumstances, the order of imposition of penalty is held unreasonable.  

The CESTAT held that there was no shortcoming as were pointed out against the appellant (3 in number).  The order confirming the demand based on alleged said shortcomings was set aside and allowed the appeal.  

To Read the full text of the Order CLICK HERE

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