Service Tax not Payable When TDS Paid from Assessee's own Account: CESTAT [Read Order]

The Bangalore Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that the TDS amount paid to the Income Tax Department by the appellant from his account cannot form part of the consideration of the service charges paid to the overseas service provider, accordingly, service tax is not payable on the Tax Deducted Source (TDS) amount paid by the appellant.

FCI OEN Connectors Ltd, the appellant is engaged in the manufacture and sale of electronic connectors. The services viz. ‘IPR services’ and ‘Management Consultancy’ services imported from related parties located outside India, are chargeable to service tax under reverse charge mechanism basis under Section 66A of the Finance Act, 1994.

An investigation was initiated based on intelligence that the appellant had wrongly availed the benefit of exemption Notification No. 17/2004-ST dt. 10.09.2004 to the extent of research and development cess paid on the imports of technology under IPR service and also imported ‘management consultancy service’ from their group companies abroad, but had not discharged service tax on the TDS amount paid from April 2011 onwards.

 A show cause notice was issued to the appellant for recovery of an amount of Rs.1,92,48,984/- under the category of Intellectual Property other than copyright service and an amount of Rs.51,71,248/- was also proposed to be recovered on the TDS amount with interest and proposal for penalty; also Rs.1,75,23,250/- proposed to be appropriated against the demanded amount on IPR service.

On adjudication, the demand of Rs.1,75,23,250 was confirmed being the service tax not paid on IPR services imported by them for the period 2009-10 to 30.6.2012 and the amount already paid is appropriated; demand of Rs.51,71,248/- was also confirmed being short paid by them on the value of Management Consultancy Services imported during the period 2011 to 2013; interest under Section 75 confirmed; penalty amounting to Rs.2,26,94,498/- imposed under section 78; penalty of Rs.10,000 imposed under section 77 of the Finance act, 1994. 

The appellant has submitted that they have received the right to use the licensed patent from FCI, France, by license agreement. In consideration, the appellant pays a royalty to FCI, France on the gross revenue earned by the appellant. At the time of import, the appellant paid R&D cess at the rate of 5% on the cost of the imported patent.

The appellant had discharged service tax on the patent cost paid to FCI as a recipient of service under Section 66A of the Finance Act, 1994. It provides that such taxable services received by a person in India from persons outside India shall be taxable service and such taxable service shall be treated as if the recipient had himself provided such service in India, and accordingly all the provisions of the Finance Act, 1994 shall apply. 

A two-member bench of Dr D M Misra, Member (Judicial) and Pullela Nageswara Rao, Member (Technical) observed that “the TDS amount paid to the Income Tax department by the appellant from his account cannot form part of the consideration of the service charges paid to the overseas service provider, accordingly, service tax is not payable on the TDS amount paid by the appellant.  Also, it is brought on record that after the payment of  the TDS,  realizing that being wrongly paid, a refund application was filed.”

The CESTAT set aside the impugned order and allowed the appeal.

To Read the full text of the Order CLICK HERE

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