(Per : HONOURABLE MR.JUSTICE AKIL KURESHI) 1) The petitioners have challenged two show-cause notices dated 15.10.2004 and 9.11.2004 annexed at Annexure-H collectively to the petition in the following factual background:
1.1) The petitioner No.1 is a company registered under the Companies Act, 1956 and the petitioner No.2 is its office bearer. The petitioners are engaged in the business of manufacture of various industrial products. For the purpose of manufacturing activity and for utilising advance technology to improve the quality of goods, the petitioner No.1-Company avails of technical know-how provided by a U.S. based company. For such service, the petitioners paid royalty of Rs.2,52,60,537/- to such service provider. The respondent-authorities holding a belief that on such payments, the petitioners were liable to pay service tax in terms of Rule 2(d)(iv) of the Service Tax Rules, 1994 (hereinafter to be referred to as “the Rules), issued a show-cause notice dated 15.10.2004 calling upon the petitioners why service tax at appropriate rate, amounting to Rs.20,20,843/- be not recovered on such payments. For some strange reason, for the same transaction on the basis of same averments, yet another show-cause notice dated 9.11.2004 came to be issued. The petitioners contending that the respondent-authorities have no power to collect any service tax from the petitioners, therefore filed the present petition challenging both the show-cause notices.
2) Appearing for the petitioners, learned counsel Mr. Paresh M. Dave, assailed the notices contending that the same were issued without any jurisdiction. Rule 2(d)(iv) of the said Rules would not empower the authorities to collect service tax from the recipients. He contended that in absence of any charging section in the Finance Act, 1994, providing for payment of service tax by the service recipients, merely on the basis of the Rules, such service tax could not be collected from the petitioners.
3) Counsel pointed out that the Apex Court in the case of Laghu Udyog Bharti Vs. Union of India, 1999 (112) E.L.T 365, in the context of goods transport agents held that in absence of any charging section, liability of collection of service tax on such service cannot be shifted on the service recipient.
4) Counsel relied on the decision of Division Bench of this Court in the case of Commissioner, Service Tax Vs. Quintiles Data Processing Centre (I) P. Ltd., 2011 (23) S.T.R. 15 (Guj.), wherein relying on the decision of the Apex Court in the case of Laghu Udyog Bharti Vs. Union of India (Supra) and other decisions of Bombay and Delhi High Courts, this High Court took a view that in absence of any charging section in the patent Act, on the basis of Rule 2(d) (iv), service tax cannot be collected from the service recipient.
5) Ms. Sejal K. Mandavia, learned counsel for the Department submitted that since issuance of the show- cause notices, the legislature has amended the act and introduced section 66A, which provides for collection of service tax from the service recipient in cases where the service provider is a non-resident.
6) Before dealing with the rival contentions, we may record that the counsel for the petitioners had previously not pressed the prayer for striking down section 66A of the Act. Before us, he further gave up the challenge to the vires of Rule 2(d)(iv) of the Rules also.
7) The question is whether the respondents can collect service tax from the petitioners as service recipients on the payments made to a service provider which is a non-resident and who does not have any office in India. Rule 2(1)(d)(iv), on which the respondents rely, reads as under:
“(d) person liable for paying the service tax means:
iv)In relation to any taxable service provided by a person who is a non-resident or is from outside India, does not have any office in India, the person receiving taxable service in India.”
8) It is an undisputed position that the royalty payment in question was made during the period between 1.4.21003 to 31.3.2004. At such time section 66A was not introduced in the patent Act. With effect from 18.4.2006, the legislature has introduced section 66A, which reads as under:
“66A.(1)Where any service specified in clause (105) of section 54 is,-
(a) provided or to be provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and
(b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India, such service shall, for the purpose of this section, be the taxable service, and such taxable service shall be treated as if the recipients had himself provided the service in India, and accordingly, all the provisions of this Chapter shall apply:
Provided that where the recipients of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub- section shall not apply;
Provided further that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.
(2)where a person is carrying on a business through a permanent establishment in India and through another permanent establishment in a country other than India, such permanent establishment shall be treated as separate persons for the purpose of this section.”
