RCM Service Tax Demand Cannot Be Raised Solely on Foreign Currency Expenditure Shown in Balance Sheet : CESTAT [Read Order]

Appellant Shree Venkatesh Films Pvt. Ltd., is in the business of film production TV content and digital cinema services. The Department had issued a show cause notice for the service tax demand exceeding ₹2.18 crores for the period from 2010-11 to 2013-14 mainly on the Reverse Charge Mechanism.

The Department had raised the demand on the premise that the appellant had incurred foreign currency expenditure on the shooting of films outside India and the Department had relied on the balance sheet entries treating the said expenditure as the receipt of taxable services from foreign service providers on which service tax had been levied.The demand along with penalties had been confirmed by the adjudicating authority and the assessee had approached the Tribunal.

The assessee argued that the Department did not point out any specific taxable service under the pre-2012 positive list or the post-2012 negative list of taxable services. It was claimed by the assessee that just accounting entries or payments made in foreign currency do not automatically qualify for service tax unless the nature of service and its taxability were established.

Further the assessee claimed that film shooting done outside India would qualify as an event service and under the Place of Provision of Services Rules, 2012 the place of provision of service would be the location of the event i.e. outside India and hence would not be taxable.

The Revenue supported the demand, arguing that foreign currency expenditure indicated receipt of services from abroad and was sufficient to invoke RCM.

The two-member bench comprising P.K. Choudhary [Judicial Member] and K. Anpazhakan [Technical Member],rejected the Revenue’s approach and held that service tax liability cannot be inferred from the balance sheet. It observed, “Identification and classification of the service is sine qua non for levy of service tax.”

The Tribunal held that under both tax regimes, it is necessary for the Department to establish the service received, its taxability, and the place of providing the service being within India. Since the Department had not done so, the demand was held to be unsustainable. The Tribunal set aside the service tax demand, interest, and penalties.