Pay thru CENVAT - Services Recd From Abroad : Earthshaking Judgement

Service Tax - Tax payable on services received from abroad - Tax can be paid from CENVAT Credit : High Court 

By TIOL News Service

BANGALORE, NOV 28, 2011: THE assessee is a Company engaged in the manufacture and sale of readymade garments bearing the brand names like 'Wrangler' and ‘Lee', which belong to foreign Companies. The foreign Companies provided Intellectual Property Service ( IPS ) with effect from 10.9.2001 to the assessee and the assessee Company being the service provider was made liable to pay service tax. The Service Tax liability was discharged by the assessee using Cenvat credit availed on 'Intellectual Property Service', which was objected to by the Department. The assessee filed a revised return and used credit relating to other input services such as advertisement, freight, manpower recruitment, courier services, maintenance, repair and construction services for discharging Service Tax under the category of 'Intellectual Property Service' in the capacity of the service receiver.

The Revenue proceeded against the assessee on the ground that Cenvat was wrongly used for paying Service Tax on 'Intellectual Property Service' purported service when he is not a service provider but the receiver of service. Therefore overruling the objections of the assessee the demand was confirmed. Aggrieved by the said order the assessee preferred an appeal to the Tribunal. The Tribunal held that though the assessee is a recipient of services in law as the service provider is outside the country he is deemed to be the service provider and tax is levied on him. But to discharge that liability he can use the Cenvat credit which is to his credit and therefore they set aside the order passed by the Commissioner. Aggrieved by the said order the Revenue is in appeal.

High Court's Decision:

In the instant case, though he is the recipient of service tax, the service provider is outside the country. In law, he is treated as a service provider and is levied tax. In other words, the liability to pay tax on the service, which he has received, is foisted on him under law. It is to discharge the liability he is entitled to use the Cenvat credit, which was available with him, and therefore the Tribunal was justified in interfering with the order passed by the Commissioner. As there is no liability to pay tax the question of imposing penalty would not arise.

Tail spark: But what about Rule 5 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, which reads as,

"5. Taxable services not to be treated as output services.-  The taxable services provided from outside India and received in India shall not be treated as output services for the purpose of availing credit of duty  of excise paid on any input  or service tax paid on any input services under CENVAT Credit Rules, 2004."

Obviously, this was a case prior to 19.04.2006, when these rules came into existence. But then, before that, this was not taxable at all!