9) The question whether, for the period before introduction of section 66A in the statute, the Department can recover service tax from a service recipient, where the service provider is a non- resident and does not have any office in India, on the strength of Rule 2(1)(d)(iv), came up for consideration before this Court in the case of Quintiles Data Processing Centre (I) P. Ltd. (Supra). In such decision, referring to and relying upon the decision of the Apex Court in the case of Laghu Udyog Bharti (Supra) and decision of Bombay High Court in the case of Indian National Shipowners Association Vs. Union of India, 2009 (13) S.T.R 235 (Bombay) and the decision of Delhi High Court in the case of Unitech Ltd. Vs. Commissioner of Service Tax, Delhi, 2009 (15) S.T.R 385 (Delhi), and observed as under:
“This Rule for the period prior to 18/04/2006 and; in particular in absence of Section 66A of the Finance Act, 1994 came up for consideration before the Bombay High Court in case of Indian National Shipowners Association (Supra). Relying on the decision of the Apex Court in case of Laghu Udyog Bharti (Supra), Bombay High Court was of the opinion that before enactment of Section 66A of the Finance Act, 1994 there was no authority vested by law in the respondent to levy service tax on a person who is resident in India but who receives services outside India. It was observed that law laid down by the Apex Court in case of Laghu Udyog Bharti (Supra) is squarely applicable to Rule 2 (1) (d) (iv), which was relied by the revenue. Bombay High Court also considered the effect of explanation to Section 65 (105) of the Finance Act, 1994 which reads as under.
“Explanation – For the removal of doubts, it is hereby declared that where any service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place or residence, in a country other than India and such service is received or to be received by a person who has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India, such service shall be deemed to be taxable service for the purposes of this clause.”
However, in absence of any charging Section the Court was of the opinion that merely by virtue of provisions contained in Rule 2 (1) (d) (iv) in the Service Tax Rules, recipient of service tax could not be made liable to pay the tax. It is of course true that in the concluding portion, the Bench observed that the person who receives service outside India from a person who is non- resident cannot be made to pay service tax. To our mind, however, this is not the ratio of the decision and the entire decision is based on the ratio laid down by the Apex Court in the case of Laghu Udyog Bharti (Supra).
Bombay High Court's observations relevant for our purpose may be noted thus:
“20. It appears that a similar provision in the rules was made applicable by the Government in relation to the Clearing Agents by making customers of the Clearing Agent liable for levy of the service tax. That question has been decided by the Supreme Court by its judgment in the case of Lagu Udyog Bharati (supra) and the Supreme Court has clearly laid down that the imposition of the service tax is on the persons rendering the services and by making a provision in the Rules, levy of tax cannot be shifted to the recipients of the services and the rule framed which brought about this situation has been declared by the Supreme Court to be invalid. The law laid down by the Supreme Court in its judgment in Laghu Udyog (supra) is squarely applicable to Rule 2 (1) (d) (iv), which is relied on in this case. It appears that it is first time when the Act was amended and Section 66A was inserted by Finance Act, 2006 w.e.f. 18-4-2006, the Respondents got legal authority to levy service tax on the recipients of the taxable service. Now, because of the enactment of Section 66A, a person who is resident in India or business in India becomes liable to be levied service tax when he receives service outside India from a person who is non-resident or is from outside India. Before enactment of Section 66A it is apparent that there was no authority vested by law in the Respondents to levy service tax on a person who is resident in India, but who receives services outside India. In that case till Section 66A was enacted a person liable was the one who rendered the services. In other words, it is only after enactment of Section 66A that taxable services received from abroad by a person belonging to India are taxed in the hands of the Indian residents. In such cases, the Indian recipient of the taxable services is deemed to be a service provider. Before enactment of Section 66A, there was no such provision in the Act and therefore, the Respondents had no authority to levy service tax on the members of the petitioners – association.”
We also notice that Delhi High Court in case of Unitech Ltd., (supra) relying on decision of the Bombay High Court in the case of Indian National Shipowners Association (Supra), deleted the tax demand from assessee who was a recipient of taxable services in the nature of architectural services from a non-resident.
In view of the above judicial pronouncement and in view of the facts on record, we do not find that the Tribunal committed any error in setting aside the service tax demand. When we find that the charging Section making service recipient liable to pay service tax, in certain circumstances was introduced by virtue of Section 66A of the Finance Act, 1994 with effect from 18/04/2006, any demand of service tax prior to the said period, merely relying on Rule 2 (1) (d) (iv) of the Service Tax Rules was wholly impermissible. Tribunal correctly ruled in favour of assessee.
10) The entire issue is thus covered by the decision of this Court in the case of Quintiles Data Processing Centre (I) P. Ltd. (Supra). The impugned show-cause notices, therefore, quashed. Rule is made absolute with no order as to costs.
(AKIL KURESHI,J.)
(HARSHA DEVANI,J.)
Vahid