Tax On Services From Foreign Providers Based On Receipt Date, Not Payment Date: CESTAT Chennai

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Chennai, has held that the rate of service tax applicable to services received from foreign service providers is determined by the date of receipt, and not the subsequent date of payment

The later date of payment to the foreign service provider does not determine the applicable rate under the reverse charge mechanism.

The bench of Judicial Member Ajayan T.V. and Technical Member Vasa Seshagiri Rao observed, “We accordingly do not follow Adani Enterprises, and hold that it is the date on which the service is received, not the date of payment, that governs.”

Since the Consulting Engineer and Business Auxiliary services were received when the applicable rate was 12%, the tribunal held that the subsequent reduction to 10% did not apply merely because payment to the foreign service providers was made after the rate cut

The tribunal also ruled that TDS paid from the service recipient's own funds, without recovering it from the foreign service provider, could not be included in the taxable value. It held that the amount was not consideration flowing to the service provider but a statutory obligation discharged by the recipient.

The appellant, a manufacturer of forgings holding a service tax registration, had received Consulting Engineer Service and Business Auxiliary Service from foreign service providers. It was liable to pay service tax under the reverse charge mechanism under Section 66A of the Finance Act, 1994, which made the service recipient responsible for the tax on specified services received from abroad.

The department found that service tax had not been paid on amounts shown as withheld from payments to the foreign service providers. These amounts represented TDS paid towards income tax. It also found a short payment for 2007-08 because the 10% rate had been adopted instead of 12%. Four show cause notices were issued covering the TDS issue for different periods from 2007-08 to 2011-12 and the rate dispute.

The original adjudicating authority confirmed the demands and imposed an equivalent penalty under Section 78 for the 2007-08 demand, along with penalties under Section 76 for subsequent periods. The Commissioner (Appeals) later remanded the TDS issue for factual examination while upholding the demand arising from the rate difference.

On the TDS issue, the tribunal noted that the original authority had already recorded that the withholding tax was borne by the appellant. It was not recovered from or deducted from the amount payable to the foreign service provider.

The tribunal also rejected the argument that the Commissioner (Appeals) lacked power to remand. It held that the appeal before the Commissioner (Appeals) was under Section 85 of the Finance Act, 1994 and that the Commissioner (Appeals) retained the power to remand. However, that power should not be exercised when the relevant fact was already established on record.

Section 67 deals with the value of taxable service for determining the service tax payable. The issue was whether the TDS amount could be treated as part of the consideration for the foreign service.

The tribunal held that it could not. It observed:

“Tax deducted at source and paid to the credit of the Central Government by a service recipient out of its own funds, without recovering the same from the foreign service provider, does not form part of the value of taxable service under Section 67 of the Finance Act, 1994, since it is not a consideration flowing to the service provider but a statutory obligation discharged by the recipient on its own account.”

The tribunal therefore held that the TDS retained by the appellant from its own funds was not includible in the taxable value. No service tax was payable on that component, and the remand ordered by the Commissioner (Appeals) on the issue was set aside.

On the rate dispute, it was undisputed that the services had been received when the rate was 12%. Payment was made on February 24 and 26, 2009, after the rate had been reduced to 10%. The appellant relied on Adani Enterprises to argue that the rate on the payment date should apply.

The tribunal instead relied on earlier decisions, including Tech Mahindra, which held that under reverse charge the date of receipt of the service determines the applicable rate. It declined to follow Adani Enterprises, noting that the decision had not considered Consulting Engineering Services or Lea Associates.

Since the services were received when the rate stood at 12%, the subsequent payments on February 24 and 26, 2009 did not attract the reduced 10% rate. The tribunal therefore held that the differential demand was sustainable.

The tribunal upheld the ₹1,47,574 differential service tax demand with interest. It set aside the penalty relating to the rate dispute, holding that the issue involved interpretation of the applicable law.

The penalty connected with the TDS demand also could not survive after that demand was held unsustainable. 

For Appellant: G. Natarajan, Advocate

For Respondent: N. Satyanarayana, Authorised Representative