Transactions made prior to 2008 Service Tax Rules Amendment not Liable to Rule 6 Retrospectively: CESTAT [Read Order]

Recently, the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) held that transactions made prior to the May 10, 2008 amendment of the Service Tax Rules are not liable to Rule 6 retrospectively.

The ruling came in response to an appeal filed by a multinational engineering consultancy firm, which was challenging a tax demand raised by the Commissioner of Central Excise, Rohtak, over outstanding balances in its accounts prior to the 2008 rule change.

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The appellant, Parsons Brinkerhoff, an engineering consultancy firm operating in India, had been providing consultancy services for infrastructure projects. As part of its operations, it availed services from its associated entities located outside India. The payments for these services were recorded in the company's books as debit entries, with actual payments being deferred. Under the Service Tax Rules as they existed prior to May 10, 2008, service tax was only payable when payments for these imported services were made.

However, on May 10, 2008, a crucial amendment was introduced to Rule 6 of the Service Tax Rules, 1994. The new explanation clarified that in transactions involving associated enterprises, service tax would be payable immediately upon a debit or credit entry being made in the books of account, regardless of whether actual payment had been made. This change created a retrospective tax liability on transactions that had been recorded but not yet paid for before the amendment.

In February 2012, the Central Excise authorities issued a show-cause notice to the firm, demanding service tax, along with education cess and secondary higher education cess, totaling approximately Rs. 1.58 crore for the outstanding amounts in its accounts as of May 10, 2008. The notice also included interest and penalties.

Aggrieved, the appellant appealed before the Commissioner of Central Excise, who also confirmed this demand in an order dated April 17, 2013.

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Aggrieved again, the appellant then filed an appeal with the CESTAT, arguing that the amendment to the Service Tax Rules should only apply prospectively, from May 10, 2008, and not to transactions recorded before this date. The appellant contended that the law as it existed before the amendment stipulated that service tax was payable only when actual payments were made for services received from abroad.

The appellant further pointed out that the Central Board of Excise and Customs ( CBEC ) had issued a press note on May 11, 2008, clarifying that the amendment was intended to apply only to transactions made after May 10, 2008. Therefore, the firm argued, it was not liable to pay service tax on the amounts that had been debited in its books prior to that date but for which no payment had been made.

The firm also cited several legal precedents in support of its argument, including decisions in Sify Technologies Ltd. v. Commissioner of Central Excise & Service Tax and CC v. Skycell Communications Ltd., which held that amendments introducing substantive changes to the law could not be applied retrospectively unless explicitly stated.

Moreover, the appellant informed the tribunal that it had voluntarily paid the service tax on the disputed amounts in March 2011, despite believing it was not liable, to avoid litigation. Since the tax had been paid before the issuance of the show-cause notice, the appellant argued that no penalties or interest should be levied under Section 73 of the Finance Act, 1994.

In opposition, the tax department argued that the appellant-firm was liable to pay service tax under the reverse charge mechanism, as outlined in Section 66A of the Finance Act, 1994, and the amended Rule 6 of the Service Tax Rules. They asserted that the firm had failed to disclose the outstanding amounts as of May 10, 2008, and had not paid the corresponding service tax until a tax audit raised the issue in 2011.

The department contended that the firm’s failure to declare these amounts in its ST-3 tax returns constituted suppression of facts, justifying the extended period of limitation for issuing the tax demand. As such, they argued that the amendment applied to all transactions recorded in the firm's books as of May 10, 2008, regardless of when the services were received.

The CESTAT bench, comprising  Dr. Rachna Gupta (Judicial Member) and Ms. Hemambika R. Priya (Technical Member), focused on whether the 2008 amendment to Rule 6 was retrospective or prospective in nature. They concluded that prior to the May 2008 amendment, service tax was payable only when payment for services was made, and the amendment introduced a substantive change in the law by requiring tax to be paid upon making an entry in the books of accounts.

Relying on several judicial precedents, including the Delhi High Court’s decision in Pr. Commissioner of GST v. McDonalds India Pvt Ltd. and the Supreme Court’s ruling in Union of India v. Martin Lottery Agencies Ltd., the Tribunal held that the amendment could not be applied retrospectively. The Tribunal observed that the CBEC’s press note and other clarifications had also affirmed that the amendment was meant to apply prospectively, and there was no indication that it was intended to cover transactions that had taken place before May 10, 2008.

The Tribunal further noted that the firm had paid the disputed service tax in 2011, which created a revenue-neutral situation. As the firm had already complied with the tax requirement before the show-cause notice was issued, the Tribunal ruled that no penalties or interest could be levied.

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In its final order, the CESTAT set aside the Commissioner’s demand for service tax on the pre-amendment transactions and ruled in favor of the appellant.

To Read the full text of the Order CLICK HERE

